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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549-1004

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Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

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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TRANSCRYPT INTERNATIONAL, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

47-0801192(I.R.S. Employer Identification No.)


4800 N.W. 1st Street
Lincoln, Nebraska 68521
(402) 474-4800(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 / /

As
of April 30, 2001, 17,577,315 shares of the Registrant's Common Stock were outstanding.

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETSMarch 31, 2001 and December 31,
2000  (in thousands)

|                                                      |                                                                                                       | March 31,
2001 |                           | December 31,
2000 |  
|----------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------- | ------------------------- | ----------------- | -
|
|ASSETS                                                |                                                                                                       |                |                           |                   |  
|Current assets:                                       |                                                                                                       |                |                           |                   |  
|                                                      | Cash and cash equivalents                                                                             |                | $                         | 11,488            |  
|                                                      | Accounts receivable, net of allowance for returns and doubtful accounts of $763 and $823 respectively |                |                           | 5,052             |  
|                                                      | Receivablesother                                                                                     |                |                           | 161               |  
|                                                      | Cost in excess of billings on uncompleted contracts                                                   |                |                           | 2,528             |  
|                                                      | Inventory, net of reserve of $3,119 and $3,156 respectively                                           |                |                           | 12,977            |  
|                                                      | Prepaid expenses                                                                                      |                |                           | 368               |  
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       |                | Total current assets      |                   |  
|Property, plant and equipment, net                    |                                                                                                       |                | 2,034                     |                   |  
|Intangible assets, net of accumulated amortization    |                                                                                                       |                | 11,081                    |                   |  
|Other assets                                          |                                                                                                       |                | 299                       |                   |  
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       | $              | 45,988                    |                   | $
|                                                      |                                                                                                       |                |                           |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                  |                                                                                                       |                |                           |                   |  
|Current liabilities:                                  |                                                                                                       |                |                           |                   |  
|                                                      | Revolving line of credit                                                                              |                | $                         | 8,600             |  
|                                                      | Current portion of capitalized lease obligations                                                      |                |                           | 43                |  
|                                                      | Accounts payable                                                                                      |                |                           | 4,213             |  
|                                                      | Billings in excess of cost on uncompleted contracts                                                   |                |                           | 686               |  
|                                                      | Deferred revenue                                                                                      |                |                           | 1,108             |  
|                                                      | Accrued expenses                                                                                      |                |                           | 1,844             |  
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       |                | Total current liabilities |                   |  
|Provision for litigation settlement                   |                                                                                                       |                | 4,197                     |                   |  
|Capitalized lease obligations, net of current portion |                                                                                                       |                | 7                         |                   |  
|Deferred revenue                                      |                                                                                                       |                | 318                       |                   |  
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       |                | 21,016                    |                   |  
|                                                      |                                                                                                       |                |                           |                   |  
|Stockholders' equity:                                 |                                                                                                       |                |                           |                   |  
|                                                      | Common stock                                                                                          |                |                           | 143               |  
|                                                      | Additional paid-in capital                                                                            |                |                           | 92,188            |  
|                                                      | Accumulated deficit                                                                                   |                |                           | (67,359           | )
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       |                | 24,972                    |                   |  
|                                                      |                                                                                                       |                |                           |                   |  
|                                                      |                                                                                                       | $              | 45,988                    |                   | $
|                                                      |                                                                                                       |                |                           |                   |  

See
accompanying notes to the condensed consolidated financial statements.

2

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ITEM 1.  FINANCIAL STATEMENTS (continued)

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the three months ended March 31,
2001 and 2000  (Unaudited and in thousands, except share and per share data)

|                                                 |                            | Three Months Ended
March 31, |           
|------------------------------------------------ | -------------------------- | ---------------------------- | ----------
|
|Revenues                                         |                            | $                            | 9,551     
|Cost of sales                                    |                            |                              | 5,966     
|                                                 |                            |                              |           
|                                                 | Gross profit               |                              |           
|                                                 |                            |                              |           
|Operating expenses:                              |                            |                              |           
|                                                 | Research and development   |                              |           
|                                                 | Sales and marketing        |                              |           
|                                                 | General and administrative |                              |           
|                                                 |                            |                              |           
|                                                 |                            | Total operating expenses     |           
|                                                 |                            |                              |           
|                                                 |                            | Loss from operations         |           
|Other income                                     |                            |                              | 67        
|Interest income                                  |                            |                              | 136       
|Interest expense                                 |                            |                              | (129      
|                                                 |                            |                              |           
|                                                 |                            | Loss before income taxes     |           
|Income tax provision                             |                            |                              |          
|                                                 |                            |                              |           
|                                                 |                            | Net Loss                     |           
|                                                 |                            |                              |           
|Net loss per shareBasic and Diluted             |                            | $                            | (0.06     
|                                                 |                            |                              |           
|Weighted average common sharesBasic and Diluted |                            |                              | 14,423,913
|                                                 |                            |                              |           

See
accompanying notes to the condensed consolidated financial statements.

