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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004



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Form 10-Q



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(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 0-21681



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EFJ, INC.

(Exact name of registrant as specified in its charter)



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

1440 CORPORATE DRIVE

IRVING, TEXAS 75038

(972) 819-0700

(Address, including zip code, and telephone number,

including area code, of registrants

principal executive office)



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Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one)

Large Accelerated Filer ̈Accelerated Filer  x             Non-accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    YES ̈NO  x

As of April 27, 2006, 25,958,054 shares of the Registrants Common Stock were outstanding.



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EFJ, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2006 and December 31,
2005

(Unaudited and in thousands, except share and per share data)



|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                              |  | March 31,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                     |  | $             | 46,556  |   |                  | $ | 39,107  |  
|Accounts receivable, net of allowance for returns and doubtful accounts of $183 and $135, respectively                                                                        |  |               | 10,497  |   |                  |   | 35,745  |  
|Receivables - other                                                                                                                                                           |  |               | 9,325   |   |                  |   | 7,209   |  
|Cost in excess of billings on uncompleted contracts                                                                                                                           |  |               | 2,260   |   |                  |   | 1,726   |  
|Inventories                                                                                                                                                                   |  |               | 23,066  |   |                  |   | 14,092  |  
|Deferred income taxes                                                                                                                                                         |  |               | 1,287   |   |                  |   | 1,287   |  
|Prepaid expenses                                                                                                                                                              |  |               | 1,155   |   |                  |   | 692     |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                          |  |               | 94,146  |   |                  |   | 99,858  |  
|                                                                                                                                                                              |  |              
|Property, plant and equipment, net                                                                                                                                            |  |               | 4,724   |   |                  |   | 4,573   |  
|Deferred income taxes, net of current portion                                                                                                                                 |  |               | 22,853  |   |                  |   | 22,853  |  
|Intangible assets, net of accumulated amortization                                                                                                                            |  |               | 6,741   |   |                  |   | 6,741   |  
|Other assets                                                                                                                                                                  |  |               | 126     |   |                  |   | 213     |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                                  |  | $             | 128,590 |   |                  | $ | 134,238 |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Current portion of long-term debt obligations                                                                                                                                 |  | $             | 48      |   |                  | $ | 65      |  
|Accounts payable                                                                                                                                                              |  |               | 3,776   |   |                  |   | 5,611   |  
|Accrued expenses                                                                                                                                                              |  |               | 6,083   |   |                  |   | 7,344   |  
|Billings in excess of cost on uncompleted contracts                                                                                                                           |  |               | 79      |   |                  |   | 5       |  
|Deferred revenues                                                                                                                                                             |  |               | 384     |   |                  |   | 363     |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                     |  |               | 10,370  |   |                  |   | 13,388  |  
|Long-term debt obligations, net of current portion                                                                                                                            |  |               |        |   |                  |   | 5       |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|TOTAL LIABILITIES                                                                                                                                                             |  |               | 10,370  |   |                  |   | 13,393  |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                 |  |               |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              
|Stockholders equity:                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Preferred stock ($0.01 par value; 3,000,000 shares authorized; none issued)                                                                                                   |  |               |        |   |                  |   |        |  
|Common stock ($0.01 par value; 50,000,000 voting shares authorized, 25,959,316 and 25,867,094 issued and outstanding as of March 31, 2006
and December 31, 2005, respectively |  |               | 260     |   |                  |   | 259     |  
|Additional paid-in capital                                                                                                                                                    |  |               | 149,169 |   |                  |   | 150,387 |  
|Unearned stock compensation                                                                                                                                                   |  |               |        |   |                  |   | (1,693  | )
|Accumulated deficit                                                                                                                                                           |  |               | (31,209 | ) |                  |   | (28,108 | )
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                    |  |               | 118,220 |   |                  |   | 120,845 |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  | $             | 128,590 |   |                  | $ | 134,238 |  
|                                                                                                                                                                              |  |               |         |   |                  |   |         |  

See accompanying notes to the condensed consolidated financial statements.



Page 2



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EFJ, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended
March 31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)



|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                                                                          |  | Three Months Ended March 31, |           
|                                                                                                                                                                                                                                                                                                          |  | 2006                         |            |   | 2005 |  
|Revenues, net                                                                                                                                                                                                                                                                                             |  | $                            | 10,563     |   |      | $ | 24,161     |  
|Cost of sales                                                                                                                                                                                                                                                                                             |  |                              | 5,014      |   |      |   | 8,838      |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Gross profit                                                                                                                                                                                                                                                                                              |  |                              | 5,549      |   |      |   | 15,323     |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Operating expenses:                                                                                                                                                                                                                                                                                       |  |                              |            |   |      |   |            |  
|Research and development                                                                                                                                                                                                                                                                                  |  |                              | 2,742      |   |      |   | 3,969      |  
|Sales and marketing                                                                                                                                                                                                                                                                                       |  |                              | 2,095      |   |      |   | 2,954      |  
|General and administrative, inclusive of non-cash stock option repricing (benefit) expense adjustment of $0 and $(395) for the three months
ended March 31, 2006 and 2005, respectively, and facility relocation expenses of $0 and $470 for the three months ended March 31, 2006 and 2005, respectively |  |                              | 4,241      |   |      |   | 3,206      |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Total operating expenses                                                                                                                                                                                                                                                                                  |  |                              | 9,078      |   |      |   | 10,129     |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Income (loss) from operations                                                                                                                                                                                                                                                                             |  |                              | (3,529     | ) |      |   | 5,194      |  
|Other income (expense), net                                                                                                                                                                                                                                                                               |  |                              |           |   |      |   | 4          |  
|Interest income                                                                                                                                                                                                                                                                                           |  |                              | 442        |   |      |   | 62         |  
|Interest expense                                                                                                                                                                                                                                                                                          |  |                              | (14        | ) |      |   | (17        | )
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Income (loss) before income taxes                                                                                                                                                                                                                                                                         |  |                              | (3,101     | ) |      |   | 5,243      |  
|                                                                                                                                                                                                                                                                                                          |  |                             
|Income tax provision                                                                                                                                                                                                                                                                                      |  |                              |           |   |      |   |           |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Net income (loss)                                                                                                                                                                                                                                                                                         |  | $                            | (3,101     | ) |      | $ | 5,243      |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Net income (loss) per share  Basic                                                                                                                                                                                                                                                                       |  | $                            | (0.12      | ) |      | $ | 0.29       |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Net income (loss) per share  Diluted                                                                                                                                                                                                                                                                     |  | $                            | (0.12      | ) |      | $ | 0.28       |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Weighted average common shares  Basic                                                                                                                                                                                                                                                                    |  |                              | 25,710,713 |   |      |   | 18,313,043 |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  
|Weighted average common shares  Diluted                                                                                                                                                                                                                                                                  |  |                              | 25,710,713 |   |      |   | 18,771,246 |  
|                                                                                                                                                                                                                                                                                                          |  |                              |            |   |      |   |            |  

See accompanying notes to the condensed consolidated financial statements



Page 3



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EFJ, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended
March 31, 2006 and 2005

