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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549-1004

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Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

or

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

For the transition period from  to

Commission File Number 0-21681

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

DELAWARE(State or other jurisdiction of
incorporation or organization)

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


4800 N.W. 1st STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800(Address, including zip code, and telephone number, including area code, of registrant's principal executive office)

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

As
of July 16, 2001, 17,577,315 shares of the Registrant's Common Stock were outstanding.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000
(in thousands)

|                                                      |                                                                                                                                                                                                                                                     | JUNE 30,
2001             |        | DECEMBER 31,
2000 |       
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ----------------- | ------
|
|ASSETS                                                |                                                                                                                                                                                                                                                    
|Current assets:                                       |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | Cash and cash equivalents                                                                                                                                                                                                                           |                           | $      | 11,729            |       
|                                                      | Accounts receivable, net of allowance for returns and doubtful accounts of $802 and $823 respectively                                                                                                                                               |                           |        | 7,108             |       
|                                                      | Receivablesother                                                                                                                                                                                                                                   |                           |        | 139               |       
|                                                      | Cost in excess of billings on uncompleted contracts                                                                                                                                                                                                 |                           |        | 499               |       
|                                                      | Inventory, net of reserve of $2,467 and $3,156 respectively                                                                                                                                                                                         |                           |        | 11,680            |       
|                                                      | Prepaid expenses                                                                                                                                                                                                                                    |                           |        | 406               |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      |                                                                                                                                                                                                                                                     | Total current assets      |        |                   | 31,561
|Property, plant and equipment, net                    |                                                                                                                                                                                                                                                     |                           | 1,784  |                   |       
|Intangible assets, net of accumulated amortization    |                                                                                                                                                                                                                                                     |                           | 10,833 |                   |       
|Other assets                                          |                                                                                                                                                                                                                                                     |                           | 299    |                   |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | TOTAL ASSETS                                                                                                                                                                                                                                        |                           | $      | 44,477            |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                  |                                                                                                                                                                                                                                                    
|Current liabilities:                                  |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | Revolving line of credit                                                                                                                                                                                                                            |                           | $      | 8,334             |       
|                                                      | Current portion of capitalized lease obligations                                                                                                                                                                                                    |                           |        | 40                |       
|                                                      | Accounts payable                                                                                                                                                                                                                                    |                           |        | 3,602             |       
|                                                      | Billings in excess of cost on uncompleted contracts                                                                                                                                                                                                 |                           |        | 460               |       
|                                                      | Deferred revenue                                                                                                                                                                                                                                    |                           |        | 575               |       
|                                                      | Accrued expenses                                                                                                                                                                                                                                    |                           |        | 2,115             |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      |                                                                                                                                                                                                                                                     | Total current liabilities |        |                   | 15,126
|Provision for litigation settlement                   |                                                                                                                                                                                                                                                     |                           |       |                   |       
|Capitalized lease obligations, net of current portion |                                                                                                                                                                                                                                                     |                           |       |                   |       
|Deferred revenue                                      |                                                                                                                                                                                                                                                     |                           | 359    |                   |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | TOTAL LIABILITIES                                                                                                                                                                                                                                   |                           |        | 15,485            |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|Stockholders' equity:                                 |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | Preferred stock ($0.01 par value; 3,000,000 shares authorized; none issued)                                                                                                                                                                         |                           |        |                  |       
|                                                      | Common stock ($0.01 par value; 25,000,000 voting shares authorized, 17,359,773 and 14,124,581 issued and outstanding as of June 30, 2001 and December 31, 2000, respectively; 600,000 non-voting shares authorized, 217,542
issued and outstanding) |                           |        | 176               |       
|                                                      | Additional paid-in capital                                                                                                                                                                                                                          |                           |        | 96,435            |       
|                                                      | Accumulated deficit                                                                                                                                                                                                                                 |                           |        | (67,619           | )     
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | TOTAL STOCKHOLDERS' EQUITY                                                                                                                                                                                                                          |                           |        | 28,992            |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       
|                                                      | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                          |                           | $      | 44,477            |       
|                                                      |                                                                                                                                                                                                                                                     |                           |        |                   |       

See
accompanying notes to the condensed consolidated financial statements.

