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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, 2006

or



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

For the transition period from  to

Commission File Number 0-21681



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EFJ, INC.

(Exact name of registrant as specified in its charter)



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

1440 CORPORATE DRIVE

IRVING, TEXAS 75038

(972) 819-0700

(Address, including zip code, and telephone number, including area code, of registrants principal executive office)



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

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

Large Accelerated Filer ̈Accelerated Filer  x     Non-accelerated Filer ̈

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

As of July 31, 2006, 25,828,811 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, 2006 and December 31,
2005

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



|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                              |  | June 30, 2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                     |  | $             | 44,326  |   |                   | $ | 39,107  |  
|Accounts receivable, net of allowance for returns and doubtful accounts of $199 and $135, respectively                                                                        |  |               | 22,992  |   |                   |   | 35,745  |  
|Receivables - other                                                                                                                                                           |  |               | 10,715  |   |                   |   | 7,209   |  
|Cost in excess of billings on uncompleted contracts                                                                                                                           |  |               | 2,332   |   |                   |   | 1,726   |  
|Inventories                                                                                                                                                                   |  |               | 21,835  |   |                   |   | 14,092  |  
|Deferred income taxes                                                                                                                                                         |  |               | 1,287   |   |                   |   | 1,287   |  
|Prepaid expenses                                                                                                                                                              |  |               | 952     |   |                   |   | 692     |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                          |  |               | 104,439 |   |                   |   | 99,858  |  
|                                                                                                                                                                              |  |              
|Property, plant and equipment, net                                                                                                                                            |  |               | 5,043   |   |                   |   | 4,573   |  
|Deferred income taxes, net of current portion                                                                                                                                 |  |               | 22,853  |   |                   |   | 22,853  |  
|Intangible assets, net of accumulated amortization                                                                                                                            |  |               | 6,739   |   |                   |   | 6,741   |  
|Other assets                                                                                                                                                                  |  |               | 1,349   |   |                   |   | 213     |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                                  |  | $             | 140,423 |   |                   | $ | 134,238 |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Current portion of long-term debt obligations                                                                                                                                 |  | $             | 8       |   |                   | $ | 65      |  
|Accounts payable                                                                                                                                                              |  |               | 11,278  |   |                   |   | 5,611   |  
|Accrued expenses                                                                                                                                                              |  |               | 6,114   |   |                   |   | 7,344   |  
|Billings in excess of cost on uncompleted contracts                                                                                                                           |  |               |        |   |                   |   | 5       |  
|Deferred revenues                                                                                                                                                             |  |               | 469     |   |                   |   | 363     |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                     |  |               | 17,869  |   |                   |   | 13,388  |  
|Long-term debt obligations, net of current portion                                                                                                                            |  |               |        |   |                   |   | 5       |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                                             |  |               | 17,869  |   |                   |   | 13,393  |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                                 |  |               |         |   |                   |   |         |  
|                                                                                                                                                                              |  |              
|Stockholders equity:                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Preferred stock ($0.01 par value; 3,000,000 shares authorized; none issued)                                                                                                   |  |               |        |   |                   |   |        |  
|Common stock ($0.01 par value; 50,000,000 voting shares authorized, 25,970,316 and 25,867,094 issued and outstanding as of June 30, 2006
and December 31, 2005, respectively) |  |               | 260     |   |                   |   | 259     |  
|Additional paid-in capital                                                                                                                                                    |  |               | 149,627 |   |                   |   | 150,387 |  
|Unearned stock compensation                                                                                                                                                   |  |               |        |   |                   |   | (1,693  | )
|Accumulated deficit                                                                                                                                                           |  |               | (27,333 | ) |                   |   | (28,108 | )
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                    |  |               | 122,554 |   |                   |   | 120,845 |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  | $             | 140,423 |   |                   | $ | 134,238 |  
|                                                                                                                                                                              |  |               |         |   |                   |   |         |  

See accompanying notes to the condensed consolidated financial statements.



Page 2



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EFJ, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months
ended June 30, 2006 and 2005

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



|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                                                                                                                              |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                                                                                                                                                                                                              |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Revenues, net                                                                                                                                                                                                                                                                                 |  | $                           | 28,750     |   |                           | $ | 19,855     |      |  | $ | 39,313     |   |  | $ | 44,016     |  
|Cost of sales                                                                                                                                                                                                                                                                                 |  |                             | 16,249     |   |                           |   | 9,847      |      |  |   | 21,263     |   |  |   | 18,685     |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                                                                                                                                                                                                                                                  |  |                             | 12,501     |   |                           |   | 10,008     |      |  |   | 18,050     |   |  |   | 25,331     |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                                                                                                                                                                                                                                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                                                                                                                                                                                                                                                      |  |                             | 2,994      |   |                           |   | 4,424      |      |  |   | 5,736      |   |  |   | 8,393      |  
|Sales and marketing                                                                                                                                                                                                                                                                           |  |                             | 2,625      |   |                           |   | 2,332      |      |  |   | 4,720      |   |  |   | 5,286      |  
|General and administrative, inclusive of non-cash stock option repricing benefit adjustment of $125 and $520 for the three and six months
ended June 30, 2005, respectively; and facility relocation expenses of $439 and $909 for the three and six months ended June 30, 2005, respectively |  |                             | 3,468      |   |                           |   | 3,010      |      |  |   | 7,709      |   |  |   | 6,216      |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                                                                                                                                                                                                                      |  |                             | 9,087      |   |                           |   | 9,766      |      |  |   | 18,165     |   |  |   | 19,895     |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from operations                                                                                                                                                                                                                                                                 |  |                             | 3,414      |   |                           |   | 242        |      |  |   | (115       | ) |  |   | 5,436      |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |  
|Other income (expense), net                                                                                                                                                                                                                                                                   |  |                             | (1         | ) |                           |   | (1         | )    |  |   | (1         | ) |  |   | 3          |  
|Interest income                                                                                                                                                                                                                                                                               |  |                             | 477        |   |                           |   | 75         |      |  |   | 920        |   |  |   | 137        |  
|Interest expense                                                                                                                                                                                                                                                                              |  |                             | (14        | ) |                           |   | (21        | )    |  |   | (29        | ) |  |   | (38        | )
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before income taxes                                                                                                                                                                                                                                                                    |  |                             | 3,876      |   |                           |   | 295        |      |  |   | 775        |   |  |   | 5,538      |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |  
|Income tax provision                                                                                                                                                                                                                                                                          |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                                                    |  | $                           | 3,876      |   |                           | $ | 295        |      |  | $ | 775        |   |  | $ | 5,538      |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income per share  Basic                                                                                                                                                                                                                                                                  |  | $                           | 0.15       |   |                           | $ | 0.02       |      |  | $ | 0.03       |   |  | $ | 0.30       |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income per share  Diluted                                                                                                                                                                                                                                                                |  | $                           | 0.15       |   |                           | $ | 0.02       |      |  | $ | 0.03       |   |  | $ | 0.29       |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares  Basic                                                                                                                                                                                                                                                        |  |                             | 25,795,798 |   |                           |   | 18,518,964 |      |  |   | 25,753,471 |   |  |   | 18,416,004 |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares  Diluted                                                                                                                                                                                                                                                      |  |                             | 26,195,984 |   |                           |   | 18,848,032 |      |  |   | 26,191,963 |   |  |   | 18,809,639 |  
|                                                                                                                                                                                                                                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes to the condensed consolidated financial statements



Page 3



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EFJ, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30,
2006 and 2005

