**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, 2008** |
|           |   |
| **or**         |
|           |   |
| **o**          | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **     | ** ** |
| ** **     | **For the transition period from               to                      ** |

 

**CommissionFile Number 0-21681**

 

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**EF JOHNSON TECHNOLOGIES, INC.**

(Exact name of registrantas specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **47-0801192**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction ofincorporation  or organization) | ** ** | (I.R.S.  EmployerIdentification  No.) |

 

**1440CORPORATE DRIVE**

**IRVING,TEXAS 75038**

**(972)819-0700**

(Address, includingzip code, and telephone number,

including area code,of registrant’s

principal executiveoffice)

 

**EFJ, Inc.**

(Formername, former address and former fiscal year, if changed since last report)

 

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Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90days.    YES  x    NO  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (check one) 

 

| Large Accelerated  Filer o |   | Accelerated  Filer  o |   | Non-accelerated  Filer  x |
|---------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

 

Asof July 25, 2008, 26,121,791 shares of the Registrant’s Common Stock wereoutstanding.

 

 

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****                             ****FINANCIAL STATEMENTS**

 

**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

June 30, 2008 and December 31, 2007

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

 
| ** **                                                                                                                                                                                 | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                 |       |                    |       |                        |       |
| Current  assets:                                                                                                                                                                           |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                 |       | $                       | 8,358      |                        | $          | 15,636 |   |
| Accounts  receivable, net of allowance for returns and doubtful accounts of $1,829 and  $1,642, respectively                                                                               |       | 29,574                  |       | 21,345                      |       |
| Receivables  - other                                                                                                                                                                       |       | 7,157                   |       | 6,944                       |       |
| Cost  in excess of billings on uncompleted contracts                                                                                                                                       |       | 3,869                   |       | 3,275                       |       |
| Inventories,  net                                                                                                                                                                          |       | 31,348                  |       | 33,871                      |       |
| Prepaid  expenses                                                                                                                                                                          |       | 1,453                   |       | 1,109                       |       |
| Total  current assets                                                                                                                                                                      |       | 81,759                  |       | 82,180                      |       |
| Property,  plant and equipment, net                                                                                                                                                        |       | 6,793                   |       | 7,096                       |       |
| Goodwill                                                                                                                                                                                   |       | 20,040                  |       | 20,040                      |       |
| Other  intangible assets, net of accumulated amortization                                                                                                                                  |       | 13,008                  |       | 13,821                      |       |
| Other  assets                                                                                                                                                                              |       | 75                      |       | 352                         |       |
| **TOTAL ASSETS**                                                                                                                                                                           |       | $                       | 121,675    |                        | $          | 123,489 |   |
|                                                                                                                                                                                       |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                                                      |       |                    |       |                        |       |
| Current  portion of long-term debt obligations                                                                                                                                             |       | $                       | 8          |                        | $          | 8 |   |
| Accounts  payable                                                                                                                                                                          |       | 11,055                  |       | 13,411                      |       |
| Accrued  expenses                                                                                                                                                                          |       | 11,292                  |       | 11,232                      |       |
| Billings  in excess of cost on uncompleted contracts                                                                                                                                       |       | 502                     |       | 221                         |       |
| Deferred  revenues                                                                                                                                                                         |       | 1,096                   |       | 1,010                       |       |
| Total  current liabilities                                                                                                                                                                 |       | 23,953                  |       | 25,882                      |       |
| Long-term  debt obligations, net of current portion                                                                                                                                        |       | 15,010                  |       | 15,015                      |       |
| Deferred  income taxes                                                                                                                                                                     |       | 1,489                   |       | 1,489                       |       |
| Other  liabilities                                                                                                                                                                         |       | 732                     |       | 737                         |       |
| **TOTAL LIABILITIES**                                                                                                                                                                      |       | 41,184                  |       | 43,123                      |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |
| 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, 26,261,064 and  26,210,232 issued and outstanding as of June 30, 2008 and  December 31, 2007, respectively) |       | 262                     |       | 262                         |       |
| Additional  paid-in capital                                                                                                                                                                |       | 154,577                 |       | 153,356                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                      |       | (705                    | )          | (710                        | )          |
| Accumulated  deficit                                                                                                                                                                       |       | (73,643                 | )          | (72,542                     | )          |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                                                                        |       | 80,491                  |       | 80,366                      |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       | $                       | 121,675    |                        | $          | 123,489 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

2

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

For the three and six months ended June 30,2008 and 2007

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

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                       | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                         |       | $                                | 32,570     |                           | $          | 57,296 |   | $ | 66,469 |   | $ | 96,244 |   |
| Cost  of sales                                   |       | 21,810                           |       | 38,866                         |       | 44,411 |   | 65,240 |   |
| Gross  profit                                    |       | 10,760                           |       | 18,430                         |       | 22,058 |   | 31,004 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                             |       |                             |       |                           |       |   |   |   |   |
| Research  and development, net of reimbursements |       | 121                              |       | 4,115                          |       | 3,376 |   | 7,574 |   |
| Sales  and marketing                             |       | 3,248                            |       | 3,720                          |       | 6,414 |   | 7,126 |   |
| General  and administrative                      |       | 5,706                            |       | 6,192                          |       | 12,107 |   | 11,838 |   |
| Amortization  of intangibles                     |       | 406                              |       | 374                            |       | 813 |   | 795 |   |
| Total  operating expenses                        |       | 9,481                            |       | 14,401                         |       | 22,710 |   | 27,333 |   |
| Income  (loss) from operations                   |       | 1,279                            |       | 4,029                          |       | (652 | ) | 3,671 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Interest  expense, net                           |       | (268                             | )          | (16                            | )          | (449 | ) | (21 | ) |
| Income  (loss) before income taxes               |       | 1,011                            |       | 4,013                          |       | (1,101 | ) | 3,650 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Income  tax (expense)                            |       | —                           |       | (159                           | )          | — |   | (159 | ) |
| Net  income (loss)                               |       | $                                | 1,011      |                           | $          | 3,854 |   | $ | (1,101 | ) | $ | 3,491 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Net  income (loss) per share – Basic        |       | $                                | 0.04       |                           | $          | 0.15 |   | $ | (0.04 | ) | $ | 0.13 |   |
| Net  income (loss) per share – Diluted      |       | $                                | 0.04       |                           | $          | 0.15 |   | $ | (0.04 | ) | $ | 0.13 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted  average common shares – Basic     |       | 26,082,124                       |       | 26,031,173                     |       | 26,072,017 |   | 26,030,472 |   |
| Weighted  average common shares – Diluted   |       | 26,406,890                       |       | 26,408,999                     |       | 26,072,017 |   | 26,387,795 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

3

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

Six months ended June 30, 2008 and 2007

(Unaudited and in thousands)

 
| ** **                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash  flows from operating activities:                                       |       |     |       |     |       |
| Net  income (loss)                                                           |       | $        | (1,101     | )        | $          | 3,491 |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |     |       |     |       |
| Provision  for returns and doubtful accounts                                 |       | 187      |       | 129      |       |
| Depreciation  and amortization                                               |       | 2,333    |       | 2,178    |       |
| Recognition  of deferred gain                                                |       | (47      | )          | (47      | )          |
| Deferred  taxes                                                              |       | —   |       | 2        |       |
| Stock-based  compensation                                                    |       | 1,177    |       | 1,126    |       |
| Changes  in operating assets and liabilities:                                |       |     |       |     |       |
| Accounts  receivable                                                         |       | (8,416   | )          | (7,908   | )          |
| Receivables  - other                                                         |       | (213     | )          | (1,600   | )          |
| Cost  in excess of billings on uncompleted contracts                         |       | (594     | )          | 866      |       |
| Inventories                                                                  |       | 2,523    |       | (5,500   | )          |
| Prepaid  expenses and other                                                  |       | (344     | )          | (1,239   | )          |
| Accounts  payable                                                            |       | (2,356   | )          | 9,437    |       |
| Accrued  and other liabilities                                               |       | 107      |       | 1,068    |       |
| Billings  in excess of cost on uncompleted contracts                         |       | 281      |       | (419     | )          |
| Deferred  revenues                                                           |       | 86       |       | (171     | )          |
| Total  adjustments                                                           |       | (5,276   | )          | (2,078   | )          |
| Net  cash (used in) provided by operating activities                         |       | (6,377   | )          | 1,413    |       |
|                                                                         |       |     |       |     |       |
| Cash  flows from investing activities:                                       |       |     |       |     |       |
| Purchase  of property, plant and equipment                                   |       | (1,217   | )          | (1,314   | )          |
| Other  assets                                                                |       | 277      |       | (2       | )          |
| Net  cash used in investing activities                                       |       | (940     | )          | (1,316   | )          |
|                                                                         |       |     |       |     |       |
| Cash  flows from financing activities:                                       |       |     |       |     |       |
| Proceeds  on revolving lines of credits                                      |       | 6,500    |       | —   |       |
| Principal  payments on revolving lines of credits                            |       | (6,500   | )          | —   |       |
| Principal  payments on long-term debt                                        |       | (5       | )          | (4       | )          |
| Proceeds  from issuances of common stock                                     |       | 27       |       | 16       |       |
| Proceeds  from exercise of stock options                                     |       | 17       |       | 34       |       |
| Net  cash provided by financing activities                                   |       | 39       |       | 46       |       |
| Net  (decrease) increase in cash and cash equivalents                        |       | (7,278   | )          | 143      |       |
| Cash  and cash equivalents, beginning of period                              |       | 15,636   |       | 22,885   |       |
| Cash  and cash equivalents, end of period                                    |       | $        | 8,358      |     | $          | 23,028 |   |

 

**Supplemental Disclosure of Cash Flow Information:**

TheCompany paid interest of $572 and $505 during six months ended June 30,2008 and 2007, respectively.