(Unaudited and in thousands)



|                                                                                         |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                         |  | Three months ended March 31, |       
|                                                                                         |  | 2006                         |        |   | 2005 |  
|Cash flows from operating activities:                                                    |  |                              |        |   |      |   |        |  
|Net (loss)/income                                                                        |  | $                            | (3,101 | ) |      | $ | 5,243  |  
|Adjustments to reconcile net (loss)/income to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                            |  |                              | 527    |   |      |   | 311    |  
|Stock-based compensation                                                                 |  |                              | 373    |   |      |   | (395   | )
|Gain on sale of fixed assets                                                             |  |                              |       |   |      |   | (45    | )
|Changes in operating assets and liabilities:                                             |  |                              |        |   |      |   |        |  
|Accounts receivable                                                                      |  |                              | 25,248 |   |      |   | 6,412  |  
|Receivables - other                                                                      |  |                              | (1,143 | ) |      |   |       |  
|Cost in excess of billings on uncompleted contracts                                      |  |                              | (534   | ) |      |   | 112    |  
|Inventories                                                                              |  |                              | (8,974 | ) |      |   | (526   | )
|Prepaid expenses                                                                         |  |                              | (463   | ) |      |   | (121   | )
|Accounts payable                                                                         |  |                              | (1,835 | ) |      |   | (1,816 | )
|Billings in excess of cost on uncompleted contracts                                      |  |                              | 74     |   |      |   | (1,046 | )
|Deferred revenues                                                                        |  |                              | 21     |   |      |   | (282   | )
|Accrued and other liabilities                                                            |  |                              | (2,234 | ) |      |   | (1,566 | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Total adjustments                                                                        |  |                              | 11,060 |   |      |   | 1,038  |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash provided by operating activities                                                |  |                              | 7,959  |   |      |   | 6,281  |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash flows from investing activities:                                                    |  |                              |        |   |      |   |        |  
|Proceeds from sale of fixed assets                                                       |  |                              |       |   |      |   | 128    |  
|Proceeds from sale of facility                                                           |  |                              | 4,600  |   |      |   |       |  
|Purchase of facility                                                                     |  |                              | (3,627 | ) |      |   |       |  
|Purchase of property, plant and equipment                                                |  |                              | (678   | ) |      |   | (676   | )
|Other assets                                                                             |  |                              | 87     |   |      |   | 192    |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                                    |  |                              | 382    |   |      |   | (356   | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash flows from financing activities:                                                    |  |                              |        |   |      |   |        |  
|Principal payments on long-term debt                                                     |  |                              | (22    | ) |      |   | (20    | )
|Deferred gain on facility purchase/sale/leaseback                                        |  |                              | (973   | ) |      |   |       |  
|Proceeds from exercise of stock options                                                  |  |                              | 103    |   |      |   | 117    |  
|Other                                                                                    |  |                              |       |   |      |   | 18     |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                      |  |                              | (892   | ) |      |   | 115    |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                                |  |                              | 7,449  |   |      |   | 6,040  |  
|Cash and cash equivalents, beginning of period                                           |  |                              | 39,107 |   |      |   | 9,484  |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                 |  | $                            | 46,556 |   |      | $ | 15,524 |  
|                                                                                         |  |                              |        |   |      |   |        |  

Supplemental Disclosure of Cash Flow Information:

The Company paid interest of $14 and $17 during the three months ended March 31, 2006 and 2005, respectively.

The Company paid income taxes of $70 during each of the three months ended March 31, 2006 and 2005.

See accompanying notes to the condensed consolidated financial statements



Page 4



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

1. GENERAL

The condensed consolidated balance sheet
of EFJ, Inc. at December 31, 2005, presented within this Report on Form 10-Q filing, has been derived from audited consolidated financial statements at that date. The condensed consolidated financial statements as of March 31, 2006 and for
the three months ended March 31, 2006 and 2005 are unaudited. The condensed consolidated financial statements reflect all normal and recurring accruals and adjustments that, in the opinion of management, are necessary for a fair presentation of
the financial position, operating results, and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto, together with managements discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2005. The results of operations and cash flows for
the three months ended March 31, 2006 are not necessarily indicative of the results for any other period or the entire fiscal year ending December 31, 2006. Where appropriate, items within the condensed consolidated financial statements
have been reclassified from the previous periods presentation to conform to the current presentation.

Unless the context otherwise
provides, all references to we, us, and our include EFJ, Inc., its predecessor entity 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 the private wireless communications segment refer to EFJohnson, and all references
to the secured communications segment refer to Transcrypt.

2. ORGANIZATION AND CONSOLIDATION

We are a provider of land mobile radio (LMR) wireless communications products and systems, which are sold to: (1) domestic public safety
/ public service and other governmental users; (2) domestic commercial users; and (3) international customers. Through EFJohnson and Transcrypt we design, develop, market, and support:



| |  |  | mobile and portable wireless radios;
| | - |  | ------------------------------------



| |  |  | stationary transmitters / receivers (base stations or repeaters);
| | - |  | -----------------------------------------------------------------



| |  |  | infrastructure equipment and systems; and
| | - |  | -----------------------------------------



| |  |  | highly secure encryption technologies for proprietary analog wireless radios.
| | - |  | -----------------------------------------------------------------------------

The condensed consolidated financial statements include the accounts of EFJ, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

3. NET INCOME PER SHARE

Basic income per share
(EPS) is calculated based upon the weighted average number of common shares outstanding during the period. The diluted EPS calculation reflects the potential dilution from common stock equivalents such as stock options. For the three
months ended March 31, 2006, all outstanding stock options were considered anti-dilutive due to our loss in the first quarter. For the three months ended March 31, 2005, outstanding stock options granted as of such dates had exercise
prices lower than the average market price of the common stock for the respective periods and are, thereby, considered common stock equivalents in the calculation of the diluted weighted average common shares. Outstanding stock options which had
exercise prices higher than the average market price of the common stock for the periods are considered anti-dilutive and excluded from the calculation of diluted weighted average common shares. All such shares were excluded as anti-dilutive for the
three months ended March 31, 2006. No shares were excluded as anti-dilutive for the three months ended March 31, 2005. We use the treasury stock method to calculate diluted weighted average common shares, as if all such options were
outstanding for the periods presented.



Page 5



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

4. ACCOUNTING FOR STOCK-BASED COMPENSATION

Prior to
2006, we accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations. Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (Revised 2004),
Share-Based Payments (SFAS 123R), and selected the modified prospective method to initially report stock-based compensation amounts in the consolidated financial statements. We are currently using the Black-Scholes option
pricing model to determine the fair value of all option grants. For the three months ended March 31, 2006, we recognized compensation expense of $0.3 million related to stock option grants and $0.1 million related to restricted stock grants.
For option grants issued in the three-month periods ended March 31, 2006 and 2005, the following weighted-average assumptions were used:



|                           |  |                              |   |  |          |  
|-------------------------- |  | ---------------------------- | - |  | -------- | -
|                           |  | Three Months Ended March 31, |  
|                           |  | 2006                         |   |  | 2005     |  
|Expected option life       |  | 4.75 years                   |   |  | 10 years |  
|Expected annual volatility |  | 77                           | % |  | 75       | %
|Risk-free interest rate    |  | 4.74                         | % |  | 4.40     | %
|Dividend yield             |  | 0                            | % |  | 0        | %

Stock option grants issued prior to December 31, 2005 generally had five year vesting periods
and ten year lives. Grants issued since January 1, 2006 have four year vesting periods and seven year lives. A summary of options activity for the quarter ended March 31, 2006 is presented below:



|                               |  |           |   |  |                               |       |                                          |     |                               |   |      
|------------------------------ |  | --------- | - |  | ----------------------------- | ----- | ---------------------------------------- | --- | ----------------------------- | - | -----
|Options                        |  | Shares    |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue($000)
|Outstanding at January 1, 2006 |  | 1,267,767 |   |  | $                             | 5.97  |                                          | 8.2 |                               | $ | 7,568
|Granted                        |  | 47,650    |   |  |                               | 11.23 |                                          | 6.9 |                               |   | 535  
|Exercised                      |  | (91,410   | ) |  |                               | 1.04  |                                          |    |                               |   | 96   
|Forfeited or expired           |  |          |   |  |                               |      |                                          |    |                               |   |     
|                               |  |           |   |  |                               |       |                                          |     |                               |   |      
|Outstanding at March 31, 2006  |  | 1,224,007 |   |  | $                             | 6.54  |                                          | 8.0 |                               | $ | 8,007
|                               |  |           |   |  |                               |       |                                          |     |                               |   |      
|Exercisable at March 31, 2006  |  | 307,047   |   |  | $                             | 5.01  |                                          | 7.4 |                               | $ | 1,538
|                               |  |           |   |  |                               |       |                                          |     |                               |   |      