2

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ITEM 1. FINANCIAL STATEMENTS (continued)

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2001 and 2000
(Unaudited and in thousands, except share and per share data)

|                                                 |                                     | THREE MONTHS ENDED
JUNE 30, |            | SIX MONTHS ENDED
JUNE 30, |      
|------------------------------------------------ | ----------------------------------- | --------------------------- | ---------- | ------------------------- | -----
|
|Revenues                                         |                                     | $                           | 10,564     |                           | $    
|Cost of sales                                    |                                     |                             | 6,573      |                           |      
|                                                 |                                     |                             |            |                           |      
|                                                 |                                     | Gross profit                |            |                           | 3,991
|                                                 |                                     |                             |            |                           |      
|Operating expenses:                              |                                     |                             |            |                           |      
|                                                 | Research and development            |                             |            | 1,297                     |      
|                                                 | Sales and marketing                 |                             |            | 1,138                     |      
|                                                 | General and administrative          |                             |            | 1,846                     |      
|                                                 | Provision for litigation settlement |                             |            |                          |      
|                                                 |                                     |                             |            |                           |      
|                                                 |                                     | Total operating expenses    |            |                           | 4,281
|                                                 |                                     |                             |            |                           |      
|                                                 |                                     | Loss from operations        |            |                           | (290 
|Other income                                     |                                     |                             | 29         |                           |      
|Interest income                                  |                                     |                             | 97         |                           |      
|Interest expense                                 |                                     |                             | (96        | )                         |      
|                                                 |                                     |                             |            |                           |      
|                                                 |                                     | Loss before income taxes    |            |                           | (260 
|Income tax provision                             |                                     |                             |           |                           |      
|                                                 |                                     |                             |            |                           |      
|                                                 |                                     |                             | Net loss   |                           | $    
|                                                 |                                     |                             |            |                           |      
|Net loss per shareBasic and Diluted             |                                     | $                           | (0.02      | )                         | $    
|                                                 |                                     |                             |            |                           |      
|Weighted average common sharesBasic and Diluted |                                     |                             | 16,891,161 |                           |      
|                                                 |                                     |                             |            |                           |      

See
accompanying notes to the condensed consolidated financial statements.

3

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ITEM 1. FINANCIAL STATEMENTS (continued)

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2000
(Unaudited and in thousands)

|                                                     |                                                                             | Six months ended June 30,          |                                                    
|---------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                |                                                                             |                                    |                                                    
|                                                     | Net loss                                                                    |                                    | $                                                  
|                                                     |                                                                             |                                    |                                                    
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                    |                                                    
|                                                     |                                                                             | Depreciation and amortization      |                                                    
|                                                     |                                                                             | Gain on sale of fixed assets       |                                                    
|                                                     |                                                                             | Changes in assets and liabilities: |                                                    
|                                                     |                                                                             |                                    | Accounts receivable                                
|                                                     |                                                                             |                                    | Cost in excess of billings on uncompleted contracts
|                                                     |                                                                             |                                    | Inventory                                          
|                                                     |                                                                             |                                    | Prepaid expenses and other assets                  
|                                                     |                                                                             |                                    | Accounts payable                                   
|                                                     |                                                                             |                                    | Billings in excess of cost on uncompleted contracts
|                                                     |                                                                             |                                    | Deferred revenues                                  
|                                                     |                                                                             |                                    | Payments on restructuring reserve                  
|                                                     |                                                                             |                                    | Accrued and other liabilities                      
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Cash flows from investing activities:                |                                                                             |                                    |                                                    
|                                                     | Proceeds from sale of fixed assets                                          |                                    |                                                    
|                                                     | Purchase of fixed assets                                                    |                                    |                                                    
|                                                     | Purchase of software                                                        |                                    |                                                    
|                                                     | Decrease in other assets                                                    |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Cash flows from financing activities:                |                                                                             |                                    |                                                    
|                                                     | Proceeds on revolving lines of credit, net                                  |                                    |                                                    
|                                                     | Principal payments on capitalized leases                                    |                                    |                                                    
|                                                     | Proceeds from the exercise of employee stock options                        |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|                                                     |                                                                             |                                    |                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                    | 320                                                
|Cash and cash equivalents, beginning of period       |                                                                             |                                    | 11,409                                             
|                                                     |                                                                             |                                    |                                                    
|Cash and cash equivalents, end of period             |                                                                             | $                                  | 11,729                                             
|                                                     |                                                                             |                                    |                                                    

