TRANSCRYPT INTERNATIONAL INC, 424B4, 1997-10-15

TRANSCRYPT INTERNATIONAL INC
424B4, 1997-10-15
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

Previous: TRANSCRYPT INTERNATIONAL INC, POS EX, 1997-10-15

Next: CONSECO FUND GROUP, 485APOS, 1997-10-15

<PAGE> 1
As filed pursuant to Rule 424(b)(4)
under the Securities Act of 1933
Registration No. 333-35469

PROSPECTUS

4,500,000 SHARES
[TRANSCRYPT LOGO]

COMMON STOCK

Of the 4,500,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), of Transcrypt International, Inc. (the "Company") offered hereby,
2,500,000 shares are being offered by the Company and 2,000,000 shares are being
offered by certain of the Company's stockholders (the "Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders.

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "TRII." On October 14, 1997, the last reported sale price of the
Common Stock was $21.688 per share. See "Price Range of Common Stock."
------------------------------

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -----------------------------------------------------------------------------------------------------
Per Share.................... $21.00 $1.09 $19.91 $19.91
- -----------------------------------------------------------------------------------------------------
Total(3)..................... $94,500,000 $4,905,000 $49,775,000 $39,820,000
=====================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deduction of expenses payable by the Company estimated at $800,000.

(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 184,481 additional shares of Common Stock
from the Company and 490,519 additional shares of Common Stock from the
Selling Stockholders, on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$108,675,000, $5,640,750, $53,448,017 and $49,586,233, respectively. See
"Underwriting."

The shares are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by Underwriters, and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of shares will be made against payment
therefor at the offices of Furman Selz LLC in New York, New York on or about
October 20, 1997.

FURMAN SELZ
NATIONSBANC MONTGOMERY SECURITIES, INC.
DAIN BOSWORTH
INCORPORATED
------------------------------

The date of this Prospectus is October 15, 1997.
<PAGE> 2

[DESCRIPTION OF GATEFOLD

Seven photographs with Transcrypt International Logo on top center and a
simple picture of a Globe at bottom center. Looking left to right, top to
bottom: Picture 1 is of a radio base station cabinet reading "Radio Systems";
Picture 2 is of 2 hand held land mobile radios ("LMR") reading "Specialized
Radio"; Picture 3 is of 4 LMRs and an add-on board reading "Land Mobile Radio
Security"; Picture 4 is of a computer with a land line data scrambler reading
"Data Security"; Picture 5 is of a "Cryptophone" cellular telephone and a land
line telephone with scrambler attached reading "Telephony Voice Privacy";
Picture 6 is of a woman sitting at a dispatch terminal reading "Radio System
Solution"; Picture 7 is of a man seated at a desk and speaking on a telephone
reading "Secure Office Solutions."]

[DESCRIPTION OF INSIDE FRONT COVER

Background is the detail of a circuit board, desktop computer keyboard and
cellular telephone. Foreground is two arrows, one from top and one from bottom,
meeting at Transcrypt International Logo in center. Upper right reads
"Solutions," lower left reads "Technology."]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND THE SELLING
GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, included elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless the context otherwise provides, all
references to the "Company" include Transcrypt International, Inc., its
predecessor entities and E.F. Johnson Company, on a Pro Forma combined basis;
all references to "Transcrypt" refer to Transcrypt International, Inc.; and all
references to "E.F. Johnson" refer to E.F. Johnson Company. In addition to the
historical information contained herein, certain statements in this Prospectus
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), and as such, may involve risks and
uncertainties. The Company's actual results may differ significantly from those
discussed herein. Factors that might cause such a difference include, but are
not limited to, those discussed under the caption "Risk Factors." See "Risk
Factors -- Forward-Looking Statements."

THE COMPANY

The Company is a leading manufacturer of information security products and
wireless communications products and systems. The Company designs and
manufactures information security products which prevent unauthorized access to
sensitive voice and data communications. These products are based on a wide
range of analog scrambling and digital encryption technologies and are sold
principally to the land mobile radio ("LMR"), telephony and data security
markets. The Company manufactures a wide range of wireless communications
products and systems principally for the LMR market. Typical end users of the
Company's products include state, local and foreign government agencies,
including police and other public safety departments, and industrial and
commercial organizations such as taxi fleets, railroads and construction and oil
and gas companies.

The Company's objective is to leverage its expertise in information
security and digital communications technologies to provide new and expanded
business solutions for the telecommunications industry. The Company's strategy
to accomplish its objective includes the following elements: developing new
products based on its existing core technologies; offering complete, stand-alone
secure communications solutions; fostering key strategic relationships; and
exploring strategic acquisitions. The Company believes that its expertise in
both analog and digital information security, including the ability to provide
"dual mode" analog and digital security in the same product, provides a
competitive advantage as communications products migrate from analog to digital
technology. The Company is also using its technological expertise to transition
from supplying principally "add-on" information security components for
installation in products manufactured by others to also providing complete,
stand-alone secure communications systems. For example, in August 1996, the
Company introduced a hand-held LMR which is compatible with "APCO 25," a
recently adopted industry standard for digital LMRs. The Company is also
developing a complete secure APCO 25 compliant LMR system incorporating this
product. The Company intends to continue developing key strategic relationships
in the areas of distribution, marketing and technology licensing, and exploring
strategic acquisitions to complement and support the Company's products and
technologies.

THE E.F. JOHNSON ACQUISITION

As part of its growth strategy, in July 1997 the Company expanded its
presence in the wireless communications market by acquiring E.F. Johnson Company
("E.F. Johnson"), an established provider of products and systems for the LMR
market. The Company acquired the capital stock of E.F. Johnson for $436,000 in
cash and 832,465 shares of Common Stock. Through its E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets stationary LMR
transmitters/receivers (base stations and repeaters) and mobile and portable
radios. The Company markets its LMR products and systems principally in two
broad markets: business and industrial ("B&I") users and public safety and other
governmental users.

3
<PAGE> 4

distribution network in domestic and overseas markets and with additional
manufacturing capacity to support increased sales of information security and
wireless communications products. Furthermore, the acquisition has provided the
Company with additional research and development resources, particularly in
radio frequency ("RF") technology and other technologies which management
believes may provide further expansion opportunities.

In December 1991, the Company acquired the business of its predecessor,
which was founded in 1978. The Company's principal offices are located at 4800
NW 1st Street, Lincoln, Nebraska 68521, and its telephone number is (402)
474-4800.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,500,000 shares
Common Stock offered by the Selling
Stockholders............................... 2,000,000 shares
Common Stock outstanding after the
offering(1)................................ 12,710,543 shares
Use of proceeds to the Company............... Reduction of bank indebtedness; facilities
expansion and improvement; working capital;
potential acquisitions; and general corporate
purposes.
Nasdaq National Market symbol................ TRII
</TABLE>

- ---------------

(1) Excludes 1,075,533 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of the date of this Prospectus under the
Company's stock option plan, at a weighted average exercise price of $4.39
per share, and an aggregate of 124,467 shares available for future issuance
thereunder. Includes 95,000 shares to be issued upon the exercise of options
by a Selling Stockholder, John T. Connor, which shares are being offered
hereby. "Management -- 1996 Stock Incentive Plan" and "Principal and Selling
Stockholders."

RECENT DEVELOPMENTS

On October 13, 1997, the Company reported preliminary results of operations
for the quarter and nine months ended September 30, 1997, including two months
of operations of E.F. Johnson, which the Company acquired effective July 31,
1997. Third quarter revenues were $17.6 million. Including a one-time $9.8
million charge for the write-off of in-process research and development relating
to E.F. Johnson and an additional $120,000 charge for increased tax expense
relating to tax losses as a result of the acquisition of E.F. Johnson, the
Company's net loss for the third quarter of 1997 was $(8.3) million, or net loss
per share of $(0.78). Excluding such charges, the Company's net income for the
third quarter would have been $1.7 million or $0.16 per share.

For the nine months ended September 30, 1997, revenues were $27.9 million.
Including the $9.8 million charge relating to the write-off of in-process
research and development and the $120,000 charge for additional taxes, the
Company's net loss for the nine months ended September 30, 1997 was $(6.7)
million, or net loss per share of $(0.67). Excluding such charges, the Company's
net income for the nine months would have been $3.3 million or $0.33 per share.
The per share figures for the three and nine months ended September 30, 1997 are
based on 10,590,589 and 9,954,373 weighted average shares outstanding,
respectively, reflecting the issuance of additional shares in July 1997 in
connection with the E.F. Johnson acquisition.

During the quarter and nine months ended September 30, 1996, the Company
had revenues of $3.5 million and $9.3 million, respectively. For the third
quarter of 1996, the Company had a pro forma net loss of $(3.2) million and a
pro forma net loss per share of $(0.46). For the nine months ended September 30,
1996, the Company had a pro forma net loss of $(2.7) million and a pro forma net
loss per share of $(0.38), based on 6,969,000 shares outstanding. Pro forma
results for the 1996 periods reflect a provision for income taxes as if the
Company had been taxed as a Subchapter "C" corporation for the entire periods,
and include a non-recurring, non-cash special compensation expense of $5.4
million resulting from the vesting of stock options and the accrual of a special
compensation expense of $210,000. Excluding these special compensation expenses,
pro forma net income for the three and nine months ended September 30, 1996
would have been $.5 million and $1.0 million, respectively, and pro forma net
income per share for these periods would have been $0.07 and $0.16,
respectively.

4
<PAGE> 5

SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA(1)
-----------------------------
SIX MONTHS YEAR ENDED SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ---------------- ------------ --------------
1992 1993 1994 1995 1996 1996 1997 1996 1997
------ ------ ------ ------- ------- ------ ------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA:
Revenues.............. $4,974 $6,900 $9,155 $ 8,128 $13,776 $5,728 $10,278 $ 92,188 $ 37,964
Gross profit.......... 3,738 5,284 6,254 5,145 8,911 3,878 6,413 37,254 16,479
Amortization of
intangible assets... 1,100 1,092.. 1,092 1,093 1,001 546 -- 1,595 297
Income (loss) from
operations before
special compensation
expense............. (453) 921 1,318 (1,201) 2,160 718 2,094 (19,937) (1,372)
Special compensation
expense(2).......... -- -- -- -- 5,568 -- -- 5,568 --
Income (loss) from
operations.......... (453) 921 1,318 (1,201) (3,408) 718 2,094 (25,505) (1,372)
Net income (loss)..... $ (596) $ 788 $1,207 $(1,338) $(2,011) $ 667 $ 1,658 $(18,983) $ (1,962)
PRO FORMA TAX CALCULATION:
Income (loss) before taxes and Pro Forma taxes........... $(3,539) $ 667 $ 2,330 $(28,333) $ (2,929)
Pro Forma and provision (benefit) for income taxes(3).... (1,393) 134 672 (9,350) (967)
Pro Forma and net income (loss).......................... $(2,146) $ 533 $ 1,658 $(18,983) $ (1,962)
Pro Forma and net income (loss) per share(4)............. $ (0.31) $ 0.08 $ 0.17 $ (2.43) $ (0.19)
Shares used to compute Pro Forma and net income (loss)
per share(4)........................................... 6,969 6,969 9,596 7,801 10,428
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------
PRO FORMA AS
PRO ADJUSTED
ACTUAL FORMA(5) (5)(6)
------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $21,277 $ 8,749 $ 49,796
Total assets.......................................................... 31,851 72,998 107,734
Current maturities of long-term debt and capitalized lease
obligations......................................................... 159 14,311 --
Long-term debt and capitalized lease obligations, net of current
portion............................................................. 2,850 4,558 4,558
Stockholders' equity.................................................. 26,441 26,613 75,660
</TABLE>

- ---------------

(1) Represents the results of operations as if the acquisition of E.F. Johnson
had occurred on January 1, 1996. See "Selected Financial Data of E.F.
Johnson Company", "Pro Forma Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of E.F. Johnson appearing elsewhere in
this Prospectus.

(2) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."

(3) Prior to June 30, 1996, the Company operated as a partnership. The Pro Forma
provision for income taxes reflects the provision for income taxes as if the
Company had been taxed as a Subchapter "C" corporation under the Internal
Revenue Code.

(4) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute Pro
Forma and net income (loss) per share.

(5) Represents the balance sheet as if the acquisition of E.F. Johnson had
occurred on June 30, 1997. See "Selected Financial Data of E.F. Johnson
Company", "Pro Forma Financial Data", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of E.F. Johnson appearing elsewhere in this Prospectus.

(6) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby (at the initial offering price of $21.00 per share)
after deducting underwriting discounts and commissions and estimated
offering expenses, and the receipt and application of the net proceeds
therefrom. Also reflects the issuance of 95,000 shares upon exercise of
stock options by a Selling Stockholder. See "Use of Proceeds" and
"Capitalization."

5
<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing any of the shares of Common Stock
offered hereby.

RISKS RELATED TO THE E.F. JOHNSON ACQUISITION

Transcrypt acquired E.F. Johnson, effective July 31, 1997, with the
expectation that the acquisition will result in benefits to the consolidated
company. However, the process of integrating and rationalizing management,
administrative organizations, facilities, management information systems and
other aspects of operations, while managing a larger and geographically expanded
entity, presents a significant challenge to the management of the Company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the acquisition will be fully realized. In addition, the
integration of certain operations will require substantial dedication of the
Company's management resources, which may distract attention from the day-to-day
business of the Company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. Integrating the two companies has caused the Company to incur certain
additional expenses, and there can be no assurance that there will not continue
to be substantial costs associated with the integration process or that the
integration process will not result in decreased sales or loss of management
personnel of the combined companies. The inability of management to integrate
the operations of the two companies successfully would have a material adverse
effect on the Company.

Additionally, E.F. Johnson has recently experienced significant financial
difficulties prior to its acquisition by Transcrypt. E.F. Johnson incurred a net
loss of $26.5 million in 1996 (including $13.5 million in nonrecurring charges)
and a net loss of $6.2 million in the first six months of 1997. E.F. Johnson may
continue to incur losses, which may deplete or impair the Company's cash
reserves and negatively impact the Company's borrowing capacity. Furthermore,
E.F. Johnson incurred significant past due accounts payable prior to its
acquisition by Transcrypt, which has affected the availability and delivery of
components for certain of E.F. Johnson's products. Although Transcrypt has
reduced these payables in part, it is uncertain whether these vendors may
continue to delay shipments. A number of vendors have also increased prices and
terms, including requiring cash in advance. Finally, the Company may be
susceptible to unknown contingent liabilities, financial claims or lawsuits from
customers and vendors of E.F. Johnson, among others, any of which could have a
material adverse effect on the Company. To compensate the Company in the event
of breaches of certain representations and warranties, the prior owners of E.F.
Johnson have delivered to the Company a $500,000 cash bond and personal
guarantees for an additional $500,000. However, the Company is unable to predict
whether these amounts would be adequate to cover any unknown liabilities of E.F.
Johnson. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- the E.F. Johnson Acquisition."

COMPETITION

The information security and wireless communications equipment industries,
and the LMR market segment in particular, are highly competitive. Competition in
the sale of stand-alone and digital products, which the Company expects to
account for an increasing percentage of its business, is more intense than for
add-on and analog products. In addition, other wireless communication
technologies, including cellular telephone, paging, specialized mobile radio
("SMR"), satellite communications and personal communication services ("PCS")
currently compete and are expected to compete in the future with certain of the
Company's stand-alone products. Many of the Company's competitors or potential
competitors have significantly greater financial, managerial, technical and
marketing resources than the Company. Accordingly, there can be no assurance
that the Company will be able to continue to compete effectively in its markets,
that competition will not intensify or that future competition will not have a
material adverse effect on the Company. In addition, there can be no assurance
that new competitors will not arise and begin to compete in the markets for the
Company's products.

6
<PAGE> 7

Motorola and Ericsson hold a dominant position in the market for wireless
communication products, especially in the LMR and cellular telephone market
segments. In North America, Motorola and Ericsson are the leading providers of
LMR equipment. While the Company believes that it is the third largest supplier
in the North American LMR equipment market, its share of such market is
relatively small in comparison to Motorola and Ericsson. In addition to
providing equipment to the industry, Motorola is one of the largest SMR
operators in the United States. Motorola and Ericsson have financial, technical,
marketing, sales, manufacturing, distribution and other resources substantially
greater than those of the Company, and have entrenched market positions in
certain segments of the North American LMR market. Certain of the Company's
competitors, including Motorola and Ericsson, have established trade names,
trademarks, patents and other intellectual property rights and substantial
technological capabilities.

The Company believes that the wireless communications equipment industry is
undergoing a period of consolidation which may involve the acquisition or merger
of some of the significant manufacturers of these types of products and a
concentration of market share in a relatively few companies. There can be no
assurance that consolidations in the industry would not result in the
strengthening of the Company's existing competitors or the creation of new
competitors, some of which may have significantly greater financial, managerial,
technical and marketing resources than the Company. See
"Business -- Competition."

RELIANCE ON MOTOROLA

Motorola is one of the Company's largest customers and a key supplier. On a
Pro Forma combined basis, the Company's sales to Motorola amounted to $1.3
million and $1.6 million, respectively, during the first half of 1997 and in
1996, and the Company purchased an aggregate of $1.4 million and $4.6 million,
respectively, in components from Motorola during these periods. In addition, the
Company relies on Motorola to provide MicroTAC(TM) and StarTAC(TM) cellular
telephones for resale by the Company as an upgraded, secure cellular telephone.
The Company's dependence on Motorola, both as a customer and supplier, is
expected to continue. The Company also is dependent on continuing access to
certain proprietary Motorola intellectual property used in the products of both
Transcrypt and E.F. Johnson. Although the Company believes that its relationship
with Motorola is good, there can be no assurance that Motorola will continue to
purchase products from or supply components and technology to the Company on the
scale or at the prices that it now does. Internal decisions or allocations of
resources within Motorola could lead to reduced purchases of the Company's
products or to the modification or discontinuation of components used in the
Company's products. In addition, the Company may increasingly be perceived by
Motorola as a competitor, particularly in light of its acquisition of E.F.
Johnson. This perception could impact Motorola's willingness to do business with
the Company. Although the Company has certain contractual relationships with
Motorola, both as a customer and a supplier, most of these agreements are
subject to termination in certain circumstances and expire by their terms within
one to ten years. Any reduction of the Company's contractual relations with
Motorola or a decision by Motorola to reduce purchases of the Company's products
or to reduce or eliminate the provision of components and technology to the
Company could have a material adverse effect on the Company. See
"Business -- Motorola Relationship."

TRANSITION FROM ADD-ON TO STAND-ALONE PRODUCTS

Prior to the third quarter of 1996, the Company sold almost exclusively
add-on products, such as scrambling modules, for use with LMRs and cellular
telephones manufactured by other companies. The Company's acquisition of E.F.
Johnson has resulted in an increased concentration of the Company's sales of
stand-alone products, as E.F. Johnson manufactures exclusively stand-alone
products. In general, add-on products carry higher gross margins than
stand-alone products. To the extent that sales of stand-alone products increase
in the future relative to add-on product sales, the Company's gross margins are
likely to decline compared to historical levels. In addition, in connection with
its entry into the stand-alone market, the Company is offering to certain of its
customers extended credit terms on those products. These terms present increased
risks of, among other things, delayed or reduced collection of accounts
receivable.

7
<PAGE> 8

TRANSITION FROM ANALOG TO DIGITAL PRODUCTS

The Company believes that the LMR and cellular telephone markets will in
the future migrate from analog to digital equipment, due primarily to bandwidth
capacity constraints and the perception that digital transmissions are more
secure than analog transmissions. As a result, the Company is seeking to upgrade
many of the LMR products of E.F. Johnson to be compatible with digital LMR
communications standards, including APCO 25. However, there can be no assurance
that the Company will be able to effect this transition on a timely basis or
that E.F. Johnson's digital products will compete successfully in the LMR
marketplace. The failure of E.F. Johnson's products to compete successfully in
the marketplace would have a material adverse effect on the Company. In
addition, a significant delay in the marketplace acceptance of digital LMR
communications standards could result in decreased sales of the Company's APCO
25 products. Furthermore, the transition from analog to digital communications
could result in a decrease in demand for the Company's add-on security modules,
as customers may perceive digital communications to be more secure than
communications using analog devices.

MANAGEMENT OF GROWTH

The Company recently consummated the acquisition of E.F. Johnson, and may
in the future continue to expand the scope of its operations and the products
which it offers through additional acquisitions of complementary businesses,
products or technologies. The Company's growth has resulted, and will continue
to result, in an expansion of the Company's facilities and work force. This
growth can be expected to place a significant strain on the Company's financial,
managerial and other resources. To manage growth effectively, the Company will
need to continue to improve and upgrade its operational, financial and
management information systems, and to attract, train, motivate, manage and
retain key executives and employees. In addition, if the Company were to
identify one or more additional acquisition candidates in the future, there is
no assurance that the Company would be able to integrate the acquired business,
products or technologies into the Company's existing business and operations,
that the integration would not cause an excessive diversion of management time
and resources or that the acquisition would not require that the Company issue
additional equity securities to help finance such transaction. See
"Business -- The Company's Strategy."

RAPIDLY EVOLVING MARKETS

The information security and wireless communications products markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The development of new technologies by existing or future competitors may place
the Company at a competitive disadvantage by rendering some or all of the
Company's existing or new products obsolete. The Company has invested heavily in
the introduction of LMR products that comply with the APCO 25 standard. The
Company believes that the APCO 25 standard will be accepted in the public safety
and government markets, however, some manufacturers have adopted and actively
support other digital LMR transmission standards for the public safety
marketplace. The widespread acceptance of one or more other standards in the
public safety market would have a material adverse effect on the Company. See
"Business -- Competition" and "Business -- Industry Overview."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International sales constituted approximately 39.3% and 31.5% of the
Company's revenues on a Pro Forma combined basis in the six months ended June
30, 1997 and the year ended December 31, 1996, respectively. International sales
are subject to a number of risks not found in domestic sales, including
unexpected changes in regulatory requirements, tariffs and other trade barriers,
political and economic instability in foreign markets, difficulties in
establishing foreign distribution channels, longer payment cycles, uncertainty
in the collection of accounts receivable, increased costs associated with
maintaining international marketing efforts and difficulties in protecting
intellectual property. In particular, the Company has begun to offer financing
for the purchase of its products by certain international customers, which
presents increased

8
<PAGE> 9

risks of, among other things, delayed or reduced collection of accounts
receivable. Because most of the Company's foreign sales are denominated in U.S.
dollars, fluctuations in the value of international currencies relative to the
U.S. dollar may also affect the price, competitiveness and profitability of the
Company's products sold in international markets. Furthermore, the uncertainty
of monetary exchange values has caused, and may in the future cause, some
foreign customers to delay new orders or delay payment for existing orders. Some
of the Company's products, particularly in the information security area, are
subject to export controls under U.S. law, which in most cases requires the
approval of the National Security Agency and the Department of Commerce in order
to ship internationally. There can be no assurance that such approvals will be
available to the Company or its products in the future in a timely manner or at
all or that the federal government will not revise its export policies or the
list of products and countries for which export approval is required. The
Company's inability to obtain required export approvals would adversely affect
the Company's international sales, which would have a material adverse effect on
the Company. In addition, foreign companies not subject to United States export
restrictions may have a competitive advantage in the international information
security market. Recently, President Clinton issued an Executive Order removing
most encryption products from the "munitions" list and transferring jurisdiction
over the export of such products from the Department of State to the Department
of Commerce. The Executive Order allows the export of products featuring digital
encryption technology that previously could not be exported, which may increase
competition for international sales of the Company's analog scrambling products.
In response to industry opposition to the President's Executive Order and
implementing interim regulations, Members of Congress have introduced
legislation which would aggressively expand the ability of U.S. companies to
export encryption products. The Company cannot predict the impact of the
Executive Order on the international market for its products. See
"Business -- Government Regulation and Export Controls."

RELIANCE ON PUBLIC SECTOR MARKETS

Public safety agencies and other governmental entities comprise a
significant portion of the Company's current and anticipated customer base.
Because many governmental customers purchase through dealers, the Company cannot
determine the percentage of its products that are ultimately sold to
governmental agencies. However, the Company believes that domestic and
international governments are the end users of most of its products. As the
transition in the Company's product line from add-on to stand-alone products
progresses and as competition for such sales intensifies, the Company expects
that it will increasingly be subject to competitive bidding requirements for
sales to governmental customers, which can be expected to result in lower prices
and longer sales cycles with resulting lower margins. These bidding procedures
often include the posting of bonds. Any inability by the Company to obtain
requisite bonds would prevent the Company from bidding on LMR systems contracts,
which could have a material adverse effect on the Company. See
"Business -- Sales and Marketing."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon a number of key
employees. The loss of the services of one or more of these key employees or the
Company's inability to attract and retain other qualified employees could have a
material adverse effect on the Company. With the exception of policies covering
John T. Connor and Jeffery L. Fuller, the Company's Chairman and Chief Executive
Officer, respectively, the Company does not maintain any key-person life
insurance policies. The Company believes that its future success will depend in
part on its ability to attract, motivate and retain highly skilled engineering,
technical, managerial and marketing personnel. Competition for such personnel is
intense and the Company competes in the market for such personnel against
numerous companies, including larger, more established companies with
significantly greater financial resources than the Company. There can be no
assurance that the Company will be successful in attracting, motivating or
retaining such personnel. See "Management."

DEPENDENCE ON SUPPLIERS

Most of the Company's current and proposed products require essential
electronic components supplied by outside vendors. Certain components may be
available from only one supplier and may occasionally be in

9
<PAGE> 10

short supply. For example, in late 1993 and early 1994, there was a shortage of
certain Motorola surface-mount microprocessors, which resulted in a substantial
increase in the cost of these components. The Company's inability to obtain key
components could result in lost sales, the need to maintain excessive inventory
levels and higher component costs, which could increase the cost of producing
the Company's products and have a material adverse effect on the Company.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company has experienced and expects to continue to experience quarterly
variations in revenues and net income as a result of many factors, including the
timing of customer orders, the timing of the introduction of new products, mix
of product sales and general economic conditions. Due to the buying patterns of
governmental customers, revenues for the first quarter tend to be lower than
revenues for the fourth quarter of the preceding year. Purchases of equipment by
governmental customers are also frequently characterized by long sales cycles
and timing fluctuations. In addition, the Company's expansion has resulted and
will result in the future in significant fixed costs that will be recognized
before any related revenues are realized, which could adversely affect the
Company's quarterly operating results. While the Company maintains a moderate
backlog for wireless communications products as a result of its acquisition of
E.F. Johnson, the Company has not historically maintained a significant backlog
for its products and does not maintain a significant backlog for information
security products. As a result, the Company is dependent upon the receipt of
current customer orders for its information security products. Any deferral of
customer purchasing decisions or delays in shipments can produce significant
variations in the Company's quarterly results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations" and "Business -- Backlog."

REGULATORY ENVIRONMENT

Wireless communications and data encryption products are subject to
regulation by United States and foreign laws and international treaties. The
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations can adversely affect the Company and its
customers. Such changes could make existing or planned products of the Company
obsolete or unsaleable in one or more markets, which could have a material
adverse effect on the Company. See "-- Risks Associated with International
Sales" and "Business -- Government Regulation and Export Controls."

ENVIRONMENTAL REGULATION

The Company is subject to various federal, state and local environmental
statutes, ordinances and regulations relating to the use, storage, handling and
disposal of certain toxic, volatile or otherwise hazardous substances and wastes
used or generated in the manufacturing and assembly of the Company's products.
Under such laws, the Company may become liable for the costs of removal or
remediation of certain hazardous substances or wastes that have been or are
being released on or in its facilities, or have been or are being disposed of
offsite as wastes. Such laws may impose liability without regard to whether the
Company knew of, or caused, the release of such hazardous substances or wastes.

Although the Company has not to date suffered any material adverse effects
in complying with applicable environmental laws, there can be no assurance that
any environmental assessments undertaken by the Company with respect to its
facilities have revealed all potential environmental liabilities, that any prior
owner or operator of its properties did not create any material environmental
condition not known to the Company, or that an environmental condition that
could result in penalties, expenses, or liability to the Company does not
otherwise exist in any one or more of its facilities. In addition, the amount of
hazardous substances or wastes produced or generated by the Company may increase
in the future depending on changes in the Company's operations. Any failure by
the Company to comply with present or future environmental laws could subject
the Company to the imposition of substantial fines, suspension of production,
alteration of manufacturing processes or cessation of operations, any of which
could have a material adverse effect on the Company. Compliance with such
environmental laws could require the Company to acquire expensive remediation
equipment or to incur substantial expenses. Furthermore, the presence of
hazardous substances on a property

10
<PAGE> 11

or at certain offsite locations could result in the Company incurring
substantial liabilities as a result of a claim by a private third party for
personal injury or a claim by an adjacent property owner for property damage.
The imposition of any of the foregoing liabilities could materially adversely
affect the Company.

LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD-PARTY CLAIMS
OF INFRINGEMENT

The Company currently holds a number of domestic and international patents
and has on file applications for additional patents. Although the Company
assesses the advisability of patenting any technological development, it has
historically relied, in the information security area, primarily on copyright
and trade secret law and employee and third party non-disclosure agreements to
protect its proprietary intellectual property and rights. The protection
afforded by such means may not be as complete as patent protection. In addition,
the laws of some countries do not protect trade secrets. There are limitations
on the availability of patent protection as a means to protect the Company's
products. Even when patent protection can be obtained, there are often
limitations on the enforceability of such patent rights. The inability of the
Company to preserve all of its proprietary intellectual property and rights
could have a material adverse effect on the Company.

In addition, the information security and wireless communications
industries in which the Company sells its products are characterized by
substantial litigation and assertions of claims regarding patent and other
intellectual property rights. At various times over the last several years, most
recently in December 1996, Ericsson has notified the APCO 25 Project Steering
Committee and certain current and proposed manufacturers of APCO 25 products
(including the Company and Motorola) that it believes that products complying
with the APCO 25 standard will necessarily infringe various Ericsson patents and
that APCO 25 manufacturers must obtain licenses under such patents. The Company
does not believe that the APCO 25 standard or any of the Company's products
infringe the relevant Ericsson patents or any valid intellectual property right
of others. However, there can be no assurance that Ericsson will not continue to
assert these or other claims of patent infringement or other wrongful conduct
against the APCO 25 standard, manufacturers of APCO 25 products, including the
Company, or present or future products of the Company, or that Ericsson would
license its technology to the Company or other manufacturers. Further, there can
be no assurance that any litigation which may be instituted in the future by
Ericsson or any other party alleging infringement of intellectual property
rights or other wrongful conduct will not have an adverse effect upon the
Company, including the imposition of monetary damages, expenses of litigation,
diversion of management and other resources and injunction against continued
manufacture, use or sale of certain processes or products. See
"Business -- Intellectual Property."

CONCENTRATION OF OWNERSHIP

Upon completion of this offering, the Company's principal stockholders (5%
or greater ownership) will own beneficially, in the aggregate, approximately 25%
of the Company's outstanding Common Stock (assuming no exercise of the
Underwriters' over-allotment option). These stockholders will have the ability
to influence the outcome of all corporate actions requiring stockholder approval
and the election of the Company's directors. See "Principal and Selling
Stockholders."

POSSIBLE VOLATILITY OF SHARE PRICE

Market prices for securities of technology companies tend to be highly
volatile. The trading price of the Common Stock may fluctuate widely in response
to quarterly variations in operating results, announcements of technical
innovations or new products by the Company or companies in the same or closely
related fields, changes in financial estimates by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to the Company, general stock market and economic conditions, and
other events or factors which may be unrelated to the operating performance of
the Company.

11
<PAGE> 12

DILUTION

Purchasers of shares of Common Stock in this offering will suffer immediate
and substantial dilution in the net tangible book value per share of Common
Stock of approximately $15.37 per share, based on the initial offering price per
share of $21.00. See "Dilution."

UNALLOCATED NET PROCEEDS

The Company has not yet identified specific uses for a substantial portion
of the estimated net proceeds from this offering. Pending the identification of
such uses, the Company expects that it will invest the net proceeds in
short-term investment grade, interest-bearing instruments and use a portion of
the net proceeds for working capital, repayment of certain long-term debt and
general corporate purposes. The Company will have discretion in the use and
investment of such proceeds. See "Use of Proceeds."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
12,710,543 shares of Common Stock, of which the 2,500,000 shares offered hereby
by the Company and the 2,000,000 shares offered hereby by the Selling
Stockholders will, subject to certain exceptions, be freely tradable without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"). Of the remaining shares outstanding, 4,327,273 shares of
Common Stock are "restricted" securities under the Securities Act, which the
Company believes are subject to volume limitations on resale until at least June
30, 1998. All of the Company's directors, officers and optionees have agreed not
to sell any Common Stock for a period of 180 days after this offering without
the consent of Furman Selz LLC. An aggregate of 1,200,000 shares of Common Stock
have been reserved for issuance under the Company's 1996 Stock Incentive Plan.
As of the date of this Prospectus, an aggregate of 706,533 shares of Common
Stock were issuable upon the exercise of vested stock options granted by the
Company and an aggregate of 369,000 shares were subject to issuance upon the
exercise of granted but unvested stock options. The Company has filed a
registration statement on Form S-8 under the Securities Act covering the
1,200,000 shares of Common Stock reserved for issuance under the Company's 1996
Stock Incentive Plan. Future sales of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could have a material
adverse effect on the prevailing market price for the Company's Common Stock.
See "Shares Eligible for Future Sale" and "Management -- 1996 Stock Incentive
Plan."

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "plans," "anticipates,"
"intends," "expects" and words of similar import, forecasts and projections
regarding the anticipated benefits of the restructuring of the Company and the
future performance of Transcrypt and E.F. Johnson, expectations of the business
environment in which the Company operates, perceived opportunities in the market
and statements regarding the Company's strategy, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the timing of the full implementation of the
Company's restructuring program for E.F. Johnson, the effects of the
restructuring program on the customers, vendors and employees of Transcrypt and
E.F. Johnson, business conditions generally, the state of the overall economy,
development of the markets for the Company's products, including the domestic
digital LMR market, availability of third-party compatible products, other
competitive factors, and the other factors referenced in this Prospectus,
including, without limitation, under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.