For the three months ended March 31, 2006, we recorded $0.3 million for stock-based
compensation expense related to stock option grants, which is reflected in general and administrative expense. At March 31, 2006, there is $4.5 million of total unrecognized compensation cost related to unvested stock options remaining to be
recognized. Of this total, approximately $1.0 million will be recognized in the remaining nine months of the current year, with the remainder recognized through 2010. Under SFAS 123R, any tax deductions in excess of recognized compensation costs are
reported as financing cash flows rather than operating cash flows as was prescribed prior to the adoption of SFAS 123R. Due to our significant net operating loss carryforwards (NOLs), we have not reflected these excess deductions since they have not
yet reduced taxes payable.

In 2000 and 2001, we effectively cancelled and reissued stock options in order to lower the exercise price of
those options to $0.656 per share, an amount approximating 150% of the then prevailing market value of our common stock (the repricing). The repricing of the stock options resulted in a new measurement date for accounting



Page 6



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. Aggregate non-cash compensation charges, therefore,
result to the extent that the market value at the respective period ending date exceeds the repriced exercise price of $0.656 per share. Relating to these repriced options, compensation benefit of $0.4 million was recorded in the three months ended
March 31, 2005. These amounts are included in general and administrative expenses. Upon our adoption of SFAS 123R, the repricing of shares was discontinued in accordance with the provisions of SFAS 123R.

If compensation cost for our stock option plans had been determined based on the fair value at the grant date for awards for the three months ended
March 31, 2005, our pro forma net income and pro forma net income per share would have been as follows:



|                                                                                   |  |      |       |  
|---------------------------------------------------------------------------------- |  | ---- | ----- | -
|                                                                                   |  | 2005 |      
|Net income  as reported                                                           |  | $    | 5,243 |  
|Add: Stock option repricing benefit  as reported                                  |  |      | 385   |  
|Less: General and administrative expenses for management stock option compensation |  |      | (261  | )
|                                                                                   |  |      |       |  
|Pro forma net income                                                               |  | $    | 5,367 |  
|                                                                                   |  |      |       |  
|Net income per share, basic  as reported                                          |  | $    | 0.29  |  
|Net income per share, diluted  as reported                                        |  |      | 0.28  |  
|Pro forma net income per share, basic                                              |  |      | 0.29  |  
|Pro forma net income per share, diluted                                            |  |      | 0.29  |  

In November, 2005, 170,000 restricted stock grants were issued to an employee and non-employee
directors that included performance criteria and were accounted for as variable plan awards under APB 25 prior to the adoption of SFAS 123R. Effective with the adoption of SFAS 123R, changes, either increases or decreases, in the estimated fair
value of the shares between the date of grant and the final vesting date generally do not result in a change in the measure of compensation cost as previously reported. Compensation cost for these grants is recognized as expense based on the
remaining service period and consideration of performance criteria included in the restricted grant. At December 31, 2005, we had recorded unearned stock compensation of $1.7 million as a component of stockholders equity based on our
prior treatment of the restricted stock grants under APB 25. As required under SFAS 123R, this balance was reversed into paid in capital upon adoption of SFAS 123R.

In March, 2006, an additional restricted stock grant of 62,500 shares was made to an employee. This grant was accounted for under the provisions of SFAS 123R. Accordingly, the full fair value compensation expense of
$0.7 million is being recorded over the three year service period.

A summary of the status of our nonvested restricted stock grants as of
March 31, 2006 and changes during the quarter ended March 31, 2006 is presented below:



|                                  |  |         |  |                                       
|--------------------------------- |  | ------- |  | --------------------------------------
|Nonvested Restricted Stock Grants |  | Shares  |  | Weighted-Average Grant-Date Fair
Value
|Nonvested at January 1, 2006      |  | 170,000 |  | 9.34                                  
|Granted                           |  | 62,500  |  | 11.23                                 
|Vested                            |  |        |  |                                      
|Forfeitied                        |  |        |  |                                      
|                                  |  |         |  |                                       
|Nonvested at March 31, 2006       |  | 232,500 |  | 9.85                                  
|                                  |  |         |  |                                       



Page 7



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

5. INVENTORIES

The following is a summary of
inventories:



|                           |  |                |        |                   |   |       
|-------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                           |  | March 31, 2006 |        | December 31, 2005
|Raw materials and supplies |  | $              | 7,134  |                   | $ | 8,395 
|Work in progress           |  |                | 12,352 |                   |   | 1,432 
|Finished goods             |  |                | 276    |                   |   | 93    
|Service inventories        |  |                | 3,700  |                   |   | 4,564 
|                           |  |                |        |                   |   |       
|                           |  |                | 23,462 |                   |   | 14,484
|Reserve for obsolescence   |  |                | 396    |                   |   | 392   
|                           |  |                |        |                   |   |       
|Total inventories          |  | $              | 23,066 |                   | $ | 14,092
|                           |  |                |        |                   |   |       

During the three months ended March 31, 2006, a supplier provided product to us which did not meet
our specification, quantity and delivery schedule requirements. Our contract manufacturer therefore, was unable to produce enough radios to meet our customers demand, resulting in increased inventory levels due to scheduled product deliveries
from other vendors and decreased product shipments to customers. We believe we have satisfactorily addressed this supply chain issue and have resumed delivering product to customers.

During the three months ended March 31, 2005, we transferred all inventories located at EFJohnsons Waseca, Minnesota plant (which was closed
as of March 31, 2005) to our Irving, Texas facility. In the course of this transfer, we sold approximately $1.7 million of raw materials to the vendor with whom EFJohnson has outsourced its wireless communication manufacturing. This sale was in
addition to the $2.4 million sale of raw material inventory to such vendor in the fourth quarter of 2004. These inventory sales were in exchange for non-interest-bearing notes calling for monthly payments to be not less than actual inventories
consumed by the vendor in the course of manufacturing EFJohnsons products. Other receivables at March 31, 2006 and December 31, 2005 are substantially comprised of amounts owed pursuant to these note agreements and other transfers of
component inventories to this contract manufacturer. We have a security interest in the inventories, and the transactions were recorded as inventory transfers and not as revenue. In addition, we recognized no gain or loss on the exchange.

6. INTANGIBLE ASSETS

We do not
amortize our goodwill and tradename, both of which relate solely to EFJohnson, but instead review such assets for impairment, at least annually. We performed fair value-based impairment tests at December 31, 2005 and 2004 and concluded that no
impairment of goodwill or tradename had occurred as of such dates. No events occurred during the three months ended March 31, 2006 and 2005, respectively, which would indicate that an impairment of such assets had taken place as of such dates.