TheCompany paid income taxes of $236 and $174 during six months ended June 30,2008 and 2007, respectively.

 

See accompanying notes to the condensedconsolidated financial statements

 

4

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

**1. GENERAL**

 

The condensed consolidated balance sheet of EFJohnson Technologies, Inc., formerly EFJ, Inc., at December 31,2007, presented within this Report on Form 10-Q, has been derived fromaudited consolidated financial statements at that date. The condensedconsolidated financial statements as of June 30, 2008 and for the threemonths ended June 30, 2008 and 2007 are unaudited. The condensedconsolidated financial statements reflect all normal and recurring accruals andadjustments that, in the opinion of management, are necessary for a fair presentationof the financial position, operating results, and cash flows for the interimperiods presented in this quarterly report. The condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto, together with management’s discussionand analysis of financial condition and results of operations, contained in ourAnnual Report on Form 10-K for the year ended December 31, 2007. Theresults of operations and cash flows for the three and six months ended June 30,2008 are not necessarily indicative of the results for any other period or theentire fiscal year ending December 31, 2008.

 

At the Company’s May 28, 2008 Annual Meeting ofStockholders, the Stockholders approved an amendment of the Company’sCertificate of Incorporation to change the corporate name from EFJ, Inc.to EF Johnson Technologies, Inc. The Company’s stock is quoted on theNASDAQ Global Market under the symbol “EFJI”, and its ticker symbol did notchange.

 

Unless the context otherwise provides, allreferences to “the Company”,  “we,” “us,”and “our” include EF Johnson Technologies, Inc., its predecessor entity and itssubsidiaries, including E.F. Johnson Company, Transcrypt International, Inc.,and 3e Technologies International, Inc. on a consolidated basis. Allreferences to “EF Johnson” refer to E.F. Johnson Company, all references to “Transcrypt”refer to Transcrypt International, Inc., and all references to “3eTI”refer to 3e Technologies International, Inc.

 

**2. ORGANIZATION AND CONSOLIDATION**

 

We are a provider of secure wireless solutions whichare sold to: (1) domestic and foreign public safety / public serviceentities, (2) federal, state and local governmental agencies, including theDepartments of Homeland Security and Defense, and (3) domestic and foreigncommercial customers.  We design,develop, market, and support:

 

·                  mobile and portable wireless radios;

 

·                  stationary transmitters / receivers (basestations or repeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies forproprietary wireless radios;

 

·                  customized wireless network centric productsand systems to the federal government primarily under government funded SmallBusiness Innovative Research (SBIR) programs; and

 

·                  niche hardware and secure softwaretechnologies for the WLAN markets primarily in the government sector.

 

The condensed consolidated financial statementsinclude the accounts of EF Johnson Technologies, Inc. and our wholly-ownedsubsidiaries. All inter-company accounts and transactions have been eliminatedin the consolidation.

 

Previously the Company was organized, and reportedits financial results, as a parent company with two segments, Private WirelessCommunications and Secured Communications.  Having recognized that thepublic safety/public service market is moving towards convergenttelecommunications solutions, the continued demand for interoperability and thetransition from analog to digital platforms, we reorganized the Company in January 2008into a single centralized corporate structure in order to be competitive inthis market.  We expect the centralizedcorporate structure to improve efficiencies in our operations and reduce ourinfrastructure costs. In light of these changes, the Company has reassessed itssegment reporting, and beginning with the first quarter of 2008, we are nolonger reporting the two segments of Private Wireless Communications andSecured Communications.

 

5

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

**3. NET INCOME PER SHARE**

 

Basic loss per share (“EPS”) is calculated based upon the weightedaverage number of common shares outstanding during the period. The diluted EPScalculation reflects the potential dilution from common stock equivalents suchas stock options, stock satisfied stock appreciation rights (“SSAR’s”),restricted stock grants and restricted stock units (collectively “IncentiveShares”). For the three months ended June 30, 2008 and 2007, outstandingincentive shares with exercise prices lower than the average market price ofthe common stock for the respective periods were considered common stockequivalents and were dilutive in the calculation of the diluted weightedaverage common shares. For the six months ended June 30, 2008, alloutstanding incentive shares were considered anti-dilutive due to the net lossfor the period end. For the six months ended June 30, 2007, outstandingincentive shares with exercise prices lower than the average market price ofthe common stock for the respective periods were considered common stockequivalents and were dilutive in the calculation of the diluted weightedaverage common shares. Outstanding incentive shares that had exercise priceshigher than the average market price of the common stock for the periods wereconsidered anti-dilutive and excluded from the calculation of diluted weightedaverage common shares. The outstanding incentive shares that are considereddilutive and anti-dilutive are:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                  | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Incentive shares  with dilutive effect      |       | 324,765                          |       | 377,825                        |       | — |   | 357,323 |   |
| Incentive shares  with anti-dilutive effect |       | 985,785                          |       | 1,278,751                      |       | 1,256,979 |   | 1,277,610 |   |
| Outstanding  incentive shares               |       | 1,310,550                        |       | 1,656,576                      |       | 1,256,979 |   | 1,634,933 |   |

 

We use the treasury stock method to calculate diluted weighted averagecommon shares, as if all such options were outstanding for the periodspresented.

 

**4. ACCOUNTING FOR STOCK-BASED COMPENSATION**

 

We use the Black-Scholes option pricing model todetermine the fair value of all stock option grants and stock satisfied stockappreciation rights (“SSAR’s”) (collectively “Options”). For the three and sixmonths ended June 30, 2008, we recognized compensation expense of $0.4million and $0.8 million, respectively, related to options and $0.1 million and$0.4 million, respectively, related to restricted stock grants and restrictedstock units.  For the three and sixmonths ended June 30, 2007, we recognized compensation expense of $0.4million and $0.8 million, respectively, related to stock options and $0.2million and $0.3 million, respectively, related to restricted stock grants.

 

In July 2007, the Compensation Committee of theBoard of Directors of the Company deemed it is in the best interests of theCompany to approve the use of Restricted Stock Units (“RSU’s) and StockSatisfied Stock Appreciation Rights (“SSAR’s”) as the equity instruments forgrant to certain key employees of the Company pursuant to the 2005 OmnibusIncentive Compensation Plan. Grants of RSU’s and SSAR’s vest over a four yearperiod and expire in five years.

 

At the Company’s May 28, 2008 Annual Meeting ofStockholders, the Stockholders approved an amendment to the EFJ, Inc. 2005Omnibus Incentive Compensation Plan to increase the number of shares availablefor issuance pursuant to the plan by 1,500,000 shares.

 

**5. INTEREST RATE SWAP AGREEMENT AND COMPREHENSIVE LOSS**

 

We entered into an interest rate swap agreement tomanage interest costs and risks associated with changing interest rates not forspeculative or trading purposes. We report derivative instruments as hedgingactivities in the consolidated financial statements at fair value. Changes inthe fair value of the derivative are recorded each period in the AccumulatedComprehensive Loss in the balance sheet as the derivative is designated aseffectively hedged at June 30, 2008.

 

On July 19, 2006, we entered into an interestrate swap agreement which effectively converts the variable LIBOR component ofthe interest rate on the $15.0 million term loan to a fixed rate of 5.64%.Under the terms of the interest rate swap agreement, the Company will pay 5.64%and the counterparty will pay LIBOR on a monthly basis. The interest rate swapagreement terminates on June 30, 2010, the termination date of the termloan. The cumulative net unrealized loss was $0.7 million and is included withother long-term liabilities and accumulated other comprehensive loss in theconsolidated balance sheet at June 30, 2008. The following is a summary ofthe components of comprehensive loss:

 

6

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income /  (loss)                          |       | $                                | 1,011      |                           | $          | 3,854 |   | $ | (1,101 | ) | $ | 3,491 |   |
| Fair value  adjustment for interest rate swap |       | 402                              |       | 210                            |       | 5 |   | 165 |   |
| Total  comprehensive income/(loss)            |       | $                                | 1,413      |                           | $          | 4,064 |   | $ | (1,096 | ) | $ | 3,656 |   |

 

**6. INVENTORIES**

 

The following is a summaryof inventories:

 
| ** **                  | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw materials  and supplies |       | $                           | 15,576     |                            | $          | 16,263 |   |
| Work in progress            |       | 3,363                       |       | 1,334                           |       |
| Finished goods              |       | 11,279                      |       | 15,728                          |       |
| Service  inventories        |       | 3,812                       |       | 3,517                           |       |
|                        |       | 34,030                      |       | 36,842                          |       |
| Reserve for  obsolescence   |       | (2,682                      | )          | (2,971                          | )          |
| Total  inventories          |       | $                           | 31,348     |                            | $          | 33,871 |   |

 

**7. GOODWILL AND INTANGIBLE ASSETS**

 

Our goodwill and intangible assets are tested forimpairment annually as of December 31 of each year unless events orcircumstances would require an immediate review. Goodwill and intangible assetamounts are allocated to the reporting units based upon amounts allocated atthe time of their respective acquisition.Intangible assets, consisting of existing technology, customerrelationships, license and covenants not-to-compete, are amortized over theiruseful life on a straight-line basis. Intangible assets consisting of trademarkand trade name and certifications are not subject to amortization.