(Unaudited and in thousands)



|                                                                                  |  |                           |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Six months ended June 30, |       
|                                                                                  |  | 2006                      |        |   | 2005 |  
|Cash flows from operating activities:                                             |  |                           |        |   |      |   |        |  
|Net income                                                                        |  | $                         | 775    |   |      | $ | 5,538  |  
|                                                                                  |  |                          
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                           | 1,063  |   |      |   | 662    |  
|Stock-based compensation                                                          |  |                           | 817    |   |      |   | (520   | )
|Gain on sale of fixed assets                                                      |  |                           | (50    | ) |      |   | (45    | )
|Changes in operating assets and liabilities:                                      |  |                           |        |   |      |   |        |  
|Accounts receivable                                                               |  |                           | 12,753 |   |      |   | 4,609  |  
|Receivables - other                                                               |  |                           | (3,506 | ) |      |   |       |  
|Cost in excess of billings on uncompleted contracts                               |  |                           | (606   | ) |      |   | (1,763 | )
|Inventories                                                                       |  |                           | (7,743 | ) |      |   | (3,918 | )
|Prepaid expenses                                                                  |  |                           | (260   | ) |      |   | (174   | )
|Accounts payable                                                                  |  |                           | 5,667  |   |      |   | (327   | )
|Billings in excess of cost on uncompleted contracts                               |  |                           | (5     | ) |      |   | (750   | )
|Deferred revenues                                                                 |  |                           | 106    |   |      |   | (437   | )
|Accrued and other liabilities                                                     |  |                           | (1,230 | ) |      |   | (1,148 | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Total adjustments                                                                 |  |                           | 7,006  |   |      |   | (3,811 | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |                           | 7,781  |   |      |   | 1,727  |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash flows from investing activities:                                             |  |                           |        |   |      |   |        |  
|Proceeds from sale of fixed assets                                                |  |                           |       |   |      |   | 128    |  
|Proceeds from sale of facility                                                    |  |                           | 4,600  |   |      |   |       |  
|Purchase of facility                                                              |  |                           | (3,627 | ) |      |   |       |  
|Purchase of property, plant and equipment                                         |  |                           | (1,533 | ) |      |   | (1,262 | )
|Other assets                                                                      |  |                           | (1,134 | ) |      |   | 22     |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash used in investing activities                                             |  |                           | (1,694 | ) |      |   | (1,112 | )
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash flows from financing activities:                                             |  |                           |        |   |      |   |        |  
|Principal payments on long-term debt                                              |  |                           | (62    | ) |      |   | (60    | )
|Deferred gain on facility purchase/sale/leaseback                                 |  |                           | (923   | ) |      |   |       |  
|Proceeds from exercise of stock options                                           |  |                           | 117    |   |      |   | 212    |  
|Other                                                                             |  |                           |       |   |      |   | 40     |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                               |  |                           | (868   | ) |      |   | 192    |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                         |  |                           | 5,219  |   |      |   | 807    |  
|Cash and cash equivalents, beginning of period                                    |  |                           | 39,107 |   |      |   | 9,484  |  
|                                                                                  |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                         | 44,326 |   |      | $ | 10,291 |  
|                                                                                  |  |                           |        |   |      |   |        |  

Supplemental Disclosure of Cash Flow Information:

The Company paid interest of $29 and $38 during the six months ended June 30, 2006 and 2005, respectively.

The Company paid income taxes of $70 during each of the six months ended June 30, 2006 and 2005.

See accompanying notes to the condensed consolidated financial statements



Page 4



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

1. GENERAL

The condensed consolidated balance sheet
of EFJ, Inc. at December 31, 2005, presented within this Report on Form 10-Q filing, has been derived from audited consolidated financial statements at that date. The condensed consolidated financial statements as of June 30, 2006 and for
the three and six months ended June 30, 2006 and 2005 are unaudited. The condensed consolidated financial statements reflect all normal and recurring accruals and adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial position, operating results, and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with managements discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2005. The results of operations
and cash flows for the three and six months ended June 30, 2006 are not necessarily indicative of the results for any other period or the entire fiscal year ending December 31, 2006.

Unless the context otherwise provides, all references to we, us, and our include EFJ, Inc., its predecessor entity
and its subsidiaries, including E.F. Johnson Company and Transcrypt International, Inc., on a combined basis. All references to EFJohnson refer to E.F. Johnson Company, and all references to Transcrypt refer to Transcrypt
International, Inc. Further, all references to the private wireless communications segment refer to EFJohnson, and all references to the secured communications segment refer to Transcrypt.

2. ORGANIZATION AND CONSOLIDATION

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



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



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



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



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

The condensed consolidated financial statements include the accounts of EFJ, Inc. and our wholly-owned subsidiaries (see also note 13). All intercompany accounts and transactions have been eliminated in consolidation.

3. NET INCOME PER SHARE

Basic income
per share (EPS) is calculated based upon the weighted average number of common shares outstanding during the period. The diluted EPS calculation reflects the potential dilution from common stock equivalents such as stock options.
Outstanding stock options with exercise prices lower than the average market price of the common stock for the respective periods are considered common stock equivalents and are dilutive in the calculation of the diluted weighted average common
shares. Outstanding stock options which had exercise prices higher than the average market price of the common stock for the periods are considered anti-dilutive and excluded from the calculation of diluted weighted average common shares. The
outstanding stock options which are considered dilutive and anti-dilutive are:



|                                  |  |                            |  |                           |  |           |  |          
|--------------------------------- |  | -------------------------- |  | ------------------------- |  | --------- |  | ---------
|                                  |  | Three Months EndedJune 30, |  | Six Months Ended June 30,
|                                  |  | 2006                       |  | 2005                      |  | 2006      |  | 2005     
|Options with dilutive effect      |  | 755,412                    |  | 1,104,241                 |  | 1,144,222 |  | 1,104,241
|Options with anti-dilutive effect |  | 458,960                    |  | 393,500                   |  | 70,150    |  | 393,500  
|                                  |  |                            |  |                           |  |           |  |          
|Outstanding stock options         |  | 1,214,372                  |  | 1,497,741                 |  | 1,214,372 |  | 1,497,741
|                                  |  |                            |  |                           |  |           |  |          

We use the treasury stock method to calculate diluted weighted average common shares, as if all such options were
outstanding for the periods presented.



Page 5



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

4. ACCOUNTING FOR STOCK-BASED COMPENSATION

Prior to
2006, we accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations. Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (Revised 2004),
Share-Based Payments (SFAS 123R), and selected the modified prospective method to initially report stock-based compensation amounts in the consolidated financial statements. We are currently using the Black-Scholes option
pricing model to determine the fair value of all option grants. For the three and six months ended June 30, 2006, we recognized compensation expense of $0.3 million and $0.6 million, respectively, related to stock option grants and $0.1 million
and $0.2 million, respectively, related to restricted stock grants. For option grants issued in the six-month periods ended June 30, 2006 and 2005, the following weighted-average assumptions were used:



|                           |  |                           |   |  |          |  
|-------------------------- |  | ------------------------- | - |  | -------- | -
|                           |  | Six Months Ended June 30, |  
|                           |  | 2006                      |   |  | 2005     |  
|Expected option life       |  | 4.75 years                |   |  | 10 years |  
|Expected annual volatility |  | 77                        | % |  | 56       | %
|Risk-free interest rate    |  | 4.74                      | % |  | 4.40     | %
|Dividend yield             |  | 0                         | % |  | 0        | %