Summary of non-cash transactions:

In
April 2001, the Company issued 3,122,001 common stock shares as payment of litigation settlement liability recorded on the books for $4,197,000.

In
June 2001, the Company issued 75,000 common stock shares as payment of litigation settlement with Physician's Mutual.

See
accompanying notes to the condensed consolidated financial statements

4

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TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  For the six months ended June 30, 2001 and 2000  (Unaudited and in thousands)

1. GENERAL

The condensed consolidated balance sheet of Transcrypt International, Inc. ("Transcrypt" or the "Company") at December 31, 2000 has been derived
from audited consolidated financial statements at that date. The condensed consolidated financial statements as of June 30, 2001 and for the three and six months ended June 30, 2001 and
2000 are unaudited. The condensed consolidated financial statements reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation
of the financial position, operating results, and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements, and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. The results of operations and cash flows for the six months ended June 30, 2001 are not necessarily
indicative of the results for any other period or the entire fiscal year ending December 31, 2001. Where appropriate, items within the condensed consolidated financial statements have been
reclassified from the previous periods' presentation to conform to the current presentation.

2. ORGANIZATION AND CONSOLIDATION

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

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

3. LOSS PER SHARE

Basic loss per share (EPS) is calculated based upon the weighted average number of common shares outstanding during the period. The diluted EPS calculation
reflects the potential dilution from common stock equivalents such as stock options. For the three and six months ended June 30, 2001 and 2000, respectively, net losses were incurred, and the
impact of outstanding stock options on diluted EPS were anti-dilutive.

5

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4. INVENTORY

The following is a summary of inventory at June 30, 2001 and December 31, 2000:

June 30, 2001

December 31, 2000Raw materials and supplies

$
6,378

$
7,761Work in progress


1,274


1,558Finished goods


4,028


5,806$
11,680

$
15,125


5. REVOLVING LINES OF CREDIT

The Company has a line of credit with a regional bank. It is a secured line of credit not to exceed $10 million. The variable interest rate is based
upon a formula (LIBOR plus 75 BP). Originally due on June 1, 2001, the bank has extended the line of credit until September 1, 2001. The Company is currently in the process of either
renewing the current line of credit or securing a replacement facility. The working capital line is collateralized by substantially all the Company's assets, including $10 million in
certificates of deposit with the bank. At June 30, 2001, the Company had $8.3 million outstanding on the revolving line of credit.

6. SEGMENT AND RELATED INFORMATION

The Company's reporting segments are strategic business units that offer different products and services. Management considers its operations to comprise of
two industry segments. One segment, represented by the Company's EFJohnson subsidiary, competes in the wireless communication industry. The second business segment, represented by the Company's
Transcrypt Secure Technologies division, consists of business conducted in the information security industry.