12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of Common Stock offered by
the Company hereby, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be $49.0 million ($52.6 million if
the Underwriters' over-allotment option is exercised in full). The Company will
not receive any proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."

The Company intends to use approximately $15.0 million of the net proceeds
of this offering to reduce existing bank debt, including a revolving credit
facility and a term facility. At August 31, 1997, the revolving credit facility
and the term facility had outstanding balances of $7.7 million and $2.9 million,
respectively. These facilities bear interest at a rate of 1.75% over the prime
rate announced by CoreStates Bank, N.A. (currently 8.5%) and mature October 31,
1997.

Approximately $8.0 million of the net proceeds will be used to finance the
expansion of the Company's manufacturing and administrative facilities. These
projects include: (i) $2.0 million for an additional administrative and
manufacturing building in Lincoln, Nebraska; (ii) $2.4 million for the purchase
of the Waseca, Minnesota manufacturing facility; (iii) $600,000 for factory
modernization at the Waseca facility; and (iv) $3.0 million of additional
capital expenditures.

The balance of the net proceeds to be received by the Company are expected
to be used for working capital and general corporate purposes, and may include
the acquisitions of, or investments in, complementary businesses, products or
technologies. Although the Company frequently reviews potential acquisition and
investment opportunities, there are no current plans or agreements with respect
to any such transaction, and no portion of the net proceeds has been allocated
for any particular acquisition or investment.

The amounts actually expended by the Company for any of these purposes may
vary significantly depending on a number of factors, including future revenue
growth, the amount of cash generated by the Company's operations and the
progress of the Company's development efforts. Pending such uses, the Company
intends to invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities.

PRICE RANGE OF COMMON STOCK

The Common Stock of the Company is quoted on Nasdaq under the symbol
"TRII." The Company completed its initial public offering in January 1997 at a
price of $8.00 per share. The following table sets forth the high and low
closing prices for the Common Stock at or for the periods indicated:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year Ending December 31, 1997:
First Quarter (beginning January 22, 1997)......... $10.06 $ 7.00
Second Quarter..................................... $14.75 $ 6.75
Third Quarter...................................... $21.75 $10.00
Fourth Quarter (through October 14, 1997).......... $23.13 $21.50
</TABLE>

The closing price of the Common Stock on October 14, 1997 was $21.688 per
share. As of June 30, 1997 there were approximately 105 record holders of the
Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997, on a Pro Forma basis to reflect the acquisition of E.F. Johnson by the
Company and on a Pro Forma as-adjusted basis to reflect the E.F. Johnson
acquisition and the sale of 2,500,000 shares of Common Stock offered by the
Company at an initial offering price of $21.00 per share and the application of
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus:

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED (2)
------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt and $ 159 $14,311 --
capitalized lease obligation (3).................
Long-term debt and capitalized lease obligations 2,850 4,558 $ 4,558
(less current portion) (3).......................
Stockholders' equity:
Preferred Stock, $0.01 par value, 3,000,000 -- -- --
shares authorized, none issued and
outstanding (4).............................
Common Stock, $0.01 par value, 19,400,000 93 101 127
voting shares authorized, 9,898,001 issued
and outstanding, actual; 600,000 non-voting
shares authorized, 217,542 issued and
outstanding, actual; 12,493,001 voting
shares issued and outstanding, as adjusted;
217,542 non-voting shares issued and
outstanding, as adjusted (4)................
Additional paid-in capital (5)................ 27,368 37,360 86,381
Retained deficit (5).......................... (1,020) (10,848) (10,848)
------- ------- -------
Total stockholders' equity............... 26,441 26,613 75,660
------- ------- -------
Total capitalization............................... $29,450 $45,482 $ 80,218
======= ======= =======
</TABLE>

- ---------------

(1) Pro Forma, giving effect to the acquisition of E.F. Johnson by Transcrypt as
of June 30, 1997.

(2) Pro Forma as adjusted, giving effect to the acquisition of E.F. Johnson, the
consummation of this offering at an initial offering price of $21.00 per
share, the exercise of 95,000 options by a Selling Stockholder, which shares
are being offered hereby and the application of the proceeds therefrom as
described in "Use of Proceeds," each as of June 30, 1997. Total debt
reflects repayment of an estimated $15.0 million in debt from net offering
proceeds.

(3) See Notes 5 and 6 of Notes to Consolidated Financial Statements of
Transcrypt and Notes 7 and 8 of Notes to Consolidated Financial Statements
of E.F. Johnson.

(4) Shares issued and outstanding excludes 1,075,533 shares of Common Stock
reserved for issuance upon exercise of options outstanding as of the date of
this Prospectus under the Company's stock option plan, at a weighted average
exercise price of $4.39 per share, and an aggregate of 124,467 shares
available for future issuance thereunder. See "Management -- 1996 Stock
Incentive Plan" and Note 11 of Notes to Consolidated Financial Statements of
Transcrypt.

(5) Reflects a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."

14
<PAGE> 15

DILUTION

The net tangible book value of the Company as of June 30, 1997, on a Pro
Forma basis giving effect to the acquisition of E.F. Johnson, was $22.5 million
or approximately $2.21 per share. Pro Forma net tangible book value per share is
determined by dividing the Company's Pro Forma net tangible book value (total
tangible assets less total liabilities) by the 10,210,543 shares of Common Stock
outstanding, excluding 611,533 shares reserved for issuance upon exercise of
vested stock options (which includes the effect of the issuance of 95,000 shares
upon the exercise of options by a Selling Stockholder). Pro Forma net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the offering and the Pro
Forma net tangible book value per share of Common Stock immediately after
completion of the offering. After giving effect to the sale by the Company of
the 2,500,000 shares of Common Stock offered by the Company in this offering at
an initial public offering price of $21.00 per share and the application of the
estimated net proceeds therefrom, the Pro Forma net tangible book value of the
Company as of June 30, 1997 would have been $71.5 million or $5.63 per share.
This represents an immediate increase in net tangible book value of $3.42 per
share to existing stockholders and an immediate dilution in net tangible book
value of $15.37 per share to the purchasers of Common Stock in the offering, as
illustrated in the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share.............. $ 21.00
Net tangible book value per share as of June 30, $ 2.21
1997(1).......................................
Increase in net tangible book value per share 3.42
attributable to new investors.................
--------
Net tangible book value per share after offering..... 5.63
--------
Dilution per share to new investors.................. $ 15.37
========
</TABLE>

- ---------------

(1) Includes 95,000 shares to be issued upon the exercise of options by a
Selling Stockholder which shares are being offered hereby.

Except as noted, the foregoing table assumes no exercise of the
Underwriters' over-allotment option or of any outstanding stock options to
purchase Common Stock of the Company.

The following table sets forth, on a Pro Forma basis as of June 30, 1997,
the difference in the number of shares purchased from the Company, the total
consideration paid and the average price per share paid by the Company's
existing stockholders and the new investors in this offering. The calculations
in this table with respect to shares of Common Stock to be purchased by new
investors in this offering reflect the initial public offering price of $21.00
per share, before deducting the underwriting discounts and commissions.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 10,210,543 80.3% $37,436,323 41.6% $ 3.72
New investors(1)................... 2,500,000 19.7% 52,500,000 58.4 21.00
---------- ----- ---------- ----- ------
Total.................... 12,710,543 100.0% $89,936,323 100.0% $ 7.08
========== ===== ========== ===== ======
</TABLE>

- ---------------

(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 8,115,543 shares or 63.8% (or 62.9%
if the Underwriters' over-allotment option is exercised in full) of the
total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares to be purchased by new
investors to 4,500,000, or 35.4% (or 40.1% if the Underwriters'
over-allotment option is exercised in full) of the total shares of Common
Stock to be outstanding. See "Principal and Selling Stockholders."

The foregoing tables and calculations exclude 1,075,533 shares of Common
Stock (including the 95,000 shares to be issued upon exercise of options, which
shares are included in the foregoing tables and calculations) reserved for
issuance upon exercise of options outstanding as of the date of this Prospectus
under the Company's stock option plan, at a weighted average exercise price of
$4.39 per share, and an aggregate of 124,467 shares available for future
issuance thereunder. See "Management -- 1996 Stock Incentive Plan" and Note 11
of Notes to Consolidated Financial Statements of Transcrypt.

15
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL DATA
OF TRANSCRYPT INTERNATIONAL, INC.

The following selected historical financial data of Transcrypt is qualified
by reference to and should be read in conjunction with the Consolidated
Financial Statements of Transcrypt and Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. The Consolidated Statements of Income (Loss) data for
the years ended December 31, 1994, 1995, and 1996 and the Consolidated Balance
Sheet data as of December 31, 1995 and 1996 are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements of Transcrypt
included elsewhere in this Prospectus. The Consolidated Statements of Income
(Loss) data for the years ended December 31, 1993 and 1992 and the Consolidated
Balance Sheet data as of December 31, 1992, 1993, and 1994 are derived from
audited financial statements not included herein. The Consolidated Statements of
Income (Loss) data for the six-month periods ended June 30, 1996 and 1997, and
the Consolidated Balance Sheet data as of June 30, 1997, are derived from
unaudited financial statements that include all adjustments (consisting of
normal recurring adjustments and accruals) that the Company considers necessary
for a fair presentation of the consolidated financial data included herein, in
accordance with generally accepted accounting principles. The Consolidated
Statement of Income (Loss) for the six months ended June 30, 1997, is not
necessarily indicative of the results for the entire fiscal year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (LOSS) DATA:
Revenues........................................... $ 4,974 $ 6,900 $ 9,155 $ 8,128 $ 13,776 $ 5,728 $ 10,278
Cost of sales...................................... 1,236 1,616 2,901 2,983 4,865 1,850 3,865
------ ------ ------ ------ ------- ------ -------
Gross profit....................................... 3,738 5,284 6,254 5,145 8,911 3,878 6,413
Operating expenses:
Research and development......................... 963 1,138 1,180 1,953 2,234 1,085 1,316
Sales and marketing.............................. 656 982 1,590 2,109 2,103 835 1,965
General and administrative....................... 1,472 1,151 1,074 1,191 1,413 694 1,038
Amortization of intangible assets................ 1,100 1,092 1,092 1,093 1,001 546 --
Special compensation expense(1).................. -- -- -- -- 5,568 -- --
------ ------ ------ ------ ------- ------ -------
Total operating expenses....................... 4,191 4,363 4,936 6,346 12,319 3,160 4,319
------ ------ ------ ------ ------- ------ -------
Income (loss) from operations...................... (453) 921 1,318 (1,201) (3,408) 718 2,094
Interest expense, net.............................. 143 133 111 137 131 51 (236)
Provision (benefit) for income taxes............... -- -- -- -- (1,528) -- 672
------ ------ ------ ------ ------- ------ -------
Net income (loss).................................. $ (596) $ 788 $ 1,207 $(1,338) $ (2,011) $ 667 $ 1,658
====== ====== ====== ====== ======= ====== =======
Income (loss) before Pro Forma taxes............... $ (3,539) $ 667 $ 2,330
Pro Forma and provision (benefit) for taxes(2)..... (1,393) 134 672
------- ------ -------
Pro Forma and net income (loss).................... $ (2,146) $ 533 $ 1,658
======= ====== =======
Pro Forma and net income (loss) per share(3)....... $ (0.31) $ 0.08 $ 0.17
======= ====== =======
Shares used to compute Pro Forma and net income
(loss) per share(3).............................. 6,969 6,969 9,596
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 436 $1,726 $3,353 $1,684 $ 2,468 $ 21,277
Total assets...................................................... 7,741 7,908 9,627 7,523 13,981 31,851
Long-term debt and capitalized lease obligations, net of current
portion......................................................... 2,552 2,035 2,164 1,847 2,631 2,850
Stockholders' equity.............................................. 3,821 4,599 5,945 3,907 7,073 26,441
</TABLE>

- ---------------

(1) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."
(2) Prior to June 30, 1996, the Company operated as a partnership. The Pro Forma
provision for income taxes reflects the provision for income taxes as if the
Company had been taxed as a Subchapter "C" corporation under the Internal
Revenue Code.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute Pro
Forma and net income (loss) per share.

16
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA
OF E.F. JOHNSON COMPANY

The following selected consolidated historical financial data of E.F.
Johnson is qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein. The Consolidated Statements of Operations data for the years ended
December 31, 1994, 1995, and 1996 and the Consolidated Balance Sheet data as of
December 31, 1995 and 1996 are derived from, and are qualified by reference to,
the audited Consolidated Financial Statements of E.F. Johnson included elsewhere
in this Prospectus. The Consolidated Statements of Operations data for the years
ended December 31, 1993 and the Consolidated Balance Sheet data as of December
31, 1992, 1993, and 1994 are derived from audited financial statements not
included herein. The Consolidated Statements of Operations data for the year
ended December 31, 1992 (Pro Forma) and the six-month periods ended June 30,
1996 and June 29, 1997, and the Consolidated Balance Sheet data as of June 29,
1997, are derived from unaudited financial statements that include all
adjustments (consisting of normal recurring adjustments and accruals) that the
Company considers necessary for a fair presentation of the consolidated
financial data included herein, in accordance with generally accepted accounting
principles. The Consolidated Statement of Operations for the six months ended
June 29, 1997, is not necessarily indicative of the results for the entire
fiscal year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------
---------------------------------------------------- JUNE 30, JUNE 29,
1992(1) 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................... $86,663 $88,083 $99,240 $88,932 $ 78,966 $43,166 $28,223
Cost of sales................................ 52,460 48,964 60,349 60,630 50,623 26,717 18,157
------- ------- ------- ------- ------- ------- -------
Gross profit................................. 34,203 39,119 38,891 28,302 28,343 16,449 10,066
Operating expenses:
Research and development................... 6,741 6,554 7,534 8,118 8,401 3,888 2,938
Selling, general and administrative........ 25,070 26,072 28,284 32,107 29,201 14,816 11,695
Nonrecurring items(2)...................... 770 -- 890 (7,479) 13,521 -- (666)
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 32,581 32,626 36,708 32,746 51,123 18,704 13,967
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations................ 1,622 6,493 2,183 (4,444) (22,780) (2,255) (3,901)
Interest expense, net........................ 2,542 2,235 2,668 4,105 3,694 1,736 2,282
Provision (benefit) for income taxes......... -- 1,623 (578) -- -- -- --
Extraordinary item, net of taxes............. -- (742) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................ $ (920) $ 1,893 $ 93 $(8,549) $(26,474) $(3,991) $(6,183)
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------- JUNE 29,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $10,959 $14,552 $15,441 $25,723 $(24,009) $(25,996)
Total assets...................................... 44,978 51,245 65,876 73,858 42,752 35,733
Long-term debt and capitalized lease obligations,
net of current portion.......................... 19,267 21,832 27,401 32,681 1,802 1,708
Shareholders' equity (deficit).................... 2,390 3,643 3,096 (6,814) (34,566) (41,402)
</TABLE>

- ---------------

(1) E.F. Johnson was acquired from Arkla, Inc. on July 31, 1992. The selected
results of operations for the year ended December 31, 1992 represent a Pro
Forma presentation as if the acquisition had occurred on January 1, 1992.

(2) E.F. Johnson incurred the following nonrecurring items:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- JUNE 29,
1992 1993 1994 1995 1996 1997
---- ---- ----- ------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gain on sale of Division......................................... $(8,343) $ (2,152)
Write down of assets............................................. $11,618
Loss on sale of capital leases................................... 750
Employee severance costs......................................... 762 375
Costs related to initial public offering not consummated......... $ 630
Costs incurred to acquire minority shares........................ 298
Costs incurred in debt refinancing not consummated............... 105
Gain from refund of real estate taxes paid in prior years........ (203)
Restructuring costs.............................................. $770
Other nonrecurring costs......................................... 60 102 1,528 736
---- ---- ----- ------- ------- ------
Total nonrecurring items (income) expense................ $770 $ 890 $(7,479) $13,521 $ (666)
==== ==== ===== ======= ======= ======
</TABLE>

17
<PAGE> 18

PRO FORMA FINANCIAL DATA

The following unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 and unaudited Pro Forma Condensed Combined Income Statements for
the six months ended June 30, 1997 and for the year ended December 31, 1996
illustrate the effect of the acquisition of E.F. Johnson (the "Acquisition") as
if the Acquisition had occurred on June 30, 1997 for the Pro Forma Condensed
Combined Balance Sheet and as of January 1, 1996 for the Pro Forma Condensed
Combined Income Statements, after giving effect to the merger-related
adjustments described in the respective accompanying notes. The Acquisition will
be accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the closing.

These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the historical financial statements of Transcrypt and E.F.
Johnson which are set forth elsewhere herein.

The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future. The Pro
Forma Condensed Combined Financial Statements reflect the best estimate of the
allocation of the purchase price as of the date of this Prospectus. Due to
operating losses incurred by E.F. Johnson between the "as of" date of the Pro
Forma financial statements and the transaction date, the ultimate value of
goodwill is expected to increase substantially. It is the Company's intention to
more fully evaluate the acquired assets and, as a result, the allocation of the
acquisition costs among the tangible and intangible assets acquired may change.
Consequently, the final Pro Forma Combined amounts will differ from those set
forth in the Pro Forma Condensed Combined Financial Statements.

18
<PAGE> 19

TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED

COMBINED BALANCE SHEET (1) (UNAUDITED)
AS OF JUNE 30, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON
TRANSCRYPT E.F. JOHNSON PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $12,699 $ 76 $ (436)(5) $ 12,339
Accounts receivable, net............................... 7,923 8,060 (461)(3) 15,522
Inventory.............................................. 2,718 11,173 13,891
Deferred tax assets.................................... 320 0 5,657(10) 5,977
Other current assets................................... 178 2,330 (723)(7) 1,785
------- --------- --------- ---------
TOTAL CURRENT ASSETS............................ 23,838 21,639 4,037 49,514
PROPERTY, PLANT & EQUIPMENT, NET......................... 6,222 6,233 (393)(4) 12,062
OTHER ASSETS:
Goodwill, and other intangible assets, net............. -- 5,618 (1,458)(4) 4,160
Deferred tax assets.................................... 1,713 -- 4,852(10) 6,565
Other assets........................................... 78 2,243 (1,624)(7) 697
------- --------- --------- ---------
TOTAL OTHER ASSETS.............................. 1,791 7,861 1,770 11,422
------- --------- --------- ---------
$31,851 $ 35,733 $ 5,414 $ 72,998
======= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................... $ 159 $ 24,152 $ (10,000)(12) $ 14,311
Accounts payable....................................... 1,193 10,061 (677)(7) 10,966
(461)(3)
850(6)
Technology and license purchase payable................ -- 3,552 (1,800)(4) 1,752
4,045(8)
Other current liabilities.............................. 1,208 9,870 (1,387)(12) 13,736
------- --------- --------- ---------
TOTAL CURRENT LIABILITIES....................... 2,560 47,635 (9,430) 40,765
LONG-TERM DEBT AND LEASE OBLIGATIONS..................... 2,850 1,708 4,558
OTHER LIABILITIES:
Other liabilities...................................... -- 1,062 1,062
Payable to related parties............................. -- 4,078 (4,078)(7) --
------- --------- --------- ---------
TOTAL OTHER LIABILITIES......................... -- 5,140 (4,078) 1,062
Series A Preferred Stock................................. -- 11,200 (11,200)(11) --
Class B Preferred Stock.................................. -- 11,452 (11,452)(11) --
------- --------- --------- ---------
-- 22,652 (22,652) --
------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock........................................... 93 38 8(11) 101
(38)(13)
Paid in capital........................................ 27,368 828 9,992(11) 37,360
12,652(11)
(13,480)(13)
Retained earnings...................................... (1,020) (42,268) (9,828)(9) (10,848)
10,509(10)
2,408(7)
11,387(12)
17,964(13)
------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY............................... 26,441 (41,402) 41,574 26,613
------- --------- --------- ---------
$31,851 $ 35,733 $ 5,414 $ 72,998
======= ========= ========= =========
</TABLE>

See accompanying notes to the Pro Forma Condensed Combined Balance Sheet.

19
<PAGE> 20

TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED

COMBINED INCOME STATEMENT(1) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON E.F. JOHNSON
TRANSCRYPT HISTORICAL PRO FORMA PRO FORMA
HISTORICAL(2) (2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues......................... $10,278 $28,223 $ (537)(14) $ 37,964
Costs of sales................... 3,865 18,157 (537)(14) 21,485
------- ------- -------- -------
Gross profit................... 6,413 10,066 -- 16,479
Operating expenses:
Research and development....... 1,316 2,938 4,254
Selling, general and
administrative.............. 3,003 11,695 (732)(16) 13,966
Nonrecurring items............. -- (666) -- (666)
Goodwill amortization.......... -- -- 297(17) 297
------- ------- -------- -------
Total operating
expenses............. 4,319 13,967 (435) 17,851
------- ------- -------- -------
Income (loss) from operations.... 2,094 (3,901) 435 (1,372)
Other income (expense):
Interest, net.................. 236 (2,282) 489(15) (1,557)
------- ------- -------- -------
Income (loss) before tax......... 2,330 (6,183) 924 (2,929)
Provision (benefit) for income
taxes.......................... 672 -- (1,639)(18) (967)
------- ------- -------- -------
Net income (loss)................ $ 1,658 $(6,183) $ 2,563 $ (1,962)
======= ======= ======== =======
Income (loss) per share.......... $ 0.17 $ (0.19)
======= =======
Number of common and common
equivalent shares issued and
outstanding.................... 9,596 832(19) 10,428
</TABLE>

See accompanying notes to the Pro Forma Condensed Combined Income Statement.

20
<PAGE> 21

TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED

COMBINED INCOME STATEMENT (1) (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON
TRANSCRYPT E.F. JOHNSON PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues......................... $13,776 $ 78,966 $ (554)(14) $ 92,188
Costs of sales................... 4,865 50,623 (554)(14) 54,934
------- ------- -------- -------
Gross profit................... 8,911 28,343 -- 37,254
------- ------- -------- -------
Operating expenses:
Research and development....... 2,234 8,401 10,635
Selling, general and
administrative.............. 3,516 29,201 (1,277)(16) 31,440
Special compensation expense... 5,568 -- 5,568
Nonrecurring items............. -- 13,521 13,521
Goodwill and other
amortization................ 1,001 -- 594(17) 1,595
------- ------- -------- -------
Total operating
expenses............. 12,319 51,123 (683) 62,759
------- ------- -------- -------
Loss from operations............. (3,408) (22,780) 683 (25,505)
Other income (expense):
Interest, net.................. (131) (3,694) 997(15) (2,828)
------- ------- -------- -------
Loss before tax.................. (3,539) (26,474) 1,680 (28,333)
Provision (benefit) for income
taxes.......................... (1,528) -- (7,822)(18) (9,350)
------- ------- -------- -------
Net loss......................... $(2,011) $ (26,474) $ 9,502 $(18,983)
======= ======= ======== =======
Loss per share................... $ (0.29) $ (2.43)
======= =======
Number of common and common
equivalent shares issued and
outstanding.................... 6,969 832(19) 7,801
</TABLE>

See accompanying notes to the Pro Forma Condensed Combined Income Statement.

21
<PAGE> 22

NOTES TO TRANSCRYPT INTERNATIONAL, INC. PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

1. The Pro Forma financial data do not give effect to any potential cost
savings and synergies that could result from the Acquisition. The Pro Forma
Condensed Combined Balance Sheet reflects the write-off of intangible assets
consisting of in-process research and development ("R&D") projects of $9.8
million related to the Acquisition, the gain of $11.4 million from the
forgiveness of debt, the gain of $2.4 million from the forgiveness of net
payables due to the former common shareholders and the recording of net deferred
tax assets of $10.5 million. The effect of these transactions have not been
reflected in the accompanying Pro Forma Condensed Combined Income Statements as
they are of a non-recurring nature. The Pro Forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the Acquisition been consummated at the dates indicated, nor
necessarily indicative of future operating results or financial position.

2. These columns represent historical results of operations and financial
position. The six month period for E.F. Johnson is as of and ended June 29,
1997.

CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1997:

3. To eliminate receivables and payables attributable to the intercompany
transactions between Transcrypt and E.F. Johnson.

4. This adjustment reflects the excess of cost over net tangible assets
acquired. For purposes of allocating the acquisition costs among the various
assets acquired, Transcrypt has tentatively considered the carrying value of
substantially all of the acquired assets to approximate their fair value, with
the excess of such acquisition costs being attributed to in-process R&D
(research and development projects in-process) and goodwill and other
intangibles. The following is a summary of the adjustment to goodwill and other
intangibles:

<TABLE>
<S> <C>
Purchased in-process R&D.............................. $ 9,828,000
Write-off of purchased in-process R&D................. $(9,828,000)
Goodwill and other intangibles........................ $ 4,160,000

Goodwill and other intangibles is being amortized over
periods of 5 to 15 years.

The determination of the purchase price is as follows:
Issuance of common shares of Transcrypt............. $10,000,000
Cash................................................ 436,000
Net assets acquired................................. (6,276,000)
-----------
Goodwill and other intangibles...................... $ 4,160,000
==========
</TABLE>

Operating losses of approximately $2.9 million due primarily to working
capital constraints incurred by E.F. Johnson from the date of the Pro Forma
financial statements until the acquisition date of July 31, 1997 will increase
the ultimate amount of goodwill and other intangibles recorded to approximately
$7.1 million. Net assets acquired are after fair value adjustments of $0.6
million.

5. To record the use of cash to purchase the E.F. Johnson common stock
outstanding for $436,000.

6. Reflects liabilities incurred for transaction costs, such as investment
advisory, legal and accounting fees, related to the Acquisition.

7. To eliminate the receivable and payable attributable to transactions
between E.F. Johnson and the former common shareholders of E.F. Johnson, which
are forgiven as part of the Acquisition, resulting in a gain on extinguishment
of debt of $2.4 million.

8. To record a reserve for costs related to plans Transcrypt has
formulated for the restructuring of E.F. Johnson's operations subsequent to the
Acquisition, including severance and relocation costs.

22
<PAGE> 23

NOTES TO TRANSCRYPT INTERNATIONAL, INC. PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. Write-off of intangible assets consisting of in-process R&D projects of
$9.8 million. (See Note 1.)

10. To record net deferred tax assets of E.F. Johnson that are deemed more
likely than not to be realized.

11. Represents the issuance of 832,465 shares of Transcrypt Common Stock,
valued at $10 million as of the Acquisition Date to purchase the E.F. Johnson
preferred stock outstanding with a carrying value of $22.7 million.

12. To record forgiveness of $10 million of subordinated debt and related
accrued interest payable of $1.4 million in accordance with the Acquisition
Agreement.

13. To eliminate the equity of E.F. Johnson.

CONDENSED COMBINED INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996:

14. To eliminate the revenues and corresponding costs attributable to the
intercompany transactions between Transcrypt and E.F. Johnson.

15. To eliminate the interest expense attributable to the senior
subordinated debt forgiven in accordance with the Acquisition Agreement.

16. To eliminate the management fees and expenses incurred by E.F. Johnson
to its common shareholders.

17. To record amortization for the effect of the goodwill and other
intangibles acquired in the Acquisition based upon the expected intangibles of
approximately $7.1 million. (See Note 4.)

18. To record the tax effect of the Pro Forma consolidated entity at the
expected effective tax rate of 33%.

19. Pro Forma per share data are based on the number of Transcrypt common
and common equivalent shares that would have been outstanding had the
Acquisition occurred on the earliest date presented.

23
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus, including the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from those discussed herein. Factors
that might cause such a difference include, but are not limited to, those
discussed under the caption "Risk Factors." See "Risk Factors -- Forward-Looking
Statements." The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein.

OVERVIEW

The Company commenced operations in 1978 to manufacture and distribute
embedded voice privacy and specialized signaling add-on devices for LMR users.
In December 1991, an investor group led by John T. Connor, the Company's current
Chairman, acquired substantially all of the assets of the Company and certain
intellectual property rights held by the Company's founders, creating intangible
assets of approximately $5.5 million, which the Company amortized on a
straight-line basis over a 60-month period ending November 30, 1996. Following
the acquisition, management took steps to diversify the Company's product lines
and further exploit the Company's core competencies in information security
technologies.

In order to take advantage of the growing demand for digital
communications, in 1993 the Company began investing in digital product and
technology research and development. In September 1994, the Company began
developing an APCO 25 compliant hand-held digital LMR. In connection with the
development of this new product, the Company hired additional technical
personnel and, in September 1994, the Company raised $1.0 million through the
sale of equity to its existing equityholders. As a result of these efforts, the
Company introduced many voice and data security products including a digital
landline telephone encryptor in October 1995 and an APCO 25 compliant digital
hand-held radio in August 1996, and plans to introduce additional digital
products in the balance of 1997 and 1998.

On July 31, 1997, the Company acquired the outstanding shares of capital
stock and certain indebtedness of E.F. Johnson. In exchange, the Company paid
cash consideration of $436,000 and issued 832,465 shares of Common Stock. The
Company is implementing a restructuring program for E.F. Johnson, including an
approximate 25% reduction in E.F. Johnson's workforce effected in August 1997, a
review and phase-out of low margin products and services, the consolidation of
E.F. Johnson's corporate headquarters with that of Transcrypt, the elimination
of duplicative sales, marketing and personnel expenses, the improvement of
vendor relationships and the implementation of stringent cash management
policies and expense controls. Management expects that this program will result
in significant cost savings; however, management can not predict when, if at
all, such savings can be achieved, and the effect of such reductions. See "Risk
Factors -- Risks Related to the E.F. Johnson Acquisition."

In connection with its acquisition of E.F. Johnson, the Company estimates
that it created an intangible asset totaling $7.1 million at closing, which
amount will be amortized by the Company on a straight-line basis over periods of
5 to 15 years beginning in August 1997. Also, as a result of the acquisition,
the Company's interest expense will increase in the future due to approximately
$16.0 million in indebtedness of E.F. Johnson as of June 30, 1997. The Company
intends to substantially reduce this indebtedness with a portion of the proceeds
from this offering. See "Use of Proceeds." Transcrypt's historical gross margins
have been significantly higher than E.F. Johnson's gross margins for similar
periods due primarily to Transcrypt's historical emphasis on add-on products,
which generally carry higher margins than stand-alone products. The Company
expects that, as a result of the acquisition of E.F. Johnson and the expected
increase in volume of stand-alone products relative to add-on products, the
Company's overall gross margins will likely decline in the future compared to
Transcrypt's historical gross margins. The Company also incurred a write-off in
the third quarter of 1997 of in-process research and development costs in
connection with the acquisition of E.F. Johnson totaling approximately $9.8
million.

24
<PAGE> 25

RESULTS OF OPERATIONS -- TRANSCRYPT

The following table sets forth, for Transcrypt, certain Consolidated
Statements of Income (Loss) information as a percentage of revenues during the
periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 31.7 36.7 35.3 32.2 37.6
----- ----- ----- ----- -----
Gross profit....................................... 68.3 63.3 64.7 67.7 62.4
Operating expenses:
Research and development......................... 12.9 24.0 16.2 18.9 12.8
Sales and marketing.............................. 17.4 26.0 15.3 14.6 19.1
General and administrative....................... 11.7 14.7 10.2 12.1 10.1
Amortization of intangible assets................ 11.9 13.4 7.3 9.5 --
Special compensation expense..................... -- -- 40.4 -- --
----- ----- ----- ----- -----
Total operating expenses................. 53.9 78.1 89.4 55.2 42.0
----- ----- ----- ----- -----
Income (loss) from operations...................... 14.4 (14.8) (24.7) 12.5 20.4
Interest expense, net.............................. 1.2 1.7 1.0 0.9 (2.3)
Provision (benefit) for income taxes............... -- -- (11.1) -- 6.5
----- ----- ----- ----- -----
Net income (loss).................................. 13.2% (16.5)% (14.6)% 11.6% 16.1%
===== ===== ===== ===== =====
Income (loss) before Pro Forma income taxes........ (25.7)% 11.6% 22.7%
Pro Forma and provision (benefit) for income
taxes............................................ (10.1) 2.4 6.5
----- ----- -----
Pro Forma and net income (loss).................... (15.6)% 9.3% 16.1%
===== ===== =====
</TABLE>

Revenues

Transcrypt recognizes revenues upon shipment of products to its customers.
Revenues increased to $10.3 million during the first six months of 1997,
compared to $5.7 million during the same period in 1996. These increases were
attributable primarily to additional revenues associated with several large new
sales contracts in 1997 in both Transcrypt's core security and LMR product
lines. Sales of Transcrypt's products grew in the first six months of 1997 in
all of its major product categories, including core security products for the
LMR and cellular telephone markets (particularly in international markets) as
well as Transcrypt's stand-alone LMR products.

Revenues increased to $13.8 million in 1996 from $8.1 million in 1995. This
increase was attributable primarily to revenues in 1996 associated with several
large new sales contracts, including the commencement of shipments of socket
scramblers to Motorola. Transcrypt also began shipment of its first stand-alone
radio and cellular products in September 1996, which contributed to the increase
in 1996 revenues. In addition, revenues for 1995 were negatively impacted due to
management conflicts over the future direction and control of Transcrypt, which
led to a management restructuring commencing in the second quarter of 1995 and
resulted in the departure of five senior executive officers.

Revenues declined to $8.1 million in 1995 from $9.2 million in 1994, which
decrease was attributable primarily to lower sales volumes in the first half of
1995, which management believes resulted primarily from the internal management
conflicts discussed above.

