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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 JUNE 30, 2005



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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    YES  x    NO ̈



As of July 22, 2005,
18,579,851 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

June 30, 2005 and December 31, 2004

(in thousands, except share data)



|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                             |  | JUNE 30, 2005 |         |   | DECEMBER 31, 2004 |  
|                                                                                                                                                                             |  | (unaudited)   |         |   |                   |  
|ASSETS                                                                                                                                                                       |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $             | 10,291  |   |                   | $ | 9,484   |  
|Accounts receivable, net of allowance for returns and doubtful accounts of $205 and $256, respectively                                                                       |  |               | 13,765  |   |                   |   | 18,296  |  
|Notes and other receivables                                                                                                                                                  |  |               | 2,306   |   |                   |   | 2,384   |  
|Cost in excess of billings on uncompleted contracts                                                                                                                          |  |               | 3,401   |   |                   |   | 1,638   |  
|Inventories                                                                                                                                                                  |  |               | 16,961  |   |                   |   | 13,043  |  
|Deferred income taxes                                                                                                                                                        |  |               | 3,000   |   |                   |   | 3,000   |  
|Prepaid expenses                                                                                                                                                             |  |               | 895     |   |                   |   | 721     |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                         |  |               | 50,619  |   |                   |   | 48,566  |  
|                                                                                                                                                                             |  |              
|Property, plant and equipment, net                                                                                                                                           |  |               | 4,014   |   |                   |   | 3,494   |  
|Deferred income taxes, net of current portion                                                                                                                                |  |               | 11,000  |   |                   |   | 11,000  |  
|Intangible assets, net of accumulated amortization                                                                                                                           |  |               | 6,743   |   |                   |   | 6,746   |  
|Other assets                                                                                                                                                                 |  |               | 491     |   |                   |   | 513     |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                                 |  | $             | 72,867  |   |                   | $ | 70,319  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                         |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Revolving line of credit                                                                                                                                                     |  | $             |        |   |                   | $ |        |  
|Current portion of long-term debt obligations                                                                                                                                |  |               | 134     |   |                   |   | 126     |  
|Accounts payable                                                                                                                                                             |  |               | 8,207   |   |                   |   | 8,534   |  
|Billings in excess of cost on uncompleted contracts                                                                                                                          |  |               | 500     |   |                   |   | 1,250   |  
|Deferred revenue                                                                                                                                                             |  |               | 748     |   |                   |   | 1,185   |  
|Accrued expenses                                                                                                                                                             |  |               | 5,023   |   |                   |   | 6,171   |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                    |  |               | 14,612  |   |                   |   | 17,266  |  
|                                                                                                                                                                             |  |              
|Long-term debt obligations, net of current portion                                                                                                                           |  |               |        |   |                   |   | 68      |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                                            |  |               | 14,612  |   |                   |   | 17,334  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|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, 18,580,962 and 18,257,877 issued and outstanding as of June 30, 2005 and
December 31, 2004, respectively |  |               | 186     |   |                   |   | 183     |  
|Additional paid-in capital                                                                                                                                                   |  |               | 103,188 |   |                   |   | 103,459 |  
|Accumulated deficit                                                                                                                                                          |  |               | (45,119 | ) |                   |   | (50,657 | )
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                   |  |               | 58,255  |   |                   |   | 52,985  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  | $             | 72,867  |   |                   | $ | 70,319  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  



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 and six months
ended June 30, 2005 and 2004

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



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | THREE MONTHS ENDED JUNE 30, |            |   | SIX MONTHS ENDED JUNE 30, |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | $                           | 19,855     |   |                           | $ | 17,571     |      |  | $ | 44,016     |   |  | $ | 39,815     |  
|Cost of sales                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                             | 9,847      |   |                           |   | 8,554      |      |  |   | 18,685     |   |  |   | 22,240     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                             | 10,008     |   |                           |   | 9,017      |      |  |   | 25,331     |   |  |   | 17,575     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                             | 4,424      |   |                           |   | 2,694      |      |  |   | 8,393      |   |  |   | 5,270      |  
|Sales and marketing                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                             | 2,332      |   |                           |   | 2,090      |      |  |   | 5,286      |   |  |   | 4,336      |  
|General and administrative, inclusive of non-cash stock option repricing (benefit) expense adjustment of $(125) and $(520) for the three and
six months ended June 30, 2005, respectively, and $3,398 and $2,311 for the three and six months ended June 30, 2004, respectively; and facility relocation expenses of $439 and $909 for the three and six months ending June 30, 2005, respectively,
and $401 for each of the three and six months ended June 30, 2004 |  |                             | 3,010      |   |                           |   | 5,672      |      |  |   | 6,216      |   |  |   | 6,359      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                             | 9,766      |   |                           |   | 10,456     |      |  |   | 19,895     |   |  |   | 15,965     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from operations                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                             | 242        |   |                           |   | (1,439     | )    |  |   | 5,436      |   |  |   | 1,610      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |  
|Other income (expense)                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                             | (1         | ) |                           |   | 4          |      |  |   | 3          |   |  |   | (5         | )
|Interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                             | 75         |   |                           |   | 9          |      |  |   | 137        |   |  |   | 20         |  
|Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             | (21        | ) |                           |   | (35        | )    |  |   | (38        | ) |  |   | (91        | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                             | 295        |   |                           |   | (1,461     | )    |  |   | 5,538      |   |  |   | 1,534      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |  
|Income tax provision                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |            |   |  |   |           |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $                           | 295        |   |                           | $ | (1,461     | )    |  | $ | 5,538      |   |  | $ | 1,534      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  Basic                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $                           | 0.02       |   |                           | $ | (0.08      | )    |  | $ | 0.30       |   |  | $ | 0.09       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $                           | 0.02       |   |                           | $ | (0.08      | )    |  | $ | 0.29       |   |  | $ | 0.08       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares  Basic                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                             | 18,518,964 |   |                           |   | 17,716,875 |      |  |   | 18,416,004 |   |  |   | 17,650,585 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares  Diluted                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                             | 18,848,032 |   |                           |   | 17,716,875 |      |  |   | 18,809,639 |   |  |   | 18,840,271 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes
to the condensed consolidated financial statements.



