UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

Form 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

or

For the transition period from              to               

Commission File Number 0-21681

EF JOHNSON TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

1440 CORPORATE DRIVE

IRVING, TEXAS 75038

(Address of principal executive offices and zip code)

(972) 819-0700

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of November 9, 2009, 26,477,611 shares of the Registrant’s Common Stock were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1.                              FINANCIAL STATEMENTS

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2009 and December 31, 2008

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

See accompanying notes to the condensed consolidated financial statements.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2009 and 2008

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

See accompanying notes to the condensed consolidated financial statements.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2009 and 2008

(Unaudited and in thousands)

Supplemental Disclosure of Cash Flow Information:

The Company paid interest of $1,024 and $920 during nine months ended September 30, 2009 and 2008, respectively.

The Company paid income taxes of $79 and $235 during nine months ended September 30, 2009 and 2008, respectively.

See accompanying notes to the condensed consolidated financial statements.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

1. GENERAL

The condensed consolidated balance sheet of EF Johnson Technologies, Inc., formerly EFJ, Inc., at December 31, 2008, presented within this Report on Form 10-Q, has been derived from audited consolidated financial statements at that date. The condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 are unaudited. The condensed consolidated financial statements reflect all normal and recurring accruals and adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, operating results, and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations and cash flows for the three and nine months ended September 30, 2009 are not necessarily indicative of the results for any other period or the entire fiscal year ending December 31, 2009.

At the Company’s May 28, 2008 Annual Meeting of Stockholders, the Stockholders approved an amendment of the Company’s Certificate of Incorporation to change the corporate name from EFJ, Inc. to EF Johnson Technologies, Inc. The Company’s stock is quoted on the NASDAQ Global Market under the symbol “EFJI”, and its ticker symbol did not change.

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

On April 1, 2009, Transcrypt International, Inc. merged into the E.F. Johnson Company.

2. ORGANIZATION AND CONSOLIDATION

We are a provider of secure wireless solutions that are sold to: (1) domestic and foreign public safety / public service entities, (2) federal, state and local governmental agencies, including the Departments of Homeland Security and Defense, and (3) domestic and foreign commercial customers.  Through EFJohnson, Transcrypt and 3eTI we design, develop, market, and support:

·                  mobile and portable wireless radios;

·                  stationary transmitters / receivers (base stations or repeaters);

·                  infrastructure equipment and systems;

·                  secure encryption technologies for proprietary wireless radios;

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

·                  niche hardware and secure software technologies for the WLAN markets primarily in the government sector and industrial controls sectors.

The condensed consolidated financial statements include the accounts of EF Johnson Technologies, Inc. and our wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the consolidation.

Previously the Company was organized, and reported its financial results, as a parent company with two segments, Private Wireless Communications and Secured Communications.  Having recognized that the public safety/public service market is moving towards convergent telecommunications solutions, the continued demand for interoperability and the transition from analog to digital platforms, we reorganized the Company in January 2008 into a single centralized corporate structure in order to be competitive in this market.  In light of these changes, the Company reassessed its segment reporting, and beginning with the first quarter of 2008, we have no segments to report.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

3. RESTATEMENT

In this Form 10-Q, we are restating our previously reported financial results for the quarter ended September 30, 2008. In our Form 10-K for 2008, we restated our previously reported financial results for the quarters ended September 30, 2007 and March 31, June 30, and September 30, 2008, respectively, and for the fourth quarter and year ended December 31, 2007.

The previously filed annual report on Form 10-K for 2007 and quarterly reports on Form 10-Q affected by the restatements have not been amended and should not be relied upon.

On March 30, 2009, the Audit Committee (the “Audit Committee”) of the Company’s Board of Directors concluded that, upon the recommendation of management, in consultation with Grant Thornton LLP (“Grant Thornton”), the Company’s independent registered public accounting firm, the Company’s previously issued financial statements for each of the quarters ended September 30, 2007 and March 31, June 30 and September 30, 2008, respectively, and for the fourth quarter and year ended December 31, 2007, required restatement.