 

We performed fair value-based impairment tests at December 31,2007. Upon completion of the impairment test, we concluded that the fair valuewas lower than the carrying value of the associated goodwill and tradename.  Therefore, we reported animpairment charge of $5.5 million related to goodwill and $0.3 million relatedto the trade name in the fourth quarter ended December 31, 2007.

 

No events occurred during the six months ended June 30,2008 and 2007, respectively, which would indicate that an impairment of suchassets had taken place as of such dates.

 

7

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

Amortization expense, related to intangible assetswhich are subject to amortization, was $0.8 million for the six months ended June 30,2008 and June 30, 2007, respectively. Intangible assets consist of thefollowing as of the dates indicated:

 
| ** **                                      | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Gross**                   | ** ** | ** **                      | ** ** | **Accumulated** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                      | ** ** | **Amount**                  | ** ** | **Impairment**                  | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                            |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible assets  not subject to amortization: |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | $                           | 20,040     |                            | $          | — |   | $ | — |   | $ | 20,040 |   | $ | 25,515 |   | $ | (5,475 | ) | $ | — |   | $ | 20,040 |   |
| Trademarks                                      |       | 4,364                       |       | —                          |       | — |   | 4,364 |   | 4,664 |   | (300 | ) | — |   | 4,364 |   |
| Certifications                                  |       | 1,230                       |       | —                          |       | — |   | 1,230 |   | 1,230 |   | — |   | — |   | 1,230 |   |
|                                            |       | 25,634                      |       | —                          |       | — |   | 25,634 |   | 31,409 |   | (5,775 | ) | — |   | 25,634 |   |
|                                            |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible assets  subject to amortization:     |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Existing  technology                            |       | 6,190                       |       | —                          |       | (2,392 | ) | 3,798 |   | 6,190 |   | — |   | (2,116 | ) | 4,074 |   |
| Customer  relationships                         |       | 4,800                       |       | —                          |       | (1,505 | ) | 3,295 |   | 4,800 |   | — |   | (1,103 | ) | 3,697 |   |
| Licence                                         |       | 320                         |       | —                          |       | (127 | ) | 193 |   | 320 |   | — |   | (95 | ) | 225 |   |
| Covenant  not-to-compete                        |       | 400                         |       | —                          |       | (400 | ) | — |   | 400 |   | — |   | (301 | ) | 99 |   |
| Trademarks/Patents                              |       | 209                         |       | —                          |       | (81 | ) | 128 |   | 209 |   | — |   | (77 | ) | 132 |   |
|                                            |       | 11,919                      |       | —                          |       | (4,505 | ) | 7,414 |   | 11,919 |   | — |   | (3,692 | ) | 8,227 |   |
|                                            |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                           |       | $                           | 37,553     |                            | $          | — |   | $ | (4,505 | ) | $ | 33,048 |   | $ | 43,328 |   | $ | (5,775 | ) | $ | (3,692 | ) | $ | 33,861 |   |

 

**8. NOTE PAYABLE AND LINE OF CREDIT**

 

We amended our secured line of credit agreement withBank of America in July 2006 to include a revolving line of credit of upto $15.0 million and a term loan of $15.0 million (the “Loan Agreement”). Bothborrowings bear interest at a variable rate based on the London InterbankOffered Rate (“LIBOR”) plus a margin (“LIBOR Margin”) determined by our ratioof debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”).The Loan Agreement expires June 30, 2010. The $15.0 million term loan wasfully funded and used to finance the acquisition of 3eTI dated July 10,2006.

 

The Loan Agreement provides for customaryaffirmative and negative covenants, including maintenance of corporateexistence, rights, property, books and records and insurance, compliance withcontracts and laws, and certain reporting requirements, as well as limitationson debt, liens, fundamental changes, acquisitions, transfers of assets,investments, loans, guarantees, use of proceeds, sale-leaseback transactions andcapital expenditures. In addition, the Loan Agreement contains certainfinancial covenants including a maximum ratio of funded debt to EBITDA and afixed charge coverage ratio. The Loan Agreement also provides for events ofdefault that would permit the lender to accelerate the loans upon theiroccurrence, including failure to make payments, breaches of representations andwarranties, insolvency events, acceleration of other indebtedness, failure todischarge judgments, material adverse effects, certain breaches of contracts,casualty losses when no or insufficient insurance is maintained, changes ofcontrol, certain ERISA events and failure to observe covenants. As collateralfor the obligations under the Loan Agreement, the Lender has a security interestin substantially all assets of the borrowers, including accounts receivable,inventories, machinery, equipment, real estate, and general intangibles.

 

As noted in our Form 10-K for the period endingDecember 31, 2007, we were not in compliance with the financial covenantsof the Loan Agreement for the quarter ended December 31, 2007. As aresult, effective March 10, 2008 we executed an Amendment to the LoanAgreement whereby Bank of America waived such financial covenant defaults on aone time basis, subject to further modification of the Loan Agreement to revisesuch financial covenants that effectively eliminated the ratio of funded debtto EBITDA and a fixed charge coverage ratio for 2008, to modify the advance andborrowing revisions under the Loan Agreement and for certain other purposesmore fully set out in the Amendment. The Loan Agreement, as amended, contains anew covenant to maintain a minimum liquidity of $3.0 million in unrestrictedcash, unencumbered marketable securities, cash and cash equivalents through March 31,2009. Additionally, a covenant for a minimum EBITDA was established for (i) breakevenfor the fiscal quarter ending June 30, 2008, (ii) $1.0 million forthe fiscal quarter ending September 30, 2008 and $3.0 million for thefiscal quarter ending December 31, 2008. Pursuant to the Loan Agreement,as further amended, the interest rate is equal to LIBOR plus 2.00% through March 31,2009, and thereafter to LIBOR plus a rate between 1.00% and 1.75% depending onour ratio of debt to EBITDA.

 

At June 30, 2008 and December 31, 2007, noborrowings had been made on the revolving line of credit. There were no lettersof credit, under our line of credit as of June 30, 2008 and there were$0.3 million as of December 31, 2007. The total

 

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

availableremaining credit under the line of credit was $7.7 million and$13.3 million as of June 30, 2008 and December 31, 2007,respectfully.

 

The interest rate in effect at June 30, 2008was 4.4 percent.

 

For the quarter ended June 30, 2008 we were incompliance with the financial covenants of the Loan Agreement as amended.

 

**9. INCOME TAXES**

 

We adopted the provisions of Financial StandardsAccounting Board Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109(“SFAS 109”)* on January 1, 2007. FIN 48 prescribes arecognition threshold that a tax position is required to meet before beingrecognized in the financial statements and provides guidance on recognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition issues. The Company has unrecognized taxbenefits of approximately $0.5 million that did not change significantly duringthe six months ended June 30, 2008 relating to carry forward of businesscredits. The adoption of FIN 48 did not result in the recognition of additionaltax liability for unrecognized income tax benefits since the tax benefits havenot be included in prior income tax return filings. In addition, future changesin the unrecognized tax benefit will have no net impact on the effective taxrate due to the existence of the valuation allowance.

 

As of June 30, 2008, we have no accrualrequirement for interest or penalties related to uncertain tax positions sincethe tax benefits have not been included in prior income tax return filings.Accrued interest relating to uncertain tax positions would be recorded as acomponent of interest expense and penalties related to uncertain tax positionswould be recorded as a component of general and administrative expenses.

 

The tax years 2003-2007 remain open to examinationby the major taxing jurisdictions to which we are subject. Additionally, uponinclusion of the NOL and R&D credit carry forward tax benefits from taxyears 1996 to 2002 in future tax returns, the related tax benefit for theperiod in which the benefit arose may be subject to examination.

 

**10. WARRANTY COSTS**

 

We provide a one-to-three year warranty onsubstantially all of our product sales, depending upon certain terms andconditions of the sale, and estimated future warranty claims based onhistorical experience and anticipated costs to be incurred over the life of thewarranty. Warranty expense is accrued at the time of sale with an additionalaccrual for specific items after the sale when their existence is known andamounts are determinable. A reconciliation of changes in our accrued warrantyreserve as of June 30, 2008 is as follows:

 
| ** **                      | ** ** | **Balance at**             | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**         | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **December 31, 2007** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **June 30, 2008** | ** ** |
| Allowance for  Warranty Reserve |       | $                               | 3,803      |                | 2,517      |                 | 2,138      |                        | $          | 4,182 |   |
|                                 |            |                                 |            |                     |            |                      |            |                             |            |  |  |

 

**11. FAIR VALUE MEASUREMENT**

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” (SFAS 157), which is effective for fiscal years beginningafter November 15, 2007 and for interim periods within those years. Thisstatement defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements. This statement applies underother accounting pronouncements that require or permit fair value measurements.The statement indicates, among other things, that a fair value measurementassumes that the transaction to sell an asset or transfer a liability occurs inthe principal market for the asset or liability or, in the absence of aprincipal market, the most advantageous market for the asset or liability. SFAS157 defines fair value based upon an exit price model.

 

Relative to SFAS 157, the FASB issued FASBStaff Positions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to excludeSFAS No. 13, “Accounting for Leases,” (SFAS 13) and its relatedinterpretive accounting pronouncements that address leasing transactions, whileFSP 157-2 delays the effective date of the application of SFAS 157 to fiscal yearsbeginning after November 15, 2008 for all nonfinancial assets andnonfinancial liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis.