Page 3



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EFJ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, 2005 and
2004

(Unaudited and in thousands, except share data)



|                                                                                  |  |                           |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Six months ended June 30, |       
|                                                                                  |  | 2005                      |        |   | 2004 |  
|Cash flows from operating activities:                                             |  |                           |        |   |      |   |        |  
|Net income                                                                        |  | $                         | 5,538  |   |      | $ | 1,534  |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                           | 662    |   |      |   | 695    |  
|Non-cash compensation expense  intrinsic value of repriced options               |  |                           | (520   | ) |      |   | 2,311  |  
|Gain on sale of fixed assets                                                      |  |                           | (45    | ) |      |   | (1     | )
|Changes in assets and liabilities:                                                |  |                           |        |   |      |   |        |  
|Accounts receivable                                                               |  |                           | 4,609  |   |      |   | 6,621  |  
|Cost in excess of billings on uncompleted contracts                               |  |                           | (1,763 | ) |      |   | (137   | )
|Inventories                                                                       |  |                           | (3,918 | ) |      |   | 5,215  |  
|Prepaid expenses                                                                  |  |                           | (174   | ) |      |   | (130   | )
|Accounts payable                                                                  |  |                           | (327   | ) |      |   | (3,432 | )
|Billings in excess of cost on uncompleted contracts                               |  |                           | (750   | ) |      |   | (30    | )
|Deferred revenues                                                                 |  |                           | (437   | ) |      |   | 52     |  
|Accrued and other liabilities                                                     |  |                           | (1,148 | ) |      |   | (97    | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Total adjustments                                                                 |  |                           | (3,811 | ) |      |   | 11,067 |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |                           | 1,727  |   |      |   | 12,601 |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash flows from investing activities:                                             |  |                           |        |   |      |   |        |  
|Proceeds from sale of fixed assets                                                |  |                           | 128    |   |      |   | 1      |  
|Purchase of property, plant and equipment                                         |  |                           | (1,262 | ) |      |   | (1,023 | )
|Other assets                                                                      |  |                           | 22     |   |      |   | 96     |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash used in investing activities                                             |  |                           | (1,112 | ) |      |   | (926   | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash flows from financing activities:                                             |  |                           |        |   |      |   |        |  
|Payments on revolving line of credit, net                                         |  |                           |       |   |      |   | (7,500 | )
|Principal payments on long-term debt                                              |  |                           | (60    | ) |      |   | (67    | )
|Proceeds from exercise of stock options                                           |  |                           | 212    |   |      |   |        |  
|Other                                                                             |  |                           | 40     |   |      |   | 97     |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                               |  |                           | 192    |   |      |   | (7,470 | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                         |  |                           | 807    |   |      |   | 4,205  |  
|                                                                                  |  |                          
|Cash and cash equivalents, beginning of period                                    |  |                           | 9,484  |   |      |   | 4,644  |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                         | 10,291 |   |      | $ | 8,849  |  
|                                                                                  |  |                           |        |   |      |   |        |  



Summary of non-cash transactions: None



Supplemental
disclosures of cash flow information:



The company paid interest of $34 and
$33 during the six months ended June 30, 2005 and the same period in 2004, respectively. The company paid income taxes of $70 during the six months ended June 30, 2005; no payments were made in the same period in 2004.



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 and six months
ended June 30, 2005 and 2004

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



1. GENERAL



The condensed consolidated balance sheet of EFJ, Inc. at December 31, 2004, 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 June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 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, 2004. The results of operations and cash flows for the six months ended June 30, 2005 are not necessarily indicative of the
results for any other period or the entire fiscal year ending December 31, 2005. 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 enterprise 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 analog wireless radios.
| | - |  | -----------------------------------------------------------------



The condensed consolidated financial statements include the accounts of EFJ, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the 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 June 30,
2005 and the six months ended June 30, 2005 and 2004, a substantial portion of all 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. We use the treasury stock method to calculate diluted weighted average common shares, as if all such options were outstanding for the
periods presented.



For the three months ended June 30, 2004,
the impact of outstanding stock options on diluted EPS was anti-dilutive as we incurred net losses during this period. Accordingly, basic EPS is used for both basic and diluted EPS for the period; if not for the net loss, the diluted weighted
average common shares would have been 18,618,425 for the three months ended June 30, 2004.



Page 5



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



4. ACCOUNTING FOR STOCK-BASED COMPENSATION



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



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 and six months ended June 30, 2005 and 2004, our pro forma net income and pro forma net income per share would have been as follows:



|                                                                             |  |                             |       |   |                           |   |        |      |  |      |       |  |   |       |  
|---------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ------ | ---- |  | ---- | ----- |  | - | ----- | -
|                                                                             |  | Three months ended June 30, |       |   | Six months ended June 30, |  
|                                                                             |  | 2005                        |       |   | 2004                      |   |        | 2005 |  | 2004 |      
|Net income (loss)  as reported                                              |  | $                           | 295   |   |                           | $ | (1,461 | )    |  | $    | 5,538 |  | $ | 1,534 |  
|General and administrative expenses for management stock option compensation |  |                             | 310   |   |                           |   | 1,009  |      |  |      | 571   |  |   | 1,810 |  
|                                                                             |  |                             |       |   |                           |   |        |      |  |      |       |  |   |       |  
|Pro forma net income (loss)                                                  |  | $                           | (15   | ) |                           | $ | (2,470 | )    |  | $    | 4,967 |  | $ | (276  | )
|                                                                             |  |                             |       |   |                           |   |        |      |  |      |       |  |   |       |  
|Net income (loss) per share, basic  as reported                             |  | $                           | 0.02  |   |                           | $ | (0.08  | )    |  | $    | 0.30  |  | $ | 0.09  |  
|Net income (loss) per share, diluted  as reported                           |  |                             | 0.02  |   |                           |   | (0.08  | )    |  |      | 0.29  |  |   | 0.08  |  
|Pro forma net income (loss) per share, basic                                 |  |                             | (0.00 | ) |                           |   | (0.14  | )    |  |      | 0.27  |  |   | (0.02 | )
|Pro forma net income (loss) per share, diluted                               |  |                             | (0.00 | ) |                           |   | (0.14  | )    |  |      | 0.26  |  |   | (0.02 | )