During the third quarter of 2007, the Company entered into a memorandum of understanding with one of its vendors in an effort to resolve a dispute between the parties regarding an outstanding non-trade receivable. The agreement granted credits on future purchases to the Company, and therefore should have been accounted for by reducing the cost of future inventory purchases, and subsequently cost of sales, over the period of the agreement, and the outstanding receivable should have been written off. Prior to the restatement, the Company recorded credits received as a result of this agreement as collections of a receivable instead of a reduction of inventory cost. As a result, the Company wrote off this “Other Receivable” balance as of the third quarter of 2007, and the related credits on future purchases received under this agreement are being treated as a reduction to cost of sales resulting from the lower cost basis of inventory. The write-off of this receivable was charged to cost of sales, as the transactions that generated the disputed receivables related to the transfer of inventory at cost to a contract manufacturer. Based on estimated purchases, we anticipate that approximately $2.7 million of credits remaining at December 31, 2008 will be earned over the next two to three years pursuant to this agreement. The balance of credits remaining at September 30, 2009 was approximately $2.4 million.

This adjustment is a non-cash adjustment in 2007 and 2008. Future purchases covered by the memorandum of understanding will have a positive impact on our gross margin and operating income on a going forward basis. For the three and nine months ended September 30, 2009 we recognized $37 and $255 in credits, respectively. For the three and nine months ended September 30, 2008 we recognized $223 and $565 in credits, respectively.

The following tables (in thousands) summarize the net increases (decreases) for the three and nine months ended September 30, 2008. These adjustments did not change the amounts reported as cash flows from operating, investing, or financing activities.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

3. RESTATEMENT (continued)

4. NET INCOME (LOSS) PER SHARE

Basic income (loss) per share (“EPS”) is calculated based upon the weighted average number of common shares outstanding during the period. The diluted EPS calculation reflects the potential dilution from common stock equivalents such as stock options, stock satisfied stock appreciation rights (“SSAR’s”), restricted stock grants and restricted stock units (collectively “Incentive Shares”). For the three months ended September 30, 2008, outstanding incentive shares with exercise

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

prices lower than the average market price of the common stock for the period were considered common stock equivalents and were dilutive in the calculation of the diluted weighted average common shares. Outstanding incentive shares that had exercise prices higher than the average market price of the common stock for the periods were considered anti-dilutive and excluded from the calculation of diluted weighted average common shares. For the three months ended September 30, 2009 and the nine months ended September 30, 2009 and 2008, respectively, all outstanding incentive shares were considered anti-dilutive due to the net loss for the period end.  The outstanding incentive shares that are considered dilutive and anti-dilutive are as follows:

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

5. ACCOUNTING FOR STOCK-BASED COMPENSATION

We use the Black-Scholes option pricing model to determine the fair value of all stock option grants and stock satisfied stock appreciation rights (“SSAR’s”) (collectively “Options”). For the three and nine months ended September 30, 2009, we recognized compensation expense of $0.3 million and $0.8 million, respectively, related to options and $0.1 million and $0.2 million, respectively, related to restricted stock grants and restricted stock units.  Additionally, $0.1 million of compensation expense was recognized related to equity grants made in the first quarter of 2009 to certain named executive officers associated with performance-based incentives earned for meeting certain operational, new product introductions and other personal goals. For the three and nine months ended September 30, 2008, we recognized compensation expense of $0.4 million and $1.2 million, respectively, related to options and $0.2 million and $0.6 million, respectively, related to restricted stock grants and restricted stock units.

At the Company’s May 27, 2009 Annual Meeting of Stockholders, the Stockholders approved an amendment to the EFJ, Inc. 2005 Omnibus Incentive Compensation Plan to increase the maximum number of shares of common stock that may be granted to any one participant in any fiscal year from 100,000 to 350,000 shares.

6. ESCROW FUND SETTLEMENT

On January 13, 2009, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) settling a claim made by the Company against the escrow fund established in connection with the acquisition of 3eTI by the Company in 2006.  Pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated July 10, 2006, by and among the Company, 3eTI, Avanti Acquisition Corp., Chih-Hsiang Li, as Stockholders’ Agent, and Steven Chen, James Whang, Chih-Hsiang Li and AEPCO, Inc. (as the “Principal Stockholders”), $3.6 million (or ten percent (10%) of the purchase price for 3eTI) was deposited into an escrow account at the time of closing to indemnify the Company for any claims under the Merger Agreement.  In August 2008, the Company made a claim against the escrow fund for damages arising out of certain alleged breaches of representations and warranties contained in the Merger Agreement.