3

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ITEM 1. FINANCIAL STATEMENTS (continued)

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWSFor the three months ended March 31,
2001 and 2000  (in thousands)

|                                                     |                                                                             | Three months ended March 31,       |                                                    
|---------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                |                                                                             |                                    |                                                    
|                                                     | Net loss                                                                    |                                    | $                                                  
|                                                     |                                                                             |                                    |                                                    
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                    |                                                    
|                                                     |                                                                             | Depreciation and amortization      |                                                    
|                                                     |                                                                             | Gain on sale of fixed assets       |                                                    
|                                                     |                                                                             | Provisions for inventory reserves  |                                                    
|                                                     |                                                                             | Provisions for bad debts           |                                                    
|                                                     |                                                                             | Changes in assets and liabilities: |                                                    
|                                                     |                                                                             |                                    | Accounts receivable                                
|                                                     |                                                                             |                                    | Cost in excess of billings on uncompleted contracts
|                                                     |                                                                             |                                    | Inventory                                          
|                                                     |                                                                             |                                    | Prepaid expenses and other assets                  
|                                                     |                                                                             |                                    | Accounts payable                                   
|                                                     |                                                                             |                                    | Billings in excess of cost on uncompleted contracts
|                                                     |                                                                             |                                    | Accrued expenses                                   
|                                                     |                                                                             |                                    | Payments on restructuring reserve                  
|                                                     |                                                                             |                                    | Deferred revenue                                   
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Cash flows from investing activities:                |                                                                             |                                    |                                                    
|                                                     | Proceeds from sale of fixed assets                                          |                                    |                                                    
|                                                     | Purchase of fixed assets                                                    |                                    |                                                    
|                                                     | Purchase of software                                                        |                                    |                                                    
|                                                     | Decrease (increase) in other assets                                         |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Cash flows from financing activities:                |                                                                             |                                    |                                                    
|                                                     | Proceeds on revolving lines of credit, net                                  |                                    |                                                    
|                                                     | Principal payments on capitalized leases                                    |                                    |                                                    
|                                                     | Proceeds from the exercise of employee stock options                        |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                    | 79                                                 
|Cash and cash equivalents, beginning of period       |                                                                             |                                    | 11,409                                             
|                                                     |                                                                             |                                    |                                                    
|Cash and cash equivalents, end of period             |                                                                             | $                                  | 11,488                                             
|                                                     |                                                                             |                                    |                                                    

See
accompanying notes to the condensed consolidated financial statements.

4

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TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)  (in thousands, except share and per share data)

1.  GENERAL

The condensed consolidated balance sheet of Transcrypt International, Inc. ("Transcrypt" or the "Company") at December 31, 2000 has been derived
from audited consolidated financial statements at that date. The condensed consolidated financial statements as of March 31, 2001 and for the three months ended March 31, 2001 and 2000
are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, 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 the Company's Annual Report on Form 10-K for the
year ended December 31, 2000. The results of operations and cash flows for the three months ended March 31, 2001 are not necessarily indicative of the results for any other period or the
entire fiscal year ending December 31, 2001. Where appropriate, items within the condensed consolidated financial statements have been reclassified from the previous periods' presentation to
conform to the current presentation.

2.  ORGANIZATION AND CONSOLIDATION

The Company is a manufacturer of wireless communications products and systems, and information security products. Through its EFJohnson subsidiary, the Company
designs, develops, manufactures and markets (1) trunked and conventional radio systems, (2) stationary land mobile radio transmitters/receivers, and (3) mobile and portable
radios. The Company sells its land mobile radio products and systems mainly to two broad customer groups: (1) public safety and other governmental users and (2) commercial users. In
addition, the Company designs and manufactures information security products, which prevent unauthorized access to sensitive voice communications. These products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the land mobile radio and telephony security markets.