 

We adopted SFAS 157 as of January 1,2008, with the exception of the application of the statement to non-recurringnonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancialassets and nonfinancial liabilities for which we

 

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

have not applied the provisions of SFAS 157 includethose measured at fair value in goodwill impairment testing, indefinite livedintangible assets measured at fair value for impairment testing, assetretirement obligations initially measured at fair value, and those initiallymeasured at fair value in a business combination.

 

Valuation Hierarchy. SFAS 157 establishes avaluation hierarchy for disclosure of the inputs to valuation used to measurefair value. This hierarchy prioritizes the inputs into three broad levels asfollows. Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities. Level 2 inputs are quoted prices for similarassets and liabilities in active markets or inputs that are observable for theasset or liability, either directly or indirectly through market corroboration,for substantially the full term of the financial instrument. Level 3 inputs areunobservable inputs based on our own assumptions used to measure assets andliabilities at fair value. A financial asset or liability’s classificationwithin the hierarchy is determined based on the lowest level input that issignificant to the fair value measurement.

 

The following table provides the liabilitiescarried at fair value measured on a recurring basis as of June 30, 2008:

 
| ** **                       | ** ** | ** **                                                      | ** ** | **Fair Value Measurements at June 30, 2008 Using:** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Total Carrying  Value at  June 30, 2008** | ** ** | **Quoted prices in  active markets  (Level 1)**                    | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs (Level 3)** | ** ** |
| Interest rate  swaps - liability |       | $                                                               | 705        |                                                                                   | $          | — |   | $ | 705 |   | $ | — |   |
|                                  |            |                                                                 |            |                                                                                        |            |  |  |  |  |  |  |  |  |

 

Valuation Techniques. Interest rate swaps aremeasured at fair value indirectly through market corroboration, forsubstantially the full term of the financial instrument within Level 2 of thevaluation hierarchy.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115,” (SFAS 159) which iseffective for fiscal years beginning after November 15, 2007. Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. This statement also establishes presentationand disclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities. Unrealized gains and losses on items for which the fair valueoption is elected would be reported in earnings. We have adopted SFAS 159 andhave elected not to measure any additional financial instruments and otheritems at fair value.

 

**12. COMMITMENTS AND CONTINGENCIES**

 

We are involved in certain legal proceedingsincidental to the normal conduct of our business. At this time, we do notbelieve that any liabilities relating to such legal proceedings are likely tobe, individually or in the aggregate, material to our business, financialcondition, results of operations or cash flows.

 

The total we have accrued in regards to all legalproceedings was $0.1 million and $0.2 million as of June 30, 2008 and December 31,2007, respectively.

 

In the normal course of our business activities, weare required under contracts with various government authorities to provideletters of credit and bonds that may be drawn upon if we fail to perform underthese contracts. At June 30, 2008 we had no open letters of credit and asof December 31, 2007 we had open letters of credit totaling $0.3million.  Bonds, which expire on variousdates, totaled $0.5 million on June 30, 2008 and December 31, 2007,respectively. No bonds had been drawn upon at either date.

 

**13.****COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES**

 

On November 15, 2007, the Company committed toan organizational plan (the “Plan”) to shift from three divisions to oneintegrated corporate structure focused on secure wireless communications forgovernment and industrial customers. The Plan is expected to improveefficiencies in our operations, reduce our infrastructure costs and to supporta new technology roadmap driving towards a streamlined and more effectivestructure. Implementation of the Plan includes senior and middle managementchanges as well as staff reductions designed to eliminate redundant positionsand reflects the Company’s decision to consolidate operations and moveproduction from three locations into a centralized operations and outsourcingprogram in the Dallas/Fort Worth area.

 

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andsix months ended June 30, 2008 and 2007**

**(Unauditedand in thousands, except share and per share data)**

 

Costs that are directly associated with the Plan arebeing recorded as “restructuring costs” and are included in general andadministrative expenses. Other costs that do not qualify as restructuring costsare being classified as other operating expenses or costs of goods sold in theCompany’s consolidated statements of operations.

 

The timing of the recognition of costs associatedwith this move were determined in accordance with SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities**,***and other relevant guidance, that provides that a liability for a costassociated with an exit or disposal activity shall be recognized at its fairvalue in the period in which the liability is incurred. In particular,employee-related termination costs associated with the relocation are generallyrecognized ratably over the period that the employees are required to provideservices in order to earn the respective termination benefit.

 

The following table summarizes the estimates andactual exit costs incurred as of June 30, 2008:

 
| ** **                     | ** ** | **Original  amount  expected to  be incurred** | ** ** | **Additional  Costs incurred** | ** ** | **Total  amount  expected to  be incurred** | ** ** | **Amount  incurred as of  December 31,  2007** | ** ** | **Amount  incurred  as of  June 30,  2008** | ** ** | **Remaining  amount to  be incurred** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| One-time  termination benefits |       | $                                                        | 951        |                                | $          | —                                                |       | $                                                             | 951        |                                                  | $          | 575                                             |       | $ | 212 |   | $ | 164 |   |
| Other cost                     |       | 139                                                      |       | 54                                  |       | 193                                                   |       | 45                                                            |       | 148                                                   |       | —                                          |       |
| Total Costs                    |       | $                                                        | 1,090      |                                | $          | 54                                                    |       | $                                                             | 1,144      |                                                  | $          | 620                                             |       | $ | 360 |   | $ | 164 |   |

 

Thefollowing table summarizes the beginning and ending liability reserve for exitcosts as of June 30, 2008:

 
| ** **                     | ** ** | **Balance at   December 31,  2007** | ** ** | **Cash   Payments** | ** ** | **Balance at  June 30,  2008** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|
| One-time  termination benefits |       | $                                                  | 575        |                     | $          | 428                                      |       | $ | 147 |   |
| Other cost                     |       | 3                                                  |       | 3                        |       | —                                   |       |
| Total Costs                    |       | $                                                  | 578        |                     | $          | 431                                      |       | $ | 147 |   |

 

**14.****RELATED PARTY TRANSACTIONS**

 

During the three months ended June 30, 2008 DRS Technologies, Inc.(“DRS”) and its related subsidiaries acquired approximately $5.5 million of ourproducts. During the six months ended June 30, 2008 and 2007, DRS and itsrelated subsidiaries acquired approximately $13.6 million and $0.1 million,respectively, of our products. Included in our account receivable balances asof June 30, 2008 and December 31, 2007 were amounts due from DRS for$1.4 million and $0.5 million, respectively. Since August 1995, MarkNewman has been the Chairman, President and Chief Executive Officer of DRS. Mr. Newmanwas appointed a director of the Company in 2005. It is anticipated that theCompany may engage in similar business with DRS in the future.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|------------------|-------------------------------------------------------------------------------------------------|

 

Discussions of certain matters contained in thisQuarterly Report on Form 10-Q may constitute forward-looking statementsunder Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Theseforward-looking statements are based upon our current expectations, estimatesand projections about our business and our industry, and reflect our beliefsand assumptions based upon information available to us at the date of thisreport. 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 ourproduct development efforts, future sales and expense levels, our futurefinancial condition, liquidity, and business prospects generally, the impact ofour relocation of operating facilities, and outsourcing of manufacturing on ouroperating results, perceived opportunities in the marketplace for our products,and our other business plans for the future.

 

These forward-looking statements are subject tocertain risks and uncertainties that could cause the actual results,performance and outcomes to differ materially from those expressed or impliedin these forward-looking statements due to a number of risk factors including,but not limited to, the risks discussed in the 2007 Annual Report on Form 10-Kunder Item 1A “Risk Factors” and in Part II of this report on Form 10-Qunder Item 1A “Risk Factors.” We caution readers not to rely on theseforward-looking statements, which reflect management’s analysis only as of thedate of this quarterly report. We undertake no obligation to revise or updateany forward-looking statement for any reason except as required by law.

 

The following discussion is intended to provide abetter understanding of the significant changes in trends relating to ourfinancial condition and results of operations. Management’s Discussion andAnalysis of Financial Condition and Results of Operations should be read inconjunction with the accompanying Condensed Consolidated Financial Statementsand Notes thereto.

 

**Overview**

 

Previously the Companywas organized, and reported its financial results, as a parent company with twosegments, Private Wireless Communications and Secured Communications. Having recognized that the public safety/public service market is movingtowards convergent telecommunications solutions, the continued demand for interoperabilityand the transition from analog to digital platforms, we reorganized the Companyin January 2008 into a single centralized corporate structure that weexpect to improve efficiencies in our operations and reduce our infrastructurecosts. Our current products, system solutions, and technology allow us toparticipate and be competitive in this transitioning market and technologytrend of convergence.

 

In light of thesechanges, the Company has reassessed its segment reporting, and beginning withthe first quarter of 2008, we are no longer reporting the two segments ofPrivate Wireless Communications and Secured Communications.  The operating structure of the Company alsochanged in the first quarter. Under the new structure, all the Company’s operationsreport up to the chief executive officer and president through the chiefoperating officer. The chief financial officer, chief operating officer,general counsel, and chief technology officer report to the chief executiveofficer and president.  Based on thesynergies of our products, customers, and organizational structure, the Companynow operates in a single segment.

 

We design, develop, market and support wirelessradios and wireless communications infrastructure and systems for digital andanalog platforms. In addition, we offer encryption technologies for wirelessvoice, video and data communications and we also design, develop, market andsupport secure wireless networking solutions that include Wi-Fi products, meshnetworking, access points, and client infrastructure products. The Company’scustomers include first responders in public safety and public service, thefederal government, and industrial organizations.