Page 8



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

Amortization expense, related to intangible assets which are subject to amortization, was $0.002 million for each of the three months ended
March 31, 2006 and March 30, 2005. Intangible assets consist of the following as of the dates indicated:



|                                               |  |                |  |                   |       |  |       |  |   |      
|---------------------------------------------- |  | -------------- |  | ----------------- | ----- |  | ----- |  | - | -----
|                                               |  | March 31, 2006 |  | December 31, 2005
|Intangible assets not subject to amortization: |  |                |  |                   |       |  |       |  |   |      
|Goodwill                                       |  |                |  | $                 | 5,126 |  |       |  | $ | 5,126
|Tradename                                      |  |                |  |                   | 1,564 |  |       |  |   | 1,564
|Intangible assets subject to amortization:     |  |                |  |                   |       |  |       |  |   |      
|Proprietary and core technology                |  | 1,290          |  |                   |       |  | 1,290 |  |   |      
|Less: accumulated amortization                 |  | 1,290          |  |                   |      |  | 1,290 |  |   |     
|                                               |  |                |  |                   |       |  |       |  |   |      
|Trademarks/Patents                             |  | 115            |  |                   |       |  | 113   |  |   |      
|Less: accumulated amortization                 |  | 64             |  |                   | 51    |  | 62    |  |   | 51   
|                                               |  |                |  |                   |       |  |       |  |   |      
|Total                                          |  |                |  | $                 | 6,741 |  |       |  | $ | 6,741
|                                               |  |                |  |                   |       |  |       |  |   |      

7. REVOLVING LINE OF CREDIT

We renewed our line of credit agreement with Bank of America in September 2004. The secured $15.0 million line of credit bears interest at LIBOR plus 150 basis points (6.33% at March 31, 2006). The line of credit
is collateralized by substantially all of our assets, and borrowings available under the line of credit are calculated as a percentage of eligible inventory and accounts receivable. The agreement, which expires September 30, 2007, includes
certain covenants, including financial covenants, with which we were in compliance as of March 31, 2006 and December 31, 2005. At March 31, 2006 and December 31, 2005, we had no amounts outstanding on our line of credit. The
total available credit under the line of credit was $11.6 million as of March 31, 2006.

8. WARRANTY COSTS

We provide a one-to-two year warranty on substantially all of our product sales, depending upon certain terms and conditions of the sale, and estimate
future warranty claims based on historical experience and anticipated costs to be incurred over the life of the warranty. 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 both extraordinary and determinable. A reconciliation of changes in our accrued warranty reserve as of March 31, 2006 is as follows:



|                               |  |                             |       |                   |     |                         |     |                          |   |      
|------------------------------ |  | --------------------------- | ----- | ----------------- | --- | ----------------------- | --- | ------------------------ | - | -----
|                               |  | Balance atDecember 31, 2005 |       | Charged toExpense |     | Deduction /Expenditures |     | Balance atMarch 31, 2006
|Allowance for Warranty Reserve |  | $                           | 2,693 |                   | 253 |                         | 424 |                          | $ | 2,522
|                               |  |                             |       |                   |     |                         |     |                          |   |      

9. COMMITMENTS AND CONTINGENCIES

We are presently disputing a certain state tax liability totaling approximately $0.2 million. We believe the basis for the states assessments of the
amount owed is incorrect, and we intend to vigorously contest such assessment. At March 31, 2006 and December 31, 2005, we had recorded a liability related to this assessment, which amount reflects our evaluation of the eventual conclusion
of these matters.

We are involved in certain other legal proceedings incidental to the normal conduct of our business. We do not believe
that any liabilities relating to such other legal proceedings are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or cash flows.



Page 9



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

In the normal course of our business activities, we are required under contracts with various government authorities to provide letters of credit and
bonds that may be drawn upon if we fail to perform under these contracts. At both March 31, 2006 and December 31, 2005 we had open letters of credit totaling $0.3 million. Bonds, which expire on various dates, totaled $1.0 million on
March 31, 2006 and $0.5 million on December 31, 2005, and no bonds had been drawn upon at either date.

10. SEGMENT AND RELATED INFORMATION

We operate in two reporting segments that both operate in the LMR industry. These segments are our two operating subsidiaries:
EFJohnson and Transcrypt. Although both segments have product offerings that have some market similarity, EFJohnsons operations primarily include the design, development, marketing, and support of wireless infrastructure, mobile and portable
wireless radios, and wireless communication systems, while Transcrypts operations primarily include the design, development, marketing, and support of devices that prevent the unauthorized interception of sensitive voice communication. We
evaluate segment results based on gross margin and income from operations. Corporate general and administrative expenses, exclusive of charges or benefits associated with variable accounting for repriced stock options, are allocated to the operating
segments based upon estimated usage of corporate resources. The following table is a summary of the unaudited operating results for the three months ended March 31, 2006 and 2005.



|                                               |  |                              |         |   |      |   |        |  
|---------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                               |  | Three Months Ended March 31, |        
|In thousands                                   |  | 2006                         |         |   | 2005 |  
|Revenues:                                      |  |                              |         |   |      |   |        |  
|Private Wireless Communications                |  | $                            | 4,563   |   |      | $ | 10,213 |  
|Secured Communications                         |  |                              | 6,000   |   |      |   | 13,948 |  
|                                               |  |                              |         |   |      |   |        |  
|                                               |  | $                            | 10,563  |   |      | $ | 24,161 |  
|                                               |  |                              |         |   |      |   |        |  
|Gross Profit:                                  |  |                              |         |   |      |   |        |  
|Private Wireless Communications                |  | $                            | 532     |   |      | $ | 3,054  |  
|Secured Communications                         |  |                              | 5,017   |   |      |   | 12,269 |  
|                                               |  |                              |         |   |      |   |        |  
|                                               |  | $                            | 5,549   |   |      | $ | 15,323 |  
|                                               |  |                              |         |   |      |   |        |  
|Operating Profit:                              |  |                              |         |   |      |   |        |  
|Private Wireless Communications                |  | $                            | (6,423  | ) |      | $ | (5,028 | )
|Secured Communications                         |  |                              | 2,894   |   |      |   | 9,827  |  
|                                               |  |                              |         |   |      |   |        |  
|Income (Loss) from Operations before Repricing |  |                              | (3,529  | ) |      |   | 4,799  |  
|                                               |  |                             
|Stock Option Repricing Adjustment, net         |  |                              |        |   |      |   | 395    |  
|Other Income (Expense), net                    |  |                              |        |   |      |   | 4      |  
|                                               |  |                              |         |   |      |   |        |  
|Income (Loss) before Income Taxes and Interest |  | $                            | (3,529  | ) |      | $ | 5,198  |  
|                                               |  |                              |         |   |      |   |        |  
|Depreciation and Amortization:                 |  |                              |         |   |      |   |        |  
|Private Wireless Communications                |  | $                            | 467     |   |      | $ | 263    |  
|Secured Communications                         |  |                              | 60      |   |      |   | 48     |  
|                                               |  |                              |         |   |      |   |        |  
|                                               |  | $                            | 527     |   |      | $ | 311    |  
|                                               |  |                              |         |   |      |   |        |  
|Assets:                                        |  |                              |         |   |      |   |        |  
|Private Wireless Communications                |  | $                            | 48,875  |   |      | $ | 37,619 |  
|Secured Communications                         |  |                              | 44,365  |   |      |   | 18,256 |  
|Corporate                                      |  |                              | 35,350  |   |      |   | 14,697 |  
|                                               |  |                              |         |   |      |   |        |  
|                                               |  | $                            | 128,590 |   |      | $ | 70,572 |  
|                                               |  |                              |         |   |      |   |        |  



Page 10



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March
31, 2006 and 2005

(Unaudited and in thousands, except share and per share data)

11. SALE/LEASEBACK TRANSACTION

On March 31,
2006, EFJohnson exercised an option under an existing lease agreement to purchase the facility at 1440 Corporate Drive in Irving, Texas for $3.6 million. Simultaneously, EFJohnson sold the facility to an unrelated party for $4.6 million and EFJ,
Inc. executed a 10-year lease for the facility. The aggregate effect of the purchase and sale transactions was a gain of $1.0 million, which has been deferred at March 31, 2006 and is recorded in accrued liabilities in the accompanying
financial statements. The settlement funds were received on April 3, 2006, and accordingly, the net funds due of $1.0 million is recorded in other receivables at March 31, 2006.