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

3.  LOSS PER SHARE

Basic earnings per share (EPS) is calculated based upon the weighted average number of common shares outstanding during the period. The diluted EPS calculation
reflects the potential dilution from common stock equivalents such as stock options. For the three months ended March 31, 2001 and 2000 net losses were incurred, and the impact of outstanding
stock options on diluted EPS were anti-dilutive.

4.  INVENTORY

The following is a summary of inventory at March 31, 2001 and December 31, 2000:

March 31, 2001

December 31, 2000Raw materials and supplies

$
7,188

$
7,761Work in progress


1,312


1,558Finished goods


4,477


5,806$
12,977

$
15,125


5

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5.  REVOLVING LINES OF CREDIT

The Company has a line of credit with a regional bank. It is a secured line of credit not to exceed $10 million. The variable interest rate is 1.25%
over the interest rate earned on the $10 million cash collateral used as security on the bank line of credit, which is due on June 1, 2001. The Company is currently in the process of
either renewing the current line of credit or securing a replacement facility. The working capital line is collateralized by substantially all the Company's assets, including $10 million in
certificates of deposit with the bank.

At
March 31, 2001, the Company had $8.6 million outstanding on the revolving line of credit. At December 31, 2000, the Company had $8.3 million outstanding
on the line of credit.

6.  COMMITMENTS AND CONTINGENCIES

The Company's decline in revenues and substantial losses has put additional strain on the Company's liquidity and cash position. As of March 31, 2001,
the Company had unrestricted cash of $1.5 million and approximately $1.4 million available under its line of credit. Without additional funding sources, the Company estimates that it
currently needs approximately $10 million in quarterly revenues to generate the cash necessary to finance its operations. However, the Company is managing its cash position through a
combination of expense reductions and by, where possible, acceleration of customer receivables. Although revenues, gross margins, and overall cash management during the first quarter have met or
exceeded expectations, the Company can give no assurance that it will in the future generate adequate cash to support its operations. The failure of the Company to achieve its revenue and other
financial goals for the remainder of 2001 and beyond will have a significant adverse impact on the liquidity of the Company. Additionally, if the Company is unable to achieve it's forecasted
performance, additional impairment losses on long-lived and intangible assets may emerge.

As
previously disclosed, the Company was named as a defendant in class action lawsuits that were filed subsequent to the Company's announcement on March 27, 1998 that the
filing of its Annual Report on Form 10-K for year ended December 31, 1997 would be delayed, and that adjustments would be made to the Company's previously announced financial
results. The Company has settled the stockholder class action suits against the Company and certain of its current or former officers. The Honorable Warren K. Urbom of the United States District Court
for the District of Nebraska approved the settlement, which also resulted in a dismissal of the stockholder class action suit pending in the District Court for Scotts Bluff County, Nebraska. In
accordance with the settlement, the Company issued 1,337,999 shares of common stock of the Company in the third quarter of 2000. The remaining 3,122,001 shares were issued during April of 2001. In
addition, the Company expects to distribute 75,000 shares resulting from the settlement of litigation with Physician's Mutual by June 30, 2001.

The
Company has entered into a contract with a governmental entity of Clay County, Florida ("Clay County") for installation of the Company's Multi-Net radio system. The
contract provision entitles Clay County to liquidated damages if the project is not completed by the project completion deadline. Clay
County states that the project completion deadline was January 17, 2001. In accordance with the contract, the liquidated damages are in the amount of $25,000 per calendar month or any part
thereof, and $1,000 per day beyond the project completion deadline. Transcrypt anticipates the completion of the project during the second quarter of 2001. The Company has considered these liquidated
damages in its accounting for this open contract.

In
December 2000, the Company received a demand letter written from Electronic Engineering Company ("EEC") in conjunction with a transaction for the installation of an EF
Johnson 900-megahertz trunked radio system. EEC alleges that the system is not functioning properly. The Company vigorously contests this allegation. However, it is unable to predict the
likelihood of the outcome or range or amount of potential liability that may arise from any formal legal action.