Pursuant to the terms of the Settlement Agreement, the Company received on January 16, 2009, approximately $2.8 million, inclusive of interest, out of the escrow fund.  The remaining balance of the escrow fund (or approximately $1.1 million, inclusive of interest) was paid out to the former stockholders of 3eTI pursuant to the terms of the Merger Agreement.  The Settlement Agreement also contains a mutual release of liability for claims related to the acquisition of 3eTI by the Company.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

The escrow funds received as part of the settlement were recorded as a reduction of operating expense. The Company previously incurred research and development costs in connection with the re-design, re-testing and re-certification of certain 3eTI products to bring them up to specifications represented to exist at the acquisition date.

7. INTEREST RATE SWAP AGREEMENT AND COMPREHENSIVE LOSS

On July 19, 2006, we entered into an interest rate swap agreement to manage interest costs and risks associated with changing interest rates, not for speculative or trading purposes. The interest rate swap has been designated as a cash flow hedge and is recorded in the consolidated financial statements at fair value. Changes in the fair value of the swap have been recorded in Accumulated Comprehensive Loss in the balance sheet as the derivative is assessed as effectively hedged at September 30, 2009. Changes in the fair value of the swap would be reclassified to other income (expense) to the extent the hedging instrument is determined to be ineffective.

The interest rate swap agreement effectively converts the variable LIBOR component of the interest rate on the $15.0 million term loan to a fixed rate of 5.64%. Under the terms of the interest rate swap agreement, the Company will pay 5.64% and the counterparty will pay LIBOR on a monthly basis. The interest rate swap agreement terminates on June 30, 2010, the termination date of the term loan. The cumulative net unrealized loss was $0.7 million and is included in the current portion of long-term debt obligations due to the termination date of the interest rate swap agreement and accumulated other comprehensive loss in the consolidated balance sheet at September 30, 2009. The following is a summary of comprehensive loss:

8. INVENTORIES

The following is a summary of inventories:

9. GOODWILL AND INTANGIBLE ASSETS

Our goodwill and intangible assets are tested for impairment annually as of December 31 of each year unless events or circumstances would require an immediate review. Goodwill and intangible asset amounts are allocated to the reporting units based upon amounts allocated at the time of their respective acquisition. Intangible assets, consisting of existing technology, customer relationships, license and covenants not-to-compete, are amortized over their useful life on a straight-line basis. Intangible assets consisting of trademark and trade name and certifications are not subject to amortization.

We performed fair value-based impairment tests at December 31, 2008. Upon completion of the impairment test, we concluded that the fair value of the 3eTI reporting unit was lower than the carrying value of the associated goodwill, certain intangibles and its trade name.  Therefore, in the fourth quarter ended December 31, 2008, we reported an impairment charge of $14.9 million related to goodwill and $3.5 million related to the other intangibles, including trade name, that was recorded in general and administrative expenses.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

No events occurred during the nine months ended September 30, 2009 and 2008, respectively, which would indicate that an impairment of such assets had taken place as of such dates.

Amortization expense, related to intangible assets which are subject to amortization, was $0.3 and $0.4 million for the three months ended September 30, 2009 and September 30, 2008, respectively. Amortization expense, related to intangible assets which are subject to amortization, was $0.8 and $1.2 million for the nine months ended September 30, 2009 and September 30, 2008, respectively. Intangible assets consist of the following as of the dates indicated:

10. NOTE PAYABLE AND LINE OF CREDIT

We amended our secured line of credit agreement with Bank of America in July 2006 to retain a revolving line of credit of up to $15.0 million and include a term loan of $15.0 million (the “Loan Agreement”). The $15.0 million term loan was fully funded and used to finance the acquisition of 3eTI dated July 10, 2006. Both borrowings bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”) determined by our ratio of debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The LIBOR Margin was 400 basis points as of September 30, 2009 and was 200 basis points at September 30, 2008. As discussed below, an amendment to the Loan Agreement was executed in March 2009 that resulted in increased basis points and lowered the revolving line of credit to $10.0 million. Interest rates of 4.26% and 4.5% were in effect at September 30, 2009 and 2008, respectively. The Loan Agreement expires June 30, 2010.