International sales as a percentage of revenues for the six months ended
June 30, 1997 were 67.3%, compared to 44.8% for the same period in 1996. Sales
of items for export to several large customers accounted for the increase in the
first half of 1997. International sales as a percentage of revenues were 49.0%,
71.4% and 57.3% in 1996, 1995 and 1994, respectively. Transcrypt believes that
the proportion of international sales in 1995 was unusually high, reflecting
large sales to Egypt and Turkey and lower domestic sales. Transcrypt

25
<PAGE> 26

anticipates that international sales will continue to represent a significant
portion of revenues in the future, although domestic sales may increase as a
percentage of revenues in the future due to Transcrypt's increased marketing
emphasis on domestic sales, including the expanded marketing domestically of
Transcrypt's digital radio products. In addition, domestic sales as a percentage
of revenues may also increase in the future as a result of the acquisition of
E.F. Johnson in July 1997, due to E.F. Johnson's historically greater emphasis
on domestic sales.

Gross Profit

Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of Transcrypt's products, as well as shipping,
royalty and warranty product costs. Gross profit increased to $6.4 million
(62.4% gross margin) for the first six months of 1997, compared to $3.9 million
(67.7% gross margin) for the same period in 1996. Transcrypt began shipment of
its first stand-alone products in September 1996. Shipments of Transcrypt's
stand-alone LMR and cellular telephone products, which generally have lower
gross margins than add-on modules and other products, continued to be strong
during the first six months of 1997 and increased relative to total sales. To
the extent that sales of stand-alone products increase in the future relative to
sales of add-on products, gross margins likely will continue to decline.

Gross profit increased to $8.9 million (64.7% gross margin) in 1996 from
$5.1 million (63.3% gross margin) in 1995. Gross profit was $6.3 million (68.3%
gross margin) in 1994. Gross margin declined in 1995 relative to 1994 due
primarily to lower sales volumes during the first six months of 1995 without a
comparable decline in fixed overhead costs.

Research and Development

Research and development expenses consist primarily of costs associated
with research and development personnel, materials and the depreciation of
research and development equipment and facilities. Research and development
expenses increased to $1.3 million for the first six months of 1997 from $1.1
million for the first six months of 1996 due to the addition of new members of
the engineering staff. However, research and development expenses as a
percentage of sales decreased to 12.8% for the first six months of 1997,
compared to 18.9% for the comparable period in 1996, due to greater revenues in
1997. The Company incurred a write-off in the third quarter of 1997 of
in-process research and development costs in connection with the acquisition of
E.F. Johnson totaling approximately $9.8 million.

Research and development expenses increased to $2.2 million in 1996 from
$2.0 million in 1995. This increase was due primarily to expenses related to the
continued development of Transcrypt's APCO 25 digital LMRs and the related
development of internal manufacturing capabilities for certain radio components.
Research and development expenses as a percentage of revenues decreased to 16.2%
in 1996 from 24.0% in 1995, due to greater revenues in 1996. Research and
development expenses increased to $2.0 million in 1995 from $1.2 million in
1994. Research and development expenses as a percentage of revenues were 12.9%
in 1994. This dollar increase was due primarily to the commencement of
development of Transcrypt's APCO 25 compliant digital LMRs, which began in
September 1994, and the expanded development of telephone security product
lines.

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, bad debt provisions and trade show
participation. Sales and marketing expenses increased to $2.0 million (19.1% of
sales) for the first six months of 1997, compared to $835,000 (14.6% of sales)
for the same period in 1996. The increase in 1997 was due primarily to the
addition of direct sales personnel and associated expenses, increased
participation in advertising and tradeshows, and an additional bad debt
provision for accounts receivable reserves of $570,000 for the first six months
of 1997. The additional bad debt provision was related to an overall increase in
Transcrypt's accounts receivables to $8.7 million at June 30, 1997 from $4.6
million at December 31, 1996. Transcrypt expects to continue its increased
commitment to sales and marketing during 1997 through the

26
<PAGE> 27

addition of direct sales and marketing personnel, primarily to support the
introduction of new products, including digital LMRs.

Sales and marketing expenses remained constant at $2.1 million in both 1996
and 1995, although the expense figure for 1995 includes severance payments and
recruiting and relocation costs for new sales executives related to the
Company's management restructuring. Sales and marketing expenses decreased as a
percentage of revenues to 15.3% in 1996, due primarily to the increase in
revenues in 1996. Sales and marketing expenses increased to $2.1 million in 1995
from $1.6 million in 1994. This increase was due primarily to an increase in
personnel and associated expenses relating to the development of international
markets and distribution channels. Sales and marketing expenses as a percentage
of revenues were 26.0% in 1995 and 17.4% in 1994. The percentage increase from
1994 to 1995 was also due in part to Transcrypt's lower revenues in 1995.

General and Administrative

General and administrative expenses consist primarily of salaries and other
expenses associated with Transcrypt's management, accounting, finance and
administrative functions. General and administrative expenses increased to $1.0
million for the first six months of 1997, compared to $694,000 for the same
period in 1996. These increases were attributable primarily to the addition of
several administrative employees and costs associated with becoming, and
maintaining its status as, a publicly-held company in 1997. Transcrypt expects
to continue to incur additional general and administrative expenses in 1997 due
to its publicly-held status and upgrades to its management information systems.
General and administrative expenses as a percentage of revenues declined to
10.1% for the first six months of 1997, compared to 12.1% for the same period in
1996, due primarily to increased revenues in 1997.

General and administrative expenses increased to $1.4 million in 1996 from
$1.2 million in 1995. This increase was attributable primarily to salaries,
recruiting and relocation expenses associated with hiring several key management
employees and additional bad debt provisions for accounts receivable reserves.
General and administrative expenses as a percentage of revenues decreased to
10.2% in 1996 from 14.7% in 1995, due primarily to the increase in revenues in
1996. General and administrative expenses remained generally constant at $1.2
million in 1995 and $1.1 million in 1994. General and administrative expenses as
a percentage of revenues were 14.7% in 1995 and 11.7% in 1994.

Amortization of Intangible Assets

In connection with Transcrypt's purchase of all of the outstanding shares
of capital stock of E.F. Johnson effective July 31, 1997, Transcrypt estimates
that it created $7.1 million of goodwill and other intangibles at closing, which
amount will be amortized by Transcrypt on a straight-line basis over periods of
5 to 15 years beginning in August 1997, resulting in a non-cash charge of
approximately $594,000 on an annual basis. Intangible assets for the fiscal
years prior to 1997 consisted primarily of the costs associated with the
acquisition of Transcrypt's business in December 1991, including proprietary
technology licenses, non-competition agreements and goodwill. Transcrypt
amortized these intangible assets on a straight-line basis over a 60-month
period ended November 30, 1996, which resulted in an amortization expense of
$1.0 million in 1996 and $1.1 million in each of 1995 and 1994. These intangible
assets were fully amortized as of November 30, 1996.

Special Compensation Expense

In September 1996, Transcrypt incurred a non-recurring, non-cash
compensation expense of $5.4 million, resulting from the vesting in September
1996 of 716,916 stock options for 10 executive officers and key employees of
Transcrypt at a weighted average exercise price of $1.81 per share, and a
special compensation expense of $210,000 payable to Transcrypt's Chairman during
1996 for services rendered related to the Company's acquisition of its business
in December 1991. Excluding the special compensation expense of $5.6 million,
income from operations, net income, Pro Forma net income and Pro Forma net
income per share for 1996 would have been $2.2 million, $1.7 million, $1.6
million and $0.23, respectively.

27
<PAGE> 28

Net Interest Income or Expense

Net interest income consists of interest income earned on cash and
investable funds, net of interest expense related to amounts payable on
Transcrypt's term and installment loans and bank lines of credit. Net interest
income was $236,000 for the first six months of 1997, compared to a $51,000
interest expense for the first six months of 1996. The increase in net interest
income in the 1997 period is attributable to the repayment of certain debt
during 1997 and an increase in interest income due to investment of a portion of
the net proceeds from Transcrypt's initial public offering in interest-bearing
instruments. Net interest expense was $131,000, $137,000 and $111,000 in 1996,
1995 and 1994, respectively.

Provision for Income Taxes

Prior to June 1996, Transcrypt was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. Transcrypt converted from a
partnership to a "C" corporation effective June 30, 1996. Pro Forma net income
and Pro Forma net income per share calculations reflect a Pro Forma provision
for income taxes as if Transcrypt had been taxed as a "C" corporation in the
first six months of 1996. Transcrypt's provision for income taxes for the six
months ended June 30, 1997 was $672,000, compared to a Pro Forma provision for
income taxes of $135,000 for the six months ended June 30, 1996. Transcrypt's
benefit for income taxes for the year ended December 31, 1996 was $(1.5)
million, primarily resulting from a deferred tax benefit of $(1.8) million in
connection with the stock option related special compensation expense of $5.4
million.

Transcrypt benefits from state tax credits arising from a 1993 agreement
with the State of Nebraska (the "Nebraska Agreement") to create at least 30 new
jobs and invest at least $3.0 million in new equipment prior to December 31,
1999. This agreement results in annual state income tax credits through 1999 of
ten percent of the purchase price of new equipment and a refund of sales taxes
(currently at a rate of 6.5%) paid on purchases of new equipment during each
year and, beginning on January 1, 1996, a credit of five percent of the annual
compensation paid to the new employees exceeding the base year's aggregate
compensation. Transcrypt believes that sufficient tax credits will be available
through the life of the Nebraska Agreement to offset Transcrypt's expected
Nebraska state income tax liability during such period. In addition, Transcrypt
utilizes its foreign sales corporation ("FSC") subsidiary located in Guam to
exempt from income taxation a portion of Transcrypt's foreign sales income.

RESULTS OF OPERATIONS -- E.F. JOHNSON

The following table sets forth, for E.F. Johnson, certain Consolidated
Statements of Operations information as a percentage of revenues during the
periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
------------------------- JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 60.8 68.2 64.1 61.9 64.3
----- ----- ----- ----- -----
Gross profit................................... 39.2 31.8 35.9 38.1 35.7
Operating expenses:
Research and development..................... 7.6 9.1 10.6 9.0 10.4
Selling, general and administrative.......... 28.5 36.1 37.0 34.3 41.4
Nonrecurring items........................... 0.9 (8.4) 17.1 -- (2.3)
----- ----- ----- ----- -----
Total operating expenses............. 37.0 36.8 64.7 43.3 49.5
Income (loss) from operations.................. 2.2 (5.0) (28.8) (5.2) (13.8)
Interest expenses, net......................... 2.7 4.6 4.7 4.0 8.1
Provision (benefit) for income taxes........... (0.6) -- -- -- --
----- ----- ----- ----- -----
Net income (loss).............................. 0.1% (9.6)% (33.5)% (9.2)% (21.9)%
===== ===== ===== ===== =====
</TABLE>

28
<PAGE> 29

Revenues

Revenues decreased to $28.2 million in the first six months ended June 29,
1997 from $43.2 million in the six months ended June 30, 1996. The 1996 period
included $5.4 million of revenues for divisions of E.F. Johnson that were sold
in January 1996 and 1997. The remaining decrease is attributable to a $4.2
million decrease in sales of systems in North America, a $3.5 million decrease
in overall International Business and a $1.9 million decrease in the overall
North American Business & Industrial Business.

Revenue decreased to $79.0 million in 1996 from $88.9 million in 1995.
Revenue attributable to the Components Division that was sold in January 1996
was $0.8 million in 1996 and $15.5 million in 1995. Excluding the revenue from
the sold Components Division, overall revenue increased to $78.2 million in 1996
from $73.4 million in 1995. This $4.8 million increase is attributable to a
$10.9 million increase in sales of systems in North America, a $3.2 million
increase in Data Telemetry Products (this division was sold in January 1997), a
$1.1 million increase in EFJ Services (this Division was discontinued
approximately at the time of Transcrypt's acquisition of E.F. Johnson), a $6.8
million decrease in the International Business, and a $3.6 million decrease in
the North American Business & Industrial Business.

International sales as a percentage of revenues were 29.1% and 27.1% during
the six-month periods ended June 29, 1997 and June 30, 1996, respectively, and
28.4% and 32.9% in 1996 and 1995, respectively.

Gross Profit

Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of E.F. Johnson's products, as well as shipping
costs. Gross profit decreased to $10.1 million in the six months ended June 29,
1997 from $16.4 million in the six months ended June 30, 1996. Gross margins
decreased to 35.7% in the six months ended June 29, 1997 from 38.1% in the same
period in 1996.

Gross profit remained constant at $28.3 million in 1996 and in 1995.
However, gross margins increased to 35.9% in 1996 from 31.8% in 1995, due
primarily to a change in product mix and an increased provision for surplus and
obsolete inventory products.

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. Research and development expenses decreased
to $2.9 million in the six months ended June 29, 1997 from $3.9 million in the
six months ended June 30, 1996, due primarily to a 23% reduction in engineering
staff necessitated by working capital constraints. Research and development
expenses as a percentage of revenues increased to 10.4% from 9.0% over this
period, due to lower revenues in the six months ended June 29, 1997.

Research and development expenses increased to $8.4 million in 1996 from
$8.1 million in 1995, due primarily to a $0.4 million increase in expenses for
the Data Telemetry Division, which was sold in January 1997. Research and
development expenses as a percentage of revenues increased to 10.6% from 9.1%
over this period, due to a decrease in revenue and an increase in research and
development expenses in 1996 compared to 1995.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related costs of selling and administrative personnel, including
sales commissions, travel expenses, cost of advertising, public relations, legal
and professional services and depreciation and amortization of SG&A assets. SG&A
expenses decreased to $11.7 million in the six months ended June 29, 1997 from
$14.8 million in the six months ended June 30, 1996, due primarily to a $2.0
million decrease in selling and marketing expenses resulting from a 28.7%
reduction in staff during this period and a decrease in selling expenses due to
a decrease in revenue. System training and support costs decreased by $400,000
as a result of lower systems sales volume. SG&A expenses related to divisions
that were sold were $800,000 during the six months ended June 30, 1996, compared
to $100,000 for the six months June 29, 1997. SG&A expenses as a percentage of
revenues

29
<PAGE> 30

increased to 41.4% for the six months ended June 29, 1997 from 34.3% for the six
months ended June 30, 1996, due to lower revenues during the 1997 period.

SG&A expenses decreased to $29.2 million in 1996 from $32.1 million in
1995, due primarily to a $2.7 million provision for losses on accounts
receivable in 1995 compared to a $500,000 provision in 1996. SG&A expenses
related to divisions that were sold was $2.1 million in 1995, compared to $1.1
million in 1996. Also selling and marketing expenses increased by $1.0 million
in 1996 compared to 1995 and administrative expenses decreased by $0.7 million
during this period. SG&A expenses as a percentage of revenue increased to 37.0%
in 1996 from 36.1% in 1995, due to lower revenues during 1996.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited financial information in
dollars and as a percentage of revenues for Transcrypt for the six quarters
ended June 30, 1997. In the opinion of the Company's management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements appearing elsewhere in this Prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the unaudited results set forth herein. The operating results for
any quarter are not necessarily indicative of results for any subsequent period
or for the entire fiscal year.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 2,580 $3,148 $ 3,547 $4,500 $ 4,728 $5,550
Cost of sales........................... 911 939 1,036 1,978 1,632 2,233
------ ------ ------ ------ ------ ------
Gross profit............................ 1,669 2,209 2,511 2,522 3,096 3,317
Operating expenses:
Research and development.............. 436 649 601 548 633 683
Sales and marketing................... 431 404 671 597 1,086 879
General and administrative............ 350 345 357 361 478 559
Amortization of intangible
assets(1)........................... 276 270 273 182 -- --
Special compensation expense(2)....... -- -- 5,568 -- -- --
------ ------ ------ ------ ------ ------
Total operating expenses....... 1,493 1,668 7,470 1,688 2,197 2,121
------ ------ ------ ------ ------ ------
Income (loss) from operations(3)........ 176 541 (4,959) 834 899 1196
Interest expense, net................... 18 32 29 52 (76) (159)
Provision for income taxes(4)........... -- -- (1,758) 230 292 380
------ ------ ------ ------ ------ ------
Net income (loss)(3).................... $ 158 $ 509 $(3,230) $ 552 $ 683 $ 975
====== ====== ====== ====== ====== ======
Income (loss) before Pro Forma taxes.... $ 158 $ 509 $(4,988) $ 782 $ 975 $1,355
Pro Forma and provision (benefit) for
income taxes.......................... 38 97 (1,758) 230 292 380
------ ------ ------ ------ ------ ------
Pro Forma and net income (loss)(3)...... $ 120 $ 412 $(3,230) $ 552 $ 683 $ 975
====== ====== ====== ====== ====== ======
Pro Forma and net income (loss) per
share(3)(5)........................... $ 0.02 $ 0.06 $ (0.46) $ 0.08 $ 0.07 $ 0.10
====== ====== ====== ====== ====== ======
Shares used to compute net income (loss)
per share(5).......................... 6,969 6,969 6,969 6,969 9,178 9,877
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 35.3 29.8 29.2 44.0 34.5 40.2
----- ----- ------ ----- ----- -----
Gross margin............................ 64.7 70.2 70.8 56.0 65.5 59.8
Operating expenses:
Research and development.............. 16.9 20.6 16.9 12.2 13.4 12.3
Sales and marketing................... 16.7 12.8 18.9 13.3 23.0 15.8
General and administrative............ 13.6 11.0 10.1 8.0 10.1 10.1
Amortization of intangible
assets(1)........................... 10.7 8.6 7.7 4.0 -- --
Special compensation expense(2)....... -- -- 157.0 -- -- --
----- ----- ------ ----- ----- -----
Total operating expenses............ 57.9 53.0 210.6 37.5 46.5 38.2
----- ----- ------ ----- ----- -----
Income (loss) from operations(3)........ 6.8 17.2 (139.8) 18.5 19.0 21.6
Interest expense, net................... 0.7 1.0 0.8 1.2 (1.6) (2.9)
Provision for income taxes(4)........... -- -- (49.6) 5.1 6.25 6.8
----- ----- ------ ----- ----- -----
Net income (loss)(3).................... 6.1% 16.2% (91.0)% 12.3% 14.4% 17.6%
===== ===== ====== ===== ===== =====
</TABLE>

(footnotes on following page)

30
<PAGE> 31

- ---------------

(1) Reflects the amortization of intangible assets related to the acquisition of
the Company's business in December 1991. These intangible assets were fully
amortized as of November 30, 1996, and thus no such amortization expense
will be incurred subsequent to November 30, 1996. See "-- Results of
Operations -- Amortization of Intangible Assets."

(3) Excluding the special compensation expense of $5.6 million, income (loss)
from operations, net income (loss), Pro Forma net income (loss) and Pro
Forma net income (loss) per share would have been $609,000, $517,000,
$517,000 and $0.07, respectively, for the three months ended September 30,
1996.

(4) Prior to June 30, 1996, the Company operated as a partnership. The Pro Forma
provision for income taxes reflects the provision for income taxes as if the
Company had been taxed as a Subchapter "C" corporation under the Internal
Revenue Code.

(5) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute Pro
Forma net income (loss) per share.

The Company historically has experienced, and expects to continue
experiencing, substantial variability in its revenues and profitability from
quarter to quarter. The level of revenues in a particular quarter vary primarily
based upon the timing of large purchase orders, due principally to the seasonal
nature of governmental budgeting processes and the needs of competing budgetary
concerns of its customers during the year. Other factors which affect the level
of revenues in a particular quarter include the timing of the introduction of
new products, general economic conditions, the timing and mix of product sales
and specific economic conditions in the information security and wireless
communications industries. In addition, due to the buying patterns of the
Company's federal and state agency customers, revenues for the first quarter of
the Company's fiscal year may be lower than revenues for the fourth quarter of
the preceding year. The Company believes that its quarterly results are likely
to vary for the foreseeable future. See "Risk Factors -- Fluctuations in
Quarterly Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations and met its capital
requirements primarily through cash flow generated from operations, short-term
borrowings, long-term debt and an initial public offering completed on January
22, 1997. Transcrypt's operating activities used cash of $2.3 million in the
first six months of 1997, and generated cash of $1.3 million in the same period
of 1996. Cash used in operating activities in the first six months of 1997
consisted primarily of increases in accounts receivable and inventory, offset in
part by net income plus depreciation and an increase in accrued expenses. Cash
provided by operating activities in the first half of 1997 consisted primarily
of net income plus depreciation and amortization and a decrease in accounts
receivable, offset in part by a decrease in accrued expenses.

In connection with its entry into the stand-alone product market, the
Company is offering to certain of its customers extended credit terms on these
types of products. Such credit terms will likely result in increased cash used
in operating activities in the future.

Cash used for investing activities, attributable primarily to capital
expenditures in the first six months of 1997 and capital expenditures and
payments for non-compete agreements for the first six months of 1996, totaled
$1.6 million and $761,000, respectively. Capital expenditures consisted
primarily of computer and networking equipment, office furniture and
manufacturing equipment for both six month periods and expenses related to the
expansion of the Company's Lincoln facility during the second quarter of 1997.
In May 1997, the Company completed construction, begun in August 1996, of the
21,000 square foot expansion of its existing Lincoln facility, primarily to
accommodate additional manufacturing capacity. As of June 30, 1997, the Company
had no additional firm commitments for capital expenditures, although the
Company expects to commence construction related to a further expansion of its
facilities in the fourth quarter of 1997. See "Use of Proceeds."

The deferred tax assets totaling $2.0 million (which resulted primarily
from the stock option related special compensation expense of $5.4 million
incurred in September 1996) were 6.4% and 7.7% of total assets

31
<PAGE> 32

and stockholders' equity, respectively, at June 30, 1997. Based upon the current
level of taxable income, management believes that it is more likely than not
that future taxable income will be sufficient to fully utilize all deferred tax
assets recorded.

The Company's financing activities have consisted primarily of borrowings
under and payments on an industrial development revenue bond issue ("IDR"), term
and installment notes payable, a construction loan, bank lines of credit and
proceeds from an initial public offering completed in January 1997. Such
activities generated $16.6 million, net and used $388,000, net during the first
half of 1997 and the first half of 1996, respectively.

The Company's two term notes were secured by substantially all of the
Company's assets, with interest payable at the bank's regional money market rate
plus 0.5%. The installment note was secured by identifiable equipment and bore
interest at the bank's national prime rate plus 0.5%. The bank lines of credit
provided for working capital and capital advances not to exceed $4.0 million,
with specific advances calculated based upon a percentage of eligible
inventories, accounts receivable and fixed assets. Interest is payable monthly
at the bank's money market rate and is collateralized by substantially all of
the Company's assets. The Company paid off all of the outstanding balances on
the two term notes, the installment note and the bank lines of credit on January
27, 1997.

At June 30, 1997 the Company had outstanding $152,000 on its working
capital line of credit, which bore an interest rate of 8.5% at such date,
payable monthly. The line of credit renews annually and the outstanding balance
is payable on May 31 of each year.

The Company had outstanding on its IDR at December 31, 1996 a principal
amount of $850,000, which bore a fixed interest rate of 6.25%, was
non-amortizing and was scheduled to mature in January 2004. On March 25, 1997,
the $850,000 IDR and the Company's construction note payable of $870,000 were
repaid through the issuance of a new IDR totaling $2,850,000. The new IDR is due
in annual principal payments of $140,000 plus interest at a variable rate (4.5%
at June 30, 1997) from March 1, 1998 through March 1, 2007, increasing to annual
principal payments plus interest at a variable rate of $145,000 from March 1,
2008 through March 1, 2016, with the remaining principal and accrued interest
due on March 1, 2017. At June 30, 1997, the remaining net proceeds of $650,000
(net of debt offering costs and the aforementioned repayments) were held in
escrow for the Company pending the completion of the Company's construction
project and related purchases of certain fixed assets.

In connection with the Company's acquisition of E.F. Johnson effective July
31, 1997, the Company delivered an irrevocable letter of credit with a face
amount of $1.6 million on June 12, 1997 to provide additional collateral under a
surety bond issued by one of E.F. Johnson's bonding companies, and on July 22,
1997, the Company delivered an irrevocable standby letter of credit with a face
amount of $436,000 to one of E.F. Johnson's lenders to provide additional
collateral under certain indebtedness incurred by E.F. Johnson. Both letters of
credit are for a term of one year but are automatically extended annually by the
issuing bank unless otherwise notified by the Company.

As a result of the acquisition of E.F. Johnson, E.F. Johnson's revolving
credit line and term loan will be reflected as liabilities on the Company's
balance sheet. The term loan is secured by the machinery and equipment of E.F.
Johnson. As of June 29, 1997, E.F. Johnson had $10.8 million outstanding on the
revolving line with an interest rate of 175 basis points over the CoreStates
Bank, N.A. prime rate (8.5% at June 30, 1997) and $3.1 million outstanding on
the term loan, with a maturity on October 31, 1997 and an interest rate of 175
basis points over the CoreStates prime rate. The Company intends to refinance
the balances remaining outstanding on the revolving credit line and term loan
after anticipated repayments of part of such indebtedness from the net proceeds
of this offering. In the event that these amounts are not repaid from the
proceeds of the offering, the Company intends to refinance the entire
indebtedness. Management is currently negotiating the terms of such refinancing
with various financial institutions. At June 29, 1997, E.F. Johnson also had a
capital lease secured by land and buildings with a principal balance of $1.9
million outstanding. In connection with the acquisition of E.F. Johnson by the
Company, one of E.F. Johnson's lenders which was also a preferred stockholder of
E.F. Johnson agreed to cancel a 9.79% senior subordinated note due July 31, 1997
with a principal amount of $10.0 million and any accrued and unpaid interest
thereon.

32
<PAGE> 33

The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future.

Payables to vendors of E.F. Johnson amounted to $11.9 million upon the
Company's acquisition of E.F. Johnson on July 31, 1997. Management believes that
this level of trade payables was significantly higher than that normally
associated with E.F. Johnson's business as a result of decisions by E.F.
Johnson's prior management to defer payments to vendors. The Company is in the
process of working out scheduled payment terms with certain of the vendors.
Therefore, the Company's net cash flow is expected to be negative in the near
future as payables are worked out and brought to normal levels.

The Company believes that cash generated from operations and the net
proceeds from the sale of Common Stock by the Company in this offering, together
with the Company's cash, cash equivalents and lines of credit, will be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and business expansion plans through at least 1998.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 eliminates the presentation of primary and fully diluted earnings per share
("EPS") and requires presentation of basic and diluted EPS. The principal
difference between primary and basic EPS is that common stock equivalents are
not included in the weighted average number of shares outstanding used in the
computation of basic EPS. Diluted EPS is computed similarly to fully diluted
EPS. SFAS 128 is effective for periods ending after December 15, 1997, including
interim periods, and required restatements of all prior-period EPS data. Early
adoption is not permitted. Management has not yet determined the impact that
this statement will have on the Company.

33
<PAGE> 34

BUSINESS

GENERAL

The Company is a leading manufacturer of information security products and
wireless communications products and systems. The Company designs and
manufactures information security products which prevent unauthorized access to
sensitive voice and data communications. These products are based on a wide
range of analog scrambling and digital encryption technologies and are sold
principally to the land mobile radio, telephony and data security markets. The
Company manufactures a wide range of wireless communications products and
systems principally for the LMR market. Typical end users of the Company's
products include state, local and foreign governmental agencies, including
police and other public safety departments, and industrial and commercial
organizations such as taxi fleets, railroads and construction and oil and gas
companies.

The Company's objective is to leverage its expertise in information
security and digital communications technologies to provide new and expanded
business solutions for the telecommunications industry. The Company believes
that its expertise in both analog and digital information security, including
the ability to provide "dual mode" analog and digital security in the same
product, provides a competitive advantage as communications products migrate
from analog to digital technology. The Company is also using its technological
expertise to transition from supplying principally "add-on" information security
components for installation in products manufactured by others to also providing
complete, stand-alone secure communications systems. For example, in August
1996, the Company introduced a hand-held LMR which is compatible with "APCO 25,"
a recently adopted industry standard for digital LMRs. The Company is also
developing a complete secure APCO 25 compliant LMR system incorporating this
product. The Company intends to continue developing key strategic relationships
in the areas of distribution, marketing and technology licensing and exploring
strategic acquisitions to complement and support the Company's products and
technologies.

In July 1997, the Company expanded its presence in the wireless
communications market by acquiring E.F. Johnson Company, an established provider
of products and systems for the LMR market. Through its E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets stationary LMR
transmitters/receivers (base stations or repeaters) and mobile and portable
radios. The Company sells its LMR products and systems principally in two broad
markets: B&I users and public safety and other governmental users.

Management believes that the E.F. Johnson acquisition has benefited the
Company by accelerating the implementation of its growth strategy. As a
significant participant in the LMR market, E.F. Johnson provides the Company
with a broad line of LMR products and systems and a platform of products to
leverage its information security and digital technologies. E.F. Johnson also
provides the Company with a significantly expanded distribution network in
domestic and overseas markets and with additional manufacturing capacity to
support increased sales of information security and wireless communications
products. Furthermore, the acquisition has provided the Company with additional
research and development resources, particularly in RF technology and other
technologies which management believes will provide further expansion
opportunities.

INFORMATION SECURITY INDUSTRY

Overview

The electronic information security industry is generally comprised of
products designed to protect the transmission of voice and data communications
through both wireless and wireline mediums. Without such protection, many forms
of electronic communications, such as LMR and cellular telephone conversations
and remote data communications, are vulnerable to interception and theft.

The information security industry originated from the need to secure
sensitive wireless military communications. By the late 1970s, the availability,
quality and cost of information security devices had improved such that the use
of these devices by non-military governmental users (such as law enforcement,

34
<PAGE> 35

fire, emergency medical and other public safety personnel) and large commercial
users (such as railroads, construction and oil companies) became economically
and functionally feasible.

Initially, all electronic communications were transmitted in analog format.
Analog transmissions typically consist of a voice or other signal modulated
directly onto a continuous radio "carrier" wave. An analog transmission can be
made secure by "scrambling" or manipulating the original signal at the point of
transmission and reconstituting the original signal at the receiving end. By the
late 1980s, accelerating use of wireless communications devices, such as LMRs
and cellular telephones, resulted in increased demand for limited radio
spectrum. In response to this demand, and enabled by the low-cost availability
of digital signal processors ("DSPs"), electronics manufacturers developed
spectrally efficient (i.e., low-bandwidth) digital communications devices. In
digital communications, an analog signal is "digitized," or converted into a
series of discrete information "bits" in the form of ones and zeroes prior to
transmission. Digital transmissions can be made secure by a process known as
"encryption," which involves the use of a mathematical algorithm to rearrange
the bit-stream prior to transmission and a decoding algorithm to reconstitute
the transmitted information back into its original form at the receiving end.

The Company believes that the demand for voice security products is growing
due to a global increase in the use of wireless voice products and an increasing
public awareness of the security limitations of existing wireless products.
Wireless communication devices operate in specific, designated frequency bands,
and include cellular telephones, land mobile radios, pagers and the new personal
communication services devices. Relatively inexpensive radio scanners, available
from many consumer electronics stores, can intercept or be easily modified to
intercept most types of analog wireless voice transmissions. The Company
believes that public safety officers in particular, significant users of LMR
products, are concerned with the interception of their sensitive radio
conversations by eavesdroppers such as members of the press and criminals. In
addition, the recent interception and publication of supposedly private cellular
telephone conversations of public figures, as well as the widespread theft of
cellular telephone services through telephone "cloning," has increased public
awareness of the need for cellular security. As a result of these factors, the
Company believes that the demand for voice information security products will
continue to grow in the foreseeable future.

Manufacturers of information security products such as the Company
typically charge higher prices for devices featuring more advanced levels of
security. Therefore, the types of end users at each level of security tend to
vary based upon the importance of the information for which security is desired.
Typical users of the most basic form of scrambler, the frequency inversion
scrambler, include taxi dispatchers, other types of consumer businesses and
transportation companies. Typical users for medium-level security devices
include business and industrial users and international customers for which an
export license is not required. High-level scrambling devices are used primarily
by public safety agencies and federal government personnel and international
customers who have obtained the required export license.

Land Mobile Radio Security Market

One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. LMRs consist of
hand-held or mobile (vehicle mounted) two-way radios and a typical LMR system
consists of one or more base control stations networked with each other and with
multiple mobile or hand-held portable LMRs. As with all other major forms of
wireless communications devices, LMRs transmit information in either analog or
digital format, although the substantial majority of LMRs currently in use
operate in analog format only. In 1995, as a result of increasing frequency
spectrum capacity constraints, the FCC mandated that all new LMR equipment
utilize a more spectrally-efficient, narrow-band (12.5 kHz) transmission system,
which will effectively require all LMR users to migrate to digital LMR systems.
In response to this mandate, APCO recommended an industry standard for digital
LMR devices which would both meet the requirements of the FCC mandate and
provide solutions for problems which increasingly troubled public safety LMR
users. These problems included: (i) the lack of interoperability, or the failure
of existing systems to communicate with other systems produced by the same or
other manufacturers; (ii) the lack of backwards compatibility between older
analog LMR systems and the new proposed digital LMR systems; and (iii) the
interception of sensitive public safety communications by

35
<PAGE> 36

third party eavesdroppers. As a result, the APCO advisory body eventually
promulgated an open standard for digital LMR products, which has come to be
known as the "APCO 25 standard."

To comply with the APCO 25 standard, a digital LMR system must utilize a
"common air interface" to achieve interoperability with other digital systems,
be compatible with existing analog LMR infrastructure and provide the user with
the ability to use advanced encryption technologies. Motorola, the largest LMR
manufacturer, played a significant role in the formulation of the APCO 25
standard and has been a major proponent of its adoption by the LMR public safety
market. Certain competitive LMR system standards have been proposed by other LMR
manufacturers, primarily the "EDACS" system proposed by Ericsson. Ericsson's
EDACS system is based on time division multiple access technology, compared with
the APCO 25 frequency division multiple access technology. The Company believes
that the APCO 25 standard is the only "open" (i.e., non-proprietary) digital LMR
transmission standard currently in use or proposed.