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The following table is a summary of unaudited quarterly results for the three and six months ended June 30, 2001 and 2000.

|                            |  | Three Months Ended
June 30, |        | Six Months Ended
June 30, |  
|--------------------------- |  | --------------------------- | ------ | ------------------------- | -
|
|
|Revenues                    |  |                             |        |                           |  
|Wireless Communication      |  | $                           | 9,253  |                           | $
|Information Security        |  |                             | 1,311  |                           |  
|                            |  |                             |        |                           |  
|                            |  | $                           | 10,564 |                           | $
|                            |  |                             |        |                           |  
|Gross Margins               |  |                             |        |                           |  
|Wireless Communication      |  | $                           | 3,089  |                           | $
|Information Security        |  |                             | 902    |                           |  
|                            |  |                             |        |                           |  
|                            |  | $                           | 3,991  |                           | $
|                            |  |                             |        |                           |  
|Operating Profit (Loss)     |  |                             |        |                           |  
|Wireless Communication      |  | $                           | 148    |                           | $
|Information Security        |  |                             | 431    |                           |  
|Corporate                   |  |                             | (869   | )                         |  
|                            |  |                             |        |                           |  
|Loss from Operations        |  |                             | (290   | )                         |  
|Other Income                |  |                             | 30     |                           |  
|                            |  |                             |        |                           |  
|Loss before Taxes           |  | $                           | (260   | )                         | $
|                            |  |                             |        |                           |  
|Depreciation & Amortization |  |                             |        |                           |  
|Wireless Communication      |  | $                           | 571    |                           | $
|Information Security        |  |                             | 70     |                           |  
|Corporate                   |  |                             | 6      |                           |  
|                            |  |                             |        |                           |  
|                            |  | $                           | 647    |                           | $
|                            |  |                             |        |                           |  
|Assets                      |  |                             |        |                           |  
|Wireless Communication      |  | $                           | 31,058 |                           | $
|Information Security        |  |                             | 3,368  |                           |  
|Corporate                   |  |                             | 10,051 |                           |  
|                            |  |                             |        |                           |  
|                            |  | $                           | 44,477 |                           | $
|                            |  |                             |        |                           |  

7. RELATED PARTY TRANSACTION

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

8. COMMITMENTS AND CONTINGENCIES

The Company has entered into a contract with a governmental entity of Clay County, Florida ("Clay County") for installation of the Company's
Multi-Net radio system. The contract provision entitles Clay County to liquidated damages if the project is not completed by the project completion deadline of January 17, 2001. The
contract was successfully completed in the second quarter of 2001. The Company has considered these liquidated damages in its accounting for this contract.

7

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

In
the normal course of its business activities, the Company is required under a contract with various governmental authorities to provide letters of credit and bonds that may be
drawn upon if the Company fails to perform under its contracts. The letters of credit, which expire on various dates in 2001, have a total undrawn balance of $2.0 million as of June 30,
2001. Bonds, which expire on various dates, totaled $11.4 million on June 30, 2001. As of that date, no bonds have been drawn upon. The Company's inability to secure bonding arrangements
when needed could adversely affect the award of new systems installation contracts, which could adversely affect its revenues.

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

8

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

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

|                         |                                     | Three Months Ended
June 30, |      | Six Months Ended
June 30, |     
|------------------------ | ----------------------------------- | --------------------------- | ---- | ------------------------- | ----
|
|Revenues                 |                                     | 100.0                       | %    | 100.0                     | %   
|Cost of sales            |                                     | 62.2                        | %    | 82.9                      | %   
|                         |                                     |                             |      |                           |     
|Gross profit             |                                     | 37.8                        | %    | 17.1                      | %   
|                         |                                     |                             |      |                           |     
|Operating expenses:      |                                     |                             |      |                           |     
|                         | Research and development            |                             | 12.3 | %                         | 12.5
|                         | Sales and marketing                 |                             | 10.8 | %                         | 14.6
|                         | General and administrative          |                             | 17.5 | %                         | 17.2
|                         | Provision for litigation settlement |                             | 0.0  | %                         | (3.2
|                         |                                     |                             |      |                           |     
|                         |                                     | Total operating expenses    |      | 40.6                      | %   
|                         |                                     |                             |      |                           |     
|Loss from operations     |                                     | (2.8                        | )%   | (24.0                     | )%  
|                         | Other income                        |                             | 0.3  | %                         | 1.3 
|                         | Interest income                     |                             | 0.9  | %                         | 2.0 
|                         | Interest expense                    |                             | (0.9 | )%                        | (1.1
|                         |                                     |                             |      |                           |     
|Loss before income taxes |                                     | (2.5                        | )%   | (21.8                     | )%  
|                         | Provision for income taxes          |                             | 0.0  | %                         | 0.0 
|                         |                                     |                             |      |                           |     
|Net loss                 |                                     | (2.5                        | )%   | (21.8                     | )%  
|                         |                                     |                             |      |                           |     