The weighted average
fair value per option at date of grant for options outstanding at June 30, 2005 and 2004, respectively, was $4.06 and $5.48, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for options granted:



|                           |  |                           |   |  |          |  
|-------------------------- |  | ------------------------- | - |  | -------- | -
|                           |  | Six months ended June 30, |  
|                           |  | 2005                      |   |  | 2004     |  
|Expected option life       |  | 10 years                  |   |  | 10 years |  
|Expected annual volatility |  | 56                        | % |  | 75       | %
|Risk-free interest rate    |  | 4.40                      | % |  | 4.40     | %
|Dividend yield             |  | 0                         | % |  | 0        | %



Page 6



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



5. INVENTORIES



The following is a summary of inventories:



|                           |  |               |        |                   |   |       
|-------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                           |  | June 30, 2005 |        | December 31, 2004
|Raw materials and supplies |  | $             | 8,176  |                   | $ | 7,905 
|Work in progress           |  |               | 3,190  |                   |   | 568   
|Finished goods             |  |               | 5,958  |                   |   | 6,520 
|                           |  |               |        |                   |   |       
|                           |  |               | 17,324 |                   |   | 14,993
|Reserve for obsolescence   |  |               | 363    |                   |   | 1,950 
|                           |  |               |        |                   |   |       
|Total inventories          |  | $             | 16,961 |                   | $ | 13,043
|                           |  |               |        |                   |   |       



During the three
months ended March 31, 2005, we transferred all inventory located at EFJohnsons Waseca, Minnesota plant (which was closed as of March 31, 2005) to our Texas facility. In the course of this transfer, we sold approximately $1,670 of raw
materials to the vendor with whom EFJohnson has outsourced its wireless communication manufacturing. This sale was in addition to the $2,384 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 inventory consumed by vendor in the course of manufacturing EFJohnsons products. Notes and other receivables at June 30, 2005 and December 31, 2004
are substantially made up by amounts owed pursuant to these note agreements. We have a security interest in the inventory, and the transactions were recorded as inventory transfers and not as revenue. In addition, we recognized no gain or loss on
the exchange.



The decrease in the reserve for obsolescence,
from December 31, 2004 to June 30, 2005, relates substantially to the aforementioned transfer of inventory from Waseca, Minnesota. All inventory items were specifically analyzed during this transfer process, and inventory deemed to have no future
benefit was written off and disposed of against the reserve balance previously reserved; hence, no significant gain or loss resulted from this disposal.



6. INTANGIBLE ASSETS



As required by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other 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, in accordance with SFAS No. 142, at December 31, 2004
and 2003 concluding that no impairment of goodwill or tradename had occurred as of such dates. No events occurred during the six months ended June 30, 2005 and 2004, respectively, which would indicate that an impairment of such assets had taken
place as of such dates.



Amortization expense, related to
intangible assets which are subject to amortization, was $3 for the six months ended June 30, 2005 and 2004. Amortization expense of intangible assets subject to amortization is anticipated to be $7 for 2005 and annually thereafter through 2012.
Intangible assets consist of the following as of the dates indicated:



|                                               |  |               |  |                   |       |  |       |  |   |      
|---------------------------------------------- |  | ------------- |  | ----------------- | ----- |  | ----- |  | - | -----
|                                               |  | June 30, 2005 |  | December 31, 2004
|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 |  |   |     
|                                               |  |               |  |                   |       |  |       |  |   |      
|Patents                                        |  | 113           |  |                   |       |  | 113   |  |   |      
|Less: accumulated amortization                 |  | 60            |  |                   | 53    |  | 57    |  |   | 56   
|                                               |  |               |  |                   |       |  |       |  |   |      
|Total                                          |  |               |  | $                 | 6,743 |  |       |  | $ | 6,746
|                                               |  |               |  |                   |       |  |       |  |   |      



Page 7



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



7. REVOLVING LINE OF CREDIT



We renewed our line of credit agreement with Bank of America in September
2004. The secured $15,000 line of credit bears interest at a rate of LIBOR plus 150 basis points. The effective rate at June 30, 2005 was 4.84%. 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 June
30, 2005 and December 31, 2004. At June 30, 2005 and December 31, 2004, we had no amounts outstanding on our line of credit. The total available credit under the line of credit was $12.0 million as of June 30, 2005.



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 as of June 30, 2005 is as follows:



|                               |  |                              |       |                    |       |                          |       |                          |   |      
|------------------------------ |  | ---------------------------- | ----- | ------------------ | ----- | ------------------------ | ----- | ------------------------ | - | -----
|                               |  | Balance at December 31, 2004 |       | Charged to Expense |       | Deduction / Expenditures |       | Balance at June 30, 2005
|Allowance for Warranty Reserve |  | $                            | 2,184 |                    | 1,304 |                          | 1,177 |                          | $ | 2,311
|                               |  |                              |       |                    |       |                          |       |                          |   |      



9. REPRICED STOCK OPTIONS



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 purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. We had previously accounted for these option grants as fixed plan awards. The market value of
our common stock was $6.75 and $8.84 per share at June 30, 2005 and 2004, respectively; this compared to market values of $9.75 and $5.90 per share at December 31, 2004 and 2003, respectively. 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. In the three and six months ended June 30, 2005, the amounts of compensation benefit relating to these repriced
options were ($125) and ($520), respectively. In the three and six months ended June 30, 2004, the amounts of compensation expense relating to these repriced options were $3,398 and $2,311 respectively. These amounts are included in general and
administrative expenses.



As of June 30, 2005, approximately
58,000 outstanding options related to options repriced in June 2000 and 2001. The remaining repriced options are held by various employees and directors. Any non-cash compensation related to these options are fixed at the time the options are
exercised; prior to exercise, the options continued to be subject to variable accounting treatment. In the first quarter of 2004, the CEO and former CFO adopted pre-arranged stock selling plans, pursuant to Rule 10b5-1 of the Securities and Exchange
Act of 1934, in regards to the repriced option shares held by them. Under the pre-arranged stock selling plans, stock options were exercised contemporaneously with the sales of the resulting shares. The respective selling of the stock commenced in
the second quarter of 2004 and was completed in the second quarter of 2005. The CEO and former CFO, in aggregate, exercised approximately 308,000 and 123,000 options during the six months ended June 30, 2005 and 2004, respectively.