Stock option grants issued prior to December 31, 2005 generally had five year vesting periods
and ten year lives. Grants issued since January 1, 2006 have four year vesting periods and seven year lives. A summary of options activity for the six months ended June 30, 2006 is presented below:



|                               |  |           |   |  |                               |       |                                          |     |                               |   |       |  
|------------------------------ |  | --------- | - |  | ----------------------------- | ----- | ---------------------------------------- | --- | ----------------------------- | - | ----- | -
|Options                        |  | Shares    |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue($000) |  
|Outstanding at January 1, 2006 |  | 1,267,767 |   |  | $                             | 5.97  |                                          | 8.2 |                               | $ | 7,568 |  
|Granted                        |  | 47,650    |   |  |                               | 11.23 |                                          | 6.7 |                               |   | 535   |  
|Exercised                      |  | (101,045  | ) |  |                               | 1.00  |                                          |    |                               |   | (101  | )
|Forfeitied or expired          |  |          |   |  |                               |      |                                          |    |                               |   |      |  
|                               |  |           |   |  |                               |       |                                          |     |                               |   |       |  
|Outstanding at June 30, 2006   |  | 1,214,372 |   |  | $                             | 6.59  |                                          | 8.2 |                               | $ | 8,002 |  
|                               |  |           |   |  |                               |       |                                          |     |                               |   |       |  
|Exercisable at June 30, 2006   |  | 341,812   |   |  | $                             | 5.33  |                                          | 8.0 |                               | $ | 1,821 |  
|                               |  |           |   |  |                               |       |                                          |     |                               |   |       |  

For the three and six months ended June 30, 2006, we recorded $0.3 million and $0.6 million,
respectively, for stock-based compensation expense related to stock option grants, which is reflected in general and administrative expense. At June 30, 2006, there is $4.2 million of total unrecognized compensation cost related to unvested
stock options remaining to be recognized. Of this total, approximately $0.6 million will be recognized in the remaining six months of the current year, with the remainder recognized through 2010. Under SFAS 123R, any tax deductions in excess of
recognized compensation costs are reported as financing cash flows rather than operating cash flows as was prescribed prior to the adoption of SFAS 123R. Due to our significant net operating loss carryforwards (NOLs), we have not reflected these
excess deductions since they have not yet reduced taxes payable.

In 2000 and 2001, we effectively cancelled and reissued stock options in
order to lower the exercise price of those options to $0.656 per share, an amount approximating 150% of the then prevailing market value of our common stock (the repricing). The repricing of the stock options resulted in a new
measurement date for accounting purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. Aggregate non-cash compensation charges, therefore, result to the extent that the market value at the
respective period ending date exceeds the repriced exercise price of $0.656 per share. Relating to these repriced options, compensation benefit of $0.1 million and $0.5 million, respectively, was recorded in the three and six months ended
June 30, 2005. These amounts are included in general and administrative expenses. Upon our adoption of SFAS 123R, the repricing of shares was discontinued in accordance with the provisions of SFAS 123R.



Page 6



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

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, our pro forma net income and pro forma net income per share would have been as follows:



|                                                                                   |  |                                 |      |   |                              |   |       |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ---- | - | ---------------------------- | - | ----- | -
|                                                                                   |  | Three MonthsEnded June 30, 2005 |      |   | Six MonthsEndedJune 30, 2005 |  
|Net income  as reported                                                           |  | $                               | 295  |   |                              | $ | 5,538 |  
|Add: Stock option repricing benefit  as reported                                  |  |                                 | 125  |   |                              |   | 520   |  
|Less: General and administrative expenses for management stock option compensation |  |                                 | (310 | ) |                              |   | (571  | )
|                                                                                   |  |                                 |      |   |                              |   |       |  
|Pro forma net income                                                               |  | $                               | 110  |   |                              | $ | 5,487 |  
|                                                                                   |  |                                 |      |   |                              |   |       |  
|Net income per share, basic  as reported                                          |  | $                               | 0.02 |   |                              | $ | 0.30  |  
|Net income per share, diluted  as reported                                        |  |                                 | 0.02 |   |                              |   | 0.29  |  
|Pro forma net income per share, basic                                              |  |                                 | 0.01 |   |                              |   | 0.30  |  
|Pro forma net income per share, diluted                                            |  |                                 | 0.01 |   |                              |   | 0.29  |  

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

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

A summary of the status of our nonvested restricted stock grants as of
June 30, 2006 and changes during the six-months ended June 30, 2006 is presented below:



|                                  |  |         |  |                                      
|--------------------------------- |  | ------- |  | -------------------------------------
|Nonvested Restricted Stock Grants |  | Shares  |  | Weighted-AverageGrant-Date Fair Value
|Nonvested at January 1, 2006      |  | 170,000 |  | 9.34                                 
|Granted                           |  | 62,500  |  | 11.23                                
|Vested                            |  |        |  |                                     
|Forfeitied                        |  |        |  |                                     
|                                  |  |         |  |                                      
|Nonvested at June 30, 2006        |  | 232,500 |  | 9.85                                 
|                                  |  |         |  |                                      



Page 7



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

5. INVENTORIES

The following is a summary of
inventories:



|                           |  |               |        |                   |   |       
|-------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                           |  | June 30, 2006 |        | December 31, 2005
|Raw materials and supplies |  | $             | 8,667  |                   | $ | 8,395 
|Work in progress           |  |               | 932    |                   |   | 1,432 
|Finished goods             |  |               | 9,853  |                   |   | 93    
|Service inventories        |  |               | 2,930  |                   |   | 4,564 
|                           |  |               |        |                   |   |       
|                           |  |               | 22,382 |                   |   | 14,484
|Reserve for obsolescence   |  |               | 547    |                   |   | 392   
|                           |  |               |        |                   |   |       
|Total inventories          |  | $             | 21,835 |                   | $ | 14,092
|                           |  |               |        |                   |   |       

During the three months ended March 31, 2005, we transferred all inventories located at
EFJohnsons Waseca, Minnesota plant (which was closed as of March 31, 2005) to our Irving, Texas facility. In the course of this transfer, we sold approximately $1.7 million of raw materials to the vendor with whom EFJohnson has outsourced
its wireless communication manufacturing. This sale was in addition to the $2.4 million sale of raw material inventory to such vendor in the fourth quarter of 2004. These inventory sales were in exchange for non-interest-bearing notes calling for
monthly payments to be not less than actual inventories consumed by the vendor in the course of manufacturing EFJohnsons products. These inventory sale notes were fully retired in June, 2006. Other receivables at June 30, 2006 and
December 31, 2005 are substantially comprised of amounts owed pursuant to these note agreements and other transfers of component inventories to this contract manufacturer. We have a security interest in the inventories, and the transactions
were recorded as inventory transfers and not as revenue. In addition, we recognized no gain or loss on the exchange.