Discussions
of certain matters contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements under Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These forward-looking statements relate to, among other
things, the results of the Company's product development efforts, future sales and expense levels, the Company's future financial condition, liquidity and business prospects generally, perceived
opportunities in the marketplace for the Company's products, and the Company's other business plans for the future. These forward-looking statements are subject to certain risks and uncertainties that
could cause the actual results, performance and outcomes to differ materially from those expressed or implied in these forward-looking statements due to a number of risk factors including, but not
limited to, the risks detailed in "ITEM 1. BUSINESSSummary of Business Considerations and Certain Factors That May Affect Future Results of Operations and/or Stock Price" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.

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

Revenues

Revenues
are recognized when the earnings process is complete, generally when the product is shipped, less an estimate for an allowance for returns, if applicable, if collection is
reasonably assured. For shipments where collection is not reasonably assured, the Company recognizes revenue as cash is

9

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received. If collection is contingent on a future event, such as a reseller of product selling the product to the end user, the Company recognizes revenue when the contingency lapses, generally upon
cash collection. On occasion, the Company recognizes revenue prior to shipment when a delayed delivery schedule is requested by the customer as dictated by the customer's business needs, however, only
when the following conditions are met: 1) product is complete and ready for shipment; 2) product is physically segregated from the Company's inventory; 3) title and risk of loss
has passed to the customer; 4) the customer's purchase commitment is fixed; 5) the Company has no remaining performance obligations; and 6) the delivery schedule is fixed.

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

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

Revenues
declined by 11% to $10.6 million in the second quarter of 2001, as compared to $11.9 million during the same period in 2000. Of total revenues in the second
quarter, the wireless communication segment comprised $9.3 million, which represents a 14% decline over segment revenues of $10.7 million during the same period in 2000. Information
security segment revenues of $1.3 million represent an 11% increase as compared to revenues of $1.2 million during the same period in 2000.

Revenues
declined by 14% to $20.1 million during the six months ended June 30, 2001, as compared to $23.3 million in the same period in 2000. Of total revenues in
the six months ended June 30, 2001, the
wireless communication segment comprised $17.5 million, which represents a 14% decline over segment revenues of $20.4 million during the same period in 2000. Information security segment
revenues of $2.6 million during the six months ended June 30, 2001 represent a 7% decrease as compared to revenues of $2.8 million during the same period in 2000.

The
decrease in revenues of the wireless communication segment was primarily due to reduced sales of equipment manufactured under contract at EF Johnson's Waseca, Minnesota facility.
This reduction was the result of management's previously announced decision to de-emphasize its contract manufacturing efforts in favor of more profitable revenue opportunities. Management
anticipates that this revenue stream from contract manufacturing will continue in its present reduced state in the future. Management anticipates that revenues from its wireless communication segment
will increase slightly during the last six months of 2001 as compared to the first six months of 2001.

The
decrease in revenues of the information security segment during the six months ended June 30, 2001 was primarily the result of timing issues associated with finalizing
certain sales agreements. The Company believes that the majority of the delayed agreements will be finalized later in the fiscal year.

Gross Profit

Cost
of sales includes materials, labor, depreciation and overhead costs associated with the production of the Company's products, as well as shipping, royalty and warranty product
costs.

Consolidated
gross profit was $4.0 million (38% gross margin) for the second quarter of 2001, compared to $2.0 million (17% gross margin) for the same period in 2000.
Gross margin for the wireless communication segment was 33% in the second quarter of 2001 and was 12% for the same

10

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period in 2000. Gross margin for the information security segment was 69% in the second quarter of 2001, and was 64% for the same period in 2000.