Page 8



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



10. COMMITMENTS AND CONTINGENCIES



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



In June 2004, Mace Incorporated (Mace) filed a complaint in the United States District Court for the Eastern District of Virginia
(Complaint) against EFJohnson seeking damages against EFJohnson for claims of commissions allegedly due in conjunction with certain product sales to the federal government. Mace has alleged projected damages of $400 and an unspecified
percentage of past and future federal government sales. In January 2005, Mace and EFJohnson agreed in principle to resolve the matter by arbitration. As a result, the Complaint was jointly dismissed without prejudice. The parties negotiation
failed to resolve the matter, and in July 2005, Mace re-filed the original complaint in the United States District Court for the Eastern District of Virginia. We believe EFJohnson has meritorious contractual defenses against Maces demands, and
we intend to vigorously contest Maces allegations. At June 30, 2005 and December 31, 2004, we had recorded a liability which amount reflects our evaluation of the eventual conclusion of this matter.



We are presently disputing a certain state tax liability totaling
approximately $240. We believe the basis for the states assessments of the amount owed is incorrect, and we intend to vigorously contest such assessment. At June 30, 2005 and December 31, 2004, 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.



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. The open letters of credit as of June 30, 2005 have a total undrawn balance of $800. Bonds, which expire on various dates, totaled $5,405 on June 30, 2005. As of June 30,
2005, no bonds had been drawn upon.



Page 9



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



11. SEGMENT AND RELATED INFORMATION



We operate in two reporting segments, both of which operate in the LMR
industry. These segments are our two operating subsidiaries: EFJohnson and Transcrypt. Although both segments have product offerings which 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 and six months ended June 30, 2005
and 2004.



|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|In thousands                           |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|Revenues:                              |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Private Wireless Communications        |  | $                           | 15,107 |   |                           | $ | 13,264 |      |  | $ | 25,320 |   |  | $ | 33,118 |  
|Secured Communications                 |  |                             | 4,748  |   |                           |   | 4,307  |      |  |   | 18,696 |   |  |   | 6,697  |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  | $                           | 19,855 |   |                           | $ | 17,571 |      |  | $ | 44,016 |   |  | $ | 39,815 |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Gross Profit:                          |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Private Wireless Communications        |  | $                           | 5,911  |   |                           | $ | 5,434  |      |  | $ | 8,965  |   |  | $ | 12,211 |  
|Secured Communications                 |  |                             | 4,097  |   |                           |   | 3,583  |      |  |   | 16,366 |   |  |   | 5,364  |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  | $                           | 10,008 |   |                           | $ | 9,017  |      |  | $ | 25,331 |   |  | $ | 17,575 |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Operating Profit:                      |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Private Wireless Communications        |  | $                           | (2,229 | ) |                           | $ | (509   | )    |  | $ | (7,551 | ) |  | $ | 516    |  
|Secured Communications                 |  |                             | 2,346  |   |                           |   | 2,468  |      |  |   | 12,467 |   |  |   | 3,405  |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income from Operations                 |  |                             | 117    |   |                           |   | 1,959  |      |  |   | 4,916  |   |  |   | 3,921  |  
|                                       |  |                             |        |  
|Stock Option Repricing Adjustment, net |  |                             | 125    |   |                           |   | (3,398 | )    |  |   | 520    |   |  |   | (2,311 | )
|Other Income (Expense), net            |  |                             | 53     |   |                           |   | (22    | )    |  |   | 102    |   |  |   | (76    | )
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income (Loss) before Income Taxes      |  | $                           | 295    |   |                           | $ | (1,461 | )    |  | $ | 5,538  |   |  | $ | 1,534  |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Depreciation & Amortization:           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Private Wireless Communications        |  | $                           | 304    |   |                           | $ | 328    |      |  | $ | 567    |   |  | $ | 628    |  
|Secured Communications                 |  |                             | 47     |   |                           |   | 32     |      |  |   | 95     |   |  |   | 67     |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  | $                           | 351    |   |                           | $ | 360    |      |  | $ | 662    |   |  | $ | 695    |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Assets:                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Private Wireless Communications        |  | $                           | 43,782 |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Secured Communications                 |  |                             | 14,229 |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Corporate                              |  |                             | 14,856 |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  | $                           | 72,867 |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



Page 10



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months
ended June 30, 2005 and 2004

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



12. PLANNED MOVES OF THE COMPANYS FACILITIES



During the second quarter of 2004, Transcrypts operations moved from
its previous facility in Lincoln, Nebraska to a similar 18,000 square-foot facility located a short distance from its previous operations. We incurred approximately $139 in relation to this move in 2004. The move was precipitated by the May 31, 2004
termination of the lease agreement on the segments previous facility and was completed by September 30, 2004.



On April 14, 2004, we announced our decision to move EFJohnsons operations, including outsourcing of its manufacturing, from its current facility in
Waseca, Minnesota to Irving, Texas. This move was completed as of March 31, 2005 at a total cost of $1,904. 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. We incurred an aggregate of $699 through the end of the second quarter of 2005 relation to this move. We expect to complete this move September 30, 2005.



The timing of the recognition of costs associated with these moves are
determined in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and other relevant guidance, which provide that a liability for a cost associated with an exit or disposal activity
shall be recognized at its fair value in the period in which the liability is incurred. In particular, employee-related termination costs associated with the 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 a total of $439 and $909, respectively, in the three and six months ended June 30, 2005, and we incurred a total of $401 in the three and six months ended June 30 2004.