 

Due to the timing of orders and seasonality, ourquarterly results fluctuate. We experience seasonality in our results in partdue to governmental customer spending patterns that are influenced bygovernment fiscal year-end budgets and appropriations. The unpredictable salescycle coupled with launching new products and solutions can also causevariations from quarter to quarter.

 

*Our Products and Solutions*

 

Our wireless radio offerings are primarily digitalsolutions designed to operate in both analog and digital system environments.Our products and systems are based on industry standards designed to enhanceinteroperability among systems, improve bandwidth efficiency, and integratevoice and data communications.

 

The Land Mobile Radio (“LMR”) industry utilizestwo-way wireless communications through wireless networks, which includeinfrastructure components such as base stations, repeaters, transmitters andreceivers, network switches and

 

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portable and mobile two-waycommunication radios. Individual users operate portable hand-held radios andvehicular-mounted radios in their wireless communications system. Utilizinglicensed RF spectrum, the customer owns and operates the wireless communicationsystem that is networked by linking together the infrastructure components. Wedevelop customer solutions, which leverage the customer’s wireless system andwireless radios with customer specific or enterprise wide applications.

 

The majority of revenues are derived from the saleof wireless radio products. Our federal, state and local governmental agencycustomers are increasingly demanding interoperable, secured communicationsproducts and systems. We believe this demand has created opportunities for usas we believe we are positioned to provide these products and systems. As aresult, we expect to continue to allocate a majority of our on-going researchand development expenditures to wireless radio features and enhancements,infrastructure components and system development efforts.

 

We provide the domesticand international LMR industry with secure encryption technologies for analogwireless radios. These products are specifically designed to preventunauthorized access to sensitive voice communications in parts of the worldwhere wireless radio systems remain analog and security needs are high. Theseproducts are sold as aftermarket add-on components or embedded components forexisting analog radios and systems.

 

We also design, develop,market and support customized wireless network centric products and systemswhich include secure Wi-Fi products, including mesh networking, access point,bridge, and client infrastructure products, as well as security software. Weprovide sensor network solutions, through our InfoMatics® middleware, whichenables sensors and databases to communicate data to pertinent personnel forcommand and control applications in near real-time. These products andsolutions utilize FIPS 140-2 validated wireless products, 802.11 wirelessnetworking (WIFI) solutions, mesh networking and conditions based and locationbased telematics solutions.

 

*Our Sales and Distribution Approach*

 

Our products and systemsare sold through multiple channels including a direct sales force, dealers,manufacturing representatives, distributors, and strategic partneringarrangements. We utilize our dealer network to assist in installing, servicing,selling and distributing our products. We also generate revenues through thefederal government under government funded research and development SmallBusiness Innovative Research programs (“SBIR”). Additionally, we offer ourproducts to commercial, non-governmental users.

 

Much of our business is obtained through submissionof formal competitive bids. Our governmental customers generally can specifythe terms, conditions and form of the contract. Our government business issubject to government funding decisions and contract types can vary widely,including cost plus, fixed-priced, indefinite-delivery/indefinite quantity, (“IDIQ”),and government-wide acquisition contracts with the General Services Administration,(“GSA”), that require pre-qualification of vendors and allows governmentcustomers to more easily procure our products and systems. Through the federalgovernment SBIR programs the business is most typically obtained through thesubmission of formal bids under cost plus or time and material agreements.

 

Depending on the size andcomplexity of customer specifications and requirements, products can be shippedto the customer in a relatively short period of time (typically 90 days) orwith complex integrations and various delivery dates, orders can span multipleyears. For example, our longer-term system contracts and government servicesrevenues are generated under customer contracts and agreements for whichrevenue is recorded under the percentage-of-completion method.

 

**Description of Operating Accounts**

 

*Revenues*. Revenues consist of product sales,services, and government funded research and development services and solutionsnet of returns and allowances. Longer-term system and government services revenuesare recognized under the percentage of completion method.

 

*Cost of Sales.* Cost of sales includes costs of componentsand materials, labor, depreciation and overhead costs associated with theproduction of our products and services, as well as shipping, royalty,inventory reserves, warranty product costs, and incurred cost under salescontracts.

 

*Gross Profit.* Gross profit is net revenues less the costof 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 consistprimarily of costs associated with research and development personnel,materials, and the depreciation of research and development equipment andfacilities. We expense research and development costs as they are incurred, netof any applicable cost reimbursements. Research and development expensesrelating to our government funded research and development services areincluded as a component of cost of sales.

 

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*Sales and Marketing.* Sales and marketing expenses consistprimarily of salaries and related costs of sales personnel, including salescommissions and travel expenses, as well as costs of advertising, product andprogram management, public relations and trade show participation.

 

*General and Administrative*. General and administrative expenses consistprimarily of salaries and other expenses associated with our management,accounting, information systems and administrative functions. This expense alsoincludes the impact of equity-based compensation expense. Accounting forgovernment contracts delineates what is a direct charge allowable to include incontract costs and what is considered to be an indirect charge reflected asgeneral and administrative expenses. We consider indirect engineering labor andoperating costs such as quality, planning, operations, and company fringebenefits, general administrative salaries and other general administrativeexpenses as general and administrative expense.

 

*Interest Expense, Net.*Interest expense, net consists of interestexpense on the term note, revolving line of credit and capital leases net ofinterest income earned on cash and cash equivalents.

 

*Provision for Income Taxes.* Provision (benefit) for income taxesincludes the increase or decrease in the valuation reserve that is based uponmanagement’s conclusions regarding, among other considerations, our historicaloperating results and forecasted future earnings over a five year period, ourcurrent and expected customer base projections, and technological andcompetitive factors impacting our current products. Current financialaccounting standards require that organizations analyze all positive andnegative evidence relating to deferred tax asset realization, which wouldinclude our historical accuracy in forecasting future earnings, as well as ourhistory of losses incurred within the past three years. Should factorsunderlying management’s estimates change, future adjustments, either positiveor negative, to our valuation allowance may be necessary.

 

**Critical Accounting Policies**

 

The preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America, or GAAP, requires management to make judgments,estimates and assumptions in certain circumstances that affect the amountsreported in the consolidated financial statements and related footnotes. Weregularly evaluate the accounting policies and estimates used to prepare ourfinancial statements. Estimates are used for, but not limited to, theaccounting for allowance for doubtful accounts and sales returns, applicationof percentage of completion accounting for long-term contract revenues,inventory reserves, warranty reserves, valuation allowance for deferred incometax assets, impairment charges and contingencies. These estimates are based onhistorical experience and various assumptions that we believe to be reasonableunder the particular applicable facts and circumstances. Actual results coulddiffer from those estimates.

 

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

 

***Revenues***

 

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

 

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

 

Government funded services revenue from cost pluscontracts is recognized as costs are incurred on the basis of direct costs plusallowable indirect costs and an allocable portion of the fixed fee. Revenuefrom fixed-type contracts is recognized under the percentage of completionmethod with estimated costs and profits included in contract revenue as work isperformed. Revenue from time and materials contracts is recognized as costs areincurred at amounts represented by the agreed billing amounts.

 

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Deferred revenues include unearned services providedunder systems maintenance contracts. We recognize the fees based upon astraight-line method over the life of the contract.

 

We periodically review our revenue recognitionprocedures to assure that such procedures are in accordance with the provisionsof Staff Accounting Bulletins 101 and 104, Statement of Position 88-1 and otherinterpretations, as applicable. In addition, while most of our current productscontain software, we believe the software is incidental in the overall contextof our products’ features and functionality, therefore, at present we do notuse revenue recognition pronouncements applicable to software sales.

 

***Inventories***

 

Inventories are recorded at the lower of cost ormarket with cost determined utilizing a standard cost method. We periodicallyassess our inventories for potential obsolescence and lower-of-cost-or-marketissues. We make estimates of inventory obsolescence, providing reserves whennecessary, based on, among other factors, demand for inventories based onbacklog, product pricing, the ability to liquidate or sell older inventories,and the impact of introducing new products. A significant portion of ourinventories is comprised of components and parts on hand to support maintenanceof products previously sold. As such, we anticipate utilizing such inventoriesover extended periods of time. Our obsolescence and lower- of - cost-or-marketaccounting policies provide for a periodic adjustment to the carrying value ofsuch inventories. As of June 30, 2008 we had a reserve for obsolescence of$2.7 million.

 

***Goodwill and Other Intangible Assets***

 

At least annually, we assess goodwill and otherindefinite lived intangible assets, using fair value-based tests. If therespective carrying amount exceeds the fair value, goodwill or other indefinitelived intangible assets are considered to be impaired. In evaluatingimpairment, we estimate the sum of the expected future cash flows derived fromsuch reporting unit and present value implied by estimates of future revenues,costs and expenses and other factors. The estimates use assumptions about ourmarket segment share in the future and about future expenditures by governmententities. We continually evaluate whether events and circumstances haveoccurred that indicate the remaining balance of goodwill or other indefinitelived intangible assets may not be recoverable. To the extent our assumptionschange, we may be required to adjust the carrying value of the goodwill orother intangible assets. For a further discussion of goodwill and otherintangible assets, see the discussion under *Footnote7 – Notes to Condensed Consolidated Financial Statement*.

 

***Income Taxes***

 

We account for income taxes using the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingcurrent enacted tax rates. The effect on deferred tax assets and liabilities ofa change in tax rates is recognized in the results of operations in the periodthat includes the enactment date.