Telephony Security Market

Since its inception in 1983, cellular telephone service has grown rapidly
and become available to most of the population of the United States. According
to International Data Corporation, the U.S. cellular subscriber base is
projected to grow from approximately 41.8 million subscribers in 1996 to
approximately 60.0 million subscribers by 2000. Cellular telephone subscribers
and revenues have grown rapidly in recent years. The increased volume has raised
significant new security and privacy issues and an increased sensitivity to the
potential risks involved in intercepted signals. Unprotected wireless
transmissions generally provide minimal or no security and allow eavesdropping
by even casual listeners with compatible scanners. The Company believes that
growth in the cellular telephony market, together with increasing awareness of
the ease of interception of cellular telephone calls, will lead to increasing
demand for cellular telephone voice security products.

Data Security Market

The Company believes that the demand for secure methods of transmitting
data electronically is growing and will continue to grow in the future. The
Company believes that during the past decade, the volume of sensitive,
proprietary information has grown significantly, along with the number of
reported incidents and severity of information theft and corporate espionage. In
addition, the shift from mainframe to distributed computing and the
proliferation of local-area networks ("LANs"), servers and interconnected LANs
or wide-area networks has raised significant new access and security issues.
While the client/server environment and availability of modem-based connections
has enabled information sharing from remote locations, the increased number of
access points into computer networks has generally made such networks
increasingly vulnerable. Individuals have been able to exploit system weaknesses
to gain unauthorized access to networks, data transmissions and individual
computers, and have at times used such access to alter or steal data or, in some
instances, to launch destructive attacks on stored information. The Company
expects that these factors will contribute to continued expansion in the data
security market.

WIRELESS COMMUNICATIONS INDUSTRY

Overview

The mobile wireless communications industry began in the mid-1930s when
police departments began using LMR systems to enable immediate communication
between headquarters and officers patrolling the community. As other public
safety agencies and commercial enterprises recognized the benefit of immediate
communications with their field personnel, as technological advances made LMR
systems more affordable, and as increasing amounts of spectrum were allocated
for LMR use, LMR dispatch service expanded beyond its traditional police and
fire applications to become an integral communications service for a variety of
government and commercial enterprises. Today, in addition to dispatch-oriented
LMR service, many other forms of mobile wireless communication technologies have
emerged and are continuing to be developed to meet the varied communication
needs of an increasingly mobile society, including paging, cellular telephone
and personal communication services. According to data published by Motorola,
the world-wide LMR installed base grew from approximately 33 million units in
1992 to 45 million units in 1995.

36
<PAGE> 37

Business and Industrial Systems Market

Business and industrial users include large commercial, industrial and
other private enterprises, such as utility and construction companies, oil
companies, railroads and universities which require rapid communications among
personnel spread out over relatively large geographic areas. While many B&I LMR
users purchase and operate entire systems for their own use, a large segment of
the B&I market consists of specialized mobile radio ("SMR") operators such as
NEXTEL Corp. and Centennial Communications, and their customers. SMR operators
build and lease private LMR systems on a for-profit basis and sell airtime to
end-users whose mobile communication needs can be served by renting or
purchasing subscriber units as opposed to purchasing an entire system, or who
are unable to obtain an FCC license to operate their own system. Traditionally,
end-users of SMR services have included taxi fleets, smaller construction
companies and delivery service companies. Currently, many SMR operators in the
larger metropolitan markets have begun to offer more consumer-oriented,
cellular-like SMR services.

There are two general types of LMR systems serving business and industrial
users, conventional and trunked, both of which operate on the specific frequency
bands allocated for such types of systems by the FCC. Conventional LMR systems
utilize a single channel to transmit and receive information. All users have
unrestricted access, similar to a "party" telephone line, and the user must
monitor the system and wait until the channel is unoccupied, which is a
relatively inefficient and unsecure system compared to trunked systems. Trunked
systems (including the Company's LTR products) combine multiple channels so that
when a user begins transmitting, an unoccupied channel is automatically
selected.

The development of trunked LMR systems and the allocation of additional
frequency spectrum in the 1970s triggered significant growth in LMR use for
business and industrial applications. In recent years, technological
developments by E.F. Johnson (included in its LTR products) and others have
enabled trunked LMR systems to be "networked," which involves multiple "sites"
linked together through a switch to provide extended geographic coverage. In
addition, many trunked subscriber units are also capable of functioning as
mobile telephones, communicating with wireline and cellular telephones through
interconnections to the public switched telephone network.

Public Safety and Other Government Users Market

Public safety and other government users includes state and local agencies,
such as law enforcement, fire and emergency medical personnel, and military and
non-military federal governmental agencies. Many of these users operate LMR
equipment which complies with specifications established by APCO, while the
remainder operate mostly conventional and non-APCO trunked LMRs. The most widely
used APCO standard is the APCO 16 standard established in 1979, which includes
specifications for 800 MHz transmission, analog voice modulation and a trunking
protocol for using the frequency spectrum. In 1988, E.F. Johnson entered the
market for APCO 16 products with its MultiNet(TM) system.

In response to increasing frequency spectrum capacity constraints and
resulting FCC bandwidth limitations, the APCO body and a number of LMR
manufacturers began in 1993 to develop the standards for a digital LMR system
known as APCO 25, which would meet the requirements of the FCC and also provide
solutions for several problems which troubled public safety LMR users. Although
public safety agencies are not currently required by the FCC or APCO to purchase
APCO 25 compliant LMR systems or otherwise adopt the APCO 25 standard, the
Company believes that APCO 25 compatibility will be one of the key purchasing
factors for public safety and other government LMR users. Furthermore, as LMR
users upgrade their existing APCO 16 systems to comply with the FCC-imposed
bandwidth limitations, the Company expects that demand for APCO 25 compliant LMR
systems will increase, due in part to the fact that APCO 25 systems are
backwardly compatible with much of the older APCO 16 equipment, allowing early
adopters of the APCO 25 standard to purchase new equipment without replacing
entire older systems.

37
<PAGE> 38

THE COMPANY'S STRATEGY

The Company believes that its expertise in information security and digital
wireless communications provides it with a competitive advantage as users of
communications products migrate from analog to digital technology. The Company's
objective is to leverage its expertise in information security and digital
communications technologies to provide new and expanded business solutions for
the telecommunications industry. The Company's strategy to accomplish its
objective includes the following elements:

Develop New Products Based on Existing Core Technologies. The Company has
developed or has acquired the rights to core technologies for scrambling analog
and encrypting digital signals in a variety of ways, most of which can be
adapted readily to new applications. This enables the Company to bring new
products to market quickly and with relatively low development costs. For
example, in August 1996, the Company was one of the first manufacturers to offer
a hand-held APCO 25 compliant LMR, which was developed in part using the
Company's core technologies. In April 1997, the Company introduced a product to
provide secure data transmission using the encryption technology developed for
the APCO 25 LMR and the Company's landline encryption device. The Company
believes that its core technologies, its application of those technologies and
its ability to create new products efficiently have provided, and will continue
to provide, a competitive advantage in responding to emerging markets for analog
and digital information security.

Offer Complete Secure Product Solutions. Until recently, the Company's
products consisted primarily of devices designed to be added to communications
products produced by other manufacturers. The Company intends to expand its
product lines to include more complete, stand-alone secure communications
solutions. The Company believes that providing complete solutions will allow it
to compete for larger orders than can be obtained for add-on products. The
Company is developing a secure, APCO 25 compliant LMR system based on its
Stealth 25 hand-held LMR and is developing digital base stations and repeaters
compatible with E.F. Johnson's APCO 16 analog system, MultiNet(TM).
Additionally, the Company provides Transcrypt-branded secure cellular telephones
and Voice Privacy Exchange Units to a regional Bell operating company, which
offers secure cellular service in one metropolitan area. The Company also is
developing data security products, which allow the Company to extend its high
speed, real-time encryption technology into the growing data security market.

Foster Key Strategic Relationships. The Company has entered into and
intends to continue to develop key strategic relationships with regard to
distribution, marketing and technology licensing. The Company plans to enhance
existing and identify new distribution channels for its information security
products and recently introduced radio products. For example, in August 1995,
the Company entered into an agreement to provide socket scrambler modules to
Motorola for resale under Motorola's name. In addition, the Company has licensed
key technologies from companies such as Motorola and Digital Voice Systems,
Inc., which have enabled the Company to integrate multiple advanced technologies
into its add-on products and its existing and proposed line of digital radios.
For example, the Company has licensed from Motorola the rights to use Motorola's
proprietary analog APCO 16 trunking technology (SmartNet(TM)) and certain
proprietary Motorola digital encryption algorithms in its LMR products, which
the Company anticipates will allow it to sell its products in additional
markets. The Company believes that these and future strategic relationships will
be important to both the Company's new product development and future growth.

Explore Strategic Acquisitions. The information security and wireless
industry is comprised primarily of a relatively small number of companies
comparable in size to the Company and several large competitors, such as
Motorola and Ericsson. The Company believes that, as the migration from analog
to digital technology progresses and the industry expands and evolves, there
will continue to be consolidation among the current competitors. Consequently,
the Company reviews opportunities to acquire businesses and technologies that
will complement its products and core technologies and expand its existing
customer base and manufacturing capability. In July 1997, the Company acquired
E.F. Johnson as a part of this strategy. The Company may consider future
acquisitions, although there are no current plans or agreements with respect to
any such transaction.

38
<PAGE> 39

THE E.F. JOHNSON ACQUISITION

The Company completed its acquisition of E.F. Johnson on July 31, 1997. The
Company undertook the E.F. Johnson acquisition due to its belief that the
acquisition will provide the Company with several strategic benefits consistent
with its overall business strategies, including the following:

Expanded Product Offerings. The E.F. Johnson acquisition will significantly
expand the Company's product line with the addition of E.F. Johnson's broad line
of LMR products. While Transcrypt produced information security products and
hand-held LMRs to complement LMR systems prior to the acquisition, it may now
manufacture and market entire LMR systems to end-users. Management believes that
the acquisition provides a platform for continued penetration by the Company
into the APCO 25 and LMR systems markets. Furthermore, the E.F. Johnson
acquisition will enable the Company to upgrade and strengthen E.F. Johnson's
product line by, among other things, integrating its digital technology and
encryption techniques into E.F. Johnson's products.

Convert E.F. Johnson's APCO 16 Analog Trunked Products into APCO 25 Digital
Products. The Company has developed or has acquired the rights to core
technologies for the development of APCO 25 digital radio products. The Company
has launched projects that will convert current E.F. Johnson analog-based APCO
16 MultiNet(TM) products for use in mobile LMRs, base stations and repeaters.
This project, expected to be completed in early 1998, will allow the Company to
manufacture and sell a complete line of APCO 25 digital radio products. The
Company intends to leverage the existing APCO 16 customer base and systems
implementation experience of E.F. Johnson to gain additional sales to the
existing, but migrating, APCO 16 market along with the emerging digital APCO 25
market.

Expanded Distribution Channels. The E.F. Johnson acquisition significantly
expands the distribution capabilities of the Company both domestically and
internationally. E.F. Johnson has domestic and international direct sales forces
and a network of more than 700 dealers in the U.S. and abroad. E.F. Johnson has
been in business since 1923 and, on average, the dealers have been carrying E.F.
Johnson products for more than 20 years. The "E.F. JOHNSON" brand name is well
recognized in the LMR industry. The Company intends to utilize E.F. Johnson's
reputation and distribution network to market Transcrypt's information security
and complete wireless communication products.

Increased Manufacturing Capacity. The addition of the E.F. Johnson
manufacturing facility in Waseca, Minnesota will provide for increased
manufacturing capacity. The Waseca factory is approximately 250,000 square feet
(180,000 of which is utilized directly by E.F. Johnson) and has extensive
testing capabilities and quality control procedures. As part of its integration
of E.F. Johnson, the Company intends to upgrade and automate the manufacturing
processes at the Waseca facility by investing substantial capital, which should
result in improved manufacturing efficiencies and product quality. The Company
believes that this facility provides the Company with the necessary capacity to
accommodate substantial growth in sales volume.

Experienced Research and Development Team. E.F. Johnson employs 43 research
and development engineers with broad experience in RF technology, computer
architecture, switch architecture, networking and software and hardware designs.
In addition, E.F. Johnson employs 10 systems applications design, manufacturing
and customer service engineers. E.F. Johnson's expertise in RF systems
engineering and the design of large LMR systems complements the Company's
abilities in digital signal processing, voice coding and encryption. Management
believes that the expanded team is equipped to extend and enhance the Company's
product offerings by coupling advanced digital technology into complete,
networked radio systems.

39
<PAGE> 40

CURRENT INFORMATION SECURITY PRODUCTS

The following table summarizes certain information concerning the Company's
principal information security products:

CURRENT LMR SECURITY PRODUCTS

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION / SECURITY LEVEL LIST PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C> <C>
MODULAR ADD-ON SCRAMBLERS
SC20-400 Scrambler............... Single inversion scrambler / LOW $124
SC20-410 Scrambler............... Rolling code scrambler / MED $249
SC20-430 Scrambler............... Hopping code scrambler / MED $399
SC20-460 Scrambler............... Hopping code scrambler / HIGH $535-599
SC20-480 Scrambler............... Hopping code w/ synch / HIGH $599
SC20-500 Scrambler............... DSP-based scrambler /VERY HIGH $699
SOCKET SCRAMBLERS
350 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $280
316 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $200
460 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $280
416 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $275
SIGNALING
TR20-200 Series.................. RF signaling modules
TR20-800 Series.................. Complex signaling modules H$59-399
TR20-900 Series.................. Special man-down modules
APCO 25 DIGITAL RADIOS
Hand-held Stealth 25 Radio....... Digital radio / VERY HIGH $2,250-4,650
</TABLE>

CURRENT TELEPHONY SECURITY PRODUCTS

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION / SECURITY LEVEL LIST PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C> <C>
CELLULAR SECURITY
Crypto Phone..................... Hopping code scrambler / HIGH $700-4,300
MicroTAC Scrambler - PX.......... Hopping code scrambler / HIGH $370-500
Mobile Scrambler - CX............ Hopping code scrambler / HIGH $250-380
DSP Scrambler GSU................ DSP-based scrambler/ VERY HIGH $370-500
Elite Scrambler.................. DSP-based scrambler/ VERY HIGH $500-700
LANDLINE SECURITY
Crypto Phone..................... DSP-based desktop phone/ VERY HIGH $1,095-1,295
LX30-33X0........................ Landline scrambler / HIGH $740-925
LX40-33X0........................ DSP-based landline scrambler/ VERY HIGH $1,095-1,295
Voice Privacy Exchange Unit...... DSP-based PBX/switch / VERY HIGH $7,495
DME 9600/9603.................... DSP-based landline encryptor / VERY HIGH $1,495-1,995
</TABLE>

Transcrypt first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs
employing basic single-inversion scrambling techniques, which it marketed
primarily to public safety agencies and international governments. Since that
time, the Company has further developed and improved upon its core information
security technologies, including its copyrighted Crypto Voice Plus(R)
technology, which the Company believes provide high levels of information
security and sound quality, high (real-time) data transmission rates and low
power consumption. The Company believes that its core technologies provide it
with a competitive advantage in the information security marketplace. The
Company has implemented its core technologies into its scrambler modules and
other types of products within

40
<PAGE> 41

the Company's two major information security product families, LMR Security and
Telephony Security. Such core technologies currently include the following
methods, listed in ascending order of sophistication of security technique: (i)
frequency inversion (inverting or otherwise adjusting the phase of a signal
based on a consistent method); (ii) split-band transmission (spreading a signal
across multiple channels); (iii) rolling code transmission (incrementally
stepping codes); (iv) hopping code transmission (randomly setting codes based
upon an algorithm); (v) frequency hopping transmission (changing broadcast
frequencies multiple times per second based upon an algorithm); and (vi) digital
encryption (encoding a digital bit-stream based upon a mathematical encryption
algorithm).

As with all of the Company's information security products, the use of
scrambling equipment is required on both the transmitting and receiving sides of
communications in order to operate in secure mode. For example, in order to
achieve secure LMR communications, it would be necessary for both the
transmitting and receiving equipment, including hand-held and mobile devices and
base stations, to be equipped with one of the Company's scramblers, whether as
an add-on installation or in the form of one of the Company's complete LMRs. In
the Company's cellular telephony family, a scrambled cellular telephone may
communicate in secure mode only with another of the Company's secure cellular
telephones, a PBX interchange or cellular service provider that has installed
one of the Company's Voice Privacy Exchange Units, or a landline telephone
equipped with one of the Company's external desktop scrambling units. However,
all of the Company's products can be used in the clear, non-scrambled mode with
equipment that does not contain a Transcrypt security device.

Land Mobile Radio Security

The Company offers a variety of add-on LMR scrambling products featuring
the Company's core technologies and varying levels of security. Add-on
scramblers are available in two packages, a modular package consisting of a
circuit board that is designed to be permanently soldered into existing
circuitry, and a socket package designed to be installed in sockets with
standard pin configurations installed by OEM manufacturers. Motorola currently
stocks and sells directly one of the Company's socket modules pursuant to an
August 1995 agreement with the Company. Other products sold by the Company are
compatible with sockets of other OEM manufacturers, including Icom America, Inc.
and Kenwood Radio. The Company also produces modules that add signaling features
to OEM radios, including "man-down" (emergency signal broadcast if radio
position becomes horizontal), "stun-kill" (disables lost or stolen radios
remotely) and "over-the-air reprogramming" (changes encryption and scrambling
codes remotely).

In August 1996, the Company introduced a hand-held digital LMR complying
with the APCO 25 "common air interface" standard and featuring the Company's
advanced core scrambling and digital encryption technologies. In April 1997, the
Company introduced additional secure LMR models. The Company plans to introduce
in the fourth quarter of 1997 mobile radios that transmit in analog format for
the existing analog market. All of the Company's APCO 25 radios contain as
standard features the Company's voice scrambling and/or digital encryption
technology. The Company's APCO 25 compliant "dual-mode" digital radios are
expected to be compatible and fully interoperable with older analog radio
systems, as well as with Motorola's proprietary analog APCO 16 trunking
technology (SmartNet(TM)) and proprietary digital encryption algorithms. The
Company believes that such backward compatibility with Motorola's APCO 16
trunking technology will provide early adopters of the APCO 25 standard, such as
the federal government and many public safety agencies, with the ability to
purchase new equipment without replacing entire older systems.

Telephony Security

The Company's add-on scramblers for cellular telephones typically consist
of a modular circuit board designed to be permanently soldered into existing
telephone circuitry. The add-on scrambler product line includes a model designed
specifically for Motorola's MicroTAC(TM) telephones as well as a "generic"
scrambler for use in a variety of OEM cellular telephone equipment and featuring
advanced digital signal processing technology. Additionally, the Company has
recently begun marketing complete, Transcrypt-branded, Motorola MicroTAC(TM) and
StarTAC(TM) cellular telephones upgraded to include the Company's advanced add-

41
<PAGE> 42

on scrambling modules. The Company believes that offering cellular telephone
security through a complete telephone product offers certain advantages over
add-on scrambler sales, such as presenting the customer with a single vendor,
overcoming customer resistance to surrendering their telephones during
installations and allowing the Company to market cellular security directly to
cellular service providers. The Company also provides Transcrypt-branded secure
cellular telephones and the Company's Voice Privacy Exchange Units to a regional
Bell operating company, which resells the telephones to its customers in one
metropolitan area and charges additional monthly fees for secure service. In the
area of landline telephone voice security, the Company has, since 1995, produced
landline scrambling and encryption devices for installation between the handset
and telephone base, which have been purchased primarily by overseas government
and corporate users.

CURRENT WIRELESS COMMUNICATIONS PRODUCTS

The following table summarizes certain information concerning the Company's
principal wireless communications products:

CURRENT BUSINESS & INDUSTRIAL
WIRELESS PRODUCTS

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LIST PRICE
- ----------------------------------------- ------------------------------- ----------------
<S> <C> <C>
PORTABLE LMRS
7500 Series $300
7510/7540.............................. Conventional
Lynx $1,000-1,700
5876................................... Conventional
5877................................... Conventional and trunked SMR
Avenger $800-1,100
Avenger SI - 815X...................... Conventional and trunked SMR
Viking CX - 818X....................... Conventional and trunked SMR
Chameleon $1,000-1,250
Viking CL - 856/7X..................... Conventional and trunked SMR
MOBILE LMRS
Challenger $450-1,550
716X................................... Conventional
718X................................... Conventional and trunked SMR
Gator/Tiger $650-1,400
860X/861X.............................. Conventional and trunked SMR
863X/864X.............................. Conventional and trunked SMR
Viking/Summit $850-2,550
Viking GT - 965/7X..................... Conventional and trunked SMR
Viking HT - 965/7X..................... Conventional and trunked SMR
9800 Series $600-1,400
984X Low Tier.......................... Conventional
984/8/9X Mid Tier...................... Conventional and trunked SMR
REPEATERS
CR $4,150-8,400
Viking CX (200X)....................... Conventional and trunked SMR
11X0................................... Conventional
Viking/Summit $7,950-13,300
Viking VX (200X)....................... Conventional
Viking VX (200X)....................... Conventional and trunked SMR
INFRASTRUCTURE
2000 Series $15,000-50,000
Control/Switch LTR..................... Trunked SMR
3000 Series $15,000-500,000
Control/Switch LTR..................... Trunked SMR
</TABLE>

42
<PAGE> 43

CURRENT PUBLIC SAFETY AND
OTHER GOVERNMENT WIRELESS PRODUCTS

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LIST PRICE
- ------------------------ -------------------------------------------- ------------------
<S> <C> <C>
PORTABLE LMRS
Avenger $900-1,300
Avenger SI - 815X..... Conventional and APCO 16 (MultiNet)
Viking CR - 818X...... Conventional and APCO 16 (MultiNet)
Chameleon $1,000-1,600
Viking CL - 856/7X.... Conventional and trunked SMR
Viking CM - 858/9X.... Conventional and APCO 16 (MultiNet)
Stealth $1,500-3,200
Stealth 25............ Conventional and APCO 16 (SmartNet)/APCO 25
Phantom............... Conventional and APCO 16 (SmartNet)
MOBILE LMRS
Viking/Summit $900-3,400
Summit - 975/7X....... Conventional and APCO 16 (MultiNet)
9800 Series $1,000-1,600
984/8X High Tier...... Conventional and APCO 16 (MultiNet)

REPEATERS
Viking/Summit $7,500-15,000
Summit................ Conventional and APCO 16 (MultiNet)

INFRASTRUCTURE
2000 Series $15,000-500,000
Control/Switch MN..... APCO 16 (MultiNet)
3000 Series $15,000-1 million
Control/Switch MN..... APCO 16 (MultiNet)
</TABLE>

The Company's wireless communications products are sold by the Company
primarily to LMR dealers and SMR operators and are used by B&I concerns and
public safety and other government users desiring point to multi-point
communications. Most of these products are sold through the Company's E.F.
Johnson subsidiary under the E.F. Johnson brand name. While there is overlap
between the types of products sold to B&I public safety and other and government
users, the following discussion summarizes the Company's products typically sold
to these types of users.

Business and Industrial Users

The Company serves the B&I user market primarily with its LTR and
conventional LMR product lines. The Company's conventional LMR product line is
sold into all of the LMR markets which the Company serves. Management believes
that significant conventional product niche markets continue to exist in the LMR
market for products with value added technology, such as signaling protocols,
security features and scrambling technology. The Company expects that it will
focus in these segments of the overall LMR market with these conventional
products in the future.

The Company's LTR product line incorporates E.F. Johnson's LTR trunking
protocols and include sub-audible signaling, which automatically selects a clear
or unoccupied channel, open architecture which is compatible with other analog
products, and transmission trunking which holds a channel for up to 20 seconds
of "hang time" after a transmission to allow for a reply.

The Company's products for the SMR market include mobile and portable
radios and repeaters, along with other infrastructure to provide a complete SMR
system. The Company targets smaller regional SMR operators who offer a
combination of dispatch and interconnect services and the traditional local SMR

43
<PAGE> 44

operators and dealers who serve local businesses primarily with dispatch
service. In serving this market, the Company relies heavily on its network of
dealers, many of whom are authorized by the Company as service centers and
provide installation, maintenance, repair and warranty service. The Company
believes that the end-users of these products value the low cost of point to
multi-point communications, flexibility of networking and support and
responsiveness of the Company and its dealers.

Public Safety and Other Government Users

The Company serves public safety and other government users primarily with
its APCO 16 MultiNet(TM) analog and APCO 25 digital product lines. The APCO 16
MultiNet(TM) was built upon the success of the E.F. Johnson LTR trunking
protocol. The Company believes that its MultiNet(TM) system, which links
together multiple sites for wide-area coverage, is a highquality, cost-effective
alternative to comparable APCO 16 systems produced by other manufacturers for
the same reasons as for the LTR product line, except that the Company utilizes a
proprietary architecture. The Company's system also offers many features
specifically designed for public safety users, such as emergency queuing, over
8,000 unique identification codes, automatic subscriber identification and five
levels of priority access. The Company provides a broad line of MultiNet(TM)
products, including repeaters, radio network terminals, system management
modules, duplex subscriber units, dispatcher consoles, audio and data link and
related accessories. E.F. Johnson's MultiNet(TM) systems are sold both
domestically and internationally.

PRODUCTS UNDER DEVELOPMENT

Consistent with the Company's development efforts for its existing
products, the Company designs new products around common core scrambling and
encryption technologies utilizing common signal processing platforms and
circuitry. Using this approach, the Company can generally incorporate
improvements in core technologies into its new products more quickly and with
relatively lower development costs compared to developing entire products
separately. The following discussion contains a summary of the Company's
principal products under development. No assurance can be given that the Company
will be able to successfully develop any of these products or, if developed,
that any such products will be commercially viable or result in material sales
by the Company.

LMR Security

The Company plans to introduce in the fourth quarter of 1997 additional LMR
models containing security features, including radios in the APCO 16 and APCO 25
configurations. See "-- Products Under Development -- Wireless Communications."
The Company is also developing an add-on LMR encryption module for use in OEM
equipment that would utilize the digital encryption standard called "DES." This
module will utilize the widely recognized DES algorithm for encoding
transmissions. The Company's analog radios, as well as its SmartNet(TM)
compatible radio, are, as of the date of this Prospectus, in the customer beta
test stage of development, as is the DES scrambler. The remaining LMR security
products under development are in the design and experimentation stage. From
time to time, the Company also has under development a number of custom security
modules, including those incorporating custom encryption and scrambling
algorithms.

Telephony Security

In January 1997, the Company began shipping in commercial quantities a
complete Transcrypt-branded Motorola StarTAC(TM) cellular telephone upgraded to
include the Company's advanced add-on scrambling modules. The Company intends to
introduce, in early 1998, a complete secure digital cellular telephone featuring
built-in digital encryption technology. The Company also plans to introduce
various other products in 1997, including a network server capable of
encryption/decryption for up to 24 simultaneous voice users, a scrambling
module, based on the DES encryption technology, for cellular telephone users and
five new landline security products. These products will be included in the
"Secure Office" suite of products. As of the date of this Prospectus, the
Company's "Secure Office" network server and DES analog scrambling module

44
<PAGE> 45

are in the final stages of product development, while the remaining telephony
security products under development are in the design and experimentation stage.

Data Security

The Company's planned data security products are expected to incorporate
real-time, high-speed digital encryption techniques originally developed for the
Company's digital radio products and landline encryption device (DME 9600).
Future data security products are expected to consist of a network server
capable of performing high speed, real-time authentication and
encryption/decryption for up to 24 simultaneous computer users, an encrypted
landline modem, an encrypted cellular modem, an encrypted fax/modem PCMCIA card
and desktop facsimile encryption devices. The Company plans on introducing
shortly a complete array of products that will allow for a company-wide security
solution called "Secure Office(TM)," which will be based on security products
employing real time, high speed encryption. The Secure Office will provide
combined voice and data security over shared facilities. The products will
consist of a switch solution for a LAN and PBX which will communicate with
computer modems, fax machines, cellular telephones, digitally encrypted landline
telephones and other LANs and PBXs at different locations. Communications will
be secured with proprietary encryption and scrambling algorithms. The Company
believes that alliances or acquisitions in this area could, in the future, allow
for rapid expansion in this growing marketplace.

Wireless Communications

The Company plans to introduce in the fourth quarter of 1997 additional
models of its hand-held digital LMRs containing different features, as well as a
line of mobile digital LMRs, all of which will comply with the APCO 25 standard.
The Company also plans to introduce in the fourth quarter additional mobile
radio models that transmit in analog format (e.g., APCO 16 and conventional
LMRs) for the existing analog market. All of these radios will contain as
standard features the Company's voice scrambling and/or digital encryption
technology. Such radios will be compatible and fully interoperable with older
analog LMRs, and some of the radios will offer compatibility with Motorola's
proprietary analog APCO 16 trunking technology (SmartNet(TM)) and Motorola's
digital encryption algorithms. Through E.F. Johnson, the Company is preparing to
manufacture both analog and digital LMR infrastructure and expects that base
stations and repeaters will be available by the Company as part of an integrated
system or stand alone equipment. The Company is also developing a trunked LMR
system known as "LTR-Net", that utilizes the Company's LTR trunking system in a
wide-area configuration, allowing linked communications over a much larger
geographic area than a single trunked system.

45
<PAGE> 46

CUSTOMERS

The following is a representative list of customers, directly or through
distributors, of the Company's information security and wireless communications
products. Other than Motorola, no customer accounted for more than 10% of
Transcrypt's aggregate sales during the six months ended June 30, 1997.

REPRESENTATIVE CUSTOMERS

STATE AND CITY PUBLIC SAFETY

Arizona Department of Public Safety
California Department of Justice
City of Carlsbad (New Mexico)
City of Jacksonville, Florida
City of Seattle
Delaware State Patrol
Hennepin County Sheriff (Minnesota)
Martin County, Florida
Iowa State Highway Patrol
Los Angeles Police Department
Michigan State Police
New York City Police Department
Oklahoma State Bureau of Narcotics
Vernal Police Department (Utah)
Washington State Department of Transportation
FEDERAL GOVERNMENT

Air Force
Army
Border Patrol
Customs Service
Department of Agriculture
Department of Defense
Department of Fish and Wildlife
Department of the Interior
Department of the Treasury
Drug Enforcement Agency
Federal Bureau of Investigation
National Forest Service
National Security Agency
Navy
Secret Service
White House Security
INTERNATIONAL

Australian Navy
Brazilian Presidential Security
Canadian Border Patrol
City of Edmonton, Alberta
Columbian Army
Egyptian National Police
German National Police
Hong Kong Police Force
London Metropolitan Police Force
Polish Border Guard
Portuguese National Police
Puerto Rico National Fire Department
Royal Canadian Mounted Police
Russian Ministry of Internal
Affairs
Turkish National Police
Vietnam Ministry of Interior

CELLULAR SERVICE PROVIDERS

AirTouch Communica-
tions, Inc.
AT&T Corporation
Bell Atlantic/NYNEX
Bell Mobility (Canada)
GTE MobileNet Service
GTE/Contel Cellular
Furst Group Inc.
Sprint Corporation
BUSINESS AND INDUSTRIAL

Amoco Oil Company
B.F. Goodrich, Inc.
Centennial Communications
Conoco Inc.
Exxon Oil Co.
Harris Corporation
Loral Terracom
Marathon Oil Co.
NEXTEL Corp.
Pillsbury Co.
Pitencrieff Communications
Salomon Brothers Inc
Shell Oil Co.
Union Pacific Railroad
LMR MANUFACTURERS

Allied Signal Corp.
Ericsson, Inc.
Glenayre Co.
Icom America, Inc.
Kenwood Radio Corp.
Maxon, Inc.
Midland International
Motorola, Inc.
Stanilite Pacific Ltd.
SEA Inc.
Yaesu USA, Inc.
MEDIA/ENTERTAINMENT

ABC News
Charlotte Observer
Time Warner Inc.
Walt Disney Co.
Warner Bros. Entertainment

46
<PAGE> 47

SALES AND MARKETING

The Company is in the process of merging the sales and marketing staffs of
Transcrypt and E.F. Johnson. However, the Company intends in the near term to
keep small discrete sales staffs for each of the companies and their respective
products, except with regard to APCO 25 products, which are being marketed by a
combined sales and marketing staff. The following discussion summarizes the
current sales and marketing approaches of each of Transcrypt and E.F. Johnson:

Transcrypt

Transcrypt sells its add-on products domestically through sales managers
primarily to distributors, OEMs and self-servicing end users, while complete
radio products are sold domestically primarily to end users. Transcrypt also
intends to market its radio and other complete products to its existing add-on
customer base. Transcrypt is actively seeking to hire additional sales personnel
for radio sales in the United States.

Transcrypt conducts international sales through sales managers each of whom
focus on specific regions of the world outside of the United States. The
majority of international sales are made by the sales managers in conjunction
with a Company-authorized distributor, which typically provides a local contact
and arranges for technical training in foreign countries. International sales
accounted for approximately 67% and 49% of Transcrypt's revenues in the six
months ended June 30, 1997 and in 1996, respectively. International sales have
been, in most cases, denominated in U.S. dollars, and Transcrypt seeks to reduce
the risks of payment in foreign sales by obtaining advance payment and
confirmed, irrevocable letters of credit. See "Risk Factors -- Risks Associated
with International Sales."

Transcrypt distributes its add-on information security products to both end
users in the LMR and telephony markets and to distributors, such as LMR dealers,
that resell these products to end users. In 1996, sales of information security
products to distributors totaled 78% of aggregate domestic sales and 90% of
aggregate international sales. To date, Transcrypt has sold its self-branded,
complete, analog secure cellular telephone primarily through distributors and
cellular service resellers, and the Company intends in the future to also sell
such analog cellular telephone and the digital version through cellular service
providers.