Aggregate Relocation Costs for Corporate

Headquarters, EFJohnson, and Transcrypt



|                                                           |  |                                      |       |                                                    |   |                                                       |  |                                 |     |  |   |   
|---------------------------------------------------------- |  | ------------------------------------ | ----- | -------------------------------------------------- | - | ----------------------------------------------------- |  | ------------------------------- | --- |  | - | --
|                                                           |  | Total amount expected to be incurred |       | Cumulative amount incurred as of December 31, 2004 |   | Amount incurred in the six months ended June 30, 2005 |  | Remaining amount to be incurred
|Description of Costs                                       |  |                                      |       |                                                    |   |                                                       |  |                                 |     |  |   |   
|Employee related costs, including severance and relocation |  | $                                    | 1,675 |                                                    | $ | 1,016                                                 |  | $                               | 623 |  | $ | 36
|Furniture and equipment relocation costs                   |  |                                      | 339   |                                                    |   | 142                                                   |  |                                 | 197 |  |   |  
|Manufacturing outsourcing set-up costs                     |  |                                      | 350   |                                                    |   | 337                                                   |  |                                 | 13  |  |   |  
|Other                                                      |  |                                      | 454   |                                                    |   | 338                                                   |  |                                 | 76  |  |   | 40
|                                                           |  |                                      |       |                                                    |   |                                                       |  |                                 |     |  |   |   
|Total                                                      |  | $                                    | 2,818 |                                                    | $ | 1,833                                                 |  | $                               | 909 |  | $ | 76
|                                                           |  |                                      |       |                                                    |   |                                                       |  |                                 |     |  |   |   



Page 11



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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 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 detailed in ITEM 1.
BUSINESS  Summary of Business Considerations and Certain Factors That May Affect Future Results of Operations and/or Stock Price contained in our Annual Report on Form 10-K for the year ended December 31, 2004.



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, wireless communications infrastructure and systems for digital and analog platforms. In addition, we offer encryption for analog wireless radios. Our products and systems are provided to homeland security,
defense, public safety and public service and international markets. Customers for our products and systems include federal, state and local governmental entities, domestic enterprise users, and international entities.



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, which 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.



The majority of our revenue in our private wireless communications segment is 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 anticipate that these
infrastructure components and digital systems will begin to generate a material part of our private wireless communications segment revenues in 2006.



Page 12



---

In 2004 and through the first quarter of 2005, 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.



Our secured communications segment focuses on leveraging 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 digital secured
communication system is usually prohibitive. Our secured communication 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.



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 primarily achieved through a select group of dealers and distributors worldwide.



Much of our private wireless communications 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 contract 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.



Our product revenue is
generated under purchase orders which are made and generally fulfilled within a 90-day period. Our system revenue is generated under long-term contracts, and is recorded under the percentage-of-completion method.



Factors Affecting Our Business



Fluctuations and Seasonality of Results. Due to the timing of orders,
our results are impacted both by seasonality and by fluctuations from quarter to quarter. In our wireless communications segment, we experience seasonality in our results in a large 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. Recently, we have experienced greater revenues in our first and fourth quarters.



Gross Margins. There are a number of factors that have impacted and will impact our gross margins. These include:



| |  |  | Revenue mix. We have historically generated consistently higher gross margins from our secured communications products. The mix of revenues between our private wireless
communications and secured communications segments can cause our gross margins to vary from period to period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facility Move. During 2004, we began moving EFJohnsons operations in Waseca, Minnesota to Irving, Texas. We completed the move during the first quarter of 2005. This
move involved periods of planned duplicative operations and inefficiencies in the manufacturing of our wireless communications products. During April 2004, we began moving Transcrypts operations from its previous facility in Lincoln, Nebraska
to a similar facility located a short distance from its previous operations. The move was completed as of September 30, 2004. In March 2005, we began moving our Corporate headquarters from Washington, D.C. to Irving, Texas. We expect to complete
this move by September 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Outsourcing. During 2004, we made the decision to design our own RF module and outsource manufacturing of our products and systems. Through the first quarter of 2005, we
produced most
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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of our private wireless communications products at our Minnesota facility. As of March 31, 2005, the
Minnesota facility was closed, and we transitioned this production to our Texas-based outsource vendor. In late 2004 and early 2005, we also began integrating our own RF module instead of purchasing a third party module. These activities negatively
impacted our gross margins for the first half of 2005; however we believe that they will begin to have a positive impact beginning in the second half of 2005.



Research and Development. With the adoption of the Project 25 standard, the need for digital product technology for government customers has
increased. As such, we concentrate our research and development efforts on digital technology for our growing private wireless communications segment. We will continue to develop products and systems in 2005, to include feature enhancements and
additions, which comply with the Project 25 standard.



In 2005,
our increased research and development expenditures were concentrated on:



| |  |  | trunked and conventional Project 25 system infrastructure, including repeaters, voters, and base stations;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | applying standard internet protocol switching techniques for connecting wireless sites utilizing VOIP technology
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | integration of new RF modules into current radios; and
| | - |  | ------------------------------------------------------



| |  |  | our project regarding digital encryption of analog transmissions.
| | - |  | -----------------------------------------------------------------



Additional Non-cash Compensation in 2005 Due to Stock Option Repricing. In 2000 and 2001, we repriced 1,186,000 of our stock options; as such, they
are subject to variable accounting treatment. Our non-cash compensation (benefit) expense from these repriced stock options was $(0.5) million and $2.3 million for the six months ended June 30, 2005 and 2004, respectively. As of June 30, 2005, only
57,506 of the 1,186,000 repriced stock options remained outstanding.



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.



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 substantially 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, and finance and administrative functions. This expense also includes the impact of the variable accounting treatment of repriced stock options 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 related to amounts payable on its term and installment loans and bank line of credit.



Page 14



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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 operating results over a five year period, our current and expected customer base projections, technological and competitive factors
impacting our current products, and managements estimates of future earnings based on information currently available. Current financial accounting standards require that organizations analyze all positive and negative evidence relating to
deferred tax asset realization, which would include 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 deferred tax asset results principally from net operating loss carryforwards, or NOLs.



Critical Accounting Policies



The preparation of our consolidated financial statements in conformity with generally accepted accounting principles, 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 accruals; valuation allowance for deferred income tax asset; 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 may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. Listed below are those
policies we believe are critical and require the use of complex judgment in their application.



Revenue



Our
revenue recognition policy is in accordance with the criteria set forth in Staff Accounting Bulletins 101 and 104 and Statement of Position 81-1, as applicable, to our sale transactions. 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. For sales where collection is not reasonably assured, we recognize revenue as cash is received. If collection is contingent on
a future event, we recognize revenue when the contingency lapses, generally upon cash collection.



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



Deferred revenue includes unearned 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 and Statement of Position 81-1, as applicable.



Page 15



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Inventory



Inventory is recorded at the lower of cost or market with cost determined by the first-in, first-out (FIFO) method. We periodically assess our inventory
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 inventory based on backlog, product pricing, the ability to
liquidate or sell older inventory, and the impact of introducing new products. Charges associated with providing for inventory obsolescence, or revisions to related reserves, have historically correlated with selling activity and have had a
consistent negative impact on our gross margins over the last three fiscal years.