The 10-year lease executed by EFJ, Inc. covered the entire facility purchased and sold in the previous transactions; therefore, the gain has been
deferred and will be amortized over the term of the lease as a reduction of rent expense in general and administrative expenses.

12. RELOCATION OF
OPERATIONS

On April 14, 2004, we announced our decision to move EFJohnsons operations, including outsourcing of its
manufacturing, from its facility in Waseca, Minnesota to Irving, Texas. This move was completed as of March 31, 2005 at a total cost of $1.9 million. A significant portion of EFJohnsons workforce was replaced or otherwise terminated in
relation to this move.

On February 28, 2005, we announced our decision to move our Corporate Headquarters to Irving, Texas,
co-located with EFJohnsons operations. This move was substantially complete at the end of the second quarter of 2005.

The timing of
the recognition of costs associated with these moves are determined based on the fair value in the period in which the liability is incurred. In particular, employee-related termination costs associated with the relocations are generally recognized
ratably over the period that the employees are required to provide services in order to earn the respective termination benefit.

In
relation to these moves, we incurred costs of $0 and $0.5 million, respectively, in the three months ended March 31, 2006 and 2005.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Discussions of certain matters contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the Exchange Act). These forward-looking statements are based upon our current expectations, estimates
and projections about our business and our industry, and that reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as if,
may, might, will, should, expects, plans, anticipates, believes, estimates, predicts, potential,
continue, and other similar terms. These forward-looking statements relate to, among other things, the results of our product development efforts, future sales and expense levels, our future financial condition, liquidity, and business
prospects generally, the impact of our relocation of operating facilities, and outsourcing of EFJohnsons manufacturing on our operating results, perceived opportunities in the marketplace for our products, and our other business plans for the
future.

These forward-looking statements are subject to certain risks and uncertainties that could cause the actual results, performance
and outcomes to differ materially from those expressed or implied in these forward-looking statements due to a number of risk factors including, but not limited to, the risks discussed in the 2005 Annual Report on Form 10-K under Item 1A
Risk Factors and in Part II of this report on Form 10-Q under Item 1A Risk Factors. We caution readers not to rely on these forward-looking statements, which reflect managements analysis only as of the
date of this quarterly report. We undertake no obligation to revise or update any forward-looking statement for any reason.

The following
discussion is intended to provide a better understanding of the significant changes in trends relating to our financial condition and results of operations. Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto.

Overview

We design, develop, market and support private wireless communications, including wireless radios and wireless communications infrastructure and systems
for digital and analog platforms. In addition, we offer encryption technologies for analog wireless radios. We provide our products and systems to homeland security, defense, public safety and public service, commercial users and international
markets. Customers for our products and systems include federal, state and local governmental entities, domestic enterprise users, and international entities.

Due to the timing of orders and seasonality, our quarterly results fluctuate. In our private wireless communications segment, we experience seasonality in our results in part due to governmental customer spending
patterns that are influenced by government fiscal year-end budgets and appropriations. The impact of this is primarily realized in the fourth quarter, consistently our strongest quarter. The unpredictable sales cycle and aftermarket nature of our
secured communications business can also cause significant variations from quarter to quarter.

Private Wireless
Communications

Our private wireless communications segment designs, develops, markets and supports secure wireless radios, wireless
communications infrastructure and systems. Our wireless radio offerings are primarily digital solutions designed to operate in both conventional analog and newer digital system environments. Our products and systems are based on industry standards
designed to enhance interoperability among systems, improve bandwidth efficiency, and integrate voice and data communications.

The private
wireless communications industry provides two-way wireless communications through wireless networks, which include infrastructure components such as base stations, transmitters and receivers, network switches and portable and mobile two-way
communication radios. Individual users operate portable hand-held radios and vehicular-mounted radios in the private wireless communications system. Utilizing free licensed RF spectrum, the customer owns and operates the private wireless
communications system, that is networked by linking the infrastructure components together. We develop customer solutions, which leverage the customers private wireless system and wireless radios with customer specific or enterprise wide
applications.



Page 12



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The majority of revenues in our private wireless communications segment are derived from the sale of
wireless radio products. Our federal, state and local governmental agency customers are increasingly demanding interoperable, secured, private wireless communications products and systems. We believe this demand has created significant opportunities
for us as we believe we are well positioned to provide these products and systems. As a result, we expect to continue to allocate an increasing share of our on-going research and development expenditures to infrastructure components and system
development efforts. We shipped our first trunked system in the second quarter of 2005.

In 2004, we relocated our private wireless
communications operations from Waseca, Minnesota to Irving, Texas to benefit from a larger and more experienced engineering and marketing community, and to increase synergistic opportunities with other local technology providers. Concurrent with
this move, we began to outsource the manufacturing of our products and systems.

Secured Communications

Our secured communications segment designs, develops, markets and supports secured communications products such as highly secure encryption technologies
for analog wireless radios. These products are specifically designed to prevent unauthorized access to sensitive voice communications.

Our
secured communications segment leverages our leading market position to gain new customers in parts of the world where wireless radio systems remain analog, security needs are high, and the cost to upgrade to a digital secured communications system
is usually prohibitive. Our secured communications products are sold as aftermarket add-on components or embedded components for existing analog radios and systems. We have also developed an analog encryption product that uses digital technology in
order to obtain higher levels of security and allows for compatibility with our analog encryption product line.

Sales

Our private wireless communications products and systems are sold domestically through a direct sales force, dealers and manufacturing representatives. We
utilize our dealer network to assist in installing, servicing, selling and distributing our products. Our secured communications sales are achieved through a select group of dealers and distributors.

Much of our private wireless business is obtained through submission of formal competitive bids. Our governmental customers generally specify the terms,
conditions and form of the contract. Government business is subject to government funding decisions and contract types can vary widely, including fixed-priced, indefinite-delivery/indefinite quantity, or IDIQ, and government-wide acquisition
contracts with the General Services Administration, or GSA, which requires pre-qualification of vendors and allows government customers to more easily procure our products and systems.

Description of Operating Accounts

Revenues. Revenues consist of product sales and services
net of returns and allowances and system sales revenues recognized under the percentage of completion method.

Cost of Sales. Cost
of sales includes costs of components and materials, labor, depreciation and overhead costs associated with the production of our products, as well as shipping, royalty, inventory reserves, warranty product costs, and incurred cost under sales
contracts.

Gross Profit. Gross profit is net revenues less the cost of sales and is affected by a number of factors, including
competitive pricing, product mix, business segment mix, and cost of products and services.



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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. We expense all research and development costs as they are incurred.

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.

General and Administrative.
General and administrative expenses consist primarily of salaries and other expenses associated with our management, accounting, IT and administrative functions. This expense also includes the impact of equity-based compensation expense, the
variable accounting treatment of repriced stock options prior to the adoption of SFAS 123R and costs related to our operating facilities moves.

Net Interest Income or Expense.Net interest income (expense) consists of interest income earned on cash and invested funds, net of interest expense capital leases and commitment fees on the bank line of credit.