At September 30, 2009 and December 31, 2008, no borrowings had been made on the revolving line of credit. There was $0.75 million open letters of credit under our line of credit at September 30, 2009 and there were no open letters of credit under our line of credit at December 31, 2008. The total available remaining credit under the line of credit was $9.25 million and $14.4 million as of September 30, 2009 and December 31, 2008, respectively.

The Loan Agreement provides for customary affirmative and negative covenants, including maintenance of corporate existence, rights, property, books and records and insurance, compliance with contracts and laws, and certain reporting requirements, as well as limitations on debt, liens, fundamental changes, acquisitions, transfers of assets, investments, loans, guarantees, use of proceeds, sale-leaseback transactions and capital expenditures. In addition, the Loan Agreement contains certain financial covenants including a maximum ratio of funded debt to EBITDA and a fixed charge coverage ratio. The Loan Agreement also provides for events of default that would permit the lender to accelerate the loans upon their occurrence, including failure to make payments, breaches of representations and warranties, insolvency events, acceleration of other indebtedness, failure to discharge judgments, material adverse effects, certain breaches of contracts, casualty losses

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

when no or insufficient insurance is maintained, changes of control, certain ERISA events and failure to observe covenants. As collateral for the obligations under the Loan Agreement, the Lender has a security interest in substantially all assets of the borrowers, including accounts receivable, inventories, machinery, equipment, real estate, and general intangibles.

As noted in our Form 10-K for the period ending December 31, 2008, we were not in compliance with the financial covenants of the Loan Agreement for the quarter ended December 31, 2008. As a result, effective March 16, 2009 we executed an Amendment to the Loan Agreement whereby Bank of America waived such financial covenant defaults on a one-time basis, and amended the Loan Agreement to, among other things, lower the revolving line of credit from $15.0 million to $10.0 million, revise such financial covenants, add additional covenants, and to modify the advance and borrowing provisions under the Loan Agreement. In order to maintain compliance with the terms of the Amendment, the Company pledged as additional cash collateral for the remaining term of the term loan $3.0 million on the effective date of the Amendment. Furthermore, beginning with the quarter ending June 30, 2009, we are required to maintain a certain level of EBITDA, maintain certain fixed charge coverage ratio on a cumulative basis beginning April 1, 2009, a minimum funded debt to EBITDA ratio on an annualized basis beginning April 1, 2009 for each quarterly financial reporting period through June 30, 2010 and limit capital expenditures to $2.5 million for 2009. In addition, the interest rate on the revolving note issuable pursuant to the Loan Agreement has been amended to a floating rate equal to LIBOR plus a Libor Margin ranging from 2.50% to 5.00% through the term of the note based on the Company’s funded debt to EBITDA.

The Company was in compliance with all financial and negative covenants at September 30, 2009 under the Loan Agreement except for the minimum EBITDA financial covenant. Effective November 9, 2009, Bank of America waived such financial covenant default on a one time basis.  As discussed above, compliance with new, more restrictive financial covenants under the Loan Agreement was required beginning in the Company’s second quarter of 2009.  If certain orders are not received and shipped in the fourth quarter, the Company may not meet those more restrictive loan covenants for the fourth quarter. Management’s evaluation is based on recent experience with expected orders being temporarily delayed by customers.  In such event, the Company intends to attempt to obtain a waiver of noncompliance from the lender, failing which the lender could declare the Company in default under the Loan Agreement and accelerate the payment of the $15.0 million term loan, require payment of any borrowings under the revolving line of credit and raise the interest rate an additional 4%.  There can be no assurance that the Company will be able to obtain such waiver.