Goodwill and Other Intangibles Assets



In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 142. SFAS No. 142 requires that goodwill and certain other intangible assets no longer be amortized to earnings, but instead be reviewed for
impairment, on at least an annual basis, by applying a fair value-based test. We adopted the provisions of SFAS No. 142 effective January 1, 2002. At least annually, we assess goodwill and tradename, using fair value-based tests, consistent with
SFAS No. 142. If the respective carrying amount exceeds the fair value, goodwill and/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, and 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 which 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



In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, 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;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Page 16



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We continually evaluate whether such 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 incur charges
for impairment in the future.



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 Ended June 30, |   |  | Six Months Ended June 30, |   
|                                   |  | 2005                        |   |  | 2004                      |    |  | 2005  |   |  | 2004  |  
|Revenues                           |  | 100.0                       | % |  | 100.0                     | %  |  | 100.0 | % |  | 100.0 | %
|Cost of sales                      |  | 49.6                        |   |  | 48.7                      |    |  | 42.4  |   |  | 55.9  |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Gross profit                       |  | 50.4                        |   |  | 51.3                      |    |  | 57.6  |   |  | 44.1  |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Operating expenses:                |  |                             |   |  |                           |    |  |       |   |  |       |  
|Research and development           |  | 22.3                        |   |  | 15.3                      |    |  | 19.1  |   |  | 13.2  |  
|Sales and marketing                |  | 11.7                        |   |  | 11.9                      |    |  | 12.0  |   |  | 10.8  |  
|General and administrative (1) (2) |  | 15.2                        |   |  | 32.3                      |    |  | 14.1  |   |  | 16.0  |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Total operating expenses           |  | 49.2                        |   |  | 59.5                      |    |  | 45.2  |   |  | 40.0  |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Income (loss) from operations      |  | 1.2                         |   |  | (8.2                      | )  |  | 12.4  |   |  | 4.1   |  
|Interest income (expense)  net    |  | 0.3                         |   |  | (0.1                      | )  |  | 0.2   |   |  | (0.2  | )
|Other income (expense)             |  |                            |   |  |                          |    |  |      |   |  |      |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Income (loss) before income taxes  |  | 1.5                         |   |  | (8.3                      | )  |  | 12.6  |   |  | 3.9   |  
|Income tax provision               |  |                            |   |  |                          |    |  |      |   |  |      |  
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  
|Net income (loss)                  |  | 1.5                         | % |  | (8.3                      | )% |  | 12.6  | % |  | 3.9   | %
|                                   |  |                             |   |  |                           |    |  |       |   |  |       |  

---

|(1) | Includes non-cash compensation (benefit) expense of (0.6)% and (1.2)% in the three and six months ended June 30, 2005, respectively, and 19.3% and 5.8% in the three and six months
ended June 30, 2004, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes facility move costs of 2.2% and 2.1% in the three and six months ended June 30, 2005, respectively, and 2.3% and 1.0% in the three and six months ended June 30, 2004,
respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Comparison of the Three and Six Months Ended
June 30, 2005 and 2004



Revenues.Our revenues
increased $2.3 million, or 13%, to $19.9 million for the three months ended June 30, 2005 from $17.6 million for the same period in 2004. In the second quarter of 2005, the private wireless communications segment revenues comprised $15.1 million, or
76% of total revenues, and the secured communications segment revenues comprised $4.7 million, or 24% of total revenues. For the second quarter of 2004, the private wireless communications segment revenues comprised $13.3 million, or 75% of total
revenues, and the secured communications segment revenues comprised $4.3 million, or 25% of total revenues.



Our revenues increased $4.2 million, or 11%, to $44.0 million for the six months ended June 30, 2005 from $39.8 million for the same period in 2004. In
the first six months of 2005, the private wireless communications segment revenues comprised $25.3 million, or 58% of total revenues, and the secured communications segment revenues comprised $18.7 million, or 42% of total revenues.



Private wireless communications revenues decreased $7.8 million to $25.3
million in the first six months of 2005 from $33.1 million in the same period in 2004. This 24% decrease was principally the result of a significant order delivered in the three months ended March 31, 2004 which was not replicated in the first
quarter of 2005, a delay in finalizing the development of the replacement RF modules and completing the transition of EFJohnsons production to an outside vendor.



Page 17



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Secured communications revenues increased $12.0 million to $18.7 million in the first six months of 2005
from $6.7 million in the same period in 2004. This 179% increase was substantially due to $11.7 million of sales to the Middle East in the first quarter of 2005.



Gross Profit.Our gross profit increased $1.0 million, or 11%, to $10.0 million in the three months ended June 30,
2005 from $9.0 million for the same period in 2004. Gross profit, as a percentage of revenue, or gross margin, was 50% for the three months ended June 30, 2005, as compared to 51% for the same period in 2004. In the second quarter of 2005, gross
margin for the private wireless communications segment was 39% compared to 41% in the second quarter of 2004, and gross margin for the secured communications segment was 86%, compared to 83% in the second quarter of 2004.



Our gross profit increased $7.7 million, or 44%, to $25.3 million in the six
months ended June 30, 2005 from $17.6 million for the same period in 2004. Gross margin was 58% for the six months ended June 30, 2005, as compared to 44% for the same period in 2004. The increase in overall gross margins reflects the fact that
higher-margin secured communications sales constituted 42% of total revenue for the six months ended June 30, 2005, and compared to 17% for the six months ended June 30, 2004.



In the first six months of 2005, gross margin for the private wireless communications segment was 35%, compared to 37% in
the first six months of 2004. The private wireless communications gross margin in the first half of 2005 was negatively impacted by duplicative manufacturing costs and other transitional costs incurred with the outsourcing of EFJohnsons
production and with the development of its replacement RF module. This transition and development is substantially complete, and similar costs are not expected during the second half of 2005.



During the first six months of 2005, gross margin for the secured
communications segment increased to 88% from 80% in the same period in 2004. The higher 2005 margin for the secured communications segment substantially resulted from economies of scale achieved at the materially higher 2005 revenue.