 

We adopted FIN 48 *“Accountingfor Uncertainty in Income Taxes” an interpretation of FASB Statement No. 109“Accounting for Income Taxes”*. Based on the review of the varioustax positions we estimated uncertain tax positions in the amount of $0.4million.  However, these tax benefitshave not been included in prior year income tax return filings and are includedin our deferred tax asset pools as of January 1, 2007 (FIN 48 adoptiondate) with a reasonable valuation reserve. Based on activities through December 31,2007 we increased the estimate for uncertain tax positions to $0.5 million thatare included in our deferred tax pools and fully reserved. Therefore, we haveconcluded that there is no requirement to book a liability for FIN 48 asdiscussed in Note 9 to the condensed consolidated financial statements.

 

***Long-Lived Assets***

 

We review our long-lived assets, includingintangible assets subject to amortization, for recoverability whenever eventsor changes in circumstances indicate that the carrying amount of suchlong-lived asset or group of long-lived assets may not be recoverable. Suchcircumstances include, but are not limited to:

 

·                  a significant decrease in the market price ofthe long-lived asset;

 

·                  a significant change in the extent or mannerin which the long-lived asset is being used;

 

·                  a significant change in the business climatethat could affect the value of the long-lived asset;

 

·                  a current period loss combined withprojection of continuing loss associated with use of the long-lived asset; and

 

·                  a current expectation that, more likely thannot, the long-lived asset will be sold or otherwise disposed of before the endof its previously estimated useful life.

 

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We continually evaluate whether events andcircumstances have occurred which may indicate that the carrying value may notbe recoverable. When such events or circumstances exist, the recoverability ofthe long-lived asset’s carrying value shall be determined by estimating theundiscounted future cash flows (cash inflows less associated cash outflows)that are directly associated with, and that are expected to arise as a directresult of the use and eventual disposition of, the long-lived asset. During thefourth quarter ended December 31, 2007, we recorded impairment charges forindefinite lived intangible assets. To the extent such events or circumstancesoccur in the future that could affect the recoverability of our long-livedassets, we may be required to impair these assets at that time.

 

***Stock-based Compensation***

 

Stock-based compensation cost is estimated at thegrant date based on the fair value of the award and is recognized as expenseratably over the requisite service period of the award. Determining theappropriate fair value model and calculating the fair value of stock-basedawards at the grant date requires judgment, including estimating stock pricevolatility, forfeiture rates and expected option life. To the extent ourestimates used in calculating fair value is adjusted, the amount ofcompensation costs we would be required to record could change.

 

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**Results of Operations**

 

The following table presents certain CondensedConsolidated Statements of Operations information as a percentage of revenuesduring the periods indicated:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                       |       | 100.00                           | %          | 100.00                         | %          | 100.00 | % | 100.00 | % |
| Cost of sales                  |       | 66.96                            |       | 67.83                          |       | 66.81 |   | 67.79 |   |
| Gross profit                   |       | 33.04                            |       | 32.17                          |       | 33.19 |   | 32.21 |   |
|                           |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:           |       |                             |       |                           |       |   |   |   |   |
| Research and  development      |       | 0.37                             |       | 7.18                           |       | 5.08 |   | 7.87 |   |
| Sales and  marketing           |       | 9.97                             |       | 6.49                           |       | 9.65 |   | 7.40 |   |
| General and  administrative    |       | 17.52                            |       | 10.81                          |       | 18.21 |   | 12.30 |   |
| Amortization of  intangibles   |       | 1.25                             |       | 0.65                           |       | 1.22 |   | 0.83 |   |
| Total operating  expenses      |       | 29.11                            |       | 25.13                          |       | 34.17 |   | 28.40 |   |
| Income (loss)  from operations |       | 3.93                             |       | 7.03                           |       | (0.98 | ) | 3.81 |   |
| Interest  expense, net         |       | (0.82                            | )          | (0.03                          | )          | (0.68 | ) | (0.02 | ) |
| Income before  income taxes    |       | 3.10                             |       | 7.00                           |       | (1.66 | ) | 3.79 |   |
| Income tax  (expense)          |       | —                           |       | (0.28                          | )          | — |   | (0.17 | ) |
| Net income  (loss)             |       | 3.10                             |       | 6.73                           |       | (1.66 | ) | 3.63 |   |

 

**Comparison of the Three Months and Six Months Ended June 30,2008 and 2007**

 

*Revenues.*Our revenues decreased $24.7 million, or 43%,to $32.6 million for the three months ended June 30, 2008 from $57.3million for the same period in 2007. The decline was attributable to largedeliveries against Department of Defense contracts in the second quarter of2007 not replicated in the second quarter of 2008. Partially offsetting thisdecline in revenue were increases in revenues associated with the FCC rebandingeffort. Our revenues decreased $29.8 million, or 31%, to $66.5 million for thesix months ended June 30, 2008 from $96.2 million for the same period in2007. The decline was attributable to large deliveries against Department ofDefense contracts in the first half of 2007 not replicated in the first half of2008. Partially offsetting this decline in revenue were increases in revenuesassociated with the FCC rebanding effort.

 

*Gross Profit.*Our gross profit decreased $7.7 million, or42%, to $10.8 million in the three months ended June 30, 2008 from $18.4million for the same period in 2007. Gross profit, as a percentage of revenues,or gross margin, was 33% for the three months ended June 30, 2008, ascompared to 32% for the same period in 2007. Our gross profit decreased $8.9million, or 29%, to $22.1 million in the six months ended June 30, 2008from $31.0 million for the same period in 2007. Gross profit, as a percentageof revenues, or gross margin, was 33% for the six months ended June 30,2008, as compared to 32% for the same period in 2007. As a result of our costreduction efforts, we anticipate the gross margin percentage to improveslightly in the second half of 2008.

 

*Research and Development.*Research and development expenses decreased$4.0 million, or 97%, to $0.1 million in the three months ended June 30,2008 from $4.1 million in the same period in 2007. Research and developmentexpenses as a percentage of revenues decreased to zero percent in the secondquarter of 2008 versus 7% for the same period in 2007. Research and developmentexpenses decreased $4.2 million, or 55%, to $3.4 million in the six monthsended June 30, 2008 from $7.6 million in the same period in 2007. Researchand development expenses as a percentage of revenues decreased to 5% in the firstsix months of 2008 versus 8% for the same period in 2007.

 

The decrease in research and development expenses isattributable to a non-recurring engineering cost reimbursement of $4.0 millionreceived in the second quarter of 2008 from a customer for research anddevelopment expenses relating to the development and re-engineering of ourMultinet radio product line associated with the FCC re-banding effort.  The development of our Multinet radiohas been completed and no further non-recurring engineering cost reimbursementwill be received. Excluding this cost reimbursement, we anticipate research anddevelopment expenses for the third and fourth quarters of 2008 to be similar tothe second quarter of 2008.

 

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*Sales and Marketing.*Sales and marketing expenses decreased $0.5million, or 13%, to $3.2 million in the three months ended June 30, 2008from $3.7 million in the same period in 2007. The decrease is mainlyattributable to lower sales incentives resulting from the decline in revenuenoted above. Sales and marketing expenses as a percentage of revenues was 10%in the second quarter of 2008 versus 6% in the second quarter of 2007. Salesand marketing expenses decreased $0.7 million, or 10%, to $6.4 million in thesix months ended June 30, 2008 from $7.1 million in the same period in2007. The decrease is mainly attributable to lower sales incentives resultingfrom the decline in revenue noted above. Sales and marketing expenses as apercentage of revenues was 10% for the first half of 2008 versus 7% in thefirst half of 2007. We expect the trend in sales and marketing expenses tocontinue for the remainder of 2008.

 

*General and Administrative.*General and administrative expenses decreased$0.5 million, or 8%, to $5.7 million for the three months ended June 30,2008 from $6.2 million for the same period in 2007. The decrease in expenses isprimarily attributable to reduced expenses resulting from the reorganizationand improved overhead rate allocations from general and administrative expensepools. General and administrative expenses increased $0.3 million, or 2%, to$12.1 million for the six months ended June 30, 2008 from $11.8 millionfor the same period in 2007. The increase in expenses is primarily attributableto increased bank amendment fees, bad debt expense and accrued compensationexpense.

 

*Amortization of Intangibles.*Amortization of intangibles was $0.4 millionfor the three months ended June 30, 2008 and 2007, respectively,reflecting amortization of specifically identifiable intangible assets with adefinite life. Amortization of intangibles was $0.8 million for the six monthsended June 30, 2008 and 2007, respectively, reflecting amortization ofspecifically identifiable intangible assets with a definite life.

 

*Interest Expense, net.*Interest expense, net increased $0.3 millionto $0.3 million in expense for the three months ended June 30, 2008 fromthe same period in 2007. This is attributable to interest on the term loan,short term borrowings and lower interest income earned on cash investments.Interest expense, net increased $0.4 million to $0.4 million in expense for thesix months ended June 30, 2008 from the same period in 2007. This isattributable to interest on the term loan and lower interest income earned oncash investments.

 

*Provision for Income Taxes.*We did not record a tax benefit or provisionfor the three and six months ended June 30, 2008. For the three months andsix months ended June 30, 2008, our deferred tax assets were fullyreserved requiring no provision for income taxes. The valuation reserve isbased upon management’s conclusions regarding, among other considerations, ouroperating results during each period, our current and expected customer base,technological and competitive factors impacting our current products, andmanagement’s estimates of future earnings based on information currentlyavailable. For the three months and six months ended June 30, 2007, werecorded a tax expense of $0.2 million. The difference between our effectivetax rates and the 34% federal statutory rate resulted primarily fromutilization of net operating loss carryforwards and changes in the valuationduring 2007.