Transcrypt's basic marketing strategy has been to increase market awareness
of the need for information security products and to convey the technical
capabilities of its products. Transcrypt conducts promotions through a mix of
print advertising, trade shows, direct mail campaigns, press releases, technical
articles, white paper publication, periodic newsletters, training and
presentation material, and distribution of demonstration and loaner equipment,
which are sometimes coordinated with product launches and trade shows.

E.F. Johnson

E.F. Johnson's sales and marketing functions are organized into two
separate direct sales forces, one which focuses on the North American market and
the other which focuses on the international market. For North American sales,
E.F. Johnson utilizes a direct sales force of account executives and sales
managers who sell its products primarily in the APCO market and to larger
dealers and SMR operators, and telemarketing personnel who sell primarily to
smaller dealers and SMR operators. E.F. Johnson sells its products and systems
internationally through a specialized international direct sales force.
International sales are made primarily in United States currency, and are
generally made in advance of shipment or secured by confirmed irrevocable
letters of credit.

LTR and conventional LMR products are sold primarily to an extensive
network of approximately 600 independently owned and operated dealers, some of
which are also SMR operators. The dealers typically carry other competitive
product lines as well. These products are distributed internationally primarily
through a network of approximately 100 dealers and distributors located in more
than 45 countries. Many of E.F. Johnson's dealers also are authorized as service
centers and provide installation, maintenance, repair and warranty service. On
average, these dealers have been carrying E.F. Johnson products for more than 20
years. In 1996, E.F. Johnson's top ten dealers accounted for approximately 22%
of its dealer sales. E.F. Johnson provides comprehensive dealer support,
including cooperative advertising programs, advertising materials, sales
training, service training and technical support.

47
<PAGE> 48

The majority of stand-alone LMR product sales to both commercial and
governmental purchasers involves soliciting and responding to "requests for
proposals," commonly referred to as "RFPs." The RFP process for system sales has
a relatively long cycle time -- from proposal requirements to contract award is
typically at least one year, and installation and acceptance may take up to
another year. Suppliers of LMR systems are often required by public sector
end-users issuing RFPs to supply a bond from an approved surety company at the
time that the bid is submitted and at the time that the contract is awarded. The
availability of such bonds is limited by a number of factors, including the
applicant's financial condition and operating results, the applicant's record
for completing similar systems contracts in the past and the extent to which the
applicant has bonds in place for other projects.

CUSTOMER SERVICE

Transcrypt provides toll-free telephone access for technical and other
calls, 24-hour voicemail and 24-hour emergency pager contact for customers with
technical or other problems. Product training, which includes classes, seminars
and video programs, is available at both the customer's site and the Company's
Lincoln facility. Transcrypt offers a standard warranty on all products, which
covers parts and labor for a period of one year from purchase, with an extended
warranty service option available at an additional cost.

Transcrypt installs, for a fee, all models of its scrambler modules into
customers' LMRs and telephones. Scrambler modules not installed by the Company
are generally installed by local radio and cellular telephone dealers. The
Company documents installation instructions for its products in OEM devices and
has developed these instructions for more than 2,000 OEM products, including
almost all commercially available two-way radio models sold worldwide.

E.F. Johnson's customer service group provides worldwide after-sales
service and support, including technical support through a toll-free telephone
number, on-site technical personnel for repairs and applications issues, 24-hour
turnaround for spare parts and extensive product training. Product training
includes classes, seminars and video programs available at both the customer's
site and E.F. Johnson's manufacturing facility. Such training provides
assistance to the end-user in the use, operation and application of E.F.
Johnson's LMR products and systems, and trains other end-users and dealers to
perform network programming changes and preventive maintenance and repair to
E.F. Johnson's products and systems. E.F. Johnson's LMR products and systems are
generally sold with a two-year warranty which covers parts and labor in North
America and only parts internationally. Broader warranty and service coverage is
provided in certain instances to private systems customers on a contractual
basis, usually for an additional charge.

MOTOROLA RELATIONSHIP

The Company depends to a large extent on a number of significant
relationships with Motorola. Motorola has been one of the Company's largest
customers since 1994, and the Company believes that Motorola is likely to
account for a significant portion of the Company's information security product
sales in the near future. Sales to Motorola consist primarily of
Motorola-labeled LMR socket scrambling modules available for resale by Motorola
as an accessory to certain of Motorola's portable LMRs sold worldwide.

Motorola is also a key manufacturer of electronic components used by the
Company, including microprocessors and components used in most of the Company's
scramblers and LMRs, which are supplied to the Company through an electronics
wholesaler. Furthermore, pursuant to a product sales agreement executed in June
1996, Motorola has agreed to sell to the Company, upon the Company's request,
original equipment cellular telephones and related accessories from Motorola's
MicroTAC(TM) line, including StarTAC(TM) telephones, which the Company resells
equipped with the Company's DSP-based encryption devices and labeled with the
Transcrypt logo. Such agreement specifies fixed prices for purchases of such
equipment, and its original term expires on December 31, 1997, after which it is
terminable at will by either party upon 30 days' prior notice. The Company has,
as of June 30, 1997, purchased $550,000 in cellular telephones from Motorola
pursuant to such agreement. The Company may also purchase from Motorola base
stations, repeaters and other LMR infrastructure components in order to fulfill
systems contracts requiring compatibility with these devices.

48
<PAGE> 49

The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology that the
Company believes will be important to the success of certain of the Company's
existing and proposed APCO 25 compliant LMR products. The IPR License includes
rights to use Motorola's proprietary analog APCO 16 trunking technology
(SmartNet(TM)) and certain Motorola digital encryption algorithms in LMR
products. The digital encryption technology may also be incorporated into
certain other information security products. The IPR License was obtained
initially in August 1994 and was amended to cover a broader range of products in
June 1996. The IPR License provides for minimum royalty payments and per unit
payments in amounts which the Company believes are standard for the LMR
industry. The Transcrypt IPR License provides for a fee of $1.8 million, of
which $200,000 was paid in September 1996 and $200,000 was paid in September
1997.

E.F. Johnson, prior to its acquisition by the Company, obtained a license
of certain proprietary technology from Motorola relating to the development of
APCO 25 compliant digital LMRs. This license covered infrastructure and other
APCO 25 technology. E.F. Johnson's license calls for payment of $5.0 million to
Motorola, of which E.F. Johnson has paid $2.0 million to date. Subsequent to the
acquisition, Motorola has agreed to reduce E.F. Johnson's payment obligations by
$1.8 million and to expand the coverage of Transcrypt's license to SmartNet(TM)
to cover E.F. Johnson's products.

In addition to the direct benefits of the IPR License to the Company's APCO
25 development efforts, the Company believes that sales of its APCO 25 digital
LMR products have been, and expects that such sales will in the foreseeable
future be, substantially dependent upon Motorola's dominant position as a market
leader in the APCO 25 marketplace. Motorola is the largest manufacturer of APCO
25 compliant LMR products and has been the principal public supporter of the
APCO 25 digital transmission standard for the LMR market. Any reduction in such
support could lead to reduced demand for APCO 25 compliant LMR systems
generally.

INTELLECTUAL PROPERTY

Transcrypt presently holds seven registered copyrights, which cover
software containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony, and one domestic patent, which
covers continuous synchronization methods used in analog scrambling products.
Transcrypt has also applied for 11 additional domestic patents, relating to
high-end scrambling and encryption techniques and methods of integrating
after-market devices, such as the Company's modules, into OEM products. These
patent applications were the result of Transcrypt's expanded intellectual
property program, which is intended to enhance the patent protection afforded
the Company's new and advanced intellectual property rights. Transcrypt also
holds three registered trademarks related to the "Transcrypt" name and product
names. In addition to the rights held by Transcrypt, E.F. Johnson currently
holds or has been assigned at least 15 U.S. patents, 20 pending applications for
U.S. patents, 10 patents in foreign countries and 9 pending applications for
patents in foreign countries. These patents and applications cover a broad range
of technologies, including trunking protocols and a high speed data interface
for LMR communications.

In addition to copyright and patent laws, the Company relies on trade
secret law and employee and third-party non-disclosure agreements to protect its
proprietary intellectual property rights. Furthermore, the Company designs its
information security devices to render the underlying software and processes
difficult to reverse engineer, providing an additional level of protection.

The information security and wireless communications industries in which
the Company sells its products are characterized by substantial litigation and
assertions of claims regarding patent and other intellectual property rights. At
various times over the last several years, most recently in December 1996,
Ericsson has notified the APCO 25 Project Steering Committee and certain current
and proposed manufacturers of APCO 25 products (including the Company, Motorola
and E.F. Johnson, prior to its acquisition by the Company) that it believes that
products complying with the APCO 25 standard will necessarily infringe various
Ericsson patents and that APCO 25 manufacturers must obtain licenses under such
patents. The Company does not believe that the APCO 25 standard or any of the
Company's products infringe the relevant

49
<PAGE> 50

Ericsson patents or any valid intellectual property right of others. The Company
has received an opinion of its patent counsel, Zarley, McKee, Thomte, Voorhees &
Sease, P.L.C., to the effect that, although patent infringement issues involve
inherent legal and factual uncertainties, in their opinion the Company's
products which comply with the APCO 25 standard do not infringe the patents
cited by Ericsson to date. However, there can be no assurance that Ericsson will
not continue to assert these or other claims of patent infringement or other
wrongful conduct against the APCO 25 standard, manufacturers of APCO 25
products, including the Company, or present or future products of the Company.
Further, there can be no assurance that any litigation which may be instituted
in the future by Ericsson or any other party alleging infringement of
intellectual property rights or other wrongful conduct will not have an adverse
effect upon the Company, including the imposition of monetary damages, expenses
of litigation, diversion of management and other resources and injunction
against continued manufacture, use or sale of certain processes or products.

Under the terms of a July 1993 Memorandum of Understanding (the "MOU")
among various manufacturers involved in the APCO 25 project, signatories to the
MOU (which include the Company, Ericsson, Motorola, DVSI, Cycomm Corporation,
Glenayre Technologies and E.F. Johnson, prior to its acquisition by the Company,
among others) are required to make available to other signatories licenses to
intellectual property rights that are essential to the implementation of the
APCO 25 standard on "fair and reasonable terms." Ericsson has offered a license
to the Company with regard to its allegedly infringed patents, and has notified
the Company that if it fails to negotiate a license to such patents, Ericsson
may take the position that the Company's right to obtain any license from
Ericsson under the MOU would be lost. If Ericsson were successful in asserting
infringement claims, there can be no assurance that a license would be available
from Ericsson under the MOU. To the Company's knowledge, none of the signatories
to the MOU have recognized the validity of Ericsson's position. See "Risk
Factors -- Limited Protection of Intellectual Property Rights; Risk of
Third-Party Claims of Infringement."

RESEARCH AND DEVELOPMENT

The Company has a research and development staff of 92 individuals,
including 51 engineers. Research and development efforts are organized along the
Company's two main product lines, information security and wireless
communications products. As part of the integration of E.F. Johnson's research
and development team with Transcrypt's research and development efforts, the
Company has focused significantly on integrating technologies in order to
provide new advanced products, taking advantage of the competencies of each of
the engineering staffs of Transcrypt and E.F. Johnson. For example, the combined
staffs are working on projects to integrate digital signal processing technology
into the E.F. Johnson radio systems, with the objective of expediting the
availability of a complete digital radio system interoperable with MultiNet(TM),
SmartNet(TM) and APCO Project 25. Other integration work underway relates to the
incorporation of Transcrypt's encryption technology into E.F. Johnson's radio
systems and the integration of E.F. Johnson's switching technologies into
Transcrypt's telephony products.

Information Security

Research and development personnel in the information security area have
expertise in various fields, including cryptography, analog hardware, digital
hardware, object-oriented software, RF design and mechanical design. The
research and development staff designs and develops products incorporating
digital signal processing, voice coding (including improved multi-band
excitation), encryption, spectral manipulation and rotation, systems simulation
and mixed signal scrambling. In 1995 and 1996, the Company's research and
development efforts increased significantly, as the Company commenced
development of APCO 25 compliant digital LMRs and expanded development of secure
telephony products. In order to facilitate the Company's new product line
development plans, research and development staffing has been augmented with
additional expertise in the areas of data networking, communications systems
software, RF design, mechanical design, cryptography and digital signal
processing. The Company believes that its research and development efforts have
been, and continue to be, sufficient to support planned new products lines and
enhancements to existing product lines. Management expects to continue to
increase the Company's research and development staff, primarily in the areas of
radio, signal processing and digital logic development.

50
<PAGE> 51

Wireless Communications

The wireless communications research and development organization is
located at E.F. Johnson's manufacturing facility. Research and development
personnel in the wireless communication area have expertise in RF technology,
computer architecture, switch architecture, networking, software and hardware
designs. Ongoing engineering efforts are focused on adding advanced features to
existing product lines and developing new, innovative system platforms.
Crossdisciplinary planning groups involving marketing, manufacturing and
engineering are used for product planning and definition. Present research and
development efforts are involved in upgrading existing product lines, including
the development of next generation repeaters and mobile radios for the Company's
principal product lines. This organization also has a staff of systems
applications design, manufacturing and customer service engineers that focuses
on design and implementation of custom radio systems.

MANUFACTURING

The Company's manufacturing operation consists of procurement of
commercially available subassemblies, parts and components, such as integrated
circuits, printed circuit boards and plastic and metal parts and their assembly
into finished products. Certain components and subassemblies are manufactured to
the Company's specific design criteria. All components and subassemblies are
inspected for mechanical and electrical compliance to Company specifications in
order to ensure high yield and high quality.

The Company manufactures all of its wireless communications products (other
than APCO 25 compliant products) at its Waseca, Minnesota facility. The Company
manufactures all of its information security products and APCO 25 compliant LMRs
at its facility in Lincoln, Nebraska. The Company's manufacturing processes at
its Lincoln facility have been certified as conforming to the "ISO 9001"
manufacturing standard.

The Company believes that its current manufacturing facility in Waseca
provides sufficient capacity to meet its needs at that location. The Company is
planning to expand its Lincoln facility during the fourth quarter of 1997 to
house additional administrative and manufacturing capacity. The Company believes
that this planned expansion and its existing facilities will be sufficient for
the Company's needs in the foreseeable future.

MATERIALS AND SUPPLIERS

Information Security

The Company obtains most of its electronic parts and components for
information security products from one principal distributor, Arrow/Schwebber
Electronics Group. The Company believes that concentrating its purchases through
one principal distributor lowers the Company's procurement costs and enhances
its ability to control the quality of these components and subassemblies. The
distributor stores several months' supply of basic components, such as
resistors, capacitors and connectors, on-site at the Company's manufacturing
location on a consignment basis, reducing the Company's inventory maintenance
costs. Additionally, certain high-end subassemblies, such as RF boards for use
in complete LMR units manufactured by the Company, are acquired from other
manufacturers. See "Risk Factors -- Dependence on Suppliers."

Wireless Communications

Certain components and subassemblies used in the Company's wireless
communications products are presently available only from a single supplier or a
limited group of suppliers. To date, the Company has been able to obtain
adequate supplies of all components and subassemblies in a timely manner from
existing sources. Currently, Motorola is the sole supplier of a majority of the
semiconductors used in certain of the Company's LMR products. Although
historically E.F. Johnson has not experienced a disruption of Motorola's supply
of this product, disruption or termination of Motorola's supply of this product
would have a material adverse effect on the Company's operations.

With respect to other electronic parts, components and subassemblies, the
Company believes that alternative sources could be obtained to supply these
products, if necessary. Nevertheless, a prolonged inability

51
<PAGE> 52

to obtain certain components and subassemblies could impair customer
relationships and could have an adverse effect on the Company's operating
results. See "Risk Factors -- Dependence on Suppliers."

GOVERNMENT REGULATION AND EXPORT CONTROLS

Information Security

The Company's information security products are subject to export
restrictions administered by the National Security Agency, the Department of
State and the Department of Commerce, which permit the export of encryption
products only with the required level of export license. U.S. export laws also
prohibit the export of encryption products to a number of specified hostile
countries. Although to date the Company has been able to secure most required
U.S. export licenses, including for export to 105 countries since 1978, there
can be no assurance that the Company will continue to be able to secure such
licenses in a timely manner in the future or at all. Based on the Company's
prior experience in securing export approvals, the Company believes that it
maintains good relations with federal government agencies with jurisdiction over
its products. Additionally, in certain foreign countries, the Company's
distributors are required to secure licenses or formal permission before
encryption products can be imported.

In November 1996, President Clinton issued an Executive Order altering the
federal government's policies governing the export of encryption products, such
as those currently offered and proposed to be offered by the Company. The
Executive Order shifts jurisdiction for export controls on, and licensing of,
encryption technology from the Department of State to the Department of Commerce
and removes from the "munitions" list most encryption products. In addition, the
Executive Order establishes a key management control program, under which a
third party would hold "keys" to unlock encrypted information for legitimate law
enforcement and national security needs. As a result of the Executive Order,
certain products featuring digital encryption technology that had not previously
been exportable can now be exported, which may increase competition for
international sales of the Company's analog scrambling products. Under interim
regulations adopted in December 1996 by the Department of Commerce, during a
two-year transition period, non-key recoverable 56-bit digital encryption
products may be approved for export if the manufacturer commits to build and
market key recovery products and support key management infrastructure in the
future, and provide to the government interim reports detailing internal
development efforts. The Department of Commerce is preparing draft proposed
final regulations similar to the interim regulations, but the timing for
issuance of the proposed regulations remains unclear.

In response to industry opposition to the President's Executive Order and
the interim regulations, Members of Congress have taken aggressive steps to
further expand exports of encryption products. In the 105th Congress,
legislation has been introduced in the House and Senate to eliminate "key"
controls imposed by the Administration on encryption exports. In the House of
Representatives, legislation eliminating the "key" recovery system and other
controls may be considered by the House of Representatives during the fall of
1997. This bill would lift many remaining controls on encryption exports,
including the Administration's "key" management requirement. President Clinton
opposes the House legislation and similar measures introduced in the Senate, on
the grounds that the bill's provisions eliminating the key recovery system would
seriously compromise national security, among other things, and may veto the
measure if enacted.

In the Senate, the Administration is negotiating with Members of the Senate
Commerce Committee on the details of a different proposal that would also revise
the Administration's encryption technology export policy, but less drastically
than the House bill. Under the terms of the Commerce Committee bill, exporters
would be able to sell more powerful encryption products than those allowed under
the interim regulations. In addition, the federal government would determine on
a case by case basis whether law enforcement or national security issues warrant
possible government access to the encryption codes. However, it is unclear as of
the date of this Prospectus whether such negotiations will progress further.
Management cannot predict whether any legislation easing export controls will be
enacted, what form it will take or how the Executive Order or any such
legislation will impact international sales of the Company's products.

52
<PAGE> 53

Wireless Communications

The Company's standalone wireless products are subject to regulation by the
FCC under the Communications Act of 1934, as amended, and the FCC's rules and
policies adopted thereunder, as well as the regulations of the
telecommunications regulatory authority in each country where the Company sells
its products. These regulations are in the form of general approval to sell
products within a given country for operation in a given frequency band,
one-time equipment certification, and, at times, local approval for
installation. In addition, the construction, operation and acquisition of
wireless communications systems, as well as certain aspects of the performance
of mobile communications products, are regulated by the FCC and foreign
regulatory authorities. Many of these governmental regulations are highly
technical and subject to change. The Company believes that it and its products
are in material compliance with all governmental rules and policies in the
jurisdictions where the Company sells its products.

In the United States, all of Transcrypt's wireless products are subject to
FCC Part 15 rules on unlicensed spread spectrum operation. In those countries
that have accepted certain worldwide standards, such as the FCC rulings or those
from the European Telecommunications Standards Institute, Transcrypt has not
experienced significant regulatory issues in bringing its products to market.
Approval in these markets involves retaining local testing agencies to verify
specific product compliance. However, many developing countries, including
certain markets in Asia, have not fully developed or have no frequency
allocation, equipment certification or telecommunications regulatory standards.

The majority of the systems operated by E.F. Johnson's customers must
comply with the rules and regulations governing what has traditionally been
characterized as "private radio" or private carrier communications systems.
Licenses are issued to use frequencies on either a shared or exclusive basis,
depending upon the frequency band in which the system operates. Some of the
channels designated for exclusive use are employed on a for-profit basis; others
are used to satisfy internal communications requirements. Most SMR systems in
operation today use 800 MHz channels. Within the top 50 metropolitan markets,
900 MHz frequencies licensed for exclusive use systems have been made available
to both SMR and non-SMR licensees. Additional channels designated for exclusive
use were made available in the 220 MHz band for both commercial and
non-commercial systems.

Generally, SMR licenses are issued for five year terms, initially in blocks
of five channels, and may be renewed upon showing compliance with FCC rules and
may be revoked for cause. Such licenses typically are subject to channel
"loading" or usage requirements, such as loading a minimum of 70 subscriber
units for each channel within the initial five year term. If an SMR licensee
fails to meet its loading requirements in an area where existing applications
are pending on a wait list, the FCC may cancel the license, in whole or in part,
or deny a request to renew or expand the license. Other than loading
requirements, private systems are subject to similar restrictions. For example,
licenses for private systems are also issued for five year terms, may be renewed
upon showing compliance with FCC rules and may be revoked for cause.

E.F. Johnson also offers products in bands below 800 MHz where channels are
shared by multiple users in the same geographic area. In this "shared" or
conventional spectrum, there is no requirement for loading the channel to any
particular level in order to retain use of the frequencies. These channels are
generally used by entities satisfying traditional dispatch requirements in,
among others, the transportation and services industries.

The FCC is considering a number of regulatory changes that could affect the
wireless communications industry and the Company's business. Therefore, the
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations, both in the United States and
internationally, can adversely affect the Company and its customers. Such
changes could make existing or planned products of the Company obsolete or
unsaleable in one or more markets, which could have a material adverse effect on
the Company.

The FCC, through the Public Safety Wireless Advisory Committee, is
considering regulatory measures to facilitate a transition by public safety
agencies to a more competitive, innovative environment so that the agencies may
gain access to higher quality transmission, emerging technologies, and broader
services,

53
<PAGE> 54

including interoperability. As part of this process, the FCC is reviewing the
current use of the public safety wireless spectrum, reallocation of additional
spectrum for public safety use, and use of commercial service providers for
additional public safety capacity. This FCC process could affect products
manufactured by the Company. Management cannot predict the outcome of the FCC
review or any specific changes in the spectrum or FCC policies, or any potential
effect on the Company's sales.

COMPETITION

Information Security

The markets for information security products are highly competitive.
Significant competitive factors in these markets include product quality and
performance, including the effectiveness of security features and the quality of
the resulting voice or data signal, the development of new products and
features, price, name recognition and the quality and experience of sales,
marketing and service personnel. A number of companies currently offer add-on
scramblers for LMRs that compete with the Company's add-on information security
products, including Selectone Corp., Midian Electronics Inc. and MX-COM Inc.
Also, Motorola and Ericsson offer high-end, proprietary digital encryption for
their LMR products. The Company and Motorola are believed to be the only current
suppliers of APCO 25 LMR products as of the date of this Prospectus. Other
anticipated manufacturers of digital LMRs include Garmin Industries, Relm
Communications, Midland Systems and ADI, all of which have announced intentions
to produce hand-held, mobile and/or infrastructure products meeting the APCO 25
standard. In addition, Ericsson has actively opposed the APCO 25 standard and
has promoted its "EDACS" system as an alternative standard for the public safety
marketplace. See "-- Intellectual Property." Cycomm International
Inc./Privaphone and Motorola offer add-on security products for cellular
telephones. Competitors to the Company's secure landline telephone products
include AT&T Corporation/Datatek, Motorola, Cycomm International Inc. and Cylink
Corporation.

Competition in the data security market is dynamic and growing, as new
companies seek to provide solutions to network and Internet data security. There
are a number of different approaches to data security, including "firewall"
protection, privilege control, data encryption and user identification and
authentication. the Company expects that its planned data security products will
feature mostly data encryption and user authentication features. Competitors in
the data security market include Check Point Software Technologies Ltd., Cylink
Corporation, Secure Computing Corporation, Trusted Information Systems, Inc.,
Raptor Systems, Inc. and Sun Microsystems, Inc., all of which provide firewall
solutions. ActivCard Inc., CryptoCard Inc., Digital Pathways, Inc., Security
Dynamics Technologies, Inc., Vasco Corporation and Racal Electronics, Inc.
provide remote authentication products.

Many of the Company's competitors have substantially greater financial,
technical, marketing, distribution and other resources, greater name recognition
and longer standing relationships with customers than the Company. Competitors
with greater financial resources are better able to engage in sustained price
reductions in order to gain market share. Any period of sustained price
reductions would have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully in the future or that competitive pressures
will not materially and adversely affect the Company's financial condition and
results of operations.

Wireless Communications

In North America, Motorola and Ericsson are the leading providers of LMR
equipment. While the Company believes that it is the third largest supplier in
the North American LMR equipment market, its share of such market is relatively
small in comparison to Motorola and Ericsson. The remainder of the North
American LMR equipment market is divided among a large number of suppliers. The
Company competes in the wireless communications market on the basis of price,
technology and the flexibility, support and responsiveness which the Company
believes it and its dealers provide. Motorola and Ericsson have financial,
technical, marketing, sales, manufacturing, distribution and other resources
substantially greater than those of the Company, entrenched market positions in
certain segments of the North American LMR market in which the Company is active
and established trade names, trademarks, patents and other intellectual property
rights

54
<PAGE> 55

and substantial technological capabilities. Within the North American SMR
market, the Company's competitors include Motorola, Ericsson, Uniden America
Corporation ("Uniden"), Kenwood U.S.A. Corp., ICOM America, Inc. ("ICOM") and
Midland International Corp. The Company believes that cellular telephones and
personal communication services devices provide, to some extent, the same
functionality as SMRs and other LMRs and, as such, may compete with the
Company's products. The Company believes that the international wireless
communications market is fragmented, with Motorola and Ericsson the dominant
suppliers. The Company also competes with Uniden and Hitachi Denshi, Ltd. in
Asia.

BACKLOG

The Company presently ships only a small amount of information security
products against backlog, due to the typically short manufacturing cycle of
these products. As a result, backlog amounts have historically been immaterial
to the Company, and the Company does not believe that backlog figures are
necessarily indicative of actual sales for future periods. As of June 29, 1997,
E.F. Johnson's backlog was approximately $14.7 million. Management believes this
amount was elevated as a result of E.F. Johnson's inability to procure certain
parts and components from suppliers immediately prior to its acquisition by the
Company due to E.F. Johnson's difficult financial position at that time.
However, due to the generally longer manufacturing cycle time required for the
production of complete wireless communication products, the Company's overall
backlog is expected to be larger in the future compared to historical levels.

PROPERTIES

The Company occupies a 43,500 square foot two-story administrative and
manufacturing facility located at 4800 NW 1st Street, Lincoln, Nebraska, 68521,
which is located in the University of Nebraska Technology Park. The Company owns
this facility and approximately 10 acres of surrounding land. The Company
expects to commence Phase 3 construction of additional administrative and
manufacturing facilities at its Lincoln, Nebraska campus in the fourth quarter
of 1997. In addition, the Company occupies a 250,000 square foot manufacturing
facility located on a 20 acre site in Waseca, Minnesota, pursuant to a sale and
lease back arrangement at a current annual sum of approximately $400,000,
subject to certain adjustments, with such annual sum increasing during the term
of the lease. This arrangement is scheduled to expire on July 31, 2002 and
includes an option by the Company to purchase the premises through October 1997.
The Company intends to exercise this option. See "Use of Proceeds." E.F. Johnson
formerly maintained its corporate headquarters in a leased facility located in
Burnsville, Minnesota. E.F. Johnson also leases additional sales and service
facilities in Hong Kong and Miami, Florida. The Company believes that its
current and planned facilities are adequate to meet its present and immediately
foreseeable needs.

LEGAL PROCEEDINGS

From time to time, the Company is involved in certain legal proceedings
arising in the normal course of its business. Management believes that the
outcome of these matters will not have a material adverse effect on the Company.

For discussion of an assertion by Ericsson that the APCO 25 standard
infringes certain Ericsson patents, see "Risk Factors -- Limited Protection of
Intellectual Property Rights; Risk of Third-Party Claims of Infringement" and
"Business -- Intellectual Property."

EMPLOYEES

At August 31, 1997, the Company had 501 full-time equivalent employees,
including 104 at the Company's Lincoln, Nebraska facility, 313 at the Company's
Waseca, Minnesota facility, 58 at E.F. Johnson's former corporate headquarters
and approximately 26 field sales people, sales managers or staff located in the
sales territories in which they serve. The Company also utilizes temporary
employees when necessary to manage fluctuations in demand. None of the Company's
employees are covered by a collective bargaining agreement. Management believes
its employee relations are good.

55
<PAGE> 56

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------- ---- -----------------------------------------------------
<S> <C> <C>
John T. Connor(1)(4)...... 53 Chairman of the Board of Directors
Jeffery L. Fuller(1)...... 43 President, Chief Executive Officer, Chief Operating
Officer and Director
Scott R. Bocklund......... 40 Senior Vice President of Finance and Chief Financial
Officer
William L. Fox............ 40 Senior Vice President of Sales and Business
Development
C. Eric Baumann........... 31 Vice President of Sales and Distribution
Frederick G. Hamer........ 53 Vice President of International Sales
Michael P. Wallace........ 36 Vice President of Operations
Joel K. Young............. 32 Vice President of Marketing and Engineering
Terry L. 48 Director (Vice Chairman of the Board of Directors)
Fairfield(1)(2)(4)......
Thomas E. Henning(3)...... 44 Director
Thomas R. Larsen(3)....... 53 Director
Thomas C. Smith(1)(3)..... 53 Director
Thomas R. Thomsen(2)(4)... 62 Director
Winston J. Wade(2)........ 58 Director
</TABLE>

- ---------------

(1) Member of the Executive Committee.

(2) Member of the Compensation Committee.

(3) Member of the Audit Committee.

(4) Member of the Nominating Committee.

John T. Connor led the investor group which purchased the Company from its
founder in 1991. Mr. Connor has served as Chairman of the Board of Directors of
the Company since its inception in December 1991 through the present and served
as Chief Executive Officer of the Company from December 1991 through July 1997.
From 1969 to June 1991, he held numerous senior management positions with
Deloitte & Touche LLP, an international accounting, tax and consulting firm, and
its predecessor firm, Touche Ross & Co., including National Director of Tax,
Associate Managing Partner, Mid-Atlantic Regional Managing Partner and member of
the management committee and Board of Directors.

Jeffery L. Fuller has served as the Company's President and Chief Operating
Officer since July 1995 and Chief Executive Officer since July 1997, and has
served as a director of the Company since July 1996. Mr. Fuller has served for
over 20 years in managerial positions at various wireless communications product
manufacturers, including Motorola, General Electric Mobile Radio Communications,
Inc. and Icom America, Inc. From January 1990 to July 1995, he held several
management positions with E.F. Johnson, serving most recently as Vice President
North American Sales and executive officer in charge of the North American
business unit.

Scott R. Bocklund joined the Company from E.F. Johnson as Senior Vice
President of Finance and Chief Financial Officer in July 1997. From October 1992
through July 1997, he served as Vice President, Finance for E.F. Johnson, and
has held other positions with E.F. Johnson since September 1989.

William L. Fox has served as the Company's Senior Vice President of Sales
and Business Development since August 1997. From March 1995 to July 1997, he
served as President of Real Estate Listing Service Corporation, an electronic
real estate listing service, and as President of Fox Consulting Corporation, an
outsourced services provider for the real estate industry. From February 1994 to
March 1995, he served as

56
<PAGE> 57

Manager of Strategic Services Consulting at KPMG Peat Marwick. From January 1992
to January 1994, he served as Project Manager for IBM China/Hong Kong.

C. Eric Baumann has served as the Company's Vice President of Sales and
Distribution since November 1996, and from January to November 1996 served as
Vice President of Sales and Marketing. From November 1995 to January 1996, he
served as the Vice President of Sales. From January 1990 to November 1995, he
held numerous positions at E.F. Johnson, serving most recently as Director North
American Sales and Telemetry.

Frederick G. Hamer joined the Company from E.F. Johnson as Vice President
of International Sales in July 1997. From October 1992 through July 1997, he
served as Vice President, International for E.F. Johnson, and from 1983 through
October 1992 he served as Vice President, Sales and Distribution for E.F.
Johnson.

Michael P. Wallace joined the Company as Vice President of Operations in
February 1994. From December 1989 to February 1994, he served as the Electric
Card Assembly and Test Engineering Manager of Scientific Atlanta Inc., a
manufacturer and distributor of broadband communications products.

Joel K. Young joined the Company as Vice President of Engineering in
February 1996, and became Vice President of Marketing and Engineering in June
1997. From 1986 to January 1996, he held numerous positions with AT&T and the
former AT&T Bell Laboratories, telecommunications research companies, and
specialized in signaling, network implementation and voice processing. He served
most recently as District Manager, AT&T Business Communications Services. Mr.
Young has been awarded five patents on various telecommunications systems and
techniques.

Terry L. Fairfield has served as a director of the Company since December
1991. Since 1987, he has served as President and Chief Executive Officer of the
University of Nebraska Foundation, a nonprofit corporation. Mr. Fairfield also
serves as a director of Aliant Communications Inc., a Nasdaq listed, public
telecommunications company.

Thomas E. Henning was appointed to serve the remaining term as director for
Harold S. Myers, a former director of the Company who passed away in December
1996. Mr. Henning previously served as director of the Company from February
1993 through July 1996. Mr. Henning has, since February 1995, served as
President, Chief Executive Officer and director of The Security Mutual Life
Insurance Company, a life insurance, annuity and pension products company, and
also serves as a director of National Bank of Commerce, a subsidiary of First
Commerce Bancshares, Inc., a publicly-held, exchange-listed bank holding
company. From March 1990 to February 1995, Mr. Henning served as President and
Chief Operating Officer of The Security Mutual Life Insurance Company.