Research and Development.Research and development expenses increased
$1.7 million, or 64%, to $4.4 million for the three months ended June 30, 2005 from $2.7 million for the same period in 2004. As a percentage of revenue, research and development expenses were 22% of revenues in the second quarter of 2005, as
compared to 15% during the same period in 2004.



Research and
development expenses increased $3.1 million, or 59%, to $8.4 million for the six months ended June 30, 2005 from $5.3 million for the same period in 2004. As a percentage of revenue, research and development expenses were 19% of revenues for the six
months ended June 30, 2005, as compared to 13% during the same period in 2004.



The increased research and development expenses in 2005 related primarily to the development of 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 developments were significantly completed in June 2005, and, accordingly, we expect research and development expenses, as a percentage of revenue, to
decrease in the later half of the year.



Sales and
Marketing.Sales and marketing expenses increased $0.2 million, or 12%, to $2.3 million for the three months ended June 30, 2005 from $2.1 million for the same period in 2004. As a percentage of revenue, sales and marketing expenses were 12% of
revenues in the second quarters of both 2005 and 2004.



Page 18



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Sales and marketing expenses increased $0.9 million, or 22%, to $5.3 million for the six months ended
June 30, 2005 from $4.3 million for the same period in 2004. As a percentage of revenue, sales and marketing expenses were 12% of revenues for the six months ended June 30, 2005, as compared to 11% during the same period in 2004. Sales and marketing
expenses include incremental employees to drive new business growth.



General and Administrative.General and administrative expenses decreased $2.7 million, or 47%, to $3.0 million for the three months ended June 30, 2005 from $5.7 million for the same period in 2004. As a percentage of revenue,
general and administrative expenses were 15% of revenues in the second quarter of 2005, as compared to 32% during the same period in 2004.



General and administrative expenses decreased $0.1 million, or 2%, to $6.2 million for the six months ended June 30, 2005 from $6.4 million for the same
period in 2004. As a percentage of revenue, general and administrative expenses were 14% of revenues for the six months ended June 30, 2005, as compared to 16% during the same period in 2004.



General and administrative expenses include amounts for stock option
repricing non-cash compensation, compliance with Section 404 of the Sarbanes-Oxley Act, and facility relocation. The company expects that costs associated with Section 404 of the Sarbanes-Oxley Act will continue on an ongoing basis. These amounts
for the six months ended June 30, 2005 are shown below as compared to the amounts incurred during the same period in 2004:



|                                               |  |                         |      |   |      |   |      
|---------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | -----
|                                               |  | Six Months EndedJune 30
|In thousands                                   |  | 2005                    |      |   | 2004
|Stock repricing adjustment  (benefit)/expense |  | $                       | (520 | ) |      | $ | 2,311
|Compliance with §404 of SOX                    |  |                         | 332  |   |      |   |     
|Facility relocation expense                    |  |                         | 909  |   |      |   | 401  



Net Interest
Expense.Net interest income/(expense) increased $0.08 million to $0.05 million for the three months ended June 30, 2005 from $(0.03 million ) for the same period in 2004. Net interest income/(expense) increased $0.17 million to $0.01 million
for the six months ended June 30, 2005 from $(0.07 million) for the same period in 2004.



Other Income/Expense, Net.Net other income/(expense) was $(0.001) million for the three months ended June 30, 2005, as compared to $0.004 million for the same period in 2004. Net other income/(expense) was
$0.003 million for the six months ended June 30, 2005, as compared to $(0.005) million for the same period in 2004.



Provision for Income Taxes.We did not record a tax benefit or provision for either of the three or six month periods ended June 31, 2005 or 2004.
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
2004 and 2003, 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 Income.Net income was $0.3 million for the three months ended
June 30, 2005, an increase of $1.8 million, as compared to net loss of $1.5 million for the same period in 2004. Net income was $5.5 million, an increase of $4.0 million, or 261%, for the six months ended June 30, 2005, as compared to net income of
$1.5 million for the same period in 2004.



Operating results
were impacted in both 2005 and 2004 by facility relocation costs and by non-cash compensation adjustments resulting from variable accounting treatment required for certain of our stock options repriced in the fourth quarter of 2000 and the first
quarter of 2001. The table below illustrates the operating results of the three and six months ended June 30, 2005 and 2004, adjusting for the non-cash items (i.e., tax benefit and stock option repricing effect) and the facility move expense as
discussed above. We believe that such presentation offers a more meaningful comparative measure of our operating results. When adjusting for the aforementioned items, the adjusted income is $0.6 million and $5.9 million, respectively, for the three
and six months ended June 30, 2005, as compared to $2.3 million and $4.2 million for the three and six months ended June 30, 2004.



Page 19



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|                                                               |  |                             |      |   |                           |   |        |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                               |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|Operating Results (in thousands)                               |  | 2005                        |      |   | 2004                      |   |        | 2005 |  |   | 2004  |  
|Net income (loss)  as reported                                |  | $                           | 295  |   |                           | $ | (1,461 | )    |  | $ | 5,538 |   |  | $ | 1,534 |  
|Facility relocation expense                                    |  |                             | 439  |   |                           |   | 401    |      |  |   | 909   |   |  |   | 401   |  
|Stock option repricing non-cash compensation expense (benefit) |  |                             | (125 | ) |                           |   | 3,398  |      |  |   | (520  | ) |  |   | 2,311 |  
|                                                               |  |                             |      |   |                           |   |        |      |  |   |       |   |  |   |       |  
|Adjusted income  comparative basis                            |  | $                           | 609  |   |                           | $ | 2,338  |      |  | $ | 5,927 |   |  | $ | 4,246 |  
|                                                               |  |                             |      |   |                           |   |        |      |  |   |       |   |  |   |       |  
|Adjusted income as a percentage of total revenues              |  |                             | 3.1  | % |                           |   | 13.3   | %    |  |   | 13.5  | % |  |   | 10.7  | %



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 May 26, 2005, we filed a registration statement with the Securities and Exchange Commission for a public offering of 6,000,000
shares of our common stock to be sold by us. In addition, we intend to grant the underwriters an option to purchase up to an additional 900,000 shares of our common stock to cover over-allotments. The registration statement has not yet been deemed
effective by the Securities and Exchange Commission. No sale shall be made of the securities in any jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any
such state or jurisdiction.



