UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

(Mark One)

þ		Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

o		Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from                      to                     

Commission File Number: 0-8588

TECHNICAL COMMUNICATIONS CORPORATION

(Exact name of small business issuer as specified in its charter)

Massachusetts		04-2295040
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Domino Drive, Concord, MA		01742-2892
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number, including area code: (978) 287-5100

N/A

if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 þ No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 1,381,035 shares of Common Stock, $.10 par value, outstanding as of August 3, 2007

Transitional Small Business Disclosure Format (check one): Yes o Noþ

 

 

INDEX

				Page
PART I		Financial Information
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and September 30, 2006			2
		Condensed Consolidated Statements of Operations for the Three months ended June 30, 2007 and June 24, 2006 (unaudited)			3
		Condensed Consolidated Statements of Operations for the Nine months ended June 30, 2007 and June 24, 2006 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the Nine months ended June 30, 2007 and June 24, 2006 (unaudited)			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management's Discussion and Analysis or Plan of Operation			14
Item 3.		Controls and Procedures			20
PART II		Other Information
Item 1.		Legal Proceedings			21
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3.		Defaults Upon Senior Securities			21
Item 4.		Submission of Matters to a Vote of Security Holders			21
Item 5.		Other Information			21
Item 6.		Exhibits			21
		Signatures			22
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Item 1. Financial Statements

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

		June 30, 2007				September 30, 2006
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	2,139,968			$	1,870,713
Accounts receivable — trade, less allowance for doubtful accounts of $70,000			295,742				206,320
Inventories			1,782,290				1,504,613
Other current assets			111,949				92,298
Total current assets			4,329,949				3,673,944
Equipment and leasehold improvements			5,114,077				5,077,732
Less: accumulated depreciation and amortization			(5,017,239	)			(4,994,339	)
Equipment and leasehold improvements, net			96,838				83,393
Total Assets		$	4,426,787			$	3,757,337
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	80,496			$	113,954
Accrued liabilities
Accrued compensation and related expenses			290,231				150,836
Accrued expenses			439,679				262,673
Total current liabilities			810,406				527,463
Stockholders’ Equity:
Common stock, par value $.10 per share; 7,000,000 shares authorized; 1,378,967 shares issued and outstanding at June 30, 2007 and 1,371,691 shares issued and outstanding at September 30, 2006			137,897				137,169
Additional paid-in capital			1,488,757				1,406,700
Retained earnings			1,989,727				1,686,005
Total stockholders’ equity			3,616,381				3,229,874
Total Liabilities and Stockholders’ Equity		$	4,426,787			$	3,757,337

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended
		June 30, 2007				June 24, 2006
Net sales		$	1,119,531			$	1,133,419
Cost of sales			369,388				456,707
Gross profit			750,143				676,712
Operating expenses:
Selling, general and administrative expenses			407,239				332,439
Product development costs			258,592				249,481
Total operating expenses			665,831				581,920
Operating income			84,312				94,792
Other income (expense):
Interest income			24,326				19,466
Interest expense			—				(312	)
Other			—				450
Total other income:			24,326				19,604
Net income before provision for income taxes			108,638				114,396
Provision for income taxes			—				—
Net income		$	108,638			$	114,396
Net income per common share:
Basic		$	0.08			$	0.08
Diluted		$	0.07			$	0.07
Weighted average shares:
Basic			1,378,025				1,371,441
Diluted			1,597,152				1,528,508

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

		Nine Months Ended
		June 30, 2007				June 24, 2006
Net sales		$	3,169,341			$	3,051,945
Cost of sales			917,235				1,243,500
Gross profit			2,252,106				1,808,445
Operating expenses:
Selling, general and administrative expenses			1,267,412				1,198,151
Product development costs			745,537				797,303
Total operating expenses			2,012,949				1,995,454
Operating income (loss)			239,157				(187,009	)
Other income (expense):
Interest income			65,189				37,791
Interest expense			(624	)			(1,229	)
Other			—				1,800
Total other income:			64,565				38,362
Net income (loss) before provision for income taxes			303,722				(148,647	)
Provision for income taxes			—				—
Net income (loss)		$	303,722			$	(148,647	)
Net income (loss) per common share:
Basic		$	0.22			$	(0.11	)
Diluted		$	0.20			$	(0.11	)
Weighted average shares:
Basic			1,374,358				1,369,021
Diluted			1,521,628				1,369,021