If the Company is not in compliance with the bank covenants at the end of the fourth quarter and is unable to obtain a waiver from such noncompliance, the Company may need to raise additional funds through public or private equity or debt financing to pay amounts due and owing under the Loan Agreement, to the extent existing resources and cash from operations are insufficient to pay such obligations. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

The Loan Agreement expires June 30, 2010.  As a result, the $15.0 million term loan under the Loan Agreement has been classified as current due to its maturity date of June 30, 2010. Through the expiration of the term loan, we expect to build our cash balances in anticipation of payment and / or refinancing all or a portion of the term loan at maturity. As noted above, we may need to raise additional funds through public or private equity or debt financing to satisfy the term loan at maturity. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

11. INCOME TAXES

We did not record a tax benefit or provision for the three and nine months ended September 30, 2009 and 2008 primarily due to our fully reserved deferred tax assets requiring no further provision for income taxes for each respective period end. The Company has unrecognized tax benefits of approximately $0.5 million that did not change significantly during the nine months ended September 30, 2009 relating to carry forward of business credits. The adoption of FASB authoritative guidance for accounting for uncertainty in income taxes did not result in the recognition of additional tax liability for unrecognized income tax benefits since the tax benefits have not been included in prior income tax return filings. In addition, future changes in the unrecognized tax benefit will have no net impact on the effective tax rate due to the existence of the valuation allowance.

As of September 30, 2009, we have no accrual requirement for interest or penalties related to uncertain tax positions since the tax benefits have not been included in prior income tax return filings.

The tax years 2004-2008 remain open to examination by the major taxing jurisdictions to which we are subject. Additionally, upon inclusion of the NOL and R&D credit carry forward tax benefits from tax years 1996 to 2003 in future tax returns, the related tax benefit for the period in which the benefit arose may be subject to examination.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

12. WARRANTY COSTS

We provide a one-to-three year warranty on substantially all of our product sales, depending upon certain terms and conditions of the sale, and estimate future warranty claims based on historical experience and anticipated costs to be incurred over the life of the warranty. Warranty expense is accrued at the time of sale with an additional accrual for specific items after the sale when their existence is known and amounts are determinable. A reconciliation of changes in our accrued warranty reserve as of September 30, 2009 is as follows:

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

In September 2006, the FASB issued authoritative guidance for measuring fair value, which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This guidance defines fair value, establishes a framework for measuring fair value, expands the related disclosure requirements and applies under other accounting pronouncements that require or permit fair value measurements. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The guidance defines fair value based upon an exit price model.

The Company adopted the guidance as of January 1, 2008 relating to financial assets and liabilities. The carrying amount of our current assets and liabilities approximates fair value because of the short maturity of these instruments. The carrying amount of our term loan approximates fair value as it is based on prevailing market rates of interest.

The guidance relating to non-recurring nonfinancial assets and nonfinancial liabilities will be applied as circumstances require. Non-recurring nonfinancial assets and nonfinancial liabilities include those measured at fair value in goodwill impairment testing and indefinite lived intangible assets measured at fair value for impairment testing.

The fair value of our interest rate swap agreement represents the amount required to settle the agreement using prevailing market rates of interest. Interest rate swaps are measured at fair value indirectly through market corroboration, for substantially the full term of the financial instrument within Level 2 of the fair value hierarchy.

The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2009:

14. COMMITMENTS AND CONTINGENCIES

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

The total we have accrued in regards to all legal proceedings as of September 30, 2009 and December 31, 2008 was $0.1 million.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

In the normal course of our business activities, we are required under certain supplier agreements and contracts with various government authorities to provide letters of credit and bonds that may be drawn upon if we fail to perform under these agreements or contracts. There was $0.75 million open letters of credit under our line of credit at September 30, 2009 and there were no open letters of credit under our line of credit at December 31, 2008. Bonds, which expire on various dates, totaled $2.4 million on September 30, 2009 and December 31, 2008. No bonds had been drawn upon at either date.

15. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

On November 15, 2007, the Company committed to an organizational plan (the “Plan”) to shift from three divisions to one integrated corporate structure focused on secure wireless communications for government and industrial customers. The Plan was expected to improve efficiencies in our operations, to reduce our infrastructure costs and to support a new technology roadmap driving towards a streamlined and more effective structure. Implementation of the Plan included senior and middle management changes as well as staff reductions designed to eliminate redundant positions and reflected the Company’s decision to consolidate operations and move production from three locations into a centralized operations and outsourcing program in the Dallas/Fort Worth area.

Costs that were directly associated with the Plan were recorded as “restructuring costs” and were included in general and administrative expenses. Other costs that did not qualify as restructuring costs were classified as other operating expenses or costs of goods sold in the Company’s consolidated statements of operations.