 

*Net Income / (Loss).*Net income was $1.0 million for the threemonths ended June 30, 2008, reflecting a decrease of $2.9 million, ascompared to net income of $3.9 million for the same period in 2007. Net losswas $1.1 million for the six months ended June 30, 2008, reflecting adecrease of $4.6 million, as compared to net income of $3.5 million for thesame period in 2007.

 

**Liquidity and Capital Resources**

 

The Company’s primarysources of liquidity are its cash and cash equivalents that were $8.4 millionand $15.6 million at June 30, 2008 and December 31, 2007,respectively.  Effective with the amendedLoan Agreement, we designated $3.0 million of our invested cash balances forthe minimum liquidity requirements. Due to the net losses in 2007 and 2006, weconsidered several key factors in assessing the liquidity requirements of theCompany for the next twelve months. Management monitors operational cash flow projections which factor inour backlog of orders, the cost savings of $3 million to $5 million anticipatedfrom the Company’s reorganization, and our historical collection and paymentpatterns with customers and vendors.  Weanalyzed these projections against our modified bank covenants for 2008 notingthat on a proforma basis the covenants would be met.  We noted that we are current and have madetimely interest payments on our term note. Furthermore, we may utilize our revolving line of credit to borrowsupported by the underlying borrowing base of the Company.   Based on this these factors, among others,we believe that our available cash, financing and cash flow from operationswill be adequate to meet our anticipated needs for at least the next twelvemonths.

 

*Net cash from operatingactivities.*Ouroperating activities used cash of $6.4 million and provided cash of $1.4million in the six months ended June 30, 2008 and 2007, respectively. Cashprovided by or used in operating activities is primarily a reflection of ourcollections on billed receivables, investment in inventories and expendituresfor operations.

 

During the six months ended 2008, operatingactivities used $6.4 million in cash flow primarily due to collections ofbilled receivables of $58.3 million offset by product billings of $66.7 millionthat effectively decreased cash from operating activities by $8.4 million.Additionally, the net loss of $1.1 million, and other operating activities of$2.9 million used cash. Cash was provided from improved inventory turnover thatdecreased inventory by $2.5 million together with non-cash items

 

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relating to depreciation andamortization of $2.3 million and stock-based compensation expense of $1.2million. The increase in accounts receivable reflects delays in cashcollections from certain customers during the quarter ended June 30, 2008.

 

During the six months ended 2007, operatingactivities provided $1.4 million in cash flow primarily due to net income of$3.5 million and $8.0 million from other operating activities together with noncash items relating to depreciation and amortization of $2.2 million andstock-based compensation expense of $1.1 million. Uses of cash resulted fromcollections of billed receivables of $88.5 million offset by product billingsof $96.4 million that effectively decreased cash from operating activities by$7.9 million. Additionally, we used $5.5 million to purchase inventories. Theincrease in accounts receivable reflects the significant increase in revenuescontinuing in the quarter ended June 30, 2007. The increases ininventories were principally the result of continued product procurement in thesecond quarter of 2007 in anticipation of satisfaction of shipments and salesrelating to a large Department of Defense order.

 

*Net cash from investingactivities.* Duringthe six months ended June 30, 2008 and 2007, investing activities used$0.9 million and $1.3 million, respectively, primarily attributable to thepurchases of property, plant and equipment.

 

*Net cash from financingactivities.*Duringthe six months ended June 30, 2008 and 2007, virtually no cash wasprovided from financing activities.

 

*Letters of credits and bonds.* In the normal course of our businessactivities related to sales of wireless radio systems to local and stategovernmental entities, we are required under contracts with various governmentauthorities to provide letters of credit or performance or bid bonds that maybe drawn upon if we fail to perform under our contracts. No letters of creditwere outstanding as of June 30, 2008. Our letters of credit outstanding asof December 31, 2007 were $0.3 million. Performance and bid bonds thatexpire on various dates, totaled $0.5 million at June 30, 2008. Ourcurrent bonding arrangement calls for zero-collateral bonding. In the secondquarter of 2008, we entered into a government contract requiring a $2.0 millionperformance bond, which bond was obtained by the Company on July 2,2008.  The Company was required to postcash collateral in order to obtain that bond.

 

*Secured line of credit.* We amended our secured line of creditagreement with Bank of America, (the “Loan Agreement”), in July 2006 toinclude a revolving line of credit of up to $15.0 million and a term loan of$15.0 million. Both borrowings bear interest at a variable rate based on theLondon Interbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”)determined by our ratio of debt to earnings before interest, taxes,depreciation, and amortization (“EBITDA”). Following the renegotiation of theLoan Agreement, the $15.0 million term loan was fully funded and used tofinance the acquisition of 3eTI. The LIBOR Margin was 175 basis points at December 31,2007. No borrowings were made on the revolving line of credit during 2007.

 

As noted in our Form 10-K for the period endingDecember, 31, 2007, we were not in compliance with the financial covenants ofthe Loan Agreement for the quarter ending December 31, 2007. As a result,effective March 10, 2008 we executed an Amendment to the Loan Agreementwhereby Bank of America waived such financial covenant defaults on a one timebasis, subject to further modification of the Loan Agreement to revise suchfinancial covenants, to modify the advance and borrowing revisions under theLoan Agreement and for certain other purposes more fully set out in theAmendment.

 

The Loan Agreement, as amended, provides forcustomary affirmative and negative covenants, including maintenance ofcorporate existence, rights, property, books and records and insurance,compliance with contracts and laws, and certain reporting requirements, as wellas limitations on debt, liens, fundamental changes, acquisitions, transfers ofassets, investments, loans, guarantees, use of proceeds, sale-leasebacktransactions and capital expenditures. In addition, the Loan Agreement, asamended, contains certain financial covenants including a maximum ratio offunded debt to EBITDA and a fixed charge coverage ratio. The Loan Agreement, asamended, also provides for events of default that would permit the Lender toaccelerate the loans upon their occurrence, including failure to make payments,breaches of representations and warranties, insolvency events, acceleration ofother indebtedness, failure to discharge judgments, material adverse effects,certain breaches of contracts, casualty losses when no or insufficientinsurance is maintained, changes of control, certain ERISA events and failureto observe covenants. As collateral for the obligations under the LoanAgreement, as amended, the Lender has a security interest in substantially allassets of the Borrowers, including accounts receivable, inventory, machinery,equipment, real estate, and general intangibles. Pursuant to the LoanAgreement, as further amended, effective March 10, 2008, the amended LoanAgreement effectively eliminated the ratio of funded debt to EBITDA and a fixedcharge coverage ratio for 2008 and contains a new covenant to maintain aminimum liquidity of $3.0 million in unrestricted cash, unencumbered marketablesecurities, cash and cash equivalents through March 31, 2009.Additionally, a covenant for a minimum EBITDA was established for (i) breakevenfor the fiscal quarter ending June 30, 2008, (ii) $1.0 million forthe fiscal quarter ending September 30, 2008 and $3.0 million for thefiscal quarter ending December 31, 2008. Furthermore, effective March 10,2008, the interest rate is equal to LIBOR plus 2.00% through March 31,2009, and thereafter to LIBOR plus a rate between 1.00% and 1.75% depending onour ratio of debt to EBITDA.

 

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We were in compliance with all financial andnegative covenants at June 30, 2008. At June 30, 2008, no borrowingshad been made from the revolving line of credit. The total available remainingcredit under the line of credit was $7.7 million and $13.3 million asof June 30, 2008 and December 31, 2007, respectfully.

 

*Dividend policy.* Since our initial public offering, we havenot declared or paid any dividends on our common stock. We presently intend toretain earnings for use in our operations and to finance our business. Anychange in our dividend policy is within the discretion of our board ofdirectors and will depend, among other things, on our earnings, debt serviceand capital requirements, restrictions in financing agreements, if any,business conditions and other factors that our board of directors deemsrelevant.

 

*Backlog.* Our backlog of unfilled orders at June 30,2008 was $64.9 million, compared to a backlog of $95.0 million at December 31,2007 and $83.1 million at June 30, 2007. Depending on the size andcomplexity of customer specifications and requirements, the backlog can beconverted to revenues in a relatively short period of time (typically 90 days)or with complex integrations and various delivery dates, orders can spanmultiple years.

 

**Off-Balance Sheet Arrangements**

 

As part of our ongoing business, we do not participatein transactions that generate relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or variable interest entities (“VIE”), that would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. As of June 30, 2008, we are notinvolved in any VIE transactions.

 

**Recently Issued Accounting Standards**

 

In April 2008, theFASB issued Staff Position No. 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginningafter December 15, 2008 and interim periods within those fiscal years,requiring prospective application to intangible assets acquired after theeffective date. The Company will be required to adopt the principles of FSP142-3 with respect to intangible assets acquired on or after January 1,2009. Due to the prospective application requirement, the Company is unable todetermine what effect, if any, the adoption of FSP 142-3 will have on itsconsolidated statement of financial position, results of operations or cashflows.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133” (SFAS 161). This statement is intended toimprove transparency in financial reporting by requiring enhanced disclosuresof an entity’s derivative instruments and hedging activities and their effectson the entity’s financial position, financial performance, and cash flows. SFAS161 applies to all derivative instruments within the scope of SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities” (SFAS 133) as well asrelated hedged items, bifurcated derivatives, and nonderivative instrumentsthat are designated and qualify as hedging instruments. Entities withinstruments subject to SFAS 161 must provide more robust qualitativedisclosures and expanded quantitative disclosures. SFAS 161 is effectiveprospectively for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008, with early applicationpermitted. We are currently evaluating the disclosure implications of thisstatement.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combination (“SFAS 141R”), which replaces FASBStatement No. 141. SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquire and the goodwill acquired. The Statement alsoestablishes disclosure requirements which will enable users to evaluate thenature and financial effects of the business combination. SFAS 141R is to beapplied prospectively to business combinations for which the acquisition dateis on or after an entity’s fiscal year that begins after December 15,2008. We are currently not impacted by the adoption of SFAS 141R on ourConsolidated Financial Statements.