The
Company is evaluating all of its product lines and business segments, and has implemented and is continuing to look at various initiatives to reduce operating expenses in order to
keep them in

6

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line with revenues, including workforce reductions, elimination of certain products and product lines, and exit from certain markets. As a result of these initiatives, the Company reduced its
workforce by 69 employees (26%) on November 6, 2000. Accordingly, a $0.4 million reserve was established during the fourth quarter of 2000 to cover the severance costs and other expenses
associated with this workforce reduction, all of which was paid by March 31, 2001. In addition, the Company further reduced its staff by 24 employees on March 8, 2001. The Company may be
required to pay severance if these employees are not reinstated within six months. Implementation of any additional plan resulting from these initiatives in the future may result in substantial up
front costs and cash expenditures. The Company can provide no assurance that its liquidity and cash flows will be adequate to implement the necessary initiatives. In addition, the Company cannot
guarantee that any executed initiative to reduce operating expenses will not have a material adverse effect on the Company's long-term business and financial condition.

The
Department of Commerce is currently conducting an investigation into Transcrypt's compliance with export regulations. The Company does not anticipate that this investigation will
have a material impact on either its operations or financial position. Nevertheless, there is no assurance that these matters will not have an unforeseen outcome that could impair the conduct of our
business with the U.S. government or our sales outside the United States. The Department of Commerce has the authority to impose a variety of sanctions against the Company and Company-affiliated
parties. Such sanctions could include monetary penalties and restricting or removing Transcrypt's ability to export certain products, among other things. Our international sales would be adversely
affected if the Department of Commerce imposed sanctions against the Company.

In
the normal course of its business activities, the Company is required under a contract with various governmental authorities to provide letters of credit and bonds that may be
drawn upon if the Company fails to perform under its contracts. The letters of credit, which expire on various dates in
2001, have a total undrawn balance of $2.0 million as of March 31, 2001. Bonds, which expire on various dates, totaled $20.5 million on March 31, 2001. As of that date, no
bonds have been drawn upon. The Company's inability to secure bonding arrangements when needed could adversely affect the award of new systems installation contracts, which could adversely affect its
revenues.

In
April 2001, C.S. International Electronic Company ("CSI") filed a complaint against the Company for a disputed payment. CSI alleges that the Company owes approximately
$57,000 for installation services associated with the Communication Authority of Thailand radio system. The Company vigorously contests this allegation. However, it is unable to predict the likelihood
of the outcome that may arise from the legal action.

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

7.  SEGMENT AND RELATED INFORMATION

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

7

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The following table is a summary of unaudited quarterly results for the three months ended March 31, 2001 and 2000.

Quarter EndedMarch 31,
2001

March 31,
2000In thousandsRevenuesWireless Communication

$
8,229

$
9,703Information Security


1,322


1,6579,551


11,360Gross MarginsWireless Communication


2,749


383Information Security


836


1,165$
3,585

$
1,548Operating Profit (Loss)Wireless Communication


(202
)

(3,372
)Information Security


297


294Corporate


(967
)

(755
)$
(872
)
$
(3,833
)Other Income


74


582Loss before Taxes

$
(798
)
$
(3,251
)Depreciation & AmortizationWireless Communication


584


805Information Security


78


89Corporate


2


3$
664

$
897AssetsWireless Communication


31,877


50,212Information Security


2,393


9,508Corporate


11,718


18,755$
45,988

$
78,475


8.  RELATED PARTY TRANSACTION

On January 7, 2000, the Company extended an interest fee loan to the Company's Chief Executive Officer, Michael E. Jalbert, in the principal amount of
$175,000. All tax obligations associated with the loan are the sole responsibility of Mr. Jalbert. In March 2001, the Company forgave repayment of Mr. Jalbert's loan. Accordingly,
general and administrative expense for the first quarter of 2001 includes this charge.

8

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

The following table sets forth certain Consolidated Statements of Operations (in thousands) information as a percentage of revenues during the periods
indicated:

|                                  |                            | Three Months Ended March 31, |      
|--------------------------------- | -------------------------- | ---------------------------- | -----
|
|Revenues                          |                            | $                            | 9,551
|Cost of sales                     |                            |                              | 5,966
|                                  |                            |                              |      
|Gross profit                      |                            |                              | 3,585
|Operating expenses:               |                            |                              |      
|                                  | Research and development   |                              |      
|                                  | Sales and marketing        |                              |      
|                                  | General and administrative |                              |      
|                                  |                            |                              |      
|                                  |                            | Total operating expenses     |      
|                                  |                            |                              |      
|Income (loss) from operations     |                            |                              | (872 
|Other income                      |                            |                              | 67   
|Interest income                   |                            |                              | 136  
|Interest expense                  |                            |                              | (129 
|                                  |                            |                              |      
|Income (loss) before income taxes |                            |                              | (798 
|Provision for income taxes        |                            |                              |     
|                                  |                            |                              |      
|                                  |                            | Net income (loss)            |      
|                                  |                            |                              |      