Consolidated
gross profit was $7.6 million (38% gross margin) for the six months ended June 30, 2001, compared to $3.6 million (15% gross margin) for the same
period in 2000. Gross margin for the wireless communication segment was 33% during the six months ended June 30, 2001 and was 8% for the same period in 2000. Gross margin for the information
security segment was 66% during the six months ended June 30, 2001, and was 68% for the same period in 2000.

In
the wireless communication segment, the significant increase in the gross margin percentage from 2000 to 2001 was due to: (1) lower sales of marginally profitable products
and product lines; (2) lower revenue from relatively low margin contract manufacturing; and (3) lower manufacturing overhead. These factors are primarily the result of the Company's
efforts to increase overall profitability by eliminating marginally profitable products and product lines, and, secondarily, from its efforts to bring its infrastructure more in line with revenues.
Gross margins were similar in the information security segment during the three months and six months ended June 30, 2001, as compared to the similar periods of the prior year. Gross margins
for both industry segments are likely to vary in the future, based primarily upon the mix of products and the amount of revenues for the respective period.

Research and Development

Research
and development expenses consist primarily of the costs associated with research and development personnel, materials, and the depreciation of research and development
equipment and facilities.

Research
and development expenses decreased to $1.3 million in the second quarter of 2001 (12% of revenues) from $1.5 million in the second quarter of 2000 (13% of
revenues). Further, research and development expenses decreased to $2.4 million during the six months ended June 30, 2001 (12% of revenues) from $3.0 million in the same period in
2000 (13% of revenues). This decrease was primarily due to a reduced engineering staff. The lower staffing is primarily the result of the completion of a significant effort to correct product and
system design problems with legacy systems installation contracts, as well the outsourcing of certain functions previously done in-house.

Management
expects its future research and development costs to be similar to the level experienced during the first two quarters of 2001.

Sales and Marketing

Sales
and marketing expenses consist primarily of salaries and related costs of sales personnel, including sales commissions and travel expenses, and costs of advertising, public
relations and trade show participation.

Sales
and marketing expenses decreased to $1.1 million in the second quarter of 2001 from $1.7 million in the second quarter of 2000. Further, sales and marketing
expenses decreased to $2.5 million during the six months ended June 30, 2001 from $3.5 million in the same period in 2000. This decrease was primarily due to reduced staffing
levels as the Company continues to improve its sales and marketing focus and reduces its sales efforts to customer groups that provide only marginal profitability. Sales and marketing expenses
decreased as a percentage of sales to 11% and 12%, respectively, for the three and six months ended June 30, 2001 from 15% in both the three and six months ended June 30, 2000.

The
Company anticipates that sales and marketing expenses will continue to decrease as a percentage of revenues as it continues to focus and enhance its productivity efforts in this
area.

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General and Administrative

General
and administrative expenses consist primarily of salaries and other expenses associated with the Company's management, accounting, finance, administration, and the
amortization of intangible assets.

General
and administrative expenses decreased to $1.8 million in the second quarter of 2001 from $2.0 million in the second quarter of 2000. Further, general and
administrative expenses decreased to $3.8 million for the six months ended June 30, 2001 as compared to $4.2 million in the same period in 2000. As a percentage of revenue,
general and administrative expense increased slightly to 18% and 19%, respectively, in the three and six months ended June 30, 2001 as compared to 17% and 18% for the same periods in 2000.

The
lower expenses are primarily due to the reduction in periodic amortization resulting from a $2.3 million impairment charge on intangible assets recorded during the quarter
ended December 31, 2000. The impairment charge of $2.3 million, related to acquired work force, customer base, and trade name, was based upon management's estimate of fair value of the
assets and was necessitated by the Company's recent fiscal performance. Consequently, the Company's annual expense for amortization of intangible assets has declined to approximately
$1.2 million in 2001 from approximately $1.5 million in 2000. During both the first and second quarter of 2001, the Company conducted a review of the remaining useful lives of its
intangible assets, which range from three to ten years. As a result of these reviews, management concluded that the remaining useful lives of its intangible assets are appropriate, and no adjustments
are necessary. Management will continue to monitor the valuation and useful lives of the intangible assets as conditions warrant.