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended
		June 30, 2007				June 24, 2006
Operating Activities:
Net income (loss)		$	303,722			$	(148,647	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			22,900				23,749
Stock-based compensation			74,313				—
Changes in assets and liabilities:
Accounts receivable			(89,422	)			406,672
Inventories			(277,677	)			143,415
Other current assets			(19,651	)			(15,919	)
Accounts payable and other accrued liabilities			282,943				199,088
Net cash provided by operating activities			297,128				608,358
Investing Activities:
Additions to equipment and leasehold improvements			(36,345	)			(10,741	)
Net cash used in investing activities			(36,345	)			(10,741	)
Financing Activities:
Proceeds from stock issuance			8,472				8,341
Net cash provided by financing activities			8,472				8,341
Net increase in cash and cash equivalents			269,255				605,958
Cash and cash equivalents at beginning of the period			1,870,713				1,199,175
Cash and cash equivalents at the end of the period		$	2,139,968			$	1,805,133
Supplemental Disclosures:
Interest paid		$	624			$	1,229
Income taxes paid			503				2,977

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STATEMENT OF FAIR PRESENTATION

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements of Technical Communications Corporation (the “Company” or “TCC”) and its wholly-owned subsidiary include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 29, 2007.

Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by Securities and Exchange Commission rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006.

Based on today’s product cost structure and operating expenses, we believe that current cash and accounts receivable balances, the current backlog and the near term business prospects are sufficient to provide resources to operate the Company for the next 12 months. Our profitability during the previous two quarters and the nine months ended June 30, 2007 causes us to be optimistic about future sales growth and other possible sources of financing, including private equity funding or future public stock offerings. However, there is no assurance that any of these goals can be achieved.

Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reported periods.

On an ongoing basis, management evaluates its estimates and judgments, including but not limited to those related to revenue recognition, receivable reserves, inventory reserves and income taxes. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

The accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition,” as updated by Staff Accounting Bulletin No. 104 and Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by TCC, all revenue related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product revenue is recognized.

If a contract involves the provision of multiple elements and the elements qualify for separation under EITF 00-21, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for product revenue.

The Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how actual costs compare with a budget. Revenue from reimbursement contracts is recognized as services are performed.

On fixed-price contracts, revenue is generally recognized pursuant to the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. In each type of contract, the Company receives periodic progress payments or payment upon reaching interim milestones. All payments to TCC for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue and contract costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses as incurred.

Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in cost of sales.

Inventory

The Company values inventory at the lower of actual cost to purchase and/or manufacture or the current estimated market value of the inventory. A review is periodically performed of inventory quantities on hand and the Company records a provision for excess and/or obsolete inventory based primarily on the estimated forecast of product demand, as well as historical usage. Due to the custom and specific nature of certain products, demand and usage for these products and materials can fluctuate significantly. A significant decrease in demand for these products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, the Company’s industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence, any of which could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant negative impact on the value of inventory and would reduce our reported operating results.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in any impairment of their ability to make payments, additional allowances may be required, which would reduce net income.

Stock-Based Compensation

Effective October 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” and related interpretations (“SFAS No. 123R”) using the modified prospective method and accordingly has not restated prior period results. SFAS No. 123R established the method for accounting for equity instruments issued in exchange for employee services. Under SFAS No. 123R, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. SFAS No. 123R also requires the related excess tax benefit received upon exercise of stock options, if any, to be reflected in the statement of cash flows as a financing activity rather than an operating activity.

Prior to the adoption of SFAS No. 123R, the Company accounted for stock options issued to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The Company also provided the disclosures required under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures” (“SFAS No. 148”). As a result, no expense was reflected in net income for the nine months ended June 24, 2006 for stock options, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

The table below reflects our pro forma net income and earnings per share for the periods shown had compensation for stock options been determined based on the fair value at the grant date, consistent with the methodology prescribed under SFAS No. 123 and SFAS No. 148.

		June 24, 2006
		(unaudited)
		3 months				9 months
Net income (loss), as reported		$	114,396			$	(148,647	)
Add: Stock-based employee compensation expense included in net loss			—				—
Deduct: Stock-based employee compensation expense determined under fair-value method			(19,835	)			(100,929	)
Pro forma net income (loss)		$	94,561			$	(249,576	)
Basic income (loss) per share
As reported		$	0.08			$	(0.11	)
Pro forma		$	0.07			$	(0.18	)
Diluted income (loss) per share
As reported		$	0.07			$	(0.11	)
Pro forma		$	0.06			$	(0.18	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Upon adoption of SFAS No. 123(R), in accordance with Staff Accounting Bulletin No. 107, the Company selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award, (2) the expected future stock volatility over the expected term and (3) risk-free interest rate. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock and the risk free interest rate is based on the U.S. Treasury Note rate. The fair value of options at date of grant