Thomas R. Larsen has served as a director of the Company since October 1995
and was originally appointed director as a representative of John Kuijvenhoven
and affiliates, principal stockholders of the Company. Mr. Larsen has been a
certified public accountant since 1975 and is currently President and Chief
Executive Officer of Larsen, Bryant & Porter, CPAs, P.C., a public accounting,
tax and consulting firm. Mr. Larsen is also a director of Smith Hayes Trust,
Inc., a mutual fund management company.

Thomas C. Smith has served as a director of the Company since October 1995
and was originally appointed director as a representative of the Farm Bureau
Insurance Company, a principal stockholder of the Company. Since December 1985,
he has been Chairman of the Board of Directors and President of Consolidated
Investment Corporation, the parent company of Smith Hayes Financial Services
Corporation, a financial services firm, and Conley Smith Inc., a registered
investment advisor. Mr. Smith is the chairman of both subsidiaries and President
of Smith Hayes Financial Services Corporation. He is also a director of the
Nebraska Research and Development Authority and First Mid-America Finance
Corporation.

Thomas R. Thomsen has served as a director of the Company since July 1995.
Since August 1995, he has served as Chairman of the Board of Directors and Chief
Executive Officer of Lithium Technology Corporation ("LTC"), a public company
that manufactures rechargeable batteries. Mr. Thomsen has served as a director
of LTC since February 1995. In January 1990, Mr. Thomsen retired as President of
AT&T Technologies, after holding numerous senior management positions including
director of Sandia Labs, Lucent Technologies,

57
<PAGE> 58

ATT Credit Corp. and Oliveti Inc. Mr. Thomsen also serves as a director of the
University of Nebraska Technology Park.

Winston J. Wade has served as a director of the Company since July 1996.
Since December 1996, he has served as Chief Executive Officer and Chief
Operating Officer of Binariang-Malaysia, a joint venture of U.S. West
International. From February to December 1996, he served as managing director of
BPL U.S. West Cellular in India. From 1963 to 1996, he held various positions
with Northwestern Bell, AT&T and U.S. West Communications. Mr. Wade also serves
as a director of the University of Nebraska Foundation.

The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Class I directors, Class II directors
and Class III directors serve until the annual meeting of the Company's
stockholders to be held in 2000, 1998 and 1999, respectively, and until their
respective successors are duly elected and have qualified or until their earlier
resignation or removal. The Board consists of two Class I directors (Messrs.
Larsen and Wade), three Class II directors (Messrs. Fuller, Thomsen and Smith)
and three Class III directors (Messrs. Connor, Henning and Fairfield). Executive
officers of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. There are no familial relationships between any of the
directors or executive officers of the Company.

BOARD COMMITTEES

The Board of Directors has four committees: an Audit Committee, a
Compensation Committee, a Nominating Committee and an Executive Committee. The
Audit Committee, comprised of Messrs. Henning, Smith and Larsen, oversees
actions taken by the Company's independent auditors and reviews the Company's
internal accounting controls. The Compensation Committee, comprised of Messrs.
Fairfield, Thomsen and Wade, is responsible for determining the Company's
compensation policies and administering the Company's compensation plans and
1996 Stock Incentive Plan. The Compensation Committee also reviews the
compensation levels of the Company's employees and makes recommendations to the
Board regarding changes in compensation. The Nominating Committee, comprised of
Messrs. Fairfield, Connor and Thomsen, recommends to the Board of Directors
nominees for election to the Board. The Executive Committee, comprised of
Messrs. Connor, Fuller, Fairfield and Smith, has the power to act on behalf of
the Board of Directors on matters pertaining to the day-to-day operations of the
Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors consists of Messrs.
Fairfield, Thomsen and Wade, none of whom has been or is an officer or employee
of the Company. No interlocking relationship exists between any member of the
Compensation Committee and any member of any other company's board of directors
or compensation committee.

DIRECTOR COMPENSATION

The members of the Company's Board of Directors are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings. The
Company pays to each director who is not employed by the Company, subject to a
limitation of $5,000 plus expenses per calendar year, $1,000 for each board
meeting attended and $400 for each committee meeting attended.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation contains provisions that limit
the liability of its directors for monetary damages arising from a breach of
their fiduciary duty as directors to the fullest extent permitted by Delaware
law. Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
directors and

58
<PAGE> 59

officers. The indemnification agreements may require the Company, among other
things, to indemnify its directors and officers against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceedings against them as
to which they could be indemnified.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

EXECUTIVE COMPENSATION

The following table shows the compensation earned by or paid to, for
services rendered in 1996 and 1995 (or for such shorter period that the
individual was employed by the Company), the Company's Chief Executive Officer
during such years and the other executive officers who received salary and bonus
at a rate in excess of $100,000 in such years (collectively, the "Named
Executive Officers"). No other executive officer received salary and bonus at a
rate in excess of $100,000 from the Company during 1996.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION ALL OTHER
BONUS ------------ COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY (1) OTHER ANNUAL OPTIONS # (8)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor................. 1996 $172,885 $50,000 $210,000(3) -- $ 8,716
Chairman of the Board(2) 1995 169,808 86,830 -- -- 4,760
Jeffery L. Fuller.............. 1996 $156,923 $35,000 -- -- $ 1,440
President, Chief Executive
Officer(2), Chief
Operating 1995 66,346(4) 14,840 -- 163,829 25,066
Officer and Director
C. Eric Baumann................ 1996 $103,000 $ 2,000 $ 58,254(6) -- $ 14,705
Vice President of Sales 1995 15,054(5) 3,168 154(6) 32,766 --
and Distribution
Joel K. Young.................. 1996 $ 88,461(7) $ 2,000 -- 32,766 $ 36,852
Vice President of Engineering
</TABLE>

- ---------------

(1) Bonuses listed were earned during indicated year and paid during the
following year.

(2) Mr. Connor served as Chief Executive Officer through July 1997 and Mr.
Fuller served in this position from July 1997 through the present.

(3) Represents remaining amount due to Mr. Connor for deferred fees payable
under his employment contract.

(4) Represents salary at the rate of $150,000 per year beginning in July 1995.

(5) Represents salary at the rate of $103,000 per year beginning in November
1995.

(6) Represents sales commissions earned by Mr. Baumann.

(7) Represents salary at the rate of $100,000 per year beginning in February
1996.

(8) Represents contributions to the Company's 401(k) Profit Sharing & Savings
Plan, moving allowances and personal use of Company-owned automobiles.

59
<PAGE> 60

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning options granted to
the Named Executive Officers during 1996.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION --------------------
NAME GRANTED(1) IN 1995 SHARE DATE 5% 10%
- ------------------------- ---------- ---------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Joel K. Young............ 32,766 66.7% $3.05 02/01/06 $62,849 $159,273
</TABLE>

- ---------------

(1) Options vest 20% per year, at the end of each year, for five years
commencing on the date of grant.

(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock, compounded annually over a
ten-year period and assuming a market value of the Common Stock on the date
of grant of $3.05 per share. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock and overall
stock market conditions. There can be no assurance that the Common Stock
will appreciate at any particular rate or at all in future years.

The following table sets forth the number and value of stock options held
by the Named Executive Officers at December 31, 1996. No stock options granted
to the Named Executive Officers were exercised during 1996.

FISCAL YEAR-END OPTION VALUE TABLE

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
John T. Connor................................. 389,257 / -- $2,817,056 / --
Jeffery L. Fuller.............................. 163,829 / -- $ 810,632 / --
C. Eric Baumann................................ 32,766 / -- $ 162,127 / --
Joel K. Young.................................. 32,766 / -- $ 162,127 / --
</TABLE>

- ---------------

(1) The Company's initial public offering of its Common Stock was completed in
January 1997. Therefore, solely for purposes of this table, the fair market
value per share of Common Stock at December 31, 1996 is assumed to be the
offering price per share in the initial public offering or $8.00.

1996 STOCK INCENTIVE PLAN

Effective as of September 6, 1996, the Company established the 1996 Stock
Incentive Plan (the "Plan"), in order to enable the Company to attract, retain
and motivate its employees, non-employee directors and independent contractors
by providing for or increasing the proprietary interests of such employees, non-
employee directors and independent contractors in the Company. The Company's
stockholders approved the Plan on September 18, 1996. Any person, including any
director of the Company, who is an employee of the Company or any of its
subsidiaries (an "Employee"), and any non-employee director (a "Non-Employee
Director") or independent contractor of the Company (an "Independent
Contractor," or, together with the Employees and the Non-Employee Directors, the
"Eligible Persons") is eligible to be considered for the issuance of (i) shares
of Common Stock, $0.01 par value per share, of the Company or of any other class
of security of the Company which is convertible into shares of the Company's
Common Stock ("Shares") or (ii) a right or interest with an exercise or
conversion privilege at a price related to the Common Stock or with a value
derived from the value of the Common Stock, which right or interest may, but
need not, constitute a "Derivative Security," as such term is defined in Rule
16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as such Rule may be amended from time to time.

Effective as of June 30, 1996, the Company converted from a limited
partnership form of organization to a Subchapter "C" corporation (the
"Reorganization"). Pursuant to the Reorganization, the Company assumed all of
the outstanding options (the "Partnership Options") to acquire limited
partnership interests in

60
<PAGE> 61

the Company's predecessor (the "Partnership"), which were granted pursuant to
the terms of the Partnership's 1992 Partnership Interest Option Plan (the
"Partnership Option Plan"), with each Partnership Option becoming an option to
acquire the same number of shares of Common Stock of the Company at the same
exercise price and on the same terms and conditions as set forth in the
Partnership Option Agreement entered into with the optionee. As a result of this
arrangement, the Company issued an aggregate of 716,916 options under the Plan
in the Reorganization in exchange for Partnership Options, all of which are
vested.

Grants made pursuant to the Plan are not restricted to any specified form
or structure and may include, without limitation, sales or bonuses of stock,
restricted stock, stock options, reload stock options, stock purchase warrants,
other rights to acquire stock, securities convertible into or redeemable for
stock, stock appreciation rights, limited stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and a
grant made pursuant to the Plan may consist of one such security or benefit, or
two or more of them in tandem or in the alternative.

With certain exceptions regarding "performance based compensation" as
defined under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), the aggregate number of Shares which may be granted during any
calendar year to any one Eligible Person shall not exceed 400,000.

Subject to certain adjustment provisions under the Plan, the aggregate
number of Shares issued and issuable pursuant to all incentive stock options
granted under the Plan shall not exceed 1,200,000. Such maximum number does not
include the number of Shares subject to the unexercised portion of any incentive
stock option granted under the Plan that expires or is terminated. As of August
31, 1997, there were outstanding options to purchase 1,075,533 shares of Common
Stock with a weighted average exercise price of $4.39 per share.

The Plan is required to be administered by one or more committees of the
Board of Directors (any such committee, the "Committee") or, if no Committee is
designated by the Board of Directors, the Plan will be administered by the Board
of Directors, and all references herein to the Committee shall refer to the
Board of Directors. The Committee shall consist of (i) two or more directors,
each of whom is a "non-employee director" (as such term is defined in Rule 16b-3
promulgated under the Exchange Act, as such Rule may be amended from time to
time), (ii) with respect to any grant that is intended to qualify as
"performance based compensation" under Section 162(m) of the Code, the Committee
shall consist of two or more directors, each of whom is an "outside director"
(as such term is defined under Section 162(m) of the Code), and (iii) with
respect to any other grant, the Committee shall consist of one or more directors
(any of whom also may be an Eligible Person who has been granted or is eligible
to be granted Shares under the Plan).

Subject to the provisions of the Plan, the Committee is authorized to
determine which persons are Eligible Persons and to which of such Eligible
Persons, if any, and when Shares, options or other performance awards shall be
granted, the terms and conditions of any grant, including the number of Shares
subject thereto and the circumstances under which the award will become
exercisable or vested or are forfeited or expire. The Committee is also
authorized to interpret and construe the Plan and adopt, amend and rescind rules
and regulations relating to administration of the Plan.

The Plan provides that unless otherwise provided by the Committee in the
written agreement evidencing the award, the terms of any stock option granted
under the Plan shall provide (i) that the exercise price thereof shall not be
less than 100% of the market value of a share of Common Stock on the date the
option is granted, (ii) that the term of such option shall be ten years from the
date of grant, (iii) that, upon an Employee ceasing to be employed by the
Company for any reason other than death or disability, or a Non-Employee
Director ceasing to be a Non-Employee Director of the Company, an option shall
not become exercisable to an extent greater than it could have been exercised on
the date the Employee's employment by the Company, or the Non-Employee
Director's incumbency, as the case may be, ceased, and (iv) that the option
shall expire ninety (90) days after the Employee ceases to be employed with the
Company or a Non-Employee Director ceases to be a Non-Employee Director of the
Company.

Pursuant to the Plan, the Committee is permitted to allow or require the
recipient of any award under the Plan, including any Eligible Person who is a
director or officer of the Company, to pay the purchase price of

61
<PAGE> 62

the Shares or other property issuable pursuant to such award, or such
recipient's tax withholding obligation with respect to such issuance, or both,
in whole or in part, by any one or more of the following means: the delivery of
cash; the delivery of other property deemed acceptable by the Committee; the
delivery of previously owned shares of capital stock of the Company (including
"pyramiding") or other property; a reduction in the amount of Shares or other
property otherwise issuable pursuant to such award; or the delivery of a
promissory note of the Eligible Person or of a third party, the terms and
conditions of which shall be determined by the Committee.

If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee shall make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to awards theretofore granted under
this Plan and the exercise or settlement price of such awards, and (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to such awards thereafter granted under this Plan. The foregoing
adjustments shall be applied to any awards or Incentive Stock Options only to
the extent permitted by Sections 162(m) and 422 of the Code, respectively.

Pursuant to the Plan, the Board of Directors may amend or terminate the
Plan at any time and in any manner; provided, however, that no such amendment or
termination shall deprive the recipient of any award theretofore granted under
this Plan, without the consent of such recipient, of any of his or her rights
thereunder or with respect thereto; provided, further, that if an amendment to
the Plan would affect the Plan's compliance with Rule 16b-3 under the Exchange
Act or Section 422 or 162(m) or other applicable provisions of the Code, the
amendment shall be approved by the Company's stockholders to the extent required
to comply with Rule 16b-3 under the Exchange Act, Sections 422 and 162(m) of the
Code, or other applicable provisions of or rules under the Code.

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement with John T. Connor, the
Company's Chairman, for a term beginning on July 23, 1997 and ending December
31, 1999. The agreement sets forth a base salary of $200,000 per year and
provides for a quarterly bonus of 20% of his salary if the Company meets or
exceeds quarterly sales goals and 20% if the Company meets or exceeds quarterly
profit goals, which goals are based upon Board approved plans. The agreement
provides for certain benefits to Mr. Connor, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. The agreement includes a Noncompete Agreement, which is
effective during the term of the agreement.

The Company entered into an employment agreement with Jeffery L. Fuller,
the Company's President and Chief Executive Officer, for a term beginning July
31, 1997 and ending on December 31, 1999. The agreement sets forth a base salary
of $200,000 per year and provides for an annual bonus in an amount to be
determined by the Board of Directors, provided the Company meets or exceeds
certain performance objectives provided to the Board of Directors. Mr. Fuller is
entitled, at a minimum, to receive a bonus of 20% of his quarterly salary if the
Company meets or exceeds its quarterly sales goals and 20% if the Company meets
or exceeds its quarterly profit goals. The agreement also provides for certain
benefits to Mr. Fuller, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
agreement includes a Noncompete Agreement, which is effective during the term of
the agreement.

On September 30, 1996, the Company entered into employment agreements with
C. Eric Baumann, Michael P. Wallace and Joel K. Young, each of whom is a Company
Vice President. Each of these agreements sets forth base salaries and provide
for annual bonuses to be determined by the Board of Directors, and provide for
certain benefits, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
term of these employment agreements continues for

62
<PAGE> 63

two years, unless otherwise terminated pursuant to the terms of the agreements.
Each of these individuals has entered into a Noncompete Agreement effective
during the term of each individual's employment agreement.

On July 29, 1997, the Company entered into employment agreements with Scott
R. Bocklund, the Company's Senior Vice President of Finance and Chief Financial
Officer, and Fred Hamer, the Company's Vice President International. On July 28,
1997, the Company entered into an employment agreement with William L. Fox, the
Company's Senior Vice President of Sales and Business Development. Each of these
agreements sets forth base salaries. The employment agreements of Messrs.
Bocklund and Fox provide for an annual bonus based upon revenue and net income
achievements of the Company. Mr. Hamer's employment agreement provides for
payment of commissions if the Company's quarterly plans are achieved. All of
these agreements provide for certain benefits, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. The term of the employment agreements of Messrs. Bocklund
and Hamer expires July 31, 1998. The term of Mr. Fox's employment agreement
expires August 18, 1998. Each of these individuals has entered into a Noncompete
Agreement effective during the term of each individual's employment agreement.

401(K) PROFIT SHARING & SAVINGS PLAN

In July 1992, the Company established the Transcrypt International
Employees Profit Sharing & Savings Plan (the "Benefit Plan"). The Benefit Plan
consists of a 401(k) eligible savings plan, which is intended to comply with
Sections 401(a) and 401(k) of the Code and the applicable provisions of the
Employee Retirement Income Security Act of 1974, and a profit sharing plan.
Amounts contributed to the Benefit Plan are held under a trust intended to be
exempt from income tax pursuant to Section 501(a) of the Code. Employees of the
Company that have completed at least one year of service are eligible to
participate in the profit sharing plan and employees that have completed six
months of service are eligible to participate in the 401(k) eligible savings
plan. Participating employees are entitled to make pre-tax contributions to
their 401(k) accounts, subject to certain maximum annual limits imposed by law
($9,500 in 1996), and certain other limitations. The Company may elect to make a
discretionary contribution to the Benefit Plan each year. Employees are always
fully vested in their own contributions, and the Company's contributions vest in
participating employees over a six-year period at 20% per year beginning in the
second year. Distributions generally are payable in a lump-sum after retirement,
disability or death and, in certain circumstances, upon termination of
employment with the Company for other reasons. The Company has paid or accrued
contributions to the Benefit Plan (including the 401(k) eligible savings plan
and profit sharing plan) of $74,091 in the six months ended June 30, 1997 and
$83,788 in 1996.

CERTAIN TRANSACTIONS

On January 15, 1994, the Company borrowed from the Nebraska Investment
Finance Authority ("NIFA") $850,000 in proceeds through the issuance of
Industrial Development Revenue Bonds, Series 1994, issued pursuant to a Trust
Indenture by and between NIFA and Norwest Bank of Nebraska, N.A., as trustee. In
connection with the borrowing, the Company executed a non-amortizing promissory
note under which the principal was due in a balloon payment in January 2004. The
note bore interest at a rate of 6.25% per annum, with interest due quarterly on
July 15, October 15, January 15 and April 15 of each year. The note was secured
by a Deed of Trust and Construction Security Agreement from the Company to the
trustee. The Company used the proceeds from the borrowing to finance the
construction of its Lincoln facility. The bonds were privately placed with
Security National Bank of Superior, which is owned and controlled by certain
stockholders of the Company, including the Estate of Harold S. Myers, David C.
Myers and Steven Wright. In March 1997, the Company repaid this borrowing in
full. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

In November 1993, the Company entered into a transaction with the
University of Nebraska Foundation ("UNF") in which the Company sold its then
existing facility to UNF and purchased from UNF approximately 10 acres of land
in the University of Nebraska Technology Park, which is being developed by UNF.
In the transaction, the Company transferred land and improvements valued at
$525,000 to UNF and

63
<PAGE> 64

received from UNF $450,000 in cash and land valued at $75,000. The Company has
since constructed its current headquarters and manufacturing facility on the
land acquired from UNF. The value of the property sold by the Company in the
transaction was based upon an appraisal. The Company believes that the price it
paid for the land acquired in the transaction was approximately equal to UNF's
cost, and that such price was favorable to the Company as a result of UNF's
desire to induce the Company to become the first technology company to locate in
the University of Nebraska Technology Park. UNF owned 10.9% of the outstanding
Common Stock of the Company as of August 31, 1997 and Terry L. Fairfield,
President and Chief Executive Officer of UNF, is a director of the Company. The
determination of the values used in this transaction was made for the Company by
Mr. Connor.

64
<PAGE> 65

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of August
31, 1997 and as adjusted to reflect the sale of shares offered pursuant to this
Prospectus, by (i) each person (or group of affiliated persons) known by the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock, (ii) each director, (iii) each Named Executive Officer, (iv) all
executive officers and directors as a group, and (v) each Selling Stockholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OF OFFERING(1)(2)(3)
------------------- SHARES -------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED(4) NUMBER PERCENT
- -------------------------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
John T. Connor(5)........................... 1,895,785 18.0% 95,000 1,705,785 13.1%
4800 NW 1st Street
Lincoln, Nebraska 68521
Janice K. Connor(6)......................... 1,506,528 14.9% 95,000 1,411,528 11.1%
4800 NW 1st Street
Lincoln, Nebraska 68521
University of Nebraska Foundation........... 1,106,622 10.9% 230,338 876,284 6.9%
1111 Lincoln Mall, Suite 200
P.O. Box 82555
Lincoln, Nebraska 68501-2555
First Commerce Bancshares, Inc.(7).......... 681,692 6.7% -- 681,692 5.4%
NBC Center, 3rd Floor
13th & O Streets
Lincoln, Nebraska 68508
Farm Bureau Insurance Company............... 605,898 6.0% 605,898 -- --
5400 University Avenue
Des Moines, Iowa 50265
NorAm Energy Corp. ......................... 457,856 4.5% 457,856 -- --
1111 Louisiana Street, 43rd Floor
Houston, Texas 77002
Estate of Harold S. Myers................... 391,299 3.9% 91,299 300,000 2.4%
635 South 14th Street, Suite 320
Lincoln, Nebraska 68508
Intek Diversified Corporation............... 374,609 3.7% 374,609 --
214 Carnegie Center, Suite 304
Princeton, New Jersey 08540
The Security Mutual Life Insurance
Company................................... 340,972 3.4% 50,000 290,972 2.3%
200 Centennial Mall North
Lincoln, Nebraska 68508
Jeffery L. Fuller(8)........................ 163,829 1.6% -- 163,829 1.3%
C. Eric Baumann(8).......................... 32,766 * -- 32,766 *
Joel K. Young(8)............................ 32,766 * -- 32,766 *
Thomas R. Larsen(8)......................... 1,000 * -- 1,000 *
Terry L. Fairfield(8)(9).................... 1,000 * -- 1,000 *
Thomas E. Henning(10)(11)................... 4,000 * -- 4,000 *
Thomas C. Smith(11)......................... 2,800 * -- 2,800 *
Thomas R. Thomsen(12)....................... 8,553 * -- 8,553 *
Winston J. Wade(8)(9)....................... 7,553 * -- 7,553 *
All executive officers and directors as a
group (14 persons)........................ 2,182,818 20.2% -- 1,992,818 15.0%
</TABLE>

(footnotes on following page)

65
<PAGE> 66

- ---------------

* Less than 1%.

(1) Shares of Common Stock issuable upon exercise of stock options currently
exercisable, or exercisable within 60 days of the date of this offering,
are deemed outstanding for computing the percentage of the person or entity
holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power, if any, with
respect to all shares of Common Stock shown as beneficially owned by them.

(2) Percentage ownership is based on 10,115,543 shares of Common Stock
outstanding prior to this offering and 12,710,543 shares of Common Stock
outstanding after this offering.

(3) Assumes that the Underwriters' over-allotment option is not exercised.

(4) Does not include shares which may be used to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option in full, the
following Selling Stockholders will be selling the indicated number of
additional shares: John T. Connor (99,629 shares), Janice K. Connor (99,628
shares), University of Nebraska Foundation (214,662 shares), The Security
Mutual Life Insurance Company (25,000 shares), Jeffery L. Fuller (30,000
shares), Joel K. Young (5,000 shares), Michael P. Wallace (5,000 shares),
C. Eric Baumann (5,000 shares), Stephen Cass (5,000 shares) and Rebecca T.
Schultz (1,600 shares).

(5) Includes 714,033 shares prior to the Offering and 619,033 shares after the
Offering which are held of record by Janice K. Connor and 95,358 shares
held by or in trust for other members of the Connor family, of which Mr.
Connor disclaims beneficial ownership, and 389,257 shares prior to the
Offering and 294,257 shares after the Offering which are issuable upon the
exercise of stock options that are exercisable within 60 days of the date
of this Prospectus.

(6) Includes 697,137 shares held of record by John T. Connor and 95,358 shares
held by or in trust for other members of the Connor family, of which Mrs.
Connor disclaims beneficial ownership.

(7) Shares of Common Stock owned by First Commerce Bancshares, Inc. include
217,542 shares of Non-Voting Common Stock. Pursuant to the Company's
Certificate of Incorporation, upon the disposition of the Non-Voting Common
Stock by First Commerce Bancshares, Inc., voting rights will be restored to
these shares. See "Description of Capital Stock."

(8) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.

(9) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Fairfield serves as President and Chief Executive Officer and for
which Mr. Wade serves as director.

(10) Does not include 340,972 shares held by The Security Mutual Life Insurance
Company, of which Mr. Henning serves as President, Chief Executive Officer
and director.

(11) Includes 1,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.

(12) Includes 7,553 shares issuable upon the exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.

66
<PAGE> 67

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $0.01 par value, and 3,000,000 shares of Preferred Stock, $0.01
par value. At August 31, 1997, there were 10,115,543 shares of Common Stock
outstanding, held of record by approximately 105 record holders.

COMMON STOCK

Holders of Common Stock (other than the Non-Voting Common Stock) are
entitled to one vote per share in all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of the Company's liabilities and the liquidation
preference, if any, of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive rights and no rights to convert their Common
Stock into any other securities, and there are no redemption provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Of the 20,000,000 shares of Common Stock
authorized by the Company's Certificate of Incorporation, 600,000 shares have
been authorized for issuance as Non-Voting Common Stock, of which 217,542 shares
were outstanding at June 30, 1997. All of the shares of Non-Voting Common Stock
were issued to a bank holding company which is restricted from owning more than
five percent of the voting Common Stock of the Company. Pursuant to the
Company's Certificate of Incorporation, upon the disposition of the outstanding
Non-Voting Common Stock by such stockholder, its subsidiaries or affiliates, or
any of their successors, the voting rights will be restored to these shares.

PREFERRED STOCK

The Board of Directors has the authority, without any further vote or
action by the stockholders, to issue up to 3,000,000 shares of Preferred Stock
from time to time in one or more series, to establish the number of shares to be
included in each such series, to fix the designations, preferences, limitations
and relative, participating, optional or other special rights and qualifications
or restrictions of the shares of each series, and to determine the voting
powers, if any of, such shares. The issuance of Preferred Stock could adversely
affect, among other things, the rights of existing stockholders or could delay
or prevent a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock. In
addition, any such issuance could have the effect of delaying, deferring or
preventing a change in control of the Company and could make the removal of the
present management of the Company more difficult. The Company has no current
plans to issue any Preferred Stock.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Certain provisions of Delaware law and the Company's Certificate of
Incorporation could make more difficult the acquisition of the Company by means
of a tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company. The Company believes that the benefits of increased protection
of the Company's potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.

The Company will be subject to the provisions of Section 203 of the
Delaware law. In general, this section prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an

67
<PAGE> 68

"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock. This provision may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.

The Company's Certificate of Incorporation provides that, as of the date
following the effectiveness of this offering, the Board of Directors will be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders of
the Company, with the other classes continuing for the remainder of their
three-year terms. The classification of the Board of Directors makes it more
difficult for the Company's stockholders to replace the Board of Directors, as
well as for another party to obtain control of the Company by replacing the
Board of Directors. Since the Board of Directors has the power to retain and
discharge officers of the Company, these provisions could also make it more
difficult for existing stockholders or another party to effect a change in
management. In addition, beginning on the date following the effectiveness of
this offering, the Company will not have cumulative voting rights in the
election of its directors and, accordingly, holders of more than 50% of the
shares voting will be able to elect all of the directors as each class of
directors' terms expires. See "Risk Factors -- Control by Existing
Stockholders."

The Company's Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and may not be
taken by written consent. The Certificate of Incorporation provides that special
meetings of stockholders can be called only by the Company's Board of Directors,
Chairman of the Board, President or Chief Executive Officer, or at the written
request of holders of not less than 25% of the voting shares. The Bylaws set
forth an advance notice procedure with regard to the nomination, other than by
or at the direction of the Board of Directors, of candidates for election as
directors and with regard to business to be brought before an annual meeting of
stockholders of the Company. The Company's Certificate of Incorporation provides
that the Board of Directors is authorized to amend the Bylaws only by the
affirmative vote of 60% or more of the entire Board of Directors, and the
Company's stockholders may amend the Bylaws only upon the affirmative vote of
the holders of 75% or more of the voting shares. In addition, the Company's
Certificate of Incorporation provides that certain articles of the Certificate
of Incorporation may be amended only upon the affirmative vote of the holders of
75% or more of the voting shares, including articles containing provisions
dealing with, among other things: (i) the ability of the Board of Directors to
establish a rights plan without specific approval of the stockholders; (ii) the
aforementioned voting requirements for amending the Bylaws; (iii) the size and
classification of the Board of Directors; (iv) the directors' indemnification
contained in the Certificate of Incorporation; (v) the duty of care of the
directors set forth in the Certificate of Incorporation; and (vi) the denial of
cumulative voting and stockholder action by written consent and the procedures
for calling special meetings.

Additionally, the Certificate of Incorporation authorizes the Board of
Directors to create and issue rights to purchase shares of the Company's
authorized but unissued capital stock or other securities. The Board is
authorized to determine, with respect to such rights, (i) the initial exercise
price; (ii) period for exercise; (iii) adjustment provisions in the event of a
business combination, reorganization or other transaction; (iv) redemption
provisions; and (v) provisions which deny exercise privileges to rights holders
who own at least a specified percentage of the outstanding capital stock of the
Company or which cause such rights to become void. The Board has not created or
issued any such rights and has no present intention to do so.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A.

68
<PAGE> 69

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Upon
completion of this offering, the Company will have outstanding 12,710,543 shares
(12,946,624 shares assuming the full exercise of the Underwriters'
over-allotment option) of Common Stock, assuming no exercise of options granted
under the Company's 1996 Stock Incentive Plan. Of these shares, the 2,500,000
shares offered hereby by the Company and the 2,000,000 shares offered hereby by
the Selling Stockholders (2,684,481 shares and 2,490,519 shares, respectively,
assuming the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined for purposes of Rule 144
promulgated under the Securities Act (i.e., directors, officers and 10% or
greater stockholders). Of the remaining 8,210,543 shares (7,771,624 shares
assuming the full exercise of the Underwriters' over-allotment option),
3,883,270 shares are freely tradeable without restriction under the Securities
Act and 4,327,273 shares (3,888,354 shares assuming the Underwriters'
over-allotment option is exercised in full) are "restricted" securities under
the Securities Act (the "Restricted Shares"). Of the Restricted Shares,
1,411,528 are deemed to be held by "affiliates" of the Company.

None of the Restricted Shares may be sold in the public market unless
registered under the Securities Act or upon qualification under an exemption
from registration under Rules 144 or 701 promulgated under the Securities Act.
Under Rule 144 as currently in effect, any person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
Restricted Shares for at least one year (including in certain circumstances the
holding period of a prior owner except an affiliate), and any person who is an
affiliate of the Company whose shares are not restricted securities, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (approximately 127,105 shares immediately following this offering),
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale. The
Company believes, under interpretations of Rules 144 and 145 under the
Securities Act, that the holding period applicable to 4,284,000 of the
Restricted Shares began on June 30, 1996, while the holding period applicable to
the remaining 43,273 of the Restricted Shares began on September 30, 1996.

Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

As of August 31, 1997, an aggregate of 706,533 shares of Common Stock were
issuable upon the exercise of vested stock options under the Company's 1996
Stock Incentive Plan and an aggregate of 369,000 shares were subject to issuance
upon the exercise of granted but unvested stock options. An aggregate of
1,200,000 shares of Common Stock have been reserved for issuance under the
Company's 1996 Stock Incentive Plan. In addition, the Company has filed a
registration statement on Form S-8 under the Securities Act covering the
1,200,000 shares of Common Stock reserved for issuance under the Company's 1996
Stock Incentive Plan. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to affiliates
of the Company and the lock-up agreements described below, be available for sale
in the open market, subject to applicable vesting restrictions on stock options.

All directors, officers, selling stockholders and holders of stock options
issued by the Company have entered into contractual "lock-up" agreements
providing that they will not offer, sell, pledge, contract to sell, grant any
option to purchase or otherwise dispose of any Common Stock, nor any options,
warrants or other securities convertible into or exercisable or exchangeable for
Common Stock, whether now owned or hereafter acquired, or in any manner transfer
all or a portion of the economic consequences associated with their ownership of
the Common Stock of the Company, for a period of 180 days after the effective
date of this offering, without the prior written consent of Furman Selz LLC. As
a result of these contractual restrictions, shares subject to lock-up agreements
will not be saleable until the agreements expire.

69
<PAGE> 70

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives
Furman Selz LLC, NationsBanc Montgomery Securities, Inc. and Dain Bosworth
Incorporated have severally agreed to purchase from the Company and the Selling
Stockholders the following respective numbers of shares of Common Stock at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------- ----------------
<S> <C>
Furman Selz LLC.................................... 1,755,000
NationsBanc Montgomery Securities, Inc............. 1,755,000
Dain Bosworth Incorporated......................... 871,500
Kirkpatrick, Pettis, Smith, Polian Inc. ........... 39,500
Chatsworth Securities LLC.......................... 39,500
Cruttenden Roth Incorporated....................... 39,500
---------
Total.................................... 4,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.

The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.65 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After the public offering, the public offering price and
other selling terms may be changed by the Representatives of the Underwriters.