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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These statements may involve risks and uncertainties.
These forward-looking statements relate to, among other things, the results of the Company's product development efforts, future sales levels and customer confidence, the Company's future financial
condition, liquidity and business prospects generally, perceived opportunities in the marketplace for the Company's products and its products under development, and the Company's other business plans
for the future. The actual outcomes of these matters may differ significantly from the outcomes expressed or implied in these forward-looking statements and other risks detailed in "ITEM 1.
BUSINESSSummary of Business Considerations and Certain Factors That May Affect Future Results of Operations and/or Stock Price" contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.

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

Revenues

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

System
sales under long-term contracts are accounted for under the percentage-of-completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized

9

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revenue is that percentage of estimated total revenue that incurred costs to date bear to estimated total costs to complete the contract. Revisions in cost and profit estimates are made when
conditions requiring such revisions become known. Anticipated losses on contracts are recognized in operations as soon as such losses are determined to be probable and reasonably estimable.

Deferred
revenue includes unearned warranty fees on extended product warranty contracts sold to customers. The Company recognizes the fees based on the expected warranty repairs to be
incurred over the life of the contract.

Revenues
declined by 16% to $9.6 million in the first quarter of 2001, as compared to $11.4 million during the same period in 2000. Of total revenues in the first
quarter, the wireless communication segment comprised $8.3 million, which represents a 15% decline over segment revenues of $9.7 million during the year-ago period.
Information security segment revenues of $1.3 million represent a 20% decline as compared to revenues of $1.7 million during 2000.

The
decrease in revenues of the wireless communication segment was primarily due to reduced sales of equipment manufactured under contract at EF Johnson's Waseca, Minnesota facility.
Revenues associated with this effort declined approximately 70% to $0.7 million during the first quarter of 2001 from $2.3 million during the year-ago quarter. This reduction
was the result of management's previously announced decision to de-emphasize its contract manufacturing efforts in favor of more profitable revenue opportunities. Management anticipates
that contract manufacturing revenues will continue to decline in the future.

The
decrease in revenues of the information security segment during the first quarter was primarily the result of timing issues associated with finalizing certain sales agreements.
The Company believes that the majority of the delayed agreements will be finalized later in the fiscal year.

Total
revenues from international sales increased to $2.3 million for the three months ended March 31, 2001, compared to $1.8 million for the same period in 2000.
The increase is primarily due to an increase in sales in Central and Latin America, as well as in the Middle East and Asia. The Company's revenue
during the first quarter of 2001 for Central and Latin America increased approximately 33% as compared to the first quarter of 2000. In addition, Middle East and Asian revenues for the first three
months of 2001 increased approximately 57% compared to the year-ago period. For the remainder of the fiscal year, the Company expects international sales volumes to be similar to the
levels experienced during the first quarter of 2001.

Gross Profit

Cost of sales includes materials, labor, depreciation and overhead costs associated with the production of the Company's products, as well as shipping, royalty
and warranty product costs. Consolidated gross profit was $3.6 million (38% gross margin) for the first quarter of 2001, compared to $1.5 million (14% gross margin) for the same period
in 2000. Gross margin for the wireless communication segment was 33% in the first quarter of 2001 and was 4% for the same period in 2000. Gross margin for the information security segment was 63% in
the first quarter of 2001, and was 70% for the same period in 2000.

In
the wireless communication segment, the significant increase in the gross margin percentage from 2000 to 2001 was due to: (1) lower sales of marginally profitable products
and product lines; (2) lower revenue from relatively low margin contract manufacturing; and (3) lower manufacturing overhead. These factors are primarily the result of the Company's
efforts to increase overall profitability by eliminating marginally profitable products and product lines, and from its efforts to bring its infrastructure more in line with revenues.

Gross
margins were lower in the information security segment during the first quarter of 2001, as compared to the year-ago period, primarily because of product mix issues
and lower revenues caused by

10

---

delays in the receipt of orders. Gross margins for both industry segments are likely to vary in the future, based primarily upon the mix of products and the amount of revenues for the respective
period.