The
Company anticipates future general and administrative expenses to be similar to the level experienced during the first two quarters of 2001.

Provision for Litigation Settlement

In
the quarter ended December 31, 1998, the Company recorded a special provision of $10.0 million related to actions pending against the Company. An adjustment of
$387,000 was recorded during the second quarter of 2000, and is comprised of the settlement of litigation between the Company and PricewaterhouseCoopers and the adjustment of a reserve associated with
the settlement of the Physician's Mutual litigation. As payment for the aforementioned litigation settlements, the Company issued, respectively, 3,122,001 and 75,000 common stock shares in the quarter
ended June 30, 2001.

Net Interest Income

Net
interest income consists of interest income earned on cash and invested funds, net of interest expense related to amounts payable on the Company's loans and bank lines of credit.
Net interest income was $1,000 and $8,000, respectively, for the three and six months ended June 30, 2001, as compared to $106,000 and $216,000 in the same periods in 2000. Interest income and
expense varies based on the relative interest rates earned or paid, and the relative cash and loan balances. The Company expects net interest income to continue to decline in 2001 as the cost of the
Company's borrowings continues to increase.

Other Income, net

Other
income for the six months ended June 30, 2001 related primarily to funds received for the cancellation, in the first quarter, of a licensing agreement between the Company
and Nextel. Other income for the same period in 2000 primarily related to funds received in settlement of arbitration

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proceedings by Transcrypt against EFJ Partners, the previous owners of EFJohnson, which the Company acquired in July 1997.

Other
income for the three months ended June 30, 2001 was only $29,000. Management would expect other income in the future to continue at this insignificant level.

Benefit for Income Taxes

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

Liquidity and Capital Resources

Since
January 1, 1997, the Company has financed its operations and met its capital requirements primarily through short-term borrowings, long-term debt
and stock offerings completed on January 22, 1997 and October 15, 1997. However, the Company reached a cash break-even level of operations in the first six months of 2001,
evidenced by its minimal increase in advances on its line of credit and its increase in cash for the period.

The
Company's operating activities provided cash of $0.3 million in the first six months of 2001. This compared to a use of cash of $6.9 million in the first six months
of 2000. Similarly, the Company's overall net increase in cash for the six months ended June 30, 2001 was $0.3 million. Cash provided by operating activities in the first six months of
2001 consisted primarily of a net loss of $1.1 million plus depreciation and amortization expenses of $1.3 million as the changes in the various components of working capital netted to
less than $0.1 million.

Cash
generated by investing activities netted to less than $0.1 million for the first six months of 2001, as compared to a net use of $0.4 million in the first six
months of 2000. Capital expenditures of $0.3 million for the first six months of 2001, as compared to $0.8 million for the first six months of 2000, consisted primarily of computer and
test equipment.

Financing
activities generated net cash of less than $0.1 million in the first six months of 2001, as compared to providing $1.9 million in the first six months of 2000.
The Company's advances on the its line of credit with US Bank were less than $0.1 million in the first six months of 2001 compared with advances of $1.9 million for the same period in
2000. This significant decrease in advances results from the Company's improved operating situation. The Company's line of credit agreement with US Bank terminates on September 1, 2001. The
Company anticipates that this agreement will be renewed for an additional three months; however, the Company expects that the borrowing base formula may change, potentially decreasing the Company's
overall credit availability. The Company is not certain about its prospects to replace this line of credit. If the Company is not able to renew or replace its current line of credit agreement, it
could substantially impact the Company's ability to grow its revenues.