6. INTANGIBLE ASSETS

We do not amortize our goodwill and tradename, both of which relate solely to EFJohnson, but instead review such assets for impairment,
at least annually. We performed fair value-based impairment tests at December 31, 2005 and 2004 and concluded that no impairment of goodwill or tradename had occurred as of such dates. No events occurred during the six months ended
June 30, 2006 and 2005, 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 $0.002 million for each of the six months ended June 30, 2006 and June 30, 2005. Intangible assets consist of the following as of the dates
indicated:



|                                               |  |               |  |                   |       |  |       |  |   |      
|---------------------------------------------- |  | ------------- |  | ----------------- | ----- |  | ----- |  | - | -----
|                                               |  | June 30, 2006 |  | December 31, 2005
|Intangible assets not subject to amortization: |  |               |  |                   |       |  |       |  |   |      
|Goodwill                                       |  |               |  | $                 | 5,126 |  |       |  | $ | 5,126
|Tradename                                      |  |               |  |                   | 1,564 |  |       |  |   | 1,564
|                                               |  |               |  |                  
|Intangible assets subject to amortization:     |  |               |  |                   |       |  |       |  |   |      
|Proprietary and core technology                |  | 1,290         |  |                   |       |  | 1,290 |  |   |      
|Less: accumulated amortization                 |  | 1,290         |  |                   |      |  | 1,290 |  |   |     
|                                               |  |               |  |                   |       |  |       |  |   |      
|Trademarks/Patents                             |  | 115           |  |                   |       |  | 113   |  |   |      
|Less: accumulated amortization                 |  | 66            |  |                   | 49    |  | 62    |  |   | 51   
|                                               |  |               |  |                   |       |  |       |  |   |      
|Total                                          |  |               |  | $                 | 6,739 |  |       |  | $ | 6,741
|                                               |  |               |  |                   |       |  |       |  |   |      



Page 8



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

(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 $15.0 million line of credit bears interest at LIBOR plus 150 basis points (6.85% at June 30, 2006). The line of credit is collateralized by substantially all of our assets,
and borrowings available under the line of credit are calculated as a percentage of eligible inventory and accounts receivable. The agreement, which expires September 30, 2007, includes certain covenants, including financial covenants, with
which we were in compliance as of June 30, 2006 and December 31, 2005. At June 30, 2006 and December 31, 2005, we had no amounts outstanding on our line of credit. The total available credit under the line of credit was $14.7
million as of June 30, 2006. The terms of this line of credit were modified subsequent to June 30, 2006 as described in footnote 13 below.

8.
WARRANTY COSTS

We provide a one-to-two year warranty on substantially all of our product sales, depending upon certain terms and
conditions of the sale, and estimate future warranty claims based on historical experience and anticipated costs to be incurred over the life of the warranty. Warranty expense is accrued at the time of sale with an additional accrual for specific
items after the sale when their existence is known and amounts are both extraordinary and determinable. A reconciliation of changes in our accrued warranty reserve as of June 30, 2006 is as follows:



|                               |  |                             |       |                   |     |                         |     |                         |   |      
|------------------------------ |  | --------------------------- | ----- | ----------------- | --- | ----------------------- | --- | ----------------------- | - | -----
|                               |  | Balance atDecember 31, 2005 |       | Charged toExpense |     | Deduction /Expenditures |     | Balance atJune 30, 2006
|Allowance for Warranty Reserve |  | $                           | 2,693 |                   | 459 |                         | 788 |                         | $ | 2,364
|                               |  |                             |       |                   |     |                         |     |                         |   |      

9. COMMITMENTS AND CONTINGENCIES

We are presently disputing a certain state tax liability totaling approximately $0.2 million. We believe the basis for the states assessments of the
amount owed is incorrect, and we intend to vigorously contest such assessment. At June 30, 2006 and December 31, 2005, we had recorded a liability related to this assessment, which amount reflects our evaluation of the eventual conclusion
of these matters.

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

In the normal course of our business activities, we are required under contracts with various government authorities to provide letters of credit and
bonds that may be drawn upon if we fail to perform under these contracts. At both June 30, 2006 and December 31, 2005 we had open letters of credit totaling $0.3 million. Bonds, which expire on various dates, totaled $1.0 million on
June 30, 2006 and $0.5 million on December 31, 2005, and no bonds had been drawn upon at either date.



Page 9



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

10. SEGMENT AND RELATED INFORMATION

We operate in
two reporting segments that both operate in the LMR industry. These segments are our two operating subsidiaries: EFJohnson and Transcrypt. Although both segments have product offerings that have some market similarity, EFJohnsons operations
primarily include the design, development, marketing, and support of wireless infrastructure, mobile and portable wireless radios, and wireless communication systems, while Transcrypts operations primarily include the design, development,
marketing, and support of devices that prevent the unauthorized interception of sensitive voice communication. We evaluate segment results based on gross margin and income from operations. Corporate general and administrative expenses, exclusive of
charges or benefits associated with variable accounting for repriced stock options, are allocated to the operating segments based upon estimated usage of corporate resources. The following table is a summary of the unaudited operating results for
the three and six months ended June 30, 2006 and 2005.



|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|---------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                               |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|In thousands                                   |  | 2006                       |         |   | 2005                     |   |        | 2006 |  |   | 2005    |  
|Revenues:                                      |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Private Wireless Communications                |  | $                          | 23,050  |   |                          | $ | 15,107 |      |  | $ | 27,613  |   |  | $ | 25,320 |  
|Secured Communications                         |  |                            | 5,700   |   |                          |   | 4,748  |      |  |   | 11,700  |   |  |   | 18,696 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                               |  | $                          | 28,750  |   |                          | $ | 19,855 |      |  | $ | 39,313  |   |  | $ | 44,016 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Gross Profit:                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Private Wireless Communications                |  | $                          | 7,688   |   |                          | $ | 5,911  |      |  | $ | 8,220   |   |  | $ | 8,965  |  
|Secured Communications                         |  |                            | 4,813   |   |                          |   | 4,097  |      |  |   | 9,830   |   |  |   | 16,366 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                               |  | $                          | 12,501  |   |                          | $ | 10,008 |      |  | $ | 18,050  |   |  | $ | 25,331 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating Profit:                              |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Private Wireless Communications                |  | $                          | 144     |   |                          | $ | (2,219 | )    |  | $ | (6,279  | ) |  | $ | (7,247 | )
|Secured Communications                         |  |                            | 3,270   |   |                          |   | 2,336  |      |  |   | 6,164   |   |  |   | 12,163 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (Loss) from Operations before Repricing |  |                            | 3,414   |   |                          |   | 117    |      |  |   | (115    | ) |  |   | 4,916  |  
|                                               |  |                            |         |  
|Stock Option Repricing Adjustment, net         |  |                            |        |   |                          |   | 125    |      |  |   |        |   |  |   | 520    |  
|Other Income (Expense), net                    |  |                            | (1      | ) |                          |   | (1     | )    |  |   | (1      | ) |  |   | 3      |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (Loss) before Income Taxes and Interest |  | $                          | 3,413   |   |                          | $ | 241    |      |  | $ | (116    | ) |  | $ | 5,439  |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Depreciation and Amortization:                 |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Private Wireless Communications                |  | $                          | 473     |   |                          | $ | 304    |      |  | $ | 941     |   |  | $ | 567    |  
|Secured Communications                         |  |                            | 63      |   |                          |   | 47     |      |  |   | 122     |   |  |   | 95     |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                               |  | $                          | 536     |   |                          | $ | 351    |      |  | $ | 1,063   |   |  | $ | 662    |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Assets:                                        |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Private Wireless Communications                |  | $                          | 68,209  |   |                          | $ | 43,782 |      |  | $ | 68,209  |   |  | $ | 43,782 |  
|Secured Communications                         |  |                            | 46,879  |   |                          |   | 14,229 |      |  |   | 46,879  |   |  |   | 14,229 |  
|Corporate                                      |  |                            | 25,335  |   |                          |   | 14,856 |      |  |   | 25,335  |   |  |   | 14,856 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                               |  | $                          | 140,423 |   |                          | $ | 72,867 |      |  | $ | 140,423 |   |  | $ | 72,867 |  
|                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  



Page 10



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EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

11. SALE/LEASEBACK TRANSACTION

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

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

12. RELOCATION OF OPERATIONS

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

On February 28, 2005, we announced our decision to move our Corporate Headquarters
to Irving, Texas. This move was substantially complete at the end of the second quarter of 2005.

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

In relation to these moves, we
incurred costs of $0.4 and $0.9 million, respectively, in the three and six months ended June 30, 2005.