The timing of the recognition of costs associated with this move were determined in accordance with FASB authoritative guidance for accounting for costs associated with exit or disposal activities, and other relevant guidance, which provides that a liability for a cost associated with an exit or disposal activity shall be recognized at its fair value in the period in which the liability is incurred. In particular, employee-related termination costs associated with the relocation are generally recognized ratably over the period that the employees are required to provide services in order to earn the respective termination benefit.

The following table summarizes the estimates and actual exit costs incurred as of September 30, 2009:

The following table summarizes the beginning and ending liability reserve for exit costs as of September 30, 2009:

16. RELATED PARTY TRANSACTIONS

For the period October 2005 through June 2009, DRS Technologies, Inc. (“DRS”) was considered a related party due to Mr. Newman, Chairman, President and Chief Executive Officer of DRS, who also served as a director of the Company during this period. Effective June 5, 2009, Mr. Newman resigned as a Director of the Company due to potential conflicts of

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

interest relating to his position with DRS. Transactions with DRS subsequent to June 5, 2009 would not be considered related party transactions.

For the approximate five month period ended June 5, 2009, DRS and its related subsidiaries acquired approximately $1.6 million of our products. During the three and nine months ended September 30, 2008, DRS and its related subsidiaries acquired approximately $1.7 million and $15.9 million, respectively, of our products. Included in our account receivable balances as of December 31, 2008 were amounts due from DRS for $1.3 million.

17. RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2007, the FASB revised authoritative guidance for business combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. The guidance is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. The impact of our adoption of this guidance will depend upon the nature and terms of business combinations, if any, that we consummate on or after January 1, 2009.

In December 2007, the FASB revised authoritative guidance for consolidations, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of this guidance currently has no impact on our Consolidated Financial Statements.

In March 2008, the FASB revised authoritative guidance for disclosures of derivative instruments and hedging activities, which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. The guidance also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. The Company adopted this guidance effective January 1, 2009. The adoption of this guidance had no material impact on our consolidated financial statements.

In April 2008, the FASB revised authoritative guidance for determining the useful life of intangible assets, which revises the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The Company will be required to adopt this guidance with respect to intangible assets acquired on or after January 1, 2009. Due to the prospective application requirement, the adoption of this guidance had no impact on our consolidated financial statements.

In November 2008, the FASB revised authoritative guidance for accounting for defensive intangible assets, which addresses the accounting for assets acquired in a business combination or asset acquisition that an entity does not intend to actively use, otherwise referred to as a ‘defensive asset’. The guidance requires defensive intangible assets to be initially accounted for as a separate unit of accounting and not included as part of the cost of the acquirer’s existing intangible asset(s) because it is separately identifiable. The guidance also requires that defensive intangible assets be assigned a separate useful life. Due to the prospective application requirement, the adoption of this guidance had no impact on our consolidated financial statements.

In April 2009, the FASB revised authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

In April 2009, the FASB revised authoritative guidance for disclosures of financial instruments. The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine months ended September 30, 2009 and 2008

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

In May 2009, the FASB revised authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The guidance was effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this guidance for the period ended June 30, 2009 and provided the required disclosures for the period ending September 30, 2009

In June 2009, the FASB issued new authoritative guidance for the hierarchy of accounting standards, which establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of the guidance, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“Update”) No. 2009-13, which amends the Revenue Recognition topic of the Codification. This update provides amendments to the criteria in Subtopic 605-25 of the Codification for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our consolidated financial statements.

In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the Codification. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 605-985 of the Codification. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our consolidated financial statements.

18. SUBSEQUENT EVENTS

We have evaluated events occurring subsequent to the date of our financial statements through November 12, 2009, which is the date our financial statements were issued. We have recognized the effects of all subsequent events that provide additional evidence about conditions that existed at our balance sheet date as of September 30, 2009, including estimates inherent in the process of preparing our financial statements. There were no non-recognized subsequent events to be disclosed in our financial statements.

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

These forward-looking statements are subject to certain risks and uncertainties that could cause the actual results, performance and outcomes to differ materially from those expressed or implied in these forward-looking statements due to a number of risk factors including, but not limited to, the risks discussed in the 2008 Annual Report on Form 10-K under Item 1A “Risk Factors” and in Part II of this report on Form 10-Q under Item 1A “Risk Factors.” We caution readers not to rely on these forward-looking statements, which reflect management’s analysis only as of the date of this quarterly report. We undertake no obligation to revise or update any forward-looking statement for any reason except as required by law.