Research and Development

Research and development expenses consist primarily of the costs associated with research and development personnel, materials, and the depreciation of
research and development equipment and facilities. Research and development expenses decreased to $1.1 million in the first quarter of 2001 (12% of revenues) from $1.5 million in the
first quarter of 2000 (13% of revenues). This decrease, both in cost and as a percent of revenues, was primarily due to a reduced engineering staff. The lower staffing is primarily the result of the
completion of a significant effort to correct product and system
design problems with legacy systems installation contracts, as well the outsourcing of certain functions previously done in-house. Management expects its research and development costs to
increase slightly in the future, as the Company continues to focus its engineering efforts on new product development.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related costs of sales personnel, including sales commissions and travel expenses, and costs of
advertising, public relations and trade show participation. Sales and marketing expenses decreased to $1.3 million in the first quarter of 2001 from $1.8 million in the first quarter of
2000. This was primarily due to reduced staffing levels as the Company improves its sales and marketing focus, and reduces its sales efforts to customer groups that provide only marginal
profitability. Sales and marketing expenses decreased as a percentage of sales to 14% for the first three months of 2001 from 16% in the first three months of 2000 despite the decrease in revenues.
The Company anticipates that sales and marketing expenses will continue to decrease as a percentage of revenues as it continues to focus and enhance its efforts in this area.

General and Administrative

General and administrative expenses consist primarily of salaries and other expenses associated with the Company's management, accounting, finance,
administration, and the amortization of intangible assets. General and administrative expenses decreased to $2.0 million in the first quarter of 2001 from $2.1 million in the first
quarter of 2000. As a percentage of revenue, general and administrative expense increased to 21% of revenues in the first quarter of 2001 from 19% of revenues in the first quarter of 2000. The lower
expenses are primarily due to the reduction in periodic amortization resulting from a $2.3 million impairment charge on intangible assets recorded during the quarter ended December 31,
2000. In addition, general and administrative expense for the first quarter of 2001 includes $0.2 million associated with the forgiveness of a loan to an officer of the Company. Excluding the
cost of the loan forgiveness, general and administrative expense for the 2001 quarter would have been $1.8 million or 19% of revenues. The Company anticipates future general and administrative
expenses to be lower than the level experienced during the first quarter of 2001.

In
the fourth quarter of 2000, the Company recognized an impairment charge of $2.3 million related to acquired work force, customer base, and trade name. The impairment loss
was measured based upon management's estimate of fair value of the assets and was necessitated by the Company's recent fiscal performance. During the first quarter of 2001, the Company conducted a
review of the remaining useful lives of its intangible assets, which range from three to ten years. As a result of this review, management concluded that the remaining useful lives of its intangible
assets are appropriate, and no adjustments are necessary. Consequently, the Company's annual expense for amortization of intangible assets has declined to approximately $1.2 million in 2001
from approximately $1.5 million in 2000. Management will continue to monitor the valuation and useful lives of the intangible assets as conditions warrant.

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Net Interest Income

Net interest income consists of interest income earned on cash and investable funds, net of interest expense related to amounts payable on the Company's loans
and bank lines of credit. Net interest income was $7,000 in the first quarter of 2001, as compared to $110,000 in the first quarter of 2000. Interest income and expense varies based on the relative
interest rates earned or paid, and the relative cash and loan balances. The Company expects net interest income to continue to decline in 2001 as the cost of the Company's borrowings continues to
increase.

Other Income, net

Other income for the first quarter of 2001 was primarily related to funds received for the cancellation of a licensing agreement between the Company and
Nextel. Other income for the first quarter of 2000 was primarily related to funds received in settlement of arbitration proceedings by Transcrypt against EFJ Partners, the previous owners of
EFJohnson, which the Company acquired in July 1997.

Benefit for Income Taxes

The Company did not record a tax benefit in either the first quarter of 2001 or in the first quarter of 2000. During the fourth quarter of 2000, the Company
reduced the net book value of its deferred income tax assets from $12.4 million to zero by increasing the valuation allowance. Management anticipates that if the Company develops a trend of
profitability, all or some portion of the asset may be restored.

Liquidity and Capital Resources

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

The
Company's operating activities used cash of $0.4 million in the first three months of 2001 compared to $5.3 million in the first three months of 2000. Cash used in
operating activities in the first three months of 2001 consisted primarily of a net loss plus a decrease in billings in excess of costs on
uncompleted contracts, and increases in accounts receivable and costs in excess of billings on uncompleted contracts. These uses of cash are primarily the result of increased product shipments during
the quarter, as well as increased activity with respect to systems installation contracts, and were offset in part by a significant decrease in inventory.