Provision for Income Taxes. Provision (benefit) for income taxes includes the increase or decrease in the valuation reserve that is based upon
managements conclusions regarding, among other considerations, our historical operating results and forecasted future earnings over a five year period, our current and expected customer base projections, and technological and competitive
factors impacting our current products. Current financial accounting standards require that organizations analyze all positive and negative evidence relating to deferred tax asset realization, which would include our historical accuracy in
forecasting future earnings, as well as our history of losses prior to 2001. Should factors underlying managements estimates change, future adjustments, either positive or negative, to our valuation allowance may be necessary. Our tax asset is
principally composed of net tax benefits associated with net operating loss carryforwards, or NOLs.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or
GAAP, requires management to make judgments, estimates and assumptions in certain circumstances that affect the amounts reported in the consolidated financial statements and related footnotes. We regularly evaluate the accounting policies and
estimates used to prepare our 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, warranty reserves, valuation allowance for deferred income tax assets, and contingencies. These estimates are based on historical experience and various assumptions that we believe to be reasonable under the particular
applicable facts and circumstances. Actual results could differ from those estimates.

We consider our critical accounting policies to be
those that involve significant judgments and uncertainties, require estimates that are more difficult for management to determine, and have the potential to result in materially different outcomes under varying assumptions and conditions. The
application of GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. Listed below are those policies we believe are critical and require the use of complex
judgment in their application.

Revenues

Product revenues are recognized when the earnings process is complete, less an estimate for an allowance for returns, if applicable, and 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 as typically we have no further
obligations with respect to the sale which impact the functionality of the product. For sales where collection is not reasonably assured, we recognize revenues as cash is received. If collection is contingent on a future event, we recognize revenues
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 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 in operations as soon as such losses are determined to be probable and reasonably
estimable.



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Deferred revenues include unearned services provided under systems maintenance contracts. We recognize
the fees based upon a straight-line method over the life of the contract.

We periodically review our revenue recognition procedures to
assure that such procedures are in accordance with the provisions of Staff Accounting Bulletins 101 and 104, Statement of Position 88-1 and other interpretations, as applicable. In addition, while most of our current products contain software, we
believe the software is incidental in the overall context of our products features and functionality, therefore, at present we do not use revenue recognition pronouncements applicable to software sales.

Inventories

Inventories are recorded at the
lower of cost or market with cost determined by the first-in, first-out, or FIFO, method. We periodically assess our inventories for potential obsolescence and lower-of-cost-or-market issues. We make estimates of inventory obsolescence, providing
reserves when necessary, based on, among other factors, demand for inventories based on backlog, product pricing, the ability to liquidate or sell older inventories, and the impact of introducing new products. A significant portion of our
inventories is comprised of components and parts on hand to support maintenance of products previously sold. As such, we anticipated utilizing such inventories over extended periods of time. Our obsolescence and lower of cost-or-market accounting
policies provide for a periodic adjustment to the carrying value of such inventories.

Goodwill and Other Intangibles Assets

At least annually, we assess goodwill and tradename, using fair value-based tests. If the respective carrying amount exceeds the fair value, goodwill or
tradename are considered to be impaired. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill and present value implied by estimates of future revenues, costs and expenses, other factors. The
estimates use assumptions about our market segment share in the future and about future expenditures by government entities for private wireless communications products. We continually evaluate whether events and circumstances have occurred that
indicate the remaining balance of goodwill or tradename may not be recoverable.

Income Taxes

We account 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 our deferred tax asset, management takes into account, among other factors, our historical operating results, our current and expected customer base, technological and
competitive factors impacting our current products, and managements estimates of future earnings that are based upon a five-year earnings projection, using information currently available, and discounted for risk. If we fail to achieve revenue
growth rates or gross margins assumed in the calculation of the deferred tax asset, we may be required to increase our valuation allowance in the future.

Long-Lived Assets

We review our 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:



| |  |  | a significant decrease in the market price of the asset;
| | - |  | --------------------------------------------------------



| |  |  | a significant change in the extent or manner in which the asset is being used;
| | - |  | ------------------------------------------------------------------------------



| |  |  | a significant change in the business climate that could affect the value of the asset;
| | - |  | --------------------------------------------------------------------------------------



Page 15



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| |  |  | a current period loss combined with projection of continuing loss associated with use of the asset; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

We continually evaluate 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 our long-lived assets, we may be required to impair these assets.

Stock-based Compensation

We account for
stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). Under the fair value recognition provisions of SFAS 123R, stock-based
compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of
stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates and expected option life.

Results
of Operations

The following table presents certain Condensed Consolidated Statements of Operations information as a percentage of
revenues during the periods indicated:



|                                   |  |                             |    |  |       |  
|---------------------------------- |  | --------------------------- | -- |  | ----- | -
|                                   |  | Three Months EndedMarch 31, |   
|                                   |  | 2006                        |    |  | 2005  |  
|Revenues                           |  | 100.0                       | %  |  | 100.0 | %
|Cost of sales                      |  | 47.5                        |    |  | 36.6  |  
|                                   |  |                             |    |  |       |  
|Gross profit                       |  | 52.5                        |    |  | 63.4  |  
|                                   |  |                             |    |  |       |  
|Operating expenses:                |  |                             |    |  |       |  
|Research and development           |  | 26.0                        |    |  | 16.4  |  
|Sales and marketing                |  | 19.8                        |    |  | 12.2  |  
|General and administrative (1) (2) |  | 40.1                        |    |  | 13.3  |  
|                                   |  |                             |    |  |       |  
|Total operating expenses           |  | 85.9                        |    |  | 41.9  |  
|                                   |  |                             |    |  |       |  
|Income (Loss) from operations      |  | (33.4                       | )  |  | 21.5  |  
|Interest income (expense)  net    |  | 4.0                         |    |  | 0.2   |  
|Other income (expense)             |  |                            |    |  |      |  
|                                   |  |                             |    |  |       |  
|Income (Loss) before income taxes  |  | (29.4                       | )  |  | 21.7  |  
|Income tax provision               |  |                            |    |  |      |  
|                                   |  |                             |    |  |       |  
|Net income (loss)                  |  | (29.4                       | )% |  | 21.7  | %
|                                   |  |                             |    |  |       |  

---

|(1) | Includes non-cash equity compensation (benefit) expense of 3.5% and (1.6)% in the three months ended March 31, 2006 and 2005, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes facility move costs of 2.1% in the three months ended March 31, 2005
|--- | -----------------------------------------------------------------------------

Comparison of the Three Months Ended March 31, 2006 and 2005

Revenues.Our revenues
decreased $13.6 million, or 56%, to $10.6 million for the three months ended March 31, 2006 from $24.2 million for the same period in 2005. In the first quarter of 2006, the private wireless communications segment revenues comprised $4.6
million, or 43% of total revenues, as compared to $10.2 million or 42% of total revenues in the first quarter of 2005. Revenues from the secured communications segment comprised $6.0 million, or 57% of total revenues, as compared to $13.9 million or
58% of total revenues in the first quarter of 2005.



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Private wireless communications revenues decreased $5.6 million to $4.6 million in the first three months
of 2006 from $10.2 million in the same period in 2005. This 55% decrease was principally the result of a reduction in product shipments in the first quarter of 2006 due to a supplier providing product to us which did not meet our specification,
quantity and delivery schedule requirements. Our contract manufacturer therefore, was unable to produce enough radios to meet our customers demand. We believe we have satisfactorily addressed the supply chain issue and have resumed delivering
products to customers.

Secured communications revenues decreased $7.9 million to $6.0 million in the first three months of 2006 from $13.9
million in the same period in 2005. This 57% decrease was primarily due to $11.7 million of sales to the Middle East in the first quarter of 2005, compared to $5.1 million of sales to the Middle East in the first quarter of 2006.