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

Overview

Previously the Company was organized, and reported its financial results, as a parent company with two segments, Private Wireless Communications and Secured Communications.  Having recognized that the public safety/public service market is moving towards convergent telecommunications solutions, the continued demand for interoperability and the transition from analog to digital platforms, we reorganized the Company in January 2008 into a single centralized corporate structure in order to be competitive in this market.

The operating structure of the Company also changed in the first quarter of 2008. Under the new structure, all of the Company’s operations report up to the chief executive officer and president through the chief operating officer. The chief financial officer, chief operating officer and general counsel report to the chief executive officer and president.  Based on the synergies of our products, customers, and organizational structure, the Company now operates in a single segment.

We design, develop, market and support wireless radios and wireless communications infrastructure and systems for digital and analog platforms. In addition, we offer encryption technologies for wireless voice, video and data communications and we also design, develop, market and support secure wireless networking solutions that include Wi-Fi products, mesh networking, access points, and client infrastructure products. The Company’s customers include first responders in public safety and public service, the federal government, and industrial organizations.

Due to the timing of orders and seasonality, our quarterly results fluctuate. We experience seasonality in our results in part due to governmental customer spending patterns that are influenced by government fiscal year-end budgets and appropriations. The unpredictable sales cycle coupled with launching new products and solutions can also cause variations from quarter to quarter.

Our Products and Solutions

Our wireless radio offerings are primarily digital solutions designed to operate in both analog and digital system environments. Our products and systems are based on industry standards designed to enhance interoperability among systems, improve bandwidth efficiency, and integrate voice and data communications.

The Land Mobile Radio (“LMR”) industry utilizes two-way wireless communications through wireless networks, which include infrastructure components such as base stations, repeaters, transmitters and receivers, network switches and portable and mobile two-way communication radios. Individual users operate portable hand-held radios and vehicular-mounted radios in their wireless communications system. Utilizing licensed RF spectrum, the customer owns and operates the wireless communication system that is networked by linking together the infrastructure components. We develop

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customer solutions, which leverage the customer’s wireless system and wireless radios with customer specific or enterprise wide applications.

The majority of revenues are derived from the sale of wireless radio products. Our federal, state and local governmental agency customers are increasingly demanding interoperable, secured communications products and systems. We believe this demand has created opportunities for us as we believe we are positioned to provide these products and systems. As a result, we expect to continue to allocate a majority of our on-going research and development expenditures to wireless radio features and enhancements, infrastructure components and system development efforts.

We provide the domestic and international LMR industry with secure encryption technologies for analog wireless radios. These products are specifically designed to prevent unauthorized access to sensitive voice communications in parts of the world where wireless radio systems remain analog and security needs are high. These products are sold as aftermarket add-on components or embedded components for existing analog radios and systems.

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

Our Sales and Distribution Approach

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

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

Depending on the size and complexity of customer specifications and requirements, products can be shipped to the customer in a relatively short period of time (typically 90 days) or with complex integrations and various delivery dates, orders can span multiple years. For example, our longer-term system contracts and government services revenues are generated under customer contracts and agreements for which revenue is recorded under the percentage-of-completion method.

Description of Operating Accounts

Revenues. Revenues consist of product sales, services, and government-funded research and development services and solutions net of returns and allowances. Longer-term system and government services revenues are recognized under the percentage-of-completion method.

Cost of Sales. Cost of sales includes costs of components and materials, labor, depreciation and overhead costs associated with the production of our products and services, as well as shipping, royalty, inventory reserves, warranty product costs, and incurred cost under sales contracts.

Gross Profit. Gross profit is net revenues less the cost of sales and is affected by a number of factors, including competitive pricing, product mix, type of contract and cost of products and services.

Research and Development. Research and development expenses consist primarily of costs associated with research and development personnel, materials, and the depreciation of research and development equipment and facilities. We expense research and development costs as they are incurred, net of any applicable cost reimbursements. Research and development expenses relating to our government-funded research and development services are included as a component of cost of sales.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs of sales personnel, including sales commissions and travel expenses, as well as costs of advertising, product and program management, public relations and trade show participation.

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