In
the normal course of its business activities, the Company is required under a contract with various governmental authorities to provide letters of credit and bonds that may be
drawn upon if the Company fails to perform under its contracts. The letters of credit, which expire on various dates in 2001, have a total outstanding balance of $1.9 million as of
June 30, 2001. Bonds, which expire on various dates, totaled $11.4 million on June 30, 2001. As of that date, no bonds have been drawn upon. The Company's inability to secure
bonding arrangements or adequate letters of credit, due to the Company's past financial performance, could adversely affect the award of new systems installation contracts, which could adversely
affect its revenues.

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

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

The
Company's decline in revenues and the substantial losses incurred through December 31, 2000 have put additional strain on the Company's liquidity and cash position. As of
June 30, 2001, the Company had unrestricted cash of $1.7 million and approximately $1.7 million available under its line of credit. Without additional funding sources, the Company
estimates that it currently needs approximately $10 million in quarterly revenues to generate the cash necessary to finance its operations; however, this estimate is contingent upon the
Company's ability to maintain current expense levels. This required revenue estimate was evidenced by the Company's operating results for the six months ended June 30, 2001, during which period
the Company's operating activities provided $0.3 million on revenues of $20.1 million. The timing and occurrence of unexpected expenses could increase the estimated revenues necessary to
finance operations. The Company continues to manage its cash position through a combination of expense reductions and by, where possible, acceleration of customer receivables. Although revenues,
expenses, gross margins and overall cash management during the first two quarters of 2001 have met or exceeded expectations, the Company can give no assurance that it will in the future generate
adequate cash to support its operations. The failure of the Company to achieve its revenue, expense and other financial goals for the remainder of 2001 and beyond would have a significant adverse
impact on the liquidity of the Company. Additionally, if the Company is unable to
achieve it's forecasted performance, additional impairment losses on long-lived and intangible assets may emerge.

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

For
a description of pending litigation that may affect the business, results of operations, and liquidity of the Company, see Part II, Item 1, Legal Proceedings.

Recently Issued Accounting Standards

In
June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141,Business
Combinations(SFAS 141).SFAS 141 addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16,Business Combinations,and FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All

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business combinations in the scope of SFAS 141 are to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after
June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later.

In
June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible
Assets(SFAS 142).SFAS 142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17,Intangible Assets.SFAS 142 requires that goodwill no longer
be amortized to earnings, but instead be reviewed for impairment. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001.

The
Company has not yet determined the impact of SFAS 141 and 142 on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

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PART II. OTHER INFORMATION

ITEMS 1. LEGAL PROCEEDINGS

In June 2001, the Electronic Engineering Company ("EEC") filed a complaint against the Company in conjunction with a transaction for the installation of
an EF Johnson 900-megahertz trunked radio system. EEC alleges that the system is not functioning properly. The Company vigorously contests this allegation. However, it is unable to predict
the likelihood of the outcome or range or amount of potential liability that may arise from any formal legal action.

As
previously disclosed, the Company was named as a defendant in stockholder class action lawsuits that were filed against the Company and certain of its current or former officers.
These lawsuits were subsequently settled. In accordance with the settlement, the Company issued 1,337,999 shares of common stock of the Company in the third quarter of 2000. The remaining 3,122,001
shares were issued during April of 2001. In addition, the Company distributed 75,000 shares resulting from the settlement of litigation with Physician's Mutual in the second quarter of 2001.

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

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

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In April 2001, the Company issued 3,122,001 shares of common stock in conjunction with the previously court-approved settlement of a class action
lawsuit. These shares were issued pursuant to Section 3(a)(10) of the Securities Act of 1933. As a result of the issuance of the shares, the Company reduced the reserves established for the
settlement by $4.197 million to a zero balance as of June 30, 2001.

The
Company also issued 75,000 shares of common stock in conjunction with a settlement of the Physician's Mutual litigation, and the Company issued 38,191 shares of common stock in
exchange for employment recruiting services. These shares were issued in private placements pursuant to Section 4(2) of the Securities Act of 1933.

ITEMS 3 - 5.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K





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SIGNATURE

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

|                    |  | TRANSCRYPT INTERNATIONAL, INC.
|------------------- |  | ------------------------------
|Date: July 25, 2001 |  | By:                           

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