13. SUBSEQUENT EVENTS

On July 10, 2006, a merger was consummated pursuant to the Agreement and Plan of Merger (the Agreement) by and among EFJ, Inc., a
Delaware corporation (EFJ), Avanti Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of EFJ (the Merger Sub), and 3e Technologies International, Inc., a Maryland corporation (3eTI). Pursuant to
the terms of the Agreement, Merger Sub was merged with and into 3eTI, which is the surviving corporation in the Merger, and the separate existence of Merger Sub thereupon ceased. As a result of the Merger, 3eTI became a wholly-owned subsidiary of
EFJ. The total consideration paid by EFJ in the Merger consisted of $36.0 million in cash, which includes approximately $5.0 million to satisfy certain liabilities of 3eTI and $3.6 million to be held in escrow to indemnify EFJ for any claims under
the Agreement.

On July 11, 2006, following the closing of the Merger, EFJ, Inc. and subsidiaries entered into an agreement with Bank
of America, N.A. (Lender) to amend the Revolving Line of Credit Agreement and Security Agreement, which provides for revolving loans in the amount of $15.0 million. The parties also entered into a term note which (i) provided for
the merger and add 3eTI as co-borrower and co-obligor, (ii) provided for the extension of a term loan to EFJ, Inc. for $15.0 million and (iii) effected certain other changes as described in the amendment. The revolving loans and the term
loan under the loan agreement as amended bear interest at a fluctuating rate based on either the London Interbank Offered Rate as described in the loan documents or the prime rate, plus a margin determined by the borrowers ratio of debt to its
earnings before interest, taxes, depreciation and amortization (EBITDA). However, on July 19, 2006, we entered into an interest rate swap agreement which effectively converts the variable LIBOR component of the interest rate on the
term loan to a fixed rate of 5.64% over the term of the term loan. Interest on the revolving loans and the term loan is payable quarterly and the outstanding principal



Page 11



---

EFJ, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six months
ended June 30, 2006 and 2005

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

amount of the term loan and any revolving loans is due and payable on June 30, 2010. Following the execution of this agreement, the $15.0 million term loan was
funded and used to finance the acquisition of 3eTI. No borrowings have been made on the revolving loans.

The loan agreement as amended
provides for customary affirmative and negative covenants, including maintenance of corporate existence, rights, property, books and records and insurance, compliance with contracts and laws, and certain reporting requirements, as well as
limitations on debt, liens, fundamental changes, acquisitions, transfers of assets, investments, loans, guarantees, use of proceeds, sale-leaseback transactions and capital expenditures. In addition, the loan agreement as amended contains certain
financial covenants including a maximum ratio of funded debt to EBITDA and a fixed charge coverage ratio. The loan agreement as amended also provides for events of default that would permit the Lender to accelerate the loans upon their occurrence,
including failure to make payments, breaches of representations and warranties, insolvency events, acceleration of other indebtedness, failure to discharge judgments, material adverse effects, certain breaches of contracts, casualty losses when no
or insufficient insurance is maintained, changes of control, certain ERISA events and failure to observe covenants. As collateral for the obligations under the Loan Agreement as amended, the Lender has a security interest in substantially all assets
of the Borrowers, including accounts receivable, inventory, machinery, equipment, real estate, and general intangibles.



Page 12



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

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

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

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

Overview

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

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

Private Wireless
Communications

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

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



Page 13



---

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

Secured Communications

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

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

Sales

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

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

Our product revenues are generated under purchase orders. Although the majority of these product revenues are fulfilled within a 90-day period, some
deliveries may span multiple years due to contract delivery requirements. Our system revenue is generated under customer contracts, some of which are long-term contracts for which revenue is recorded under the percentage-of-completion method.

Description of Operating Accounts

Revenues. Revenues consist of product sales and services net of returns and allowances and system sales a portion of which revenues are 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 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.



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

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

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

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make judgments, estimates and
assumptions in certain circumstances that affect the amounts reported in the consolidated financial statements and related footnotes. We regularly evaluate the accounting policies and estimates used to prepare our financial statements. Estimates are
used for, but not limited to, the accounting for allowance for doubtful accounts and sales returns, application of the percentage of completion accounting for long-term contract revenues, inventory reserves, warranty reserves, valuation allowance
for deferred income tax assets, and contingencies. These estimates are based on historical experience and various assumptions that we believe to be reasonable under the particular applicable facts and circumstances. Actual results could differ from
those estimates.

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

Revenues

Product revenues are recognized when
the earnings process is complete, less an estimate for an allowance for returns, if applicable, and collection is reasonably assured. The earnings process is generally complete when the product is shipped, or received by the customer, depending upon
whether the title to the goods, as well as the risks and benefits of ownership, are transferred to the customer at point of shipment or point of delivery as typically we have no further obligations with respect to the sale which impact the
functionality of the product. For sales where collection is not reasonably assured, we recognize revenues as cash is received. If collection is contingent on a future event, we recognize revenues when the contingency lapses, generally upon cash
collection.

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

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



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

Inventories

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

Goodwill and Other Intangibles Assets

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

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. Valuation allowances are provided to the extent that recoverability of tax assets is not considered
likely. In determining recoverability of the future tax benefits associated with our deferred tax asset, management takes into account, among other factors, our historical operating results, our current and expected customer base, technological and
competitive factors impacting our current products, and managements estimates of future earnings that are based upon a five-year earnings projection, using information currently available, and discounted for risk. If we fail to achieve revenue
growth rates or gross margins assumed in the calculation of the deferred tax asset, we may be required to increase our valuation allowance in the future.

Long-Lived Assets

We review our long-lived assets, to include intangible assets subject to amortization, for
recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as the asset) may not be recoverable. Such circumstances
include, but are not limited to:



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



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



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



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



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

We continually evaluate whether events and circumstances have occurred. When such events or circumstances exist, the recoverability of the
assets carrying value shall be determined by estimating the



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undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that
are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we
may be required to impair these assets.

Stock-based Compensation

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

Results of Operations

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



|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|---------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                   |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                   |  | 2006                       |   |  | 2005                     |   |  | 2006  |   |  | 2005  |  
|Revenues                           |  | 100.0                      | % |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                      |  | 56.5                       |   |  | 49.6                     |   |  | 54.1  |   |  | 42.5  |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Gross profit                       |  | 43.5                       |   |  | 50.4                     |   |  | 45.9  |   |  | 57.5  |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Operating expenses:                |  |                            |   |  |                          |   |  |       |   |  |       |  
|Research and development           |  | 10.4                       |   |  | 22.3                     |   |  | 14.6  |   |  | 19.1  |  
|Sales and marketing                |  | 9.1                        |   |  | 11.7                     |   |  | 12.0  |   |  | 12.0  |  
|General and administrative (1) (2) |  | 12.1                       |   |  | 15.2                     |   |  | 19.6  |   |  | 14.1  |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Total operating expenses           |  | 31.6                       |   |  | 49.2                     |   |  | 46.2  |   |  | 45.2  |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Income (loss) from operations      |  | 11.9                       |   |  | 1.2                      |   |  | (0.3  | ) |  | 12.4  |  
|Interest income (expense)  net    |  | 1.6                        |   |  | 0.3                      |   |  | 2.3   |   |  | 0.2   |  
|Other income (expense)             |  | (0.0                       | ) |  | (0.0                     | ) |  | (0.0  | ) |  | 0.0   |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Income before income taxes         |  | 13.5                       |   |  | 1.5                      |   |  | 2.0   |   |  | 12.6  |  
|Income tax provision               |  |                           |   |  |                         |   |  |      |   |  |      |  
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  
|Net income                         |  | 13.5                       | % |  | 1.5                      | % |  | 2.0   | % |  | 12.6  | %
|                                   |  |                            |   |  |                          |   |  |       |   |  |       |  

---

|(1) | Includes non-cash equity compensation (benefit) expense of 1.5% and 2.0% in the three and six months ended June 30, 2006, respectively, and (0.6)% and (1.1)% in the three and
six months ended June 30, 2005, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Comparison of the Three and Six Months Ended June 30, 2006 and 2005

Revenues.Our revenues increased $8.9 million, or 45%, to $28.8 million for the three months ended June 30, 2006 from $19.9 million for the same period in 2005. In the second quarter of 2006, the private
wireless communications segment revenues comprised $23.1 million, or 80% of total revenues, as compared to $15.1 million or 76% of total revenues in the second quarter of 2005. Revenues from the secured communications segment comprised $5.7 million,
or 20% of total revenues, as compared to $4.7 million or 24% of total revenues in the second quarter of 2005.