The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 675,000 additional shares of Common Stock, at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to 4,500,000, and the
Company and such Selling Stockholders will be obligated, pursuant to the option,
to sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments, if any, made in connection with the sale
of the Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the 4,500,000 shares
of Common Stock are being offered.

In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.

Subject to applicable limitations, the Underwriters, in connection with
this offering, may place bids for or make purchases of the Common Stock in the
open market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf

70
<PAGE> 71

of the underwriting syndicate to reduce a short position created in connection
with this offering. The Underwriters are not required to engage in these
activities and may end these activities at any time.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.

The Company and each of its directors and executive officers and certain of
its security holders, who in the aggregate will hold, following this offering,
1,346,328 shares of Common Stock and options to purchase 912,427 shares of
Common Stock, have agreed that they will not directly or indirectly, without the
prior written consent of Furman Selz LLC, offer, sell, offer to sell, contract
to sell, or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus, except that the Company may issue, and
grant options to purchase, shares of Common Stock under its current stock option
and purchase plans and other currently outstanding options. In addition, the
Company may issue shares of Common Stock in connection with any acquisition of
another company if the terms of such issuance provide that such Common Stock
shall not be resold prior to the expiration of the 180-day period referenced in
the preceding sentence.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Katten Muchin & Zavis,
Chicago, Illinois.

The reference in this Prospectus set forth under the caption "Business --
Intellectual Property" to the opinion of Zarley, McKee, Thomte, Voorhees &
Sease, P.L.C., patent counsel for the Company, has been authorized by such
counsel and is included herein in reliance upon such counsel's authority as
experts on patent law.

EXPERTS

The financial statements of Transcrypt International, Inc. as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent auditors, as stated in their report, which is included
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.

The consolidated financial statements of E.F. Johnson Company as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus have been so included in reliance
on the report (which contains an explanatory paragraph relating to E.F. Johnson
Company's ability to continue as a going concern as described in Note 1 to the
financial statements) of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.

71
<PAGE> 72

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, including the rules and
regulations promulgated thereunder, with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. All of these documents
may be inspected without charge at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials may be obtained from the Public Reference Section of
the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith, files reports, proxy or
information statements and other information with the Commission. Such reports,
proxy statements and other information can be inspected and copies may be
obtained from the sources indicated. In addition, the Company's Common Stock is
traded on the Nasdaq National Market, and the Company's reports, proxy or
information statements and other information may be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.

72
<PAGE> 73

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TRANSCRYPT INTERNATIONAL, INC.
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997...... F-3
Consolidated Statements of Income (Loss) for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997......................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months ended June 30, 1997.......... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997......................... F-6
Notes to Consolidated Financial Statements.......................................... F-8

E.F. JOHNSON COMPANY
Report of Independent Accountants................................................... F-17
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 29, 1997...... F-18
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and June 29, 1997................ F-19
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended June 30, 1996 and June
29, 1997......................................................................... F-20
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and June 29, 1997................ F-21
Notes to Consolidated Financial Statements.......................................... F-22
</TABLE>

F-1
<PAGE> 74

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
Transcrypt International, Inc.

We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income (loss), changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Lincoln, Nebraska
February 3, 1997

F-2
<PAGE> 75

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 291,712 $ 0 $12,699,287
Accounts receivable, net of allowance for doubtful
accounts of $181,659, $430,251 and $737,584,
respectively.................................... 1,923,441 4,215,403 7,923,373
Receivable -- employees and affiliate.............. 57,791 11,247 0
Inventory, net..................................... 1,119,763 2,261,381 2,718,157
Prepaid expenses................................... 60,323 59,949 176,430
Deferred tax assets................................ 0 196,234 320,287
----------- ---------- -----------
Total current assets....................... 3,453,030 6,744,214 23,837,534
Property, plant and equipment, at cost, net of
accumulated depreciation........................... 3,066,740 4,907,438 6,221,616
Deferred tax assets.................................. 0 1,723,190 1,713,190
Intangible assets, net of accumulated amortization... 1,002,860 38,137 39,722
Deferred initial public offering costs............... 0 568,049 0
Other assets......................................... 0 0 39,158
----------- ---------- -----------
$7,522,630 $13,981,028 $31,851,220
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................... $ 0 $ 385,694 $ 0
Revolving line of credit........................... 0 1,022,000 152,000
Current portion of capitalized lease obligations... 15,570 13,803 6,893
Current portion of long-term debt.................. 412,656 581,959 0
Obligations under noncompete agreements............ 340,000 0 0
Accounts payable................................... 176,985 1,174,364 1,193,043
Income taxes payable............................... 0 151,894 52,496
Accrued expenses................................... 767,246 946,406 1,155,920
Deferred revenue................................... 56,814 0 0
----------- ---------- -----------
Total current liabilities.................. 1,769,271 4,276,120 2,560,352
Capitalized lease obligations, net of current
portion............................................ 15,099 1,296 0
Long-term debt, net of current portion............... 1,831,493 1,838,646 2,850,000
Revolving line of credit............................. 0 792,070 0
----------- ---------- -----------
3,615,863 6,908,132 5,410,352
----------- ---------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Partners' capital.................................. 3,906,767
Preferred stock, ($.01 par value; 3,000,000 shares
authorized; none issued)
Common stock ($.01 par value; 19,400,000 voting
shares authorized, 6,565,536 issued and
outstanding as of December 31, 1996 and
9,065,536 issued and outstanding as of June 30,
1997; 600,000 nonvoting shares authorized,
217,542 issued and outstanding)................. 0 67,831 92,831
Additional paid-in capital......................... 0 9,683,381 27,368,089
Retained deficit................................... 0 (2,678,316) (1,020,052)
----------- ---------- -----------
3,906,767 7,072,896 26,440,868
----------- ---------- -----------
$7,522,630 $13,981,028 $31,851,220
=========== ========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE> 76

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS
ENDED
JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX-MONTH SIX-MONTH
-------------------------------------- PERIOD ENDED PERIOD ENDED
1994 1995 1996 JUNE 30, 1996 JUNE 30, 1997
---------- ----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $9,155,164 $ 8,128,200 $13,775,597 $ 5,727,829 $ 10,277,993
Cost of sales.................... 2,901,577 2,982,942 4,864,589 1,849,747 3,864,889
---------- ----------- ----------- ---------- -----------
Gross profit................ 6,253,587 5,145,258 8,911,008 3,878,082 6,413,104
Operating costs and expenses:
Research and development....... 1,179,540 1,953,068 2,233,753 1,084,618 1,315,789
Sales and marketing............ 1,589,632 2,109,393 2,102,753 835,122 1,965,212
General and administrative..... 1,074,408 1,190,751 1,412,856 694,311 1,037,460
Special compensation expense... 0 0 5,568,250 0 0
Amortization of acquisition
related expense............. 1,092,426 1,092,680 1,001,666 546,340 0
---------- ----------- ----------- ---------- -----------
Total operating costs and
expenses.................. 4,936,006 6,345,892 12,319,278 3,160,391 4,318,461
---------- ----------- ----------- ---------- -----------
Income (loss) from operations.... 1,317,581 (1,200,634) (3,408,270) 717,691 2,094,643
Interest income.................. 34,147 53,297 30,567 24,614 317,642
Interest expense................. (144,940) (190,403) (161,905) (75,109) (81,772)
---------- ----------- ----------- ---------- -----------
Income (loss) before income
taxes.......................... 1,206,788 (1,337,740) (3,539,608) 667,196 $ 2,330,513
Provision (benefit) for income
taxes.......................... 0 0 (1,528,488) 0 672,249
---------- ----------- ----------- ---------- -----------
Net income (loss)................ $1,206,788 $(1,337,740) $(2,011,120) $ 667,196 $ 1,658,264
========== =========== =========== ========== ===========
Pro forma information:
Income (loss) before pro forma
income taxes................ $(1,337,740) $(3,539,608) $ 667,196 $ 2,330,513
Pro forma and provision
(benefit) for income
taxes....................... (496,316) (1,393,209) 134,645 672,249
----------- ----------- ---------- -----------
Pro forma and net income
(loss)...................... $ (841,424) $(2,146,399) $ 532,551 $ 1,658,264
=========== =========== ========== ===========
Pro forma and net income (loss)
per share................... $ (.12) $ (.31) $ 0.08 $ 0.17
=========== =========== ========== ===========
Weighted average common and
common equivalent shares
outstanding................. 6,968,712 6,968,712 6,968,712 9,596,406
=========== =========== ========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE> 77

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
PAR PAID-IN RETAINED PARTNERS'
UNITS SHARES VALUE CAPITAL DEFICIT CAPITAL TOTAL
---------- --------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... 4,975,434 0 $ 0 $ 0 $ 0 $ 4,599,191 $ 4,599,191
Additional investment................ 200,000 0 0 0 0 1,000,007 1,000,007
Distributions........................ 0 0 0 0 0 (861,482) (861,482)
Net income........................... 0 0 0 0 0 1,206,788 1,206,788
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1994........... 5,175,434 0 0 0 0 5,944,504 5,944,504
Distributions........................ 0 0 0 0 0 (699,997) (699,997)
Net loss............................. 0 0 0 0 0 (1,337,740) (1,337,740)
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1995........... 5,175,434 0 0 0 0 3,906,767 3,906,767
Distributions........................ 0 0 0 0 0 (181,001) (181,001)
Net income (loss).................... 0 0 0 0 (2,678,316) 667,196 (2,011,120)
Issuance of stock in exchange for
units of the Predecessor........... (5,175,434) 5,175,434 51,754 4,341,208 0 (4,392,962) 0
Additional shares issued in
1.3106311-for-1 stock split
effected in the form of a stock
dividend........................... 0 1,607,644 16,077 (16,077) 0 0 0
Special compensation -- options
issued............................. 0 0 0 5,358,250 0 0 5,358,250
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1996........... 0 6,783,078 67,831 9,683,381 (2,678,316) 0 7,072,896
(Unaudited)
Issuance of common stock............. 0 2,500,000 25,000 17,684,708 0 0 17,709,708
Net income........................... 0 0 0 0 1,658,264 0 1,658,264
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, June 30, 1997............... 0 9,283,078 $92,831 $27,368,089 $(1,020,052) $ 0 $26,440,868
========== ========== ======= ========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE> 78

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED DECEMBER 31, SIX-MONTH ENDED
--------------------------------------- PERIOD ENDED JUNE 30,
1994 1995 1996 JUNE 30, 1996 1997
----------- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ 1,206,788 $(1,337,740) $(2,011,120) $ 667,196 $ 1,658,264
----------- ----------- ----------- ---------- -----------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Special compensation
expense.................. 0 0 5,358,250 0 0
Depreciation............... 350,188 532,288 615,112 386,017 341,714
Amortization............... 1,092,426 1,092,680 1,001,666 546,340 0
Loss (gain) on sale of
fixed assets............. 42,449 (2,446) 5,526 8,590 0
Provisions for warranty,
bad debt and inventory
reserves................. 314,589 195,824 413,705 50,842 924,562
Deferred tax benefit....... 0 0 (1,919,424) 0 (114,053)
Changes in:
Accounts receivable........ (63,090) (672,929) (2,540,554) (145,880) (4,267,597)
Related party
receivables.............. 44,571 (4,290) 46,544 0 11,247
Inventory.................. (174,916) 82,850 (1,282,589) (14,995) (514,807)
Prepaid expenses and other
assets................... (125,026) 117,499 374 (156,848) (105,234)
Accounts payable........... 10,794 (116,470) 570,339 (8,866) 201,129
Income taxes payable....... 0 0 151,894 0 (131,881)
Accrued expenses........... 195,147 264,010 23,960 (55,159) 226,517
Deferred revenue........... (35,394) (96,204) (56,814) (2,192) 0
----------- ----------- ----------- ---------- -----------
Total adjustments..... 1,651,738 1,392,812 2,387,989 607,849 (3,428,403)
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities.......... 2,858,526 55,072 376,869 1,275,045 (1,770,139)
----------- ----------- ----------- ---------- -----------
Cash flows from investing
activities:
Issue notes receivable........ (1,833) (11,846) 0 0 0
Payments received on note
receivable................. 5,000 10,394 0 0 0
Proceeds from sale of fixed
assets..................... 591,084 37,089 30,833 0 0
Purchase of fixed assets...... (1,992,017) (1,029,471) (2,118,400) (540,798) (1,572,357)
Increase in patents and
trademarks................. (2,993) (904) (36,943) 0 0
Payments under noncompete
agreement.................. (340,000) (340,000) (340,000) (170,000) 0
----------- ----------- ----------- ---------- -----------
Net cash used in
investing
activities.......... (1,740,759) (1,334,738) (2,464,510) (760,798) (1,572,357)
----------- ----------- ----------- ---------- -----------
Cash flows from financing
activities:
Issuance of industrial
development revenue
bonds...................... 0 0 0 0 2,850,000
Payment of industrial
development revenue
bonds...................... 0 0 0 0 (850,000)
</TABLE>

F-6
<PAGE> 79

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
SIX-MONTH ENDED
YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
1994 1995 1996 JUNE 30, 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Debt issuance costs of
industrial development
revenue bonds.............. 0 0 0 0 (75,493)
Borrowings on term loan and
operating line of credit... 2,363,000 1,016,000 2,398,867 0 0
Payments on term loan and
operating line of credit... (1,743,792) (866,708) (408,341) (206,970) (3,236,738)
Principal payments on
capitalized leases......... (13,648) (13,377) (15,570) 0 0
Proceeds from issuance of
partnership interests...... 1,000,007 0 0 0 0
Partnership distributions
paid....................... (861,482) (699,997) (181,001) (181,001) 0
Bank overdraft................ 0 0 385,694 0 (385,694)
Deferred initial public
offering costs............. 0 0 (383,720)
Proceeds from IPO, net........ 0 0 0 0 17,709,708
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities.......... 744,085 (564,082) 1,795,929 (387,971) 16,011,783
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents.......... 1,861,852 (1,843,748) (291,712) 126,276 12,699,287
Cash and cash equivalents,
beginning of period........... 273,608 2,135,460 291,712 291,712 0
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents, end
of period..................... $ 2,135,460 $ 291,712 $ 0 $ 417,988 $12,699,287
=========== =========== =========== ========== ===========
Supplemental disclosures of cash
flow information:
Interest paid, net of amounts
capitalized................ $ 137,481 $ 190,403 $ 162,649 $ 76,132 $ 72,547
Income taxes paid............. $ 0 $ 0 $ 293,700 $ 6,500 $ 885,700
Supplemental disclosure of
noncash investing activities:
Additions to fixed assets
included in accounts
payable.................... $ 173,769
Additions to deferred initial
public offering costs
included in accounts
payable and accrued
liabilities................ $ 184,329
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-7
<PAGE> 80

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements. Certain prior period
amounts have been reclassified to conform to the current period presentation.

ORGANIZATION

Transcrypt International, Ltd. (the "Predecessor") was a limited
partnership formed in 1991 composed of the general partner, Transcrypt
International, Inc. (a Nebraska corporation) and various limited partners. One
percent of the profits or losses was allocated to the general partner and the
remaining 99% was allocated to the limited partners based on their respective
units of partnership interest.

Effective June 30, 1996, the assets and liabilities of the partnership were
merged tax-free into a Delaware corporation, Transcrypt International, Inc. (the
"Company"). Each respective partnership unit was converted pro rata into common
shares of the Company.

The Company is engaged in the design, manufacture and marketing of
information security products for the land mobile radio and cellular telephone
markets. The Company markets its products to customers worldwide.

PRINCIPLES OF CONSOLIDATION

The 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.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities less than 90 days as cash equivalents. The Company places its
temporary cash investments with high credit qualified financial institutions.

INVENTORY

Inventory is recorded at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. The Company's policy is
to capitalize expenditures for major improvements and to charge to operating
expenses the cost of current maintenance and repairs. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets. The
cost and related accumulated depreciation of assets retired or otherwise
disposed of are eliminated from the respective accounts at the time of
disposition. Any resulting gain or loss is included in current operating
results. For the years ended December 31, 1994, 1995 and 1996, $28,776, $0 and
$7,210 of interest expense was capitalized, respectively.

INTANGIBLE ASSETS

Intangibles are carried at cost less applicable amortization. Provision for
amortization of intangible assets is based upon the estimated useful lives of
the related assets and is computed using the straight-line method. All
intangible assets are being amortized over five years. Management reviews
intangible assets whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable.

F-8
<PAGE> 81

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

The Predecessor as a partnership was not subject to Federal or state income
taxes. Any tax liabilities arising from the Predecessor's operations were the
direct responsibility of the individual partners.

Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates and laws applicable to the years in which the differences are
expected to reverse. Valuation allowances, if any, are established when
necessary to reduce deferred tax assets to the amount that is more likely than
not to be realized. Income tax expense is comprised of the tax payable for the
period and the change during the period in deferred tax assets and liabilities.

PRO FORMA PROVISION FOR INCOME TAXES

The pro forma provision for income taxes reflects the provision for income
taxes as if the Company had been taxed as a C Corporation under the Internal
Revenue Code for the entire year. The actual provision for income taxes for 1996
included in the consolidated statement of income (loss) is reflective only of
the results of operations for the period that the Company was a C Corporation,
July 1, 1996 through December 31, 1996.

REVENUE RECOGNITION

Revenues are recorded when products are shipped or services are rendered.
Costs associated with the installation and servicing of equipment are charged to
expense as incurred and allowances are provided for returns. The Company defers
income for prepayments of significant initial engineering costs which are
components of the selling price of certain products sold. Also included in
deferred revenue are prepayments from foreign customers for which goods cannot
be shipped until certain export regulations are met.

EXPORT SALES

A significant portion of the Company's sales are made to customers outside
of the United States. Export sales are recorded and settled in U.S. dollars.
Total export sales by geographic area were as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Europe................................. $2,580,000 $2,464,000 $2,501,000
Middle East............................ 1,692,000 2,276,000 1,831,000
Latin America.......................... 978,000 1,060,000 2,412,000
---------- ---------- ----------
$5,250,000 $5,800,000 $6,744,000
========== ========== ==========
</TABLE>

WARRANTY COSTS

The Company provides for warranty costs based on estimated future
expenditures that will be incurred under product guarantees and warranties
presently in force.

F-9
<PAGE> 82

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER SHARE

Pro forma net income (loss) per share is computed on the basis of the
weighted average number of partnership interest units outstanding during the
year converted into common shares on a one-to-one ratio, adjusted for a stock
dividend and including common stock equivalents.

<TABLE>
<S> <C>
Common stock...................................................... 6,783,078
Common stock equivalents -- stock options......................... 185,634
---------
6,968,712
=========
</TABLE>

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, options to purchase common stock granted with exercise prices below the
assumed initial public offering price per share during the 12 months preceding
the date of the initial filing of the Registration Statement are included in the
calculation of common equivalent shares, using the treasury stock method, as if
they were outstanding for all periods presented.

STOCK SPLIT

On September 30, 1996, the Board of Directors and the shareholders approved
an increase in the Company's authorized common shares from 10 million to 20
million shares. On November 18, 1996, the Company declared a 1.3106311-for-1
stock split in the form of a stock dividend. All shares and per share
information has been restated to reflect the split.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect carrying amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of financial statement
dates, as well as the reported revenues and expenses for the years then ended.
Actual results may differ from management's estimates.

UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition as of June 30, 1997 and the results of operations and
cash flows for the six months ended June 30, 1996 and 1997, as presented in the
accompanying unaudited condensed consolidated financial statements.

2. INVENTORY

The following is a summary of inventory at December 31, 1995 and 1996, and
June 30, 1997:

<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials and supplies, net of reserve for
obsolescence
of $82,041, $38,848 and $96,879, respectively........ $ 879,587 $1,316,932 $1,531,905
Work in process........................................ 101,092 715,032 536,044
Finished goods......................................... 139,084 229,417 650,208
---------- ---------- ----------
$1,119,763 $2,261,381 $2,718,157
========== ========== ==========
</TABLE>

F-10
<PAGE> 83

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December 31,
1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Land................................................ $ 150,000 $ 150,000
Building............................................ 1,302,388 1,302,388
Equipment........................................... 2,325,690 3,921,095
Leased equipment.................................... 74,329 74,329
Automobiles......................................... 64,647 31,598
Furniture and fixtures.............................. 371,160 396,362
Construction in progress............................ 0 797,060
---------- ----------
4,288,214 6,672,832
Less accumulated depreciation and amortization.... 1,221,474 1,765,394
---------- ----------
$3,066,740 $4,907,438
========== ==========
</TABLE>

4. INTANGIBLE ASSETS

Intangible assets consist of the following at December 31, 1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Proprietary technology.............................. $3,355,630 $3,355,630
Noncompete agreements............................... 1,700,000 1,700,000
Goodwill............................................ 290,516 290,516
Organization costs.................................. 116,910 116,910
Patents and trademarks.............................. 5,522 42,465
---------- ----------
5,468,578 5,505,521
Less accumulated amortization..................... 4,465,718 5,467,384
---------- ----------
$1,002,860 $ 38,137
========== ==========
</TABLE>

5. REVOLVING LINES OF CREDIT

The Company has a working capital revolving line of credit not to exceed
$2,000,000 calculated using a specified borrowing base of eligible inventories
and accounts receivable. In addition, the Company has a second revolving capital
line of credit not to exceed $1,000,000, calculated using a specified borrowing
base of certain eligible fixed assets. Interest for both lines of credit is
payable monthly at a regional bank's national money market rate. The working
capital line is collateralized by substantially all the Company's assets and the
capital line is collateralized by certain fixed assets. At December 31, 1996,
the Company had $1,022,000 outstanding on the working capital line of credit and
$792,070 on the capital line of credit. The capital line of credit is due
January 2002. In January 1997, the Company increased the working capital
revolving line of credit not to exceed $3,000,000.

Average borrowings under the Company's lines of credit and the weighted
average interest rate during 1996 were $256,000 and 8.27%.

As described in Note 15, the revolving lines of credit were repaid using a
portion of the net proceeds from the initial public offering.

F-11
<PAGE> 84

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. LONG-TERM DEBT

Long-term debt at December 31, 1995 and 1996 and June 30, 1997 consists of
the following:

<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Term note payable to bank due in monthly
installments of $18,141 including interest at
7.75% beginning in March 1993 until March 1996
when it can be adjusted to a specified rate of a
regional bank (8.75% at December 31, 1996).
Principal is due in full in February 1998. The
note is collateralized by essentially all the
assets of the Company in addition to the personal
guarantees of certain stockholders................ $ 437,358 $ 251,068 $ 0
Term note payable to bank due in monthly
installments of $14,231 including interest at 8%
beginning June 1994 until May 1996, when it can be
adjusted to a specified rate of a regional bank
(8.75% at December 31, 1996). Principal is due in
full in May 1999. The note is collateralized by
essentially all the assets of the Company in
addition to personal guarantees of certain
stockholders...................................... 507,653 375,723 0
Installment note for equipment purchase payable to
bank due in monthly installments of $10,506
including daily adjusted interest at a specified
rate above the prime rate (8.25% at December 31,
1996). The note is collateralized by specific
equipment and inventory. The note is guaranteed by
a stockholder..................................... 449,138 359,017 0
Industrial development revenue bonds payable to bank
with quarterly interest only payments beginning
April 15, 1994 at 6.25% with principal due on
January 15, 2004. This note is collateralized by a
deed of trust..................................... 850,000 850,000 0
Industrial development revenue bonds payable to bank
due in annual principal payments of $140,000, plus
interest at a variable rate (4.5% at June 30,
1997) starting March 1, 1998 through March 1,
2007, increasing to annual principal payments of
$145,000 due March 1, 2008 through March 1, 2016
with the remaining principal and accrued interest
due March 1, 2017................................. 0 0 2,850,000
Construction note payable to bank, due in August
1997, including interest at 8.75%................. 0 584,797 0
---------- ---------- ----------
2,244,149 2,420,605 2,850,000
Less current portion.............................. 412,656 581,959 0
---------- ---------- ----------
$1,831,493 $1,838,646 $2,850,000
========== ========== ==========
</TABLE>

The agreements of the term notes payable and the revolving bank notes
payable discussed in Note 5 require, among other things, that the Company
maintain certain levels of working capital, net worth and debt-to-equity ratios
and limit capital expenditures, investments, other indebtedness, distributions,
mergers and acquisitions.

The construction note payable has been classified as long-term as the
Company has received a letter of intent to refinance the note through issuance
of industrial development revenue bonds upon completion of the construction
project on terms similar to the existing industrial development revenue bonds
payable.

As described in Note 15, the term and installment notes payable were
retired using a portion of the net proceeds from the initial public offering.

F-12
<PAGE> 85

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS

In connection with the purchase of the net assets of Transcrypt
International, Incorporated in 1991, the Company entered into non-compete
agreements with the former owners which called for the Company to pay a total of
$1,700,000 in consideration for the former owners' agreement not to compete for
a period of five years. The remaining payments of $340,000 were paid in 1996.

8. INCOME TAXES

The components of the provision (benefit) for income taxes for the period
ending December 31, 1996 are as follows:

<TABLE>
<S> <C>
Current......................................................... $ 390,936
Deferred........................................................ (1,919,424)
-----------
$(1,528,488)
===========
</TABLE>

The entire provision is comprised of federal taxes, as no state taxes are
expected to be paid as a result of various state incentive tax credits for which
the Company has qualified.

The Company's tax provision effective tax rate on pretax income (loss)
differs from U.S. federal statutory tax rate as follows:

<TABLE>
<S> <C> <C>
U.S. federal tax at statutory tax rate................ $(1,203,467) (34.00)%
Income taxable directly to partners of the
Predecessor......................................... (226,847) (6.41)
Benefit of foreign sales corporation.................. (52,969) (1.49)
Other................................................. (45,205) (1.28)
----------- ------
$(1,528,488) (43.18)%
=========== ======
</TABLE>

Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to deferred income taxes at
December 31, 1996 relate to the following:

<TABLE>
<S> <C>
Deferred tax assets:
Special compensation expense................................... $1,821,805
Allowance for bad debts........................................ 146,285
Reserves for warranties and inventory obsolescence............. 38,136
Difference between tax and book liability accruals............. 11,813
----------
2,018,039
----------
Deferred tax liabilities:
Difference between tax and book depreciation................... 98,615
----------
Net deferred asset............................................... $1,919,424
==========
</TABLE>

Management believes it is more likely than not that future taxable income
will be sufficient to fully utilize all deferred tax assets recorded.

9. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Payroll, bonuses and employee benefits................. $211,193 $304,297
Warranty reserve....................................... 64,455 73,316
Commissions............................................ 265,440 101,163
Special compensation expense........................... 0 210,000
Other expenses......................................... 226,158 257,630
-------- --------
$767,246 $946,406
======== ========
</TABLE>

F-13
<PAGE> 86

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES

The Company has agreed to pay fees totaling $350,000 to its chairman and
chief executive officer for initiating the purchase of the net assets of
Transcrypt International, Incorporated in 1991. Payment is contingent upon the
original limited partners receiving capital distributions equal to their
original capital contributions or upon the approval of the Board of Directors of
the Company for the sale of equity interests in the Company to the public.
Payments of $70,000 have been made as of December 31, 1995 and an additional
payment of $70,000 was approved and paid during February 1996. These payments
were accounted for as a bonus and the officer has waived rights to receive fees
to the extent of such payments. The Board of Directors approved the payment of
the remaining $210,000 fees on September 30, 1996. These remaining fees are
included in special compensation expense in the consolidated statements of
income (loss). The $210,000 was paid in February 1997.

In the normal course of its business activities, the Company is required
under a contract with foreign governmental authorities to provide letters of
credit that may be drawn upon if the Company fails to perform under their
contracts. The letters of credit, which expire on various dates in 1997, have a
total undrawn balance of $43,564 at December 31, 1996.

The Company is involved in certain disputes as part of the ordinary course
of its business. Management believes that the ultimate resolution of these
disputes will not have a material adverse effect on its financial position,
results of operations or cash flows.

11. OPTION PLANS

In January 1992, the Board of Directors approved a 1992 Partnership
Interest Option Plan which provided for the granting of up to 1,297,525 units of
non-qualified interest options to certain officers and key employees. Under the
Plan, the exercise price for the options was the fair market value at the date
of grant as determined by the Board of Directors. The term of each option
granted will in no event exceed 10 years from the date of grant. Effective June
30, 1996, the unit options were converted to stock options on a one to one
ratio. No options were exercisable under the Plan provisions until the Board of
Directors approved granting of all reserved options and full vesting of the
716,916 stock options on September 30, 1996. The vesting resulted in a special
compensation charge of $5,358,250 in the quarter ended September 30, 1996.

Effective as of September 6, 1996, the Company established the 1996 Stock
Incentive Plan (the "Plan"). Any employee, including any director of the
Company, and any nonemployee director or independent contractor of the Company
is eligible to be considered for the issuance of shares of common stock, $0.01
par value per share, of the Company or of any other class of security or right
of the Company which is convertible into common stock. The aggregate number of
shares issued under the Plan shall not exceed 1,200,000. The aforementioned
716,916 options have been issued under the Plan, all of which are vested and
compensation recognized. The Plan provides that unless otherwise provided by the
Plan committee any stock option granted shall have an exercise price not less
than 100% of the market value of a share of common stock on the date the option
is granted and that the term of such option shall be ten years from date of
grant. In January 1997, the Company granted stock options for an additional
325,000 shares, with an exercise price equal to the price per share in the
initial public offering.

F-14
<PAGE> 87

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. OPTION PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
and pro forma loss per share would have been as follows:

<TABLE>
<S> <C>
Pro forma net loss -- as reported....................................... $(2,146,399)
Pro forma net loss -- as adjusted under SFAS No. 123.................... (2,211,519)
Pro forma net loss per share -- as reported............................. (.31)
Pro forma net loss per share -- as adjusted under SFAS No. 123.......... (.32)
</TABLE>

Fair value of the options was not determinable prior to September 30, 1996
when the Board of Directors approved full vesting of the outstanding options.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for options vested in 1996:

<TABLE>
<S> <C>
Expected option life.......................................... 9.0 ears
Expected annual volatility.................................... 0%
Risk-free interest rate....................................... 6.50%
Dividend yield................................................ 0%
</TABLE>

The status of stock options under the Plan are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993............................ 908,267 $ .77 --
Granted............................................... 53,081 1.67
Exercised............................................. 0
Forfeited............................................. 0
-------- ----- -------
Balance at December 31, 1994............................ 961,348 .82 --
Granted............................................... 27,523 3.05
Exercised............................................. 0
Forfeited............................................. (572,090) .87
-------- ----- -------
Balance at December 31, 1995............................ 416,781 .91 --
Granted............................................... 300,135 3.05
Exercised............................................. 0
Forfeited............................................. 0
-------- ----- -------
Balance at December 31, 1996............................ 716,916 1.81 716,916
Granted............................................... 276,600 8.00 --
Exercised............................................. 0
Forfeited............................................. 0
-------- ----- -------
Balance at June 30, 1997 (Unaudited).................... 993,516 $3.53 716,916
======== ===== =======
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISABLE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
- -------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ .76 389,258 5.1 years $ .76 389,258 $ .76
$ 3.05 327,658 8.6 years 3.05 327,658 3.05
- -------------- -------------- ----------- -------- -------------- --------
$ .76 to $3.05 716,916 6.7 years $ 1.81 716,916 $ 1.81
=========== =========== ======== ======= ========== =======
</TABLE>

F-15
<PAGE> 88

TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. BENEFIT PLANS

The Company has a profit sharing plan which covers substantially all
employees. Contribution levels are determined by the Board of Directors
annually. Profit sharing expense approximated $45,000, $27,500 and $60,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.

The Company also has a 401(k) plan which covers substantially all
employees. Participants may contribute up to 10% of their annual compensation
and the Company makes matching contributions of 25% of the amount contributed by
participants. Contributions may not exceed the maximum allowable by law. Company
contributions approximated $11,000, $13,000 and $15,700 for the years ended
December 31, 1994, 1995 and 1996, respectively.

13. CONCENTRATIONS

Sales to major customers totaling over $200,000 each were as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---------- -------- ----------
<S> <C> <C> <C>
Percent of total sales.......................... 49% 44% 50%
Number of major customers....................... 6 7 12
Individual customers representing 10% or more of
consolidated sales in each year:
Motorola -- Poland............................ $2,044,350 -- --
Ministry of Interior -- Egypt................. -- $849,134 --
Motorola, Inc................................. -- -- $2,180,022
</TABLE>

In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. As of December
31, 1996, approximately 53% of the Company's accounts receivable were from seven
customers. The Company's policy does not require significant collateral or other
security to support such receivables, however, export sales are generally
shipped against prepayments or backed by irrevocable letters of credit confirmed
by U.S. banks.

In addition to being a major customer, Motorola is also a key manufacturer
of electronic components used by the Company. Purchases by the Company from
Motorola totaled approximately $726,000 and $1,878,000 in 1995 and 1996,
respectively.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of all financial instruments in the consolidated
balance sheets approximate fair values.

15. SUBSEQUENT EVENT

On January 22, 1997, the Company completed an initial public offering of
2,900,000 shares of common stock at a price of $8.00 per share. Of the 2,900,000
shares offered, 2,500,000 shares were sold by the Company and 400,000 were sold
by certain of the Company's stockholders. The Company's net proceeds from the
offering, after underwriting commissions and expenses, were approximately
$17,700,000.

A portion of the Company's net proceeds from the offering was used to
retire the term and installment notes payable and the revolving lines of credit.
The remaining net proceeds are to be used for general working capital purposes
and to support the Company's growth and business strategy.

