Abstract: Protection of transmitted and stored data from compromise or interception is achieved by a combined terminal authentication and encryption technique using a random number as part of both the encryption and authentication processes. Entry of data for transmission at a transmitting terminal automatically establishes a random number which is tranmitted ahead of the data stream along with a special fixed word and a code word which is encoded with the random number. The receiving station stores the random number and decodes the code word. The decoded code word and the received special word are compared to respective pre-stored counterparts thereof to determine authenticity of the transmitting terminal. Data encryption is effected by using three keys which depend, respectively, on data word content, data word sequence and the established random number.