Cash
generated by investing activities was $0.2 million for the first three months of 2001 as compared to a use of $0.4 million in the first three months of 2000.
Capital expenditures of $0.1 million for the first quarter of 2001, as compared to $0.2 million for the first quarter of 2000, consisted primarily of computer and test equipment.

Financing
activities generated cash of $0.3 million in the first quarter of 2001, which primarily consisted of advances on the Company's line of credit with US Bank.

As
of March 31, 2001, the Company had $8.6 million in outstanding indebtedness under its line of credit with US Bank. It is a secured line of credit not to exceed
$10.0 million. Interest is at a variable rate of 1.25% over the interest rate earned on the $10.0 million on certificates of deposit pledged as security on the bank line of credit. This
line of credit is due on June 1, 2001 and is collateralized by substantially all the Company's assets, including $10.0 million in certificates of deposit with the bank. The Company is
currently in the process of either extending or renewing the line of credit.

In
the normal course of its business activities, the Company is required under a contract with various governmental authorities to provide letters of credit and bonds that may be
drawn upon if the

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Company fails to perform under its contracts. The letters of credit, which expire on various dates in 2001, have a total undrawn balance of $2.0 million as of March 31, 2001. Bonds,
which expire on various dates, totaled $20.5 million on March 31, 2001. As of that date, no bonds have been drawn upon. The Company's inability to secure bonding arrangements when needed
could adversely affect the award of new systems installation contracts, which could adversely affect its revenues.

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

The
Company's decline in revenues and substantial losses has put additional strain on the Company's liquidity and cash position. As of March 31, 2001, the Company had
unrestricted cash of $1.5 million and approximately $1.4 million available under its line of credit. Without additional funding sources, the Company estimates that it currently needs
approximately $10 million in quarterly revenues to generate the cash necessary to finance its operations. However, the Company is managing its cash position through a combination of expense
reductions and by, where possible, acceleration of customer
receivables. Although revenues, gross margins, and overall cash management during the first quarter have met or exceeded expectations, the Company can give no assurance that it will in the future
generate adequate cash to support its operations. The failure of the Company to achieve its revenue and other financial goals for the remainder of 2001 and beyond will have a significant adverse
impact on the liquidity of the Company. Additionally, if the Company is unable to achieve it's forecasted performance, additional impairment losses on long-lived and intangible assets may
emerge.

The
independent auditors report relating to the audit of the Company's financial statements for the fiscal year ended December 31, 2000 included a paragraph expressing
substantial doubt over the Company's ability to continue as a going concern. The Company's ability to continue as a going concern has been impacted by the losses the Company has incurred in recent
years, the Company's current levels of available cash, and its recent pace of cash usage. This paragraph may have, to varying degrees, an adverse impact on the Company's relationships with its
vendors, customers and potential partners, and could have an adverse impact on its cash position.

For
a description of pending litigation that may affect the business, results of operations, and liquidity of the Company, see NOTE 6. COMMITMENTS AND CONTINGENCIES above.

Recently Issued Accounting Standards

In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138, Accounting for Certain
Derivative Investments and Certain Hedging Activities. The standard amends certain provisions of SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, which was issued in
June 1998 to establish accounting standards for derivative instruments and for hedging activities. The Company adopted these accounting pronouncements effective January 1, 2001. The
adoption of these standards, including the valuation of derivative instruments outstanding on the effective date, did not impact the Company's consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does a significant amount of business in foreign countries. The Company sales in these foreign countries are denominated in United States dollars.
Certain sales in foreign countries may be secured with irrevocable letters of credit.

The
Company has a line of credit with a regional bank, which carries a variable interest rate that changes based on changes in certain time certificates of deposits issued by the
lender.

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PART II.  OTHER INFORMATION

ITEMS 1 - 5.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K



The
following exhibits are being filed herewith:

|Exhibit No. |  | Description                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|11.1        |  | Computation of per share losses.                                                                                                       
|10.51       |  | Loan Agreement dated September 30, 2000 by and between U.S. Bank National Association and the Company, together with related documents.



There
were no reports on Form 8-K filed during the first quarter of 2001.

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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.

|                   |  | TRANSCRYPT INTERNATIONAL, INC.
|------------------ |  | ------------------------------
|Date: May 14, 2001 |  | By:                           

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