 

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements - an amendment ofAccounting Research Bulletin No. 51 (“SFAS 160”), which establishesaccounting and reporting standards for ownership interests in subsidiaries heldby parties other than the parent, the amount of consolidated net incomeattributable to the parent and to the noncontrolling interest, changes in aparent’s ownership interest and the valuation of retained noncontrolling equityinvestments when a subsidiary is deconsolidated. The Statement also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS 160 is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008. We are currentlynot impacted by the adoption of SFAS 160 on our Consolidated FinancialStatements.

 

In December 2007, the EITF issued Issue No. 07-1,“Accounting for Collaborative Arrangements.” This Issue is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those

 

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fiscal years, and shall beapplied retrospectively to all prior periods presented for all collaborativearrangements existing as of the effective date. This Issue requires thattransactions with third parties (i.e., revenue generated and costs incurred bythe partners) should be reported in the appropriate line item in each company’sfinancial statement pursuant to the guidance in EITF Issue No. 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent.” This Issue also includesenhanced disclosure requirements regarding the nature and purpose of thearrangement, rights and obligations under the arrangement, accounting policy,amount and income statement classification of collaboration transactionsbetween the parties. We are currently not impacted by EITF Issue No. 07-1.

 

**ITEM 3.****                              ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our financial instruments consist of cash and cashequivalents, trade accounts receivable, accounts payable and long-termobligations. The primary objective of our investment activities is to preserveprincipal while at the same time maximizing yields without increasing risk.

 

Although all of our sales are denominated in U.S.dollars, fluctuations in the value of international currencies relative to theU.S. dollar may affect the price, competitiveness and profitability ofour products sold in international markets. Furthermore, the uncertaintyof monetary exchange values has caused, and may in the future cause, someforeign customers to delay new orders or delay payment for existing orders. Whilemost international sales are supported by letters of credit or cash in advance,the purchase of our products by international customers presents increasedrisks, which include:

 

·                  unexpected changes in regulatoryrequirements;

 

·                  tariffs and other trade barriers;

 

·                  political and economic instability in foreignmarkets;

 

·                  difficulties in establishing foreigndistribution channels;

 

·                  longer payment cycles or uncertainty in thecollection of accounts receivable;

 

·                  increased costs associated with maintaininginternational marketing efforts;

 

·                  cultural differences in the conduct ofbusiness;

 

·                  natural disasters or acts of terrorism;

 

·                  difficulties in protecting intellectual property;and

 

·                  susceptibility to orders being cancelled as aresult of foreign currency fluctuations since all our quotations and invoicesare denominated in U.S. dollars.

 

Export of our products is subject to the U.S. ExportAdministration regulations and some of our secured communications productsrequire a license or a license exception in order to ship internationally. Wecannot assure that such approvals will be available to us or our products inthe future in a timely manner or at all or that the federal government will notrevise its export policies or the list of products and countries for whichexport approval is required. Our inability to obtain required export approvalswould adversely affect our international sales, which may have a material adverseeffect on us. In addition, foreign companies not subject to United Statesexport restrictions may have a competitive advantage in the internationalsecured communications market. We cannot predict the impact of these factors onthe international market for our products.

 

**ITEM 4.****                              ****CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”) reviewed and evaluated our disclosure controls andprocedures, as defined in Rule 240.13a-15(e) and 15d-15(e) underthe Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of theperiod covered by this report. Based on this evaluation, our CEO and CFO haveconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report to ensure that information required tobe disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and isaccumulated and communicated to our management including our principalexecutive and principal financial officer, as appropriate, to allow timelydecisions regarding disclosures.

 

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**Internal Controls Over Financial Reporting**

 

As required by Rule 13a-15(d) under theExchange Act, our CEO and CFO, also conducted an evaluation of our internalcontrol over financial reporting to determine whether any change occurred duringour most recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

During the first quarter of 2008, we began theprocess of consolidating our business units into one and integrating theoperations and outsourced contract manufacturing at the Company. Thisintegration continued during the second quarter. During the second quarter of2008 we began the evaluation of potential changes and modifications to theCompany’s internal control structure resulting from this on going transition.Additionally, as part of this integration, we continue to update controlprocedures associated with inventory costing, purchasing, shipping, andreceiving with our outsource manufacturing providers. We will continue toconduct full physical inventory counts periodically during 2008.

 

There were no other changes in our internal controlsover financial reporting during the quarter ending June 30, 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

In preparation of our financial statements as of andfor the period ended June 30, 2008, management believes that our internalcontrols over these processes are operating and effective.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.****                              ****LEGAL PROCEEDING**

 

See Note 12 to the Notes to Condensed ConsolidatedFinancial Statements in Part I, Item 1.

 

**ITEM 1A.****                     ****RISK FACTORS**

 

**Risk Factors Related to Our Business**

 

Our operations and financial results are subject tovarious risks and uncertainties, including those described below, that couldadversely affect our business, financial condition, results of operations andtrading price of our common stock. Item 1A of our annual report on Form 10-Kfor fiscal year 2007 includes a detailed discussion of our risk factors.

 

**ITEM 2.****                              ****UNREGISTERED SALES OFSECURITIES AND USE OF PROCEEDS**

 

N/A.

 

**ITEM 3.****                             ****DEFAULTS UPON SENIORSECURITIES**

 

N/A.

 

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

 

We held our Annual Meeting of Stockholders onMay 28, 2008.

 

At the meeting, stockholders electedthe three directors listed below to serve until the annual stockholders’meeting in 2011, or until their respective successors are elected andqualified.  Out of the 26,074,410eligible votes, 22,627,824 votes were cast at the meeting either by proxiessolicited in accordance with Regulation 14A under the Securities Act of 1934,or by security holders voting in person. In the case of directors, abstentionsare treated as votes withheld and are included in the table.

 
| **Name of Director** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------------------|------------|--------------------|------------|-------------------------|------------|
|                           |       |               |       |                    |       |
| Mark S. Newman                 |       | 21,423,708         |       | 1,204,116               |       |
| Robert L.  Barnett             |       | 21,500,050         |       | 1,127,774               |       |
| Michael E.  Jalbert            |       | 21,551,439         |       | 1,076,385               |       |

 

The otherdirectors whose terms of office continued after the meeting were Edward H.Bersoff, Winston J. Wade, Veronica A. Haggart and Thomas R. Thomsen.

 

The stockholders also voted on two additionalitems at the meeting.  The followingtable shows the vote tabulation for the shares represented at the meeting:

 

22

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| **Proposal**                                                                                                                                                            | ** ** | **Votes For** | ** ** | **Votes  Against** | ** ** | **Votes  Abstaining** | ** ** | **Broker Non-  Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------|------------|-----------------------------|------------|
| Approval of an amendment to the Company’s  Certificate of Incorporation to change the Company’s name to “EF Johnson  Technologies, Inc.”       |       | 21,734,608         |       | 690,907            |       | 202,309               |       | —                      |       |
|                                                                                                                                                                    |       |               |       |               |       |                  |       |                        |       |
| Approval of an amendment to the EFJ, Inc. 2005  Omnibus Incentive Compensation Plan to increase the number of shares  available for issuance pursuant to the plan. |       | 9,894,068          |       | 3,288,192          |       | 101,740               |       | 9,343,824                   |       |

 

**ITEM 5.****                              ****OTHER INFORMATION**

 

N/A

 

**ITEM 6.****                              ****EXHIBITS**

 

The following exhibitsare filed herewith:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                         |
| 3.1*                 |       | Certificate of Amendment of the Second Amended and  Restated Certificate of Incorporation of EFJ, Inc. dated May 28,  2008.                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                         |
| 4.1*                 |       | Specimen Common Stock Certificate of EF Johnson  Technologies, Inc. (reflecting change of Company name).                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                         |
| 10.1 +               |       | Amendment to the EFJ, Inc. 2005 Omnibus  Incentive Compensation Plan (filed as Exhibit 99.1 to EF Johnson  Technologies, Inc.’s Registration Statement on Form S-8 filed with  the SEC on June 27, 2008, and incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                         |
| 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, 2008                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                         |
| 31.2*                |       | Chief Financial Officer’s Certification of Report on  Form 10-Q for the Quarter Ending June 30, 2008                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                         |
| 32.1*                |       | Written certification of Chief Executive Officer,  dated July 30, 2008, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                         |
| 32.2*                |       | Written certification of Chief Financial Officer,  dated July 30, 2008, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                        |

 

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* Filed with this report.

 

+ Management contract or compensatory plan orarrangement.

 

**SIGNATURE**

 

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

 
|                                   | EF JOHNSON TECHNOLOGIES, INC. |
|----------------------------------------|-------------------------------|
|                                   |                          |
|                                   |                          |
| **Date: July 30, 2008** | By:                           | **/s/ Jana Ahlfinger Bell** |
| ** **                             |                          | Jana Ahlfinger Bell |
| ** **                             |                          | Executive Vice President and Chief Financial Officer |
| ** **                             |                          | (Principal Financial and Accounting Officer) |

 

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