Gross Profit.Our gross profit decreased $9.8 million, or 64%, to $5.5 million in the three months ended March 31, 2006 from $15.3 million
for the same period in 2005. Gross profit, as a percentage of revenue, or gross margin, was 53% for the three months ended March 31, 2006, as compared to 63% for the same period in 2005.

In the first three months of 2006, gross margin for the private wireless communications segment was 12%, compared to 30% in the first three months of
2005. The private wireless communications gross margin for the first three months of 2006 was negatively impacted by reduced shipments and unabsorbed overheads. Additionally, we anticipate the costs required to obtain product from the supplier that
meets our specifications will negatively impact our margin level in the second and third quarters of 2006.

Gross margin for the secured
communications segment decreased to 84% in the first three months of 2006 from 88% in the first three months of 2005. The lower 2006 margin for the secured communications segment resulted from economies of scale achieved at the materially higher
2005 revenue.

Research and Development.Research and development expenses decreased $1.2 million, or 31%, to $2.7 million in the
three months ended March 31, 2006 from $4.0 million in the same period in 2005. Research and development expenses were 26% of revenues in the first quarter of 2006, as compared to 16% during the same period in 2005.

We experienced a non-recurring engineering benefit of approximately $0.6 million in the first quarter of 2006 associated with the 800 MHz product line.
We anticipate receiving approximately $0.1 million benefit in the second quarter of 2006 as we complete the engineering effort associated with this project. The remaining decrease in research and development expenses in 2006 related primarily to the
significant development in the same period in 2005 involved in our wireless communications replacement RF module, the integration of the module into our radios, and the resources required to finalize releases of our conventional and trunking
infrastructure products. These development projects were significantly completed in June 2005.

Sales and Marketing.Sales and
marketing expenses decreased $0.9 million, or 29%, to $2.1 million for the three months ended March 31, 2006 from 3.0 million for the same period in 2005. This decrease reflects the reduction in commissions as a result of the revenue
decreases in the first quarter of 2006. Sales and marketing expenses were 20% of revenues in the first quarter of 2006, as compared to 12% of revenues in the same period of 2005.

General and Administrative.General and administrative expenses increased $1.0 million, or 32%, to $4.2 million for the three months ended
March 31, 2006 from $3.2 million for the same period in 2005. General and administrative expenses were 40% of revenues in the first quarter of 2006, as compared to 13% during the same period in 2004. General and administrative expenses
increased in the first quarter of 2006 by $0.4 million due to equity compensation expense recorded upon our adoption of SFAS 123R and by $0.4 million for due diligence costs associated with pursuing acquisition opportunities. In the same period of
2005, we recorded a benefit of $0.4 million related to the variable repricing of certain stock options. The variable repricing of these options was discontinued upon our adoption of SFAS 123R.



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General and administrative expenses include amounts for equity compensation expense and compliance with
Section 404 of the Sarbanes-Oxley Act. We expect that these costs will continue.

Net Interest Income/Expense.Net interest
income/(expense) increased $0.4 million to $0.4 million for the three months ended March 31, 2006 from $0.04 million for the same period in 2005.

Other Income/Expense, Net.Net other income/(expense) was $0 for the three months ended March 31, 2006, as compared to $0.004 million for the same period in 2005.

Provision for Income Taxes.We did not record a tax benefit or provision for either the three months ended March 31, 2006 or 2005. For each
of these periods, changes in our deferred tax assets were offset by changes in the valuation allowance. The valuation reserve is based upon managements conclusions regarding, among other considerations, our operating results during 2006, our
current and expected customer base, technological and competitive factors impacting our current products, and managements estimates of future earnings based on information currently available.

Net Loss/Income.Net loss was $3.1 million for the three months ended March 31, 2006, a decrease of 159% or $8.3 million, as compared to net
income of $5.2 million for the same period in 2005.

Liquidity and Capital Resources

Based upon our current level of operations, we expect that our cash flow from operations will be adequate to meet our anticipated needs for at least the
next twelve months. On August 24, 2005 we completed the sale of 6,900,000 shares of our common stock for $45.6 million. In support of this transaction, we incurred $0.6 million in costs which were offset against the proceeds from the sale, for
a net increase to Paid in Capital of $45.0 million.

Net cash from operating activities.Our operating activities provided cash of
$8.0 million and $6.3 million in the three months ended March 31, 2006 and 2005, respectively. Cash provided by or used in operating activities is primarily a reflection of our collections on billed receivables, investment in inventories and
expenditures for operations.

During the first quarter of 2006, we collected $36.5 million of billed receivables which effectively
increased cash from operating activities by $25.2 million. These collections included three significant accounts with departments of the federal government included in the private wireless communications segment at December 31, 2005.
Additionally, $9.4 million was used to purchase inventories and $5.6 million was used for other operating expenses. The increase in inventory and decrease in accounts receivable reflect the significant decrease in revenue in the private wireless
communications segment during the quarter ended March 31, 2006. This 55% decrease was principally the result of a reduction in product shipments in the first quarter of 2006 due to a supplier providing product to us which did not meet our
specification, quantity and delivery schedule requirements. Due to the time required to diagnose and modify the supplier-provided product, our contract manufacturer was unable to produce radios for a portion of the quarter ended March 31, 2006,
resulting in increased inventory levels due to receipts of scheduled product deliveries and decreased accounts receivable due to reduced product shipments and billings. We believe we have satisfactorily addressed this supply chain issue and have
resumed delivering products to customers.

During the first quarter of 2005, we collected $32.9 million of billed receivables which
increased cash from operating activities by $6.4 million. During the three months ended March 31, 2005, $1.5 million of cash was used to purchase inventories and $3.3 million was used for other operating expenses.

Net cash from investing activities. During the three months ended March 31, 2006 and 2005, investing activities provided $0.4 million and
used $0.4 million, respectively. In 2006, $3.6 million was used to purchase and $4.6 million was provided from the sale of the EFJohnson facility in Irving, Texas on March 31, 2006. In both the 2006 and 2005, $0.7 million was used to purchase
other property, plant and equipment.

Net cash from financing activities. Financing activities used $0.9 million and provided $0.1
million during the three months ended March 31, 2006 and 2005, respectively. The deferral of the gain from the sale of the EFJohnson Irving, Texas facility utilized $1.0 million during 2006.

Letters of credits and bonds. In the normal course of our business activities related to sales of wireless



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radio systems to local and state governmental entities, we are required under contracts with various government
authorities to provide letters of credit or performance or bid bonds that may be drawn upon if we fail to perform under our contracts. Our outstanding letters of credit had a total undrawn balance of $0.3 million on March 31, 2006. Performance
and bid bonds, which expire on various dates, totaled $1.0 million at March 31, 2006. Our current bonding arrangement calls for zero-collateral bonding up to $7.0 million; however, no single bond may exceed $2.0 million. We believe our bonding
arrangements provide us with sufficient bonding availability through 2006.

Secured line of credit. We have a secured $15.0 million
revolving line of credit with Bank of America that bears interest at LIBOR plus 150 basis points. The revolving line of credit is collateralized by substantially all of our 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 and negative covenants. Financial covenants include requirements to maintain: a tangible net worth of
$19.9 million plus 75% of preceding fiscal years net income; funded debt to EBITDA ratio of 2.5 to 1; fixed charge coverage ratio of 1.75 to 1; and positive EBITDA over any preceding two quarter period. Negative covenants include restrictions
on incurring debt above $3.0 million, encumbrances, acquisitions, transferring assets, or making large capital expenditures. We were in compliance with all financial and negative covenants at March 31, 2006. At March 31, 2006, we had no
amounts outstanding on the revolving line of credit, and the total available line of credit was $11.6 million.