Our revenues decreased $4.7
million, or 11%, to $39.3 million for the six months ended June 30, 2006 from $44.0 million for the same period in 2005. In the first six months of 2006, the private wireless communications segment revenues were $27.6 million, or 70% of total
revenues, as compared to $25.3 million, or 58% of total revenues, in the same period in 2005. Revenues from the secured communications segment were $11.7 million, or 30% of total revenues, in the first six months of 2006, as compared to $18.7
million, or 42% of total revenues in the first six months of 2005.



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Private wireless communications revenues increased $7.9 million to $23.1 million in the second quarter of
2006 from $15.1 million in the same period in 2005. This 53% increase reflects increased subscriber product shipments relating to a long-term supply contract and also system shipments to a U.S. Government customer. For the first six months of 2006,
private wireless communications revenues increased $2.3 million to $27.6 million from $25.3 million in the same period for 2005. This increase reflects the second quarter subscriber product and system shipments in the second quarter, partially
offset by the supply chain issue which resulted in decreased product shipments in the three months ended March 31, 2006.

Secured
communications revenues increased $1.0 million to $5.7 million in the second quarter of 2006 from $4.7 million in the same period in 2005. This 20% increase reflect increased product shipments to a Middle East customer and product shipments to a new
U.S. Government customer during the second quarter. For the first six months of 2006, secured communications revenues decreased $7.0 million, or 37%, from $18.7 million in 2005 to $11.7 million in the first six months of 2005. This decrease was
primarily the result of a single, large product shipment in the first quarter of 2005 that was not replicated in the first six months of 2006.

Gross Profit.Our gross profit increased $2.5 million, or 25%, to $12.5 million in the three months ended June 30, 2006 from $10.0 million for the same period in 2005. Gross profit, as a percentage of revenue, or gross margin,
was 44% for the three months ended June 30, 2006, as compared to 50% for the same period in 2005. For the six months ended June 30, 2006, gross profit decreased $7.3 million, to $18.1 million from $25.3 million. Gross margin for the first
six months of 2006 decreased to 46% from 58% in the first six months of 2005

In the second quarter of 2006, gross margin for the private
wireless communications segment was $7.7 million (33% of revenues), compared to $5.9 million (39% of revenues) in the same period for 2005. The private wireless communications gross margin for the second quarter of 2006 was negatively impacted by
the gross margin on system sales to a U.S. Government customer. For the first six months of 2006, gross margin for the private wireless communications segment was $8.2 million (30% of revenues), compared to $8.9 million (35% of revenues) in the same
period for 2005. Gross margin in the first six months of 2006 was impacted by reduced shipments in the first quarter of 2006 and margins on short-term system sales which were below our normal margin level.

Gross margin for the secured communications segment in the three months ended June 30, 2006 increased to $4.8 million from $4.1 million in the same
period in 2005. During the same period, gross margin decreased to 84% in the first three months of 2006 from 86% in the first three months of 2005. Gross profit in the first six months of 2006 decreased to $9.8 million (84%) from $16.4 million
(88%) in the same period of 2005. The decreased 2006 margin for the secured communications segment resulted from economies of scale achieved in 2005 due to higher 2005 revenue.

Research and Development.Research and development expenses decreased $1.4 million, or 32%, to $3.0 million in the three months ended
June 30, 2006 from $4.4 million in the same period in 2005. Research and development expenses were 10% of revenues in the second quarter of 2006, as compared to 22% during the same period in 2005. For the six months ended June 30, 2006,
research and development decreased $2.7 million, or 32%, to $5.7 million from $8.4 million. In the first six months, research and development expenses were 15% of revenues in 2006 compared to 19% in 2005.

We experienced a non-recurring engineering benefit of approximately $0.1 million and $0.7 million in the three and six months ended June 30, 2006
associated with the 800 MHz product line. The remaining decrease in research and development expenses in 2006 related primarily to the significant development effort incurred in the same period in 2005 involved in our wireless communications
replacement RF module, the integration of the module into our radios, and the resources required to finalize releases of our conventional and trunking infrastructure products. These development projects were substantially completed in June 2005.

Sales and Marketing.Sales and marketing expenses increased $0.3 million, or 13%, to $2.6 million for the three months ended
June 30, 2006 from $2.3 million for the same period in 2005. As a percentage of revenue, sales and marketing expenses decreased to 9% of revenues in the second quarter of 2006 from 12% of revenues in the second quarter of 2005. This decrease as
a percent of revenues reflects lower commission rates on certain private wireless communication revenues in the second quarter of 2006. For the first six months of 2006, sales and marketing expenses decreased $0.6 million, or 11%, to $4.7 million
from $5.3 million in the same period in 2005. Sales and marketing expenses were 12% of revenues in the first six months of 2006 and 2005.



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General and Administrative.General and administrative expenses increased $0.5 million, or 15%, to
$3.5 million (12% of revenues) for the three months ended June 30, 2006 from $3.0 million (15% of revenues) for the same period in 2005. For the first six months of 2006, general and administrative expenses increased $1.5 million, or 24%, to
$7.7 million (20% of revenues) from $6.2 million (14% of revenues) in 2005. Included in general and administrative expenses in the three and six months ended June 30, 2006 were $0.4 million and $0.8 million, respectively, related to equity
compensation expense recorded upon our adoption of SFAS 123R. In the three and six month periods ended June 30, 2005, we recorded a benefit of $0.1 million and $0.5 million, respectively, related to the variable repricing of certain stock
options. The variable repricing of these options was discontinued upon our adoption of SFAS 123R.

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

Net Interest Income/Expense.Net interest income/(expense) increased $0.4 million to $0.5 million for the three months ended June 30, 2006 from $0.1 million for the same period in 2005. Net interest income
increased $0.8 million to $0.9 million in the first six months of 2006 from $0.1 million in the first six months of 2005.

Other
Income/Expense, Net.Net other income/(expense) was $0 for the three and six months ended June 30, 2006 and 2005.

Provision
for Income Taxes.We did not record a tax benefit or provision for either the three or six months ended June 30, 2006 or 2005. For each of these periods, changes in our deferred tax assets were offset by changes in the valuation allowance.
The valuation reserve is based upon managements conclusions regarding, among other considerations, our operating results during 2006, our current and expected customer base, technological and competitive factors impacting our current products,
and managements estimates of future earnings based on information currently available.

Net Loss/Income.Net income for the
three months ended June 30, 2006 increased $3.6 million to $3.9 million from $0.3 million in the same period for 2005. As a percent of revenues, net income was 13.5% of revenues in the second quarter of 2006 compared to 1.5% of revenues in the
second quarter of 2005. For the first six months of 2006, net income was $0.8 million (2% of revenues) as compared to $5.5 million (13% of revenues) for the first six months of 2005.

Liquidity and Capital Resources

Subsequent to June 30, 2006, we completed the renegotiation of
our $15.0 million bank line of credit and obtained a $15.0 million term loan as further described in Subsequent Events below. Based upon our current level of operations, we expect that our available cash, financing and cash flow from
operations will be adequate to meet our anticipated needs for at least the next twelve months.

Net cash from operating activities.Our operating activities provided cash of $7.8 million and $1.7 million in the six months ended June 30, 2006 and 2005, respectively. Cash provided by or used in operating activities is primarily a reflection of our collections on billed
receivables, investment in inventories and expenditures for operations.

During the first six months of 2006, we collected $52.2 million of
billed receivables which effectively increased cash from operating activities by $12.8 million. Additionally, $28.8 million was used to purchase inventories and $17.2 million was used for other operating expenses.

During the first six months of 2005, we collected $48.8 million of billed receivables which increased cash from operating activities by $4.6 million.
During the six months ended June 30, 2005, $20.9 million of cash was used to purchase inventories and $25.6 million was used for other operating expenses.

Net cash from investing activities. During the six months ended June 30, 2006 and 2005, investing activities used $1.7 million and $1.1 million, respectively. In 2006, $3.6 million was used to purchase and
$4.6



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million was provided from the sale of the EFJohnson facility in Irving, Texas on March 31, 2006. During the six
months ended June 30, 2006, $1.5 million was used to purchase other property, plant and equipment compared to $1.3 million used to acquire property, plant and equipment in the same period in 2005

Net cash from financing activities. Financing activities used $0.9 million and provided $0.2 million during the six months ended June 30,
2006 and 2005, respectively. The deferral of the gain from the sale of the EFJohnson Irving, Texas facility utilized $1.0 million during 2006.

Letters of credits and bonds. In the normal course of our business activities related to sales of wireless radio systems to local and state governmental entities, we are required under contracts with various
government authorities to provide letters of credit or performance or bid bonds that may be drawn upon if we fail to perform under our contracts. Our outstanding letters of credit had a total undrawn balance of $0.3 million on June 30, 2006.
Performance and bid bonds, which expire on various dates, totaled $1.0 million at June 30, 2006. Our current bonding arrangement calls for zero-collateral bonding up to $7.0 million; however, no single bond may exceed $2.0 million. We believe
our bonding arrangements provide us with sufficient bonding availability through 2006.

Secured line of credit. We have a secured
$15.0 million revolving line of credit with Bank of America that bears interest at LIBOR plus 150 basis points. The revolving line of credit is collateralized by substantially all of our assets and borrowings available under the line of credit are
calculated as a percentage of eligible inventory and receivables. This amended revolving line of credit expires in September 2007 and contains certain financial and negative covenants; however, as described in Subsequent Events below, we
renegotiated this revolving line of credit subsequent to June 30, 2006. Financial covenants include requirements to maintain: a tangible net worth of $19.9 million plus 75% of preceding fiscal years net income; funded debt to EBITDA ratio
of 2.5 to 1; fixed charge coverage ratio of 1.75 to 1; and positive EBITDA over any preceding two quarter period. Negative covenants include restrictions on incurring debt above $3.0 million, encumbrances, acquisitions, transferring assets, or
making large capital expenditures. We were in compliance with all financial and negative covenants at June 30, 2006. At June 30, 2006, we had no amounts outstanding on the revolving line of credit, and the total available line of credit
was $14.7 million. As described further in Subsequent Events below, we completed the renegotiation of our bank financing facilities subsequent to June 30, 2006.

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

Backlog. Our backlog of unfilled orders at June 30, 2006 was $65.0 million, compared to a backlog of $62.3 million at December 31, 2005 and $18.9 million at June 30, 2005. Our secured communications products typically
have a relatively short period until such backlog orders are fulfilled. In contrast, our private communications products typically have a relatively longer period until such backlog orders are fulfilled due to customer system integration and
contract delivery requirements, which may span multiple years.

Subsequent Events

On July 10, 2006, a merger was consummated pursuant to the Agreement and Plan of Merger (the Agreement) by and among EFJ, Inc., a
Delaware corporation (EFJ), Avanti Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of EFJ (the Merger Sub), 3e Technologies International, Inc., a Maryland corporation (3eTI), Chih-Hsiang Li,
as Stockholders Agent, and Steven Chen, James Whang, Chih-Hsiang Li and AEPCO, Inc., as Principal Stockholders (the Merger).

Pursuant to the terms of the Agreement, Merger Sub was merged with and into 3eTI, which is the surviving corporation (the Surviving Corporation) in the Merger, and the separate existence of Merger Sub thereupon ceased. As a
result of the Merger, 3eTI became a wholly-owned subsidiary of EFJ.

Pursuant to the terms of the Agreement, the total consideration paid
by EFJ in the Merger consisted of $36.0 million in cash, which includes approximately $5.0 million to satisfy certain liabilities of 3eTI and $3.6 million to be held in escrow to indemnify EFJ for any claims under the Agreement. The Agreement
provides that certain 3eTI employees are eligible to participate in bonus programs with payments to be earned based on achievement of performance objectives and continued employment.



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Each share of 3eTI Class A Voting Common Stock and 3eTI Class B Non-Voting Common Stock that was
issued and outstanding at the time of the Merger was cancelled and extinguished and was converted automatically into the right to receive, upon surrender of the certificate representing such shares of 3eTI stock, cash consideration of $0.8015 per
share (including $0.0930 per share held in escrow) determined in accordance with the Agreement. No 3eTI stock options were assumed by EFJ and all such 3eTI stock options were either exercised in full prior to the closing of the Merger or canceled in
exchange for cash as provided in the Agreement. No 3eTI warrants were assumed by EFJ and all such 3eTI warrants were either exercised in full prior to the closing of the Merger or cancelled in exchange for cash as provided in the Agreement. All
shares of 3eTI stock formerly owned by 3eTI as treasury stock and each share of 3eTI stock formerly owned by any direct or indirect wholly-owned subsidiary of 3eTI were canceled and extinguished without any rights to conversion thereof and no
consideration was delivered in exchange therefore.

By virtue of the Merger and without any action on the part of the holder thereof, each
share of the common stock, $0.001 par value per share, of Merger Sub that was issued and outstanding was converted into and continues as one share of the common stock of the Surviving Corporation.

On July 11, 2006, following the closing of the Merger, EFJ, E. F. Johnson Company, a Minnesota corporation, Transcrypt International, Inc., a
Delaware corporation, and 3eTI (collectively, the Borrowers) and Bank of America, N.A. (Lender) entered into that certain Second Amendment to Revolving Line of Credit Agreement and Security Agreement (the
Amendment) which amended that certain Revolving Line of Credit Agreement and Security Agreement between EFJ and Lender dated November 15, 2002, as previously amended (the Loan Agreement), which provides for revolving
loans (the Revolving Loans) in the amount of $15.0 million. In connection with the Amendment, the parties also entered into a Term Note and a Second Amendment to Revolving Note (collectively with the Amendment, the Amendment
Documents). The purposes of the Amendment Documents were to (i) provide for the Merger and add 3eTI as co-borrower and co-obligor, (ii) provide for the extension of a term loan by Lender to the Borrowers in the principal amount of
$15.0 million (the Term Loan) and (iii) effect certain other changes as described in the Amendment. The Revolving Loans and the Term Loan under the Loan Agreement as amended bear interest at a fluctuating rate based on either the
London Interbank Offered Rate as described in the Loan Documents or the prime rate, plus a margin determined by the Borrowers ratio of debt to its earnings before interest, taxes, depreciation and amortization (EBITDA). However, on
July 19, 2006, we entered into an interest rate swap agreement which effectively converts the variable LIBOR component of the interest rate on the term loan to a fixed rate of 5.64% over the term of the term loan. Interest on the Revolving Loans and
the Term Loan is payable quarterly and the outstanding principal amount of the Term Loan and any Revolving Loans is due and payable on June 30, 2010. The Borrowers currently have outstanding the $15.0 million Term Loan and there are currently
no Revolving Loans outstanding.

The Loan Agreement as amended provides for customary affirmative and negative covenants, including
maintenance of corporate existence, rights, property, books and records and insurance, compliance with contracts and laws, and certain reporting requirements, as well as limitations on debt, liens, fundamental changes, acquisitions, transfers of
assets, investments, loans, guarantees, use of proceeds, sale-leaseback transactions and capital expenditures. In addition, the Loan Agreement as amended contains certain financial covenants including a maximum ratio of funded debt to EBITDA and a
fixed charge coverage ratio. The Loan Agreement as amended also provides for events of default that would permit the Lender to accelerate the loans upon their occurrence, including failure to make payments, breaches of representations and
warranties, insolvency events, acceleration of other indebtedness, failure to discharge judgments, material adverse effects, certain breaches of contracts, casualty losses when no or insufficient insurance is maintained, changes of control, certain
ERISA events and failure to observe covenants. As collateral for the obligations under the Loan Agreement as amended, the Lender has a security interest in substantially all assets of the Borrowers, including accounts receivable, inventory,
machinery, equipment, real estate, and general intangibles.

Recently Issued Accounting Standards

In June 2006, the FASB issued Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109 which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the
derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for us beginning January 1, 2007. We are in the process of determining
the effect, if any, the adoption of FIN 48 will have on our financial statements.



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In March 2005, the FASB issued Interpretation No. 47 (FIN 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.



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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 and political conditions, such as that recently experienced in Asia and in Latin America, could result in lower revenues for us. While most international sales are supported by letters of
credit or cash in advance, the purchase of our products by international customers presents increased risks, which include:



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



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



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



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



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



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



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



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



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



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

Export of our products is subject to the U.S. Export Administration regulations and some of our secured communications
products require a license or a license exception 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 on this evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Controls Over
Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our CEO and CFO, also conducted an evaluation of our internal
control over financial reporting to determine whether any change occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the
fiscal year 2005, we designed, developed, and implemented new/modified control procedures associated with inventory costing, purchasing, shipping, and receiving with our outsource manufacturing providers. In response to the increased risk imposed by
these changes, we increased the nature and extent of analytical review and analysis of the accounts impacted by these changes. In addition, we initiated timely investigations to evaluate and correct process controls and transaction processing as
deemed necessary. Further, we planned and executed a full physical inventory count and cost review of specific inventory segments impacted by the specified risks and coordinated with Internal Audit to conduct special process audits to help identify
critical control points.

In the quarter ended June 30, 2006, we improved both internal and operational controls over physical
inventories by including routine cycle count processes in our procedures and performing an additional physical inventory count.



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During the quarter ended June 30, 2006, we improved controls associated with the account
reconciliation and review process to ensure that all significant account balances have been reconciled, as necessary, prior to release of financial statements in external reports. We intend to continue to enhance our internal controls associated
with these processes. In preparation of our financial statements as of and for the period ended June 30, 2006, management believes that our internal controls over these processes are operating and effective.

There were no other changes in our internal controls over financial reporting during the quarter ending June 30, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Risk Factors Related to Our Business

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

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

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

For example:



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



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



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



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



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

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



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

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

A substantial portion of our revenues is dependent upon continued funding of federal government agencies, as well as continued funding of the programs targeted by us. U.S. government contracts are subject to
termination for convenience by the government, as well as termination, reduction, or modification in the event of budgetary constraints or any change in the governments requirements. Further, our contract-related costs and fees, including
allocated indirect costs, may be subject to audits by the U.S. government that may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. We are in the process of responding to such an audit regarding our
General Service Administration, or GSA, contract, which is scheduled to expire on August 22, 2006. We are unable to predict the outcome of this audit or any action the government may take as a result.

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

These or other factors could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts,
or to exercise their right to not renew contracts, all of which may limit our ability to obtain or maintain contract awards. Any of the aforementioned actions above could adversely affect our revenues and cash flows.

Our Loan Agreement contains covenants that require us to achieve, maintain or satisfy certain criteria.

The Loan Agreement governing our Revolving Loans and Term Loan contains certain covenants regarding limitations on debt, liens, fundamental changes,
acquisitions, transfers of assets, investments, loans, guarantees, use of proceeds, sale-leaseback transactions and capital expenditures. In addition, the Loan Agreement contains certain financial covenants including a maximum ratio of funded debt
to EBITDA and a fixed charge coverage ratio. Failure to comply with any of these covenants could constitute an event of default that would permit the Lender to accelerate the loans upon their occurrence, which could have a material adverse effect on
our operating results and cashflows.

We cannot assure you that we will be able to achieve, maintain or satisfy these criteria.

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

N/A.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A.

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

N/A.

ITEM 5.
OTHER INFORMATION

N/A



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ITEM 6. EXHIBITS

The following exhibits are filed herewith:



|            |  |                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                        
|2.1         |  | Agreement and Plan of Merger dated as of July 10, 2006 by and among EFJ, Inc. (EFJ), Avanti Acquisition Corp., 3e Technologies International, Inc. (3eTI), Chih-Hsiang
Li, as Stockholders Agent, and Steven Chen, James Whang, Chih-Hsiang Li and AEPCO, Inc., as Principal Stockholders. (filed as Exhibit 10.1 to EFJs Current Report on Form 8-K filed on July 14, 2006).
|            | 
|10.1        |  | Employment Agreement between EFJ and Robert C. Donohoo (filed as Exhibit 10.1 to EFJs Current Report on Form 8-K filed on July 11, 2006).                                                                                                                                                                                                                                         
|            | 
|10.2        |  | Second Amendment to Revolving Line of Credit Loan Agreement and Security Agreement dated as of July 11, 2006 by and among EFJ, E. F. Johnson Company, Transcrypt International, Inc., 3eTI and
Bank of America, N.A. (filed as Exhibit 10.2 to EFJs Current Report on Form 8-K filed on July 14, 2006).                                                                           
|            | 
|10.3        |  | Term Note dated as of July 11, 2006 executed by EFJ, E. F. Johnson Company, Transcrypt International, Inc. and 3eTI. (filed as Exhibit 10.3 to EFJs Current Report on Form 8-K filed on
July 14, 2006).                                                                                                                                                                           
|            | 
|10.4        |  | Second Amendment to Revolving Note dated as of July 11, 2006 by and among EFJ, E. F. Johnson Company, Transcrypt International, Inc., 3eTI and Bank of America, N.A. (filed as Exhibit 10.4 to
EFJs Current Report on Form 8-K filed on July 14, 2006).                                                                                                                           
|            | 
|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, 2006                                                                                                                                                                                                                                                                                
|            | 
|31.2        |  | Chief Financial Officers Certification of Report on Form 10-Q for the Quarter Ending June 30, 2006                                                                                                                                                                                                                                                                                
|            | 
|32.1        |  | Written certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                               
|            | 
|32.2        |  | Written certification of 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 3, 2006 |  | By:       |  | /s/ Jana Ahlfinger Bell                     
|                     |  |           |  | Jana Ahlfinger Bell                         
|                     |  |           |  | Senior Vice President and                   
|                     |  |           |  | Chief Financial Officer                     
|                     |  |           |  | (Principal Financial and Accounting Officer)



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