Approximately $0.3 million of
costs associated with the registration were in incurred in the six months ended June 30, 2005. These amounts have been reflected in Other Assets pending the completion of the offering at which time they will be charged to Paid in Capital offsetting
the proceeds. In the event that the offering is not completed and abandoned, these costs will be charged to expense at that time.



Net cash from operating activities.Our operating activities provided cash of $1.7 million and $12.6 million in the six months ended June 30, 2005
and 2004, respectively. The amount of cash provided from operations before changes in components of working capital was $5.6 million in 2005 and $4.5 million in 2004. Cash provided (used) by changes in components of working capital was $(3.9)
million and $8.1 million, the material differences between the periods substantially resulting from changes in accounts receivables, inventory and accounts payable. These changes related to the timing of sales orders, causing a corresponding buildup
or shipment of inventory.



Net cash from investing
activities. During the six months ended June 30, 2005, we used $1.1 million in investing activities; approximately $1.3 million related to the purchase of fixed assets, which was partially offset by $0.1 million of proceeds from the sale of
fixed assets and a $0.1 million decrease in other assets, primarily prepaid royalties. During the same period in 2004, we used $0.9 million in investing activities, $1.0 million related to net purchase of fixed assets, offset by $0.1 million
decrease in other assets, primarily prepaid royalties.



Net
cash from financing activities. During the six months ended June 30, 2005, our financing activities provided $0.2 million, substantially as a result of proceeds from the exercise of stock options. During the same period in 2004, we used $7.5
million in financing activities, substantially related to paying off our $7.5 million outstanding line of credit balance in February 2004.



Letters of credits and bonds. In the normal course of our business activities related to sales of wireless 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 $0.8 million on June 30, 2005. Performance bonds, which expire on various dates, totaled $5.4 million at June 30, 2005. 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 2005; however, we continue to seek improved bonding alternatives with increased limits as bonding requirements are
expected to increase in parallel with our anticipated growth in revenue, in 2006 and beyond.



Page 20



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Secured line of credit. We have a secured $15.0 million line of credit with Bank of America that
bears interest rate of LIBOR plus 150 basis points. 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 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 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 June 30, 2005. At June 30, 2005, we had no amounts outstanding on the revolving line of credit, and the total available
line of credit was $12.0 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. The Companys backlog of
unfilled orders at June 30, 2005 was $18.9 million, compared to a backlog of $20.2 million at December 31, 2004 and $11.4 million at June 30, 2004. Due to the unpredictable timing of major domestic governmental orders, the Company does not believe
that its backlog figures and variations from period to period therein, are necessarily indicative of sales of products in future periods.



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 special purpose entities, or SPEs, 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 SPE transactions.



Recently Issued Accounting
Standards



In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle, as well as changes required by an accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. This pronouncement is not anticipated to have a material effect on our consolidated financial position or results of operations.



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), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(revised) requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based upon the grant-date fair value of the award. The fair-value-based method is substantially similar to the method established in SFAS No. 123 and includes use of the Black-Scholes option-pricing
model. That fair value will be recognized over the period during which the employee is required to provide service in exchange for the award, generally the options vesting period. SFAS No. 123(revised) is effective for annual reporting periods
that begin after June 15, 2005. We will adopt SFAS No. 123(revised) as of January 1, 2006, and shall recognize as an expense the fair value of all stock-based compensation. At this time, the Company has not estimated the future fair value expense
associated with its stock-based compensation programs.



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



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



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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, 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 June 30, 2005.



Internal Controls Over Financial Reporting



During the first quarter ended March 30, 2005 through the second quarter ended June 30, 2005, our private wireless communications segment completed the
transfer of all of its final assembly production. During this period, we designed, developed, and implemented new / modified control procedures associated with inventory costing, purchasing, shipping, and receiving with our outsource manufacturing
provider.



In response to the increased risk imposed by these
changes, management increased the nature and extent of analytical review and analysis of the accounts impacted by the changes described and conducted a physical inventory. Management also initiated timely control procedures to evaluate and control
new processes for related inventory transactions as deemed necessary. We anticipate that there could be additional changes in our internal controls process during the third quarter ending September 30, 2005, as we continue to enhance our internal
controls effectiveness in conjunction with the outsourcing of our manufacturing and final assembly.



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There were no other changes in our internal controls over financial reporting during the quarter ending
June 30, 2005 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 10 to the Notes to Condensed Consolidated Financial Statements in Part I, Item 1.



ITEMS 2 - 3



N/A.



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



The Company held its Annual Meeting of Shareholders on June 10, 2005.



The director elected at the meeting was Michael E. Jalbert. Mr. Jalbert received 16,506,037 votes for and 499,306 votes
withheld. The other directors, whose terms of office continued after the meeting, were Edward H. Bersoff, Winston J. Wade, Veronica A. Haggart and Tom R. Thomsen.



The proposal to approve and ratify the adoption of the 2005 omnibus incentive compensation plan was approved with 6,303,980
votes in favor, 3,751,538 votes against and 35,450 votes abstained.



The proposal to ratify the appointment of Grant Thornton as EFJs independent registered public accounting firm received 16,898,943 for the appointment and 90,224 against the appointment and 16,176 votes abstained.



ITEM 5.



N/A



ITEM 6. EXHIBITS



The following exhibits are filed herewith:



|            |  |                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                 
|10.3        |  | EFJ, Inc. 2005 Omni bus Incentive Compensation Plan (incorporated herein by reference to Appendix A to the 2005 Proxy Statement pursuant to Schedule 14(a)).
|            | 
|11.1        |  | Computation of income per share                                                                                                                             
|            | 
|31.1        |  | Chief Executive Officers Certification of Report on Form 10-Q for the Quarter Ending June 30, 2005                                                         
|            | 
|31.2        |  | Chief Financial Officers Certification of Report on Form 10-Q for the Quarter Ending June 30, 2005                                                         
|            | 
|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:  August 02, 2005 |  | By:       |  | /s/ Jana Ahlfinger Bell                     
|                       |  |           |  | Jana Ahlfinger Bell                         
|                       |  |           |  | Senior Vice President and                   
|                       |  |           |  | Chief Financial Officer                     
|                       |  |           |  | (Principal Financial and Accounting Officer)



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