Dividend policy.
Since our initial public offering, we have not declared or paid any dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the
discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions and other factors that our board of directors deems
relevant.

Backlog. Our backlog of unfilled orders at March 31, 2006 was $71.0 million, compared to a backlog of $62.3 million
at December 31, 2005 and $15.5 million at March 31, 2005. Our secured communications products typically have a short turnaround cycle. In contrast, our private communications products typically have a longer turnaround cycle due to
customer system integration and contract delivery requirements, which may span multiple years.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or variable interest entities, or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We
are not involved in any VIE transactions.

Recently Issued Accounting Standards

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations,an interpretation of SFAS
No. 143, Accounting for Asset Retirement Obligations. This Interpretation clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, refers to a legal obligation to perform an asset
retirement activity in which the timing and / or method of settlement are conditional on a future event that may or may not be within the control of the entity. This pronouncement is not anticipated to have a material effect on our consolidated
financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123(revised) (SFAS 123R),
Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R 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. We adopted SFAS 123R as of January 1, 2006.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Although all of our 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 our 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 us. While most international sales are supported by letters of credit or cash
in advance, the purchase of our products by international customers presents increased risks, which include:



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | tariffs and other trade barriers;
| | - |  | ---------------------------------



| |  |  | political and economic instability in foreign markets;
| | - |  | ------------------------------------------------------



| |  |  | difficulties in establishing foreign distribution channels;
| | - |  | -----------------------------------------------------------



| |  |  | longer payment cycles or uncertainty in the collection of accounts receivable;
| | - |  | ------------------------------------------------------------------------------



| |  |  | increased costs associated with maintaining international marketing efforts;
| | - |  | ----------------------------------------------------------------------------



| |  |  | cultural differences in the conduct of business;
| | - |  | ------------------------------------------------



| |  |  | natural disasters or acts of terrorism;
| | - |  | ---------------------------------------



| |  |  | difficulties in protecting intellectual property; and
| | - |  | -----------------------------------------------------



| |  |  | susceptibility to orders being cancelled as a result of foreign currency fluctuations since all our quotations and invoices are denominated in U.S. dollars.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Some of our secured communications 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. We cannot assure that such approvals will be available to us or our 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. Our inability to obtain required export approvals would adversely affect our international sales, which would have a material adverse effect on us. In
addition, foreign companies not subject to United States export restrictions may have a competitive advantage in the international secured communications market. We cannot predict the impact of these factors on the international market for our
products.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) reviewed and evaluated our disclosure controls and procedures, as defined in Rule 240.13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO
have concluded that our disclosure controls and procedures were effective as of March 31, 2006.

Internal Controls Over Financial Reporting

During the fiscal year 2005, we designed, developed, and implemented new/modified control procedures associated with inventory costing,
purchasing, shipping, and receiving with our outsource manufacturing providers. In response to the increased risk imposed by these changes, we increased the nature and extent of analytical review and analysis of the accounts impacted by these
changes. In addition, we initiated timely investigations to evaluate and correct process controls and transaction processing as deemed necessary. Further, we planned and executed a full physical inventory count and cost review of specific inventory
segments impacted by the specified risks and coordinated with Internal Audit to conduct special process audits to help identify critical control points.

In the quarter ended March 31, 2006, we improved both internal and operational controls over physical inventories by including routine cycle count processes in our procedures such that we discontinued our
quarterly physical inventory process.

During the quarter ended March 31, 2006, we instituted improved controls associated with the
account reconciliation and review process to ensure that all significant account balances have been reconciled, as necessary, prior to release of financial statements in external reports. We intend to continue to enhance our internal controls
associated with these processes. In preparation of our financial statements as of and for the period ended March 31, 2006, management believes that our internal controls over these processes are operating and effective.



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There were no other changes in our internal controls over financial reporting during the quarter ending
March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART
II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDING

See Note 9 to the Notes to Condensed Consolidated Financial Statements in Part I, Item 1.

ITEM 1A. RISK
FACTORS

Risk Factors Related to Our Business

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations and trading
price of our common stock. Item 1A of our annual report on Form 10-K for fiscal year 2005 includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and
information disclosed in the Form 10-K.

Our reliance on third-party suppliers poses significant risks to our business and prospects.

We subcontract the manufacture of substantially all of our hardware components for all of our products, including integrated circuits, printed circuit
boards, connectors, cables, power supplies, and certain RF modules, on a sole or limited source basis to third-party suppliers. We use contract manufacturers to assemble our components for all of our systems. We are subject to substantial risks
because of our reliance on these and other limited or sole source suppliers.

For example:



| |  |  | if a supplier did not provide components that met our specifications in sufficient quantities, then production and sale of our products would be delayed or otherwise adversely
affected;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if a reduction or an interruption of supply of our components occurred, either because of a significant problem with a supplier not providing parts on time or providing parts that
later prove to be defective or a single-source supplier deciding to no longer provide those components to us, it could take us a considerable period of time to identify and qualify alternative suppliers to redesign our products as necessary and to
begin manufacture of the redesigned components or we may not be able to so redesign such components;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if we were unable to locate a supplier for a key component, we would be unable to complete and deliver our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | one or more suppliers could make strategic changes in their product offerings, which might delay, suspend manufacture or increase the cost of our components or systems; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | some of our key suppliers are small companies with limited financial and other resources, and consequently may be more likely to experience financial and operational difficulties
than larger, well-established companies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our products must meet demanding specifications, such as integrated circuits that
perform reliably in order to meet acceptance criteria. In the quarter ended March 31, 2006, we incurred delays in the receipt of key components for our radio subscriber product line, which delayed product shipments and acceptances. The delays
in product shipments and acceptances adversely affected our March 31, 2006 revenues and margins, and may continue to do so.



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Our products and planned successor products are based upon certain processors manufactured from multiple
suppliers. If any of these suppliers suffers delays or cancels the development of enhancements to its processors, our product revenue would be adversely affected. Changing our product designs to utilize another suppliers integrated circuits
would be a costly and time-consuming process.

We depend on federal government contracts for a substantial portion of our revenues, and the loss of
federal government contracts or a decline in funding of existing or future government contracts could adversely affect our revenues and cash flows.

A substantial portion of our revenues is dependent upon continued funding of federal government agencies, as well as continued funding of the programs targeted by us. 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, our 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. We are in the process of responding to such an audit regarding our
General Service Administration, or GSA, contract, which is scheduled to expire on June 2, 2006. We are unable to predict the outcome of this audit or any action the government may take as a result.

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

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

N/A.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A.

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

N/A.



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|ITEM 5. | OTHER INFORMATION
|------- | -----------------

N/A

ITEM 6. EXHIBITS

The following exhibits are
filed herewith:



|            |  |                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                      
|11.1        |  | Computation of income per share                                                                                  
|            | 
|31.1        |  | Chief Executive Officers Certification of Report on Form 10-Q for the Quarter Ending March 31, 2006             
|            | 
|31.2        |  | Chief Financial Officers Certification of Report on Form 10-Q for the Quarter Ending March 31, 2006             
|            | 
|32.0        |  | Written certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |           |  |                                             
|----------------- |  | --------- |  | --------------------------------------------
|                  |  | EFJ, INC.
|                  |  |          
|Date: May 2, 2006 |  | By:       |  | /s/ Jana Ahlfinger Bell                     
|                  |  |           |  | Jana Ahlfinger Bell                         
|                  |  |           |  | Senior Vice President and                   
|                  |  |           |  | Chief Financial Officer                     
|                  |  |           |  | (Principal Financial and Accounting Officer)



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