F-16
<PAGE> 89

REPORT OF INDEPENDENT ACCOUNTANTS

May 2, 1997

To the Board of Directors
and Shareholders of
E.F. Johnson Company

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and
redeemable preferred stock and of cash flows present fairly, in all material
respects, the financial position of E.F. Johnson Company and its subsidiaries at
December 31, 1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company is in default under several debt
arrangements, has suffered recurring losses from operations and has a capital
deficiency. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

PRICE WATERHOUSE LLP

Minneapolis, Minnesota

F-17
<PAGE> 90

E.F. JOHNSON COMPANY

CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 29,
1995 1996 1997
------------ -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 86 $ 176 $ 76
Trade accounts receivable, net of allowance for
doubtful accounts of $2,699, $1,320 and $1,832,
respectively........................................ 13,929 9,468 8,060
Receivable from sale of assets......................... 14,159 799 229
Receivables from related parties....................... 286 463 463
Inventories............................................ 17,996 13,240 11,173
Prepaid expenses and other current assets.............. 1,498 2,106 1,638
------- ------- -------
Total current assets........................... 47,954 26,252 21,639
Property, plant and equipment, net....................... 10,095 7,040 6,233
Intangible assets, net................................... 12,877 6,170 5,618
Receivables from related parties......................... 1,748 1,624 1,624
Other assets............................................. 1,184 1,666 619
------- ------- -------
Total assets................................... $ 73,858 $ 42,752 $ 35,733
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 2,902 $ 11,623 $ 24,152
Debt in default subject to acceleration................ 13,864
Accounts payable....................................... 9,096 10,551 10,061
Technology and license purchase payables............... 1,408 3,604 3,552
Advance billings....................................... 2,888 3,586 3,063
Accrued compensation and benefits...................... 2,344 2,642 2,107
Other accrued expenses................................. 3,593 4,391 4,700
------- ------- -------
Total current liabilities...................... 22,231 50,261 47,635
------- ------- -------
Long-term liabilities:
Long-term debt......................................... 32,681 1,802 1,708
Payable to related parties............................. 1,693 2,767 4,078
Technology and license purchase payables............... 3,205
Other.................................................. 142 490 1,062
------- ------- -------
Total long-term liabilities.................... 37,721 5,059 6,848
------- ------- -------
Total liabilities.............................. 59,952 55,320 54,483
------- ------- -------
Commitments and contingencies
Redeemable Series A preferred stock, $100 par value,
80,000 shares authorized, issued and outstanding, at
liquidation value...................................... 10,240 10,880 11,200
Redeemable Series I Class B preferred stock, $.01 par
value, 2,000,000 shares authorized, 925,850 Series I
shares, issued and outstanding, at liquidation value... 10,480 11,118 11,452
Shareholders' equity (deficit):
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,800,000 shares issued and
outstanding......................................... 38 38 38
Additional paid-in capital............................. 828 828 828
Retained deficit....................................... (7,680) (35,432) (42,268)
------- ------- -------
Total shareholders' equity (deficit)........... (6,814) (34,566) (41,402)
------- ------- -------
Total liabilities, redeemable preferred stock
and shareholders' equity (deficit)........... $ 73,858 $ 42,752 $(35,733)
======= ======= =======
</TABLE>

See accompanying notes to the consolidated financial statements.

F-18
<PAGE> 91

E.F. JOHNSON COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEAR ENDED DECEMBER 31, JUNE JUNE
-------------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $99,240 $88,932 $ 78,966 $43,166 $28,223
Cost of sales............................ 60,349 60,630 50,623 26,717 18,157
-------- ------- ------- ------- -------
Gross profit............................. 38,891 28,302 28,343 16,449 10,066
-------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative.... 28,284 32,107 29,201 14,816 11,695
Research and development............... 7,534 8,118 8,401 3,888 2,938
Nonrecurring items (see note 14)....... 890 (7,479) 13,521 (666)
-------- ------- ------- ------- -------
Total operating expenses....... 36,708 32,746 51,123 18,704 13,967
Income (loss) from operations............ 2,183 (4,444) (22,780) (2,255) (3,901)
-------- ------- ------- ------- -------
Other income (expense):
Interest expense....................... (3,075) (4,505) (3,924) (1,854) (2,407)
Interest income........................ 407 400 230 118 125
-------- ------- ------- ------- -------
Total other income (expense)... (2,668) (4,105) (3,694) (1,736) (2,282)
-------- ------- ------- ------- -------
Net loss before income tax............... (485) (8,549) (26,474) (3,991) (6,183)
Income tax benefit....................... 578
-------- ------- ------- ------- -------
Net (loss) income........................ $ 93 $(8,549) $(26,474) $(3,991) $(6,183)
======== ======= ======= ======= =======
</TABLE>

See accompanying notes to the consolidated financial statements.

F-19
<PAGE> 92

E.F. JOHNSON COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
AND REDEEMABLE PREFERRED STOCK
(THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------ -------------------------------------------------------
SERIES A SERIES I CLASS B COMMON STOCK ADDITIONAL RETAINED
---------------- ----------------- ------------------ PAID-IN EARNINGS
SHARES STOCK SHARES STOCK SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ------- ------- --------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 80,000 $ 8,960 3,800,000 $ 38 $1,069 $ 2,536 $ 3,643
Accrued preferred stock
dividends................... 640 (640) (640)
Net income.................... 93 93
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1994.... 80,000 9,600 3,800,000 38 1,069 1,989 3,096
Series I Class B issuance..... 925,850 $10,000
Preferred stock issuance
costs....................... (241) (241)
Accrued preferred stock
dividends................... 640 480 (1,120) (1,120)
Net loss...................... (8,549) (8,549)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1995.... 80,000 10,240 925,850 10,480 3,800,000 38 828 (7,680) (6,814)
Accrued preferred stock
dividends................... 640 638 (1,278) (1,278)
Net loss...................... (26,474) (26,474)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1996.... 80,000 $10,880 925,850 $11,118 3,800,000 $ 38 $ 828 $ (35,432) $(34,566)
====== ======= ======= ======= ========= === ====== ======== ========
(UNAUDITED)

Accrued preferred stock
dividends................... 320 334 (653) (653)
Net loss...................... (6,183) (6,183)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at June 29, 1997........ 80,000 $11,200 925,850 $11,452 3,800,000 $ 38 $ 828 $ (42,268) $(41,402)
====== ======= ======= ======= ========= === ====== ======== ========
</TABLE>

See accompanying notes to the consolidated financial statements.

F-20
<PAGE> 93

E.F. JOHNSON COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
YEAR ENDED DECEMBER 31, JUNE JUNE
---------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $ 93 $(8,549) $(26,474) $(3,991) $(6,183)
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Depreciation and amortization........................ 4,647 6,539 5,819 2,800 2,201
Loss from write down of long-term assets............. 6,000
Provision for losses on accounts receivable.......... 59 2,734 466 276 627
Gain on sale of Division............................. (8,343) (2,154)
Loss on sale of property............................. 39 51 40 6
Changes in components of working capital, net of
effect of sale of Division:
Receivables.......................................... (5,546) 3,456 3,994 (2,657) (202)
Inventories.......................................... (4,307) (1,639) 4,757 (839) 1,746
Prepaid expenses and other current assets............ (50) (662) (610) (913) 460
Accounts payable..................................... 4,765 1,982 1,455 (3,440) (490)
Advance billings..................................... 2,888 698 (884) (522)
Accrued liabilities.................................. (855) (1,286) 1,098 1,400 (411)
------ ------ ------- ------- ------
Net cash used by operating activities................ (1,155) (2,829) (2,757) (8,242) (4,928)
------ ------ ------- ------- ------
Cash flows from investing activities:
Capital expenditures.................................... (3,430) (3,557) (1,480) (758) (961)
Proceeds from sale of property.......................... 86 136 43 14 3
Receipt of proceeds from sale of assets................. 14,659 13,159 4,112
Purchase of intangible assets........................... (986) (4,007) (1,669) (118) (52)
Change in other assets.................................. 620 39 (1,781) (415) 1,273
------ ------ ------- ------- ------
Net cash provided (used) by investing activities..... (3,710) (7,389) 9,772 11,882 4,375
------ ------ ------- ------- ------
Cash flows from financing activities:
Net increase (decrease) in debt......................... 4,706 6,972 (7,947) (3,260) (858)
Proceeds from issuance of preferred stock, net.......... 1,913
Change in amount to/from related parties................ 153 1,342 1,022 (354) 1,311
------ ------ ------- ------- ------
Net cash (used) provided by financing activities..... 4,859 10,227 (6,925) (3,614) 453
------ ------ ------- ------- ------
Increase (decrease) in cash during the year............... (6) 9 90 26 (100)
Cash -- beginning of year................................. 83 77 86 86 176
------ ------ ------- ------- ------
Cash -- end of year....................................... $ 77 $ 86 $ 176 $ 112 $ 76
====== ====== ======= ======= ======
Supplemental cash flow information:
Cash paid for interest.................................. $ 3,045 $ 4,253 $ 3,472 $ 1,846 $ 1,418
Income tax refund....................................... $ (124) $ (336) $ (509) $ (402) $ 1
Supplemental schedule of non-cash activity:
Liabilities incurred in exchange for purchased
technology......................................... $ 5,922 $ 913 $ -- $ -- $ --
Preferred stock issued for license and technology
rights............................................. $ -- $ 4,630 $ -- $ -- $ --
Preferred stock issued in payment of accounts
payable............................................ $ -- $ 3,216 $ -- $ -- $ --
</TABLE>

See accompanying notes to the consolidated financial statements.

F-21
<PAGE> 94

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 1. DESCRIPTION OF BUSINESS AND ORGANIZATION

Operations

E.F. Johnson Company (the Company) is a leading provider of wireless
communications products and systems to the private two-way land mobile radio
(LMR) industry. The Company designs, develops, manufactures and markets
stationary transmitters/receivers (base stations or repeaters) and mobile and
portable radio transceivers. The Company offers an extensive line of such
products, including "conventional," "trunked" and "networked" systems, which are
used in a broad range of applications by numerous industrial and commercial
organizations, ranging from taxi fleets to large oil and gas refineries, and
state and local government agencies, including public safety departments such as
police departments.

Ability to Continue as a Going Concern

The Company is presently in default under several debt agreements and will
be required to restructure these obligations and possibly seek additional
financing. In addition, the Company has experienced recurring losses and as of
December 31, 1996 has a retained deficit of $35,432 and a working capital
deficit of $24,009. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets or liabilities that might result if the Company is unable to continue as
a going concern.

Management is currently pursuing additional equity and attempting to
restructure existing debt agreements. However, there is no assurance that these
efforts will be successful.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiaries E.F. Johnson International, Inc. and E.F. Johnson
Communications, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Revenue Recognition

Sales are recorded as products are shipped and services are rendered with
the exception of system sales which are generally recognized based upon
performance criteria and customer acceptance. For system sales with extended
delivery dates, sales and cost of sales are recognized under the
percentage-of-completion method as costs are incurred. Profits expected to be
realized on contracts are based on the Company's estimates of total sales value
and costs at completion. These estimates are reviewed and revised periodically
throughout the lives of the contracts, and adjustments to profits resulting from
such revisions are recorded in the accounting period in which the revisions are
made.

F-22
<PAGE> 95

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories

Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives which range from three to fifteen years.

Retirement Benefits

The Company has a defined contribution qualified retirement savings and
profit-sharing plan which covers all of its employees. The Company's
profit-sharing contributions are discretionary. No profit-sharing contributions
were authorized in 1994, 1995, 1996 and 1997. The Company's contributions to the
retirement savings plan are based on specified levels of employee contributions
subject to certain overall salary limitations. Company contributions were
approximately $271, $298 and $253 for the years ended December 31, 1994, 1995
and 1996, respectively. Company contributions were approximately $131 and $116
for the six months ended June 30, 1996 and June 29, 1997, respectively.

The Company does not currently provide postretirement healthcare benefits.

Unaudited Interim Financial Statements

In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition as of June 29, 1997 and the results of operations and
cash flows for the six months ended June 30, 1996 and June 29, 1997 as presented
in the accompanying unaudited consolidated financial statements.

NOTE 3. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and purchased
components......................... $ 6,118 $ 5,365 $ 5,120
Work-in-process...................... 2,792 1,974 1,001
Finished goods....................... 9,086 5,901 5,052
------- ------- -------
$17,996 $13,240 $11,173
======= ======= =======
</TABLE>

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................. $ 34 $ 34 $ 34
Buildings and improvements........ 3,099 3,238 3,253
Machinery and equipment........... 18,382 19,166 19,678
-------- -------- --------
21,515 22,438 22,965
Less: Accumulated depreciation.... (11,420) (15,398) (16,732)
-------- -------- --------
$ 10,095 $ 7,040 $ 6,233
======== ======== ========
</TABLE>

F-23
<PAGE> 96

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
At December 31, 1995 and 1996 and June 29, 1997, property, plant and
equipment includes $1.3 million (net of depreciation of $683), $1.1 million (net
of deprecation of $883 and $1.0 million (net of depreciation of $983),
respectively, of buildings and improvements under a capital lease.

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Technology............................................ $ 9,900 $ 5,100 $ 5,100
Licenses.............................................. 2,756 663 663
Loan origination fees................................. 1,765 1,765 1,765
Software.............................................. 1,731 2,523 2,523
-------- -------- ---------
16,152 10,051 10,051
Less: Accumulated amortization........................ (3,275) (3,881) (4,433)
-------- -------- ---------
$ 12,877 $ 6,170 $ 5,618
======== ======== =========
</TABLE>

Amortization of intangibles is provided on a straight line basis over
estimated useful lives ranging from three to ten years. The Company assesses
potential impairment of its intangible assets based on anticipated undiscounted
cash flows from operations. During 1996 the Company wrote-off $5,858 of
intangibles primarily related to discontinued product lines and a reassessment
of the value of certain technology purchased in prior years.

NOTE 6. BILLINGS ON UNCOMPLETED CONTRACTS IN EXCESS OF INCURRED COSTS

Amounts included in the financial statements which relate to billings on
uncompleted contracts in excess of incurred costs are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts............... $ 1,472 $ 16,867 $ 22,350
Profits on uncompleted contracts...................... 645 9,596 13,444
-------- -------- ---------
2,117 26,463 35,794
Less: Progress payments............................... (5,005) (29,886) (37,658)
-------- -------- ---------
$ (2,888) $ (3,423) $ (1,864)
======== ======== =========
Included in the balance sheet:
Recoverable costs and accrued profits not yet
billed........................................... $ 163 $ 1,199
Advanced billings................................... $ (2,888) (3,586) (3,063)
-------- -------- ---------
$ (2,888) $ (3,423) $ (1,864)
======== ======== =========
</TABLE>

Recoverable costs and accrued profits include direct costs of
manufacturing, installation, project management, engineering, and allocable
manufacturing overhead costs.

F-24
<PAGE> 97

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 7. DEBT

Debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 29,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit line, maximum borrowings
determined periodically against contractual
percentages of accounts receivable and
inventory........................................ $ 16,743 $ 11,331 $ 10,755
Bank term loan, secured by machinery and
equipment........................................ 6,650 3,933 3,133
Senior subordinated note due July 31, 1997,
interest payable semi-annually on January 31 and
July 31, interest at 9.79% per annum............. 10,000 10,000 10,000
Subordinated debentures, due in quarterly
installments beginning January 1, 1994 through
October 31, 1996, interest rate of 20.51%........ 64
Capital lease obligation, due in monthly principal
and interest installments of $42 through July
1996, thereafter, increasing to $52 through July
31, 2002, with payments first applied to
interest, effective interest rate of 22.1% per
annum, secured by land and building.............. 2,092 1,996 1,900
Other capital lease obligation..................... 34 29 72
-------- -------- --------
35,583 27,289 25,860
Less: Current portion based on scheduled
repayments....................................... (2,902) (11,623) (24,152)
Debt in default subject to acceleration....... -- (13,864) --
-------- -------- --------
Long-term debt..................................... $ 32,681 $ 1,802 $ 1,708
======== ======== ========
</TABLE>

On March 3, 1995, the Company refinanced its existing revolving credit line
and term loan arrangements with the same financial institution (Senior
Creditor). The amended Financing Agreements (Agreements) increased the Company's
maximum credit facility from $20,000 to $35,000 and provide for borrowings at
1.75% over the bank's prime rate. The Agreements include a fee of 2% on the
unused portion of $30,000 of the facility. The term loan requires scheduled
monthly principal payments of $117 through February 1998 and a final payment of
$2,306 due on March 3, 1998. The balance outstanding under the revolver is due
on March 3, 1998 and therefore as of June 29, 1997 all amounts outstanding under
this agreement are included in current maturities of long-term debt.

The revolving credit line, bank term loan and capital lease agreements
include certain covenants and restrictions including minimum net worth and
working capital requirements. The Company is also prohibited from paying
dividends under its credit facility, except that the holders of Preferred Stock
are entitled to receive cumulative cash dividends if and when declared by the
Board of Directors of the Company. The Company was not in compliance with these
covenants for the year ended December 31, 1996. According to the terms of the
Agreements, the creditor has the right to make all the outstanding amounts under
the Agreements due and payable, the right to appropriate, set off and apply to
the payment of outstanding amounts all collateral under the Agreements. As of
May 2, 1997 creditor had not made the outstanding amounts under the Agreements
due and payable.

In addition, the Company failed to make its semi-annual interest payments
of $490 due July 31, 1996 and January 31, 1997 with the holder of the $10,000
Senior subordinated note (the Note). On April 15, 1997, the creditor gave the
Company and the Senior Creditor notice under the default terms of the Note
agreement and

F-25
<PAGE> 98

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 7. DEBT (CONTINUED)
has accelerated all outstanding principal of the Note. The creditor can take
action, including the initiation of legal proceedings, to collect outstanding
amounts 159 days after it has given notice to the Senior Creditor.

The Company has failed to make scheduled payments under the terms of some
of its Technology agreements. The total amounts due under these agreements are
included in Technology and license purchase payable on the Company's balance
sheet.

Scheduled maturities of debt (without regard to possible acceleration of
payments due to covenant defaults) at December 31, 1996, are approximately as
follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------- -------
<S> <C>
1997....................................................... $11,623
1998....................................................... 14,125
1999....................................................... 319
2000....................................................... 393
2001....................................................... 490
Thereafter................................................. 339
-------
$27,289
=======
</TABLE>

NOTE 8. LEASE OBLIGATIONS

The Company leases certain buildings and improvements under an arrangement
which is accounted for as a capital lease. The lease requires monthly
installments ranging from $33 to $52, including an effective average annual
interest rate of 22.1% through July 31, 2002. The Company also leases various
equipment, automobiles and buildings under operating leases. Rent expense for
the years ended December 31, 1994, 1995 and 1996 was $876, $1,109 and $1,354,
respectively. Rent expense for the six months ended June 30, 1996 and June 29,
1997 was $548 and $428, respectively. Future minimum rental payments under
noncancelable lease agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
------------------------------------------------- ------- ---------
<S> <C> <C>
1997............................................. $ 644 $ 655
1998............................................. 635 394
1999............................................. 628 288
2000............................................. 625 220
2001............................................. 625 236
Thereafter....................................... 364 11
------- ------
Total minimum lease payments..................... 3,521 $ 1,804
======
Less: Amount representing interest............... (1,496)
-------
Present value of future minimum long-term capital
lease payments (see Note 7).................... $ 2,025
=======
</TABLE>

NOTE 9. REDEEMABLE PREFERRED STOCK

Series A

The terms of the preferred stock provide that, subject to certain
limitations, the holders of the shares may exchange any or all of such shares
for senior subordinated notes of the Company upon the occurrence of certain
events. The notes, if issued, would mature on the fifth anniversary of the date
of issuance and otherwise

F-26
<PAGE> 99

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 9. REDEEMABLE PREFERRED STOCK (CONTINUED)
have the same terms as the Company's Senior Subordinated Notes. Notes issued in
exchange for shares would be stated at a principal amount equal to the
liquidation value of the shares exchanged.

Dividends on the preferred stock accrue cumulatively on a daily basis at a
rate of 8% per annum. To the extent the dividends are not paid, unpaid dividends
are added to the liquidation value of any shares which is equal to the sum of
one hundred dollars per share, plus any accrued but unpaid dividends. The
preferred shares are carried on the consolidated balance sheet at liquidation
value, including accumulated dividends.

All or any portion of the outstanding shares of Preferred Stock may be
redeemed at the Company's option, at any time, for a redemption price of $100
per share plus accrued and unpaid dividends. In addition, up to 30,000
outstanding shares of Preferred Stock may be redeemed at the Company's option
for a redemption price of $50 per share plus accrued and unpaid dividends, at
any time after the Company has satisfied certain specified conditions. As of
December 31, 1996, the Preferred Stock is valued at its $100 per share
redemption value because not all conditions have been satisfied. If the
conditions for redemption of shares at $50 per share were fulfilled, the
recorded amount of preferred stock would be reduced by $1.5 million with a
corresponding increase to additional paid-in capital.

Series I Class B

In March 1995, the Company issued 925,850 shares of Series I Class B
Preferred Stock, $.01 par value per share at $10.80 per share. Simultaneous with
this issuance, the Company purchased from the preferred shareholder technology
and license rights for $4,630, settled an outstanding accounts payable balance
of $3,216 due the preferred shareholder and received cash proceeds of $2,154.
The Company incurred $241 of stock issuance costs in conjunction with this
transaction.

The terms of the Series I Class B preferred stock allow the holders of the
shares to exchange any or all such shares for common stock of the Company at a
conversion rate of one to one. Dividends accrue cumulatively on a daily basis at
the rate of 6% per annum. To the extent dividends are not paid, unpaid dividends
are added to the liquidation value of any shares which are equal to the sum of
the issuance price plus any accrued but unpaid dividends. Through December 31,
1996, no dividends have been declared or paid. The preferred shares are carried
on the consolidated balance sheet at liquidation value, including accumulated
dividends.

All or any portion of the outstanding shares of the Series I Class B
preferred stock may be redeemed at the Company's option, at any time, for a
redemption price equal to the then current liquidation value. The Company must
redeem the stock upon the earlier occurrence of March 14, 2005, the closing of
an underwritten public offering of the Company's common stock or the sale or
transfer of more than fifty percent of the Company's common stock.

F-27
<PAGE> 100

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 10. SHAREHOLDERS' EQUITY

Stock Options

The 1993 Incentive Stock Option Plan (the Plan) provides for the issuance
to employees of up to 200,000 shares of the Company's common stock at exercise
prices determined by the Option Committee. The Plan provides for the issuance of
both incentive stock options and non-qualified options. Options issued under the
Plan generally vest in equal installments over a five year period and expire ten
years from the date of grant. A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
INCENTIVE OPTION PRICE AVERAGE
STOCK RANGE PER EXERCISE
OPTIONS SHARE PRICE
--------- ------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1993.......................... 182,518 $1.00 - $9.00 $2.33
Granted................................................. -- -- --
Canceled................................................ (39,943) 1.00 - 9.00 7.01
-------
Outstanding at December 31, 1994.......................... 142,575 1.00 - 2.00 1.02
Granted................................................. 98,870 3.85 - 7.71 5.51
Canceled................................................ (68,430) 1.00 - 7.71 1.42
-------
Outstanding at December 31, 1995.......................... 173,015 1.00 - 7.71 3.43
Granted................................................. 135,310 3.85 3.85
Canceled................................................ (120,790) 1.00 - 7.71 4.04
-------
Outstanding at December 31, 1996.......................... 187,535 $1.00 - $7.71 $3.34
=======
(UNAUDITED)
Granted................................................. 43,000 1.00 1.00
Canceled................................................ (32,575) 1.00 - 3.85 2.13
-------
Outstanding at June 29, 1997.............................. 197,960 $1.00 - $7.71 $3.03
=======
Exercisable at June 29, 1997.............................. 68,374 $1.00 - $7.71 $2.96
=======
</TABLE>

As permitted by Financial Accounting Standards (FAS) No. 123, "Accounting
for Stock-Based Compensation," the Company applies Accounting Principles Board
(APB) Opinion No. 25 and related interpretations in accounting for its stock
option plans and, accordingly, does not recognize compensation expense related
thereto. If the Company had elected to recognize compensation expense based on
the fair value of the options granted at grant date as prescribed by FAS No.
123, net loss would not have been materially impacted.

Warrants

On July 31, 1992, the Company issued to the holder of the senior
zero-coupon note a warrant to purchase a total of 670,700 shares of the
Company's common stock at $.075 per share. The warrant expires on July 31, 1997.
The number and kind of securities purchasable upon the exercise of the warrant
and the warrant purchase price are subject to adjustments upon the occurrence of
certain events, including stock dividends, stock splits or combinations,
reclassifications and mergers. The warrant was valued at fair market value at
the date of issuance which resulted in a debt discount and a contribution to
capital of $107.

On March 14, 1995, the Company issued the holder of the Series I Class B
preferred stock a warrant to purchase up to 291,790 shares of the Company's
common stock. The exercise price is the fair market value of the Company's
common stock on the date the warrant is exercised. The warrant expires on the
earlier of

F-28
<PAGE> 101

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
March 14, 2005, the redemption of the Series I Class B preferred stock or the
date of an initial public offering of the Company's stock.

NOTE 11. INCOME TAXES

The Company provides income taxes using the liability method under
Financial Accounting Standard No. 109, "Accounting for Income Taxes."

At December 31, 1996, the Company had approximately $231 of available
general business credit carryforwards, $18 of minimum tax credit carryforward,
$8.9 million of tax benefit from federal net operating loss carryforwards, and
tax effected benefit of net temporary differences of $5 million available to
offset taxable income in the future. A valuation allowance has been established
for the entire net tax benefit of approximately $14 million as realization is
not assured.

The future tax benefits related to tax credit carryforwards expire in 1997.
The amount of these tax credit carryforwards are subject to final verification
related to the tax status of the predecessor. The net operating loss
carryforward begins to expire in 2009.

In fiscal 1994, the Company incurred a loss before taxes for financial
reporting and tax return purposes. For tax return purposes, the loss was carried
back to recover income taxes paid in prior years. A tax benefit of $578 has been
recognized in the 1994 statement of operations to the extent of this recovery of
taxes paid in prior years.

NOTE 12. RELATED PARTY TRANSACTIONS

Management Agreement

The Company has a management agreement with a company controlled by
significant shareholders. The agreement automatically renews on December 31 for
consecutive one year terms unless either party gives thirty days notice. The
management agreement provides for a fee of $60 per month for the period November
1, 1993 to June 30, 1994, $70 per month through June 1996 and $100 per month
thereafter.

Shareholder Transactions

The Company incurred fees payable to significant shareholders for their
execution of noncompete agreements related to the sale of the Components
Division, personally guaranteeing performance bonds and personally guaranteeing
over advances on the Company's line of credit. These fees totaled $1,693, $1,074
and $1,251 during 1995 and 1996 and the six months ended June 29, 1997,
respectively, and are included within amounts payable to related parties on the
balance sheet. In 1996, approximately $1 million of these fees related to
performance guarantees and were included in nonrecurring costs in the statement
of operations.

In October 1993, the Company loaned an aggregate of $1.5 million to two of
its shareholders. The notes bear interest at 2.5% over prime and are secured by
the shareholders' respective interest in Viking Partners, the sole shareholder
of Viking Mobile Communications, Inc. (VMC) (see below). The principal on each
of the notes is due November 1, 1998 and is included within amounts receivable
from related parties on the balance sheet. Interest income for 1996, 1995 and
1994 was $70, $172 and $148, respectively.

Viking Mobile Communications

In June 1993, the Company entered into a lease arrangement with VMC, a
corporation controlled by significant shareholders of the Company. Under the
rental agreement, the Company has agreed to lease sites

F-29
<PAGE> 102

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
to VMC which are appropriate for the installation of two-way land mobile radio
communication systems for 800 MHz SMR service and to install and service such
systems. Systems leased to VMC under this agreement qualify as sales-type
leases. Sales during the year ended December 31, 1994 approximated $49.

No new leases were entered into during 1995, 1996 and 1997. As of December
31, 1996, the lease receivable of $175 is recorded as a net receivable from
related party in the Company's balance sheet and is due with interest over the
period through 1999.

The balance due as of December 31, 1996 includes $106 of payments in
arrears. Scheduled payments in 1997 have not been made. A shareholder of the
Company has guaranteed VMC's remaining obligations under the agreement.

The Company agreed to accept the return of certain previously leased
equipment from VMC during 1996. The returns resulted in losses to the Company of
$76 and $264 recorded in 1996 and 1995, respectively.

Automated Dispatch Solutions (formerly RadioSoft, Inc.)

In March 1995, the Company entered into an agreement with Automated
Dispatch Solutions, a corporation controlled by significant shareholders of the
Company. Under the terms of the agreement, Automated Dispatch Solutions provides
the Company with sales leads and purchases product from the Company. Automated
Dispatch Solutions purchased $96 and $106, respectively, of product from the
Company during 1996 and 1995, respectively. The Company paid Automated Dispatch
Solutions $150 in sales lead fees during 1995. The Company had a receivable of
$57, from Automated Dispatch Solutions at December 31, 1995.

Viking Dispatch Services, Inc.

In June 1995, the Company entered into an agreement with Viking Dispatch
Services, Inc. (VDS), a corporation controlled by significant shareholders of
the Company. Under terms of this agreement, the Company will reimburse VDS up to
$200 for attorneys' fees and regulatory expenses and VDS will purchase a minimum
of $2 million of equipment from the Company by June 1997.

During 1995 the Company reimbursed VDS $72 in legal and regulatory
expenses. No equipment has been purchased by VDS from the Company through June
29, 1997.

Securicor

During the year ended December 31, 1995, purchases from Securicor, a
preferred shareholder (see Note 9), were $1,418. During the year ended December
31, 1995, the Company recorded sales of $2,379, to Securicor. During the year
ended December 31, 1994, the Company had $2,493 of purchases from Securicor.

F-30
<PAGE> 103

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one industry segment. Foreign sales were as
follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEARS ENDED DECEMBER 31, JUNE JUNE
------------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
South America..................... $ 6,143 $13,425 $ 6,715 $ 1,752 $ 2,359
Central America and Caribbean..... 5,527 6,089 2,018 1,504 2,945
Far East.......................... 8,548 5,670 9,990 6,209 1,579
Middle East....................... 1,211 707 242 129 1,151
Europe............................ 451 394 175 39 44
Other............................. 680 2,983 3,289 2,076 127
------- ------- ------- ------- -------
$22,560 $29,268 $22,429 $11,709 $ 8,205
======= ======= ======= ======= =======
</TABLE>

NOTE 14. NONRECURRING ITEMS

The Company incurred the following nonrecurring items:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEARS ENDED DECEMBER 31, JUNE JUNE
----------------------------- 30, 29,
1994 1995 1996 1996 1997
----- ------ -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gain on sale of Division................... $8,343 $ 2,152
Write down of assets....................... $(11,618)
Loss on sale of capital leases............. (750)
Employee severance costs................... (762) (375)
Costs related to initial public offering
not consummated.......................... $(630)
Costs incurred to acquire minority
shares................................... (298)
Costs incurred in debt refinancing not
consummated.............................. (105)
Gain from refund of real estate taxes paid
in prior years........................... 203
Other nonrecurring costs................... (60) (102) (1,528) (736)
----- ------ -------- ------- -------
Total nonrecurring (expense)
income......................... $(890) $7,479 $(13,521) $ 0 $ 666
===== ====== ======== ======= =======
</TABLE>

Effective December 29, 1995, the Company sold the net assets of its
Components Division for proceeds of $15,159 and recorded a gain on the sale of
$8,343. Total revenues and divisional contribution before allocation of
corporate costs, interest expense and income taxes from the Division were
approximately $15.5 million and $4.2 million, respectively, during 1995 and
$13.8 million and $3.6 million, respectively, during 1994. Write down of assets
during 1996, primarily related to discontinued product lines and reassessment of
the value of certain technology purchased in prior years and includes $5,858 of
intangible assets, $4,771 of inventory, and $989 of fixed assets and other.

NOTE 15. SUBSEQUENT EVENT

Sale of Data Telemetry Division

Effective January 15, 1997 the Company sold the net assets of its Data
Telemetry Division for net proceeds of $3,841 and recorded a gain on the sale of
$2,154. Additionally, advance payments of $2,168 were received for products and
services to be provided. The sale and advance payment proceeds were used to
repay $5,785 of borrowings under the revolving credit line and $100 of principal
on the bank term loan. Total

F-31
<PAGE> 104

E.F. JOHNSON COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

revenues and divisional contribution before allocation of corporate costs,
interest expense and income taxes from this Division were approximately $8.7
million and $1.5 million, respectively, during 1996.

Acquisition by Transcrypt International, Inc. (Unaudited)

On July 31, 1997 Transcrypt International, Inc. (Transcrypt) acquired the
Company for cash of $436 and the issuance of 832,465 shares of Transcrypt common
stock with an approximate market value of $10 million. In conjunction with the
acquisition by Transcrypt, certain creditors of the Company agreed to settlement
of liabilities due to them. As a result, senior subordinated debt and related
accrued interest of $11.4 million and a net payable due to related parties of
$2.4 million were extinguished in conjunction with Transcrypt's acquisition.

F-32
<PAGE> 105

[DESCRIPTION OF INSIDE BACK COVER

Picture of a caliper holding a Model Globe. Upper left reads "The Measure
of Communications Technology," lower right has Transcrypt Logo.]
<PAGE> 106

======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THIS DATE.

------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use Of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial Data
of Transcrypt International, Inc.... 16
Selected Consolidated Financial Data
of E.F. Johnson Company............. 17
Pro Forma Financial Data.............. 18
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 24
Business.............................. 34
Management............................ 56
Certain Transactions.................. 63
Principal and Selling Stockholders.... 65
Description Of Capital Stock.......... 67
Shares Eligible for Future Sale....... 69
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 72
Index To Financial Statements......... F-1
</TABLE>

======================================================
======================================================

4,500,000 SHARES
[TRANSCRYPT LOGO]

COMMON STOCK
------------------------------

PROSPECTUS
------------------------------

FURMAN SELZ

NATIONSBANC MONTGOMERY
SECURITIES, INC.

DAIN BOSWORTH
INCORPORATED
OCTOBER 15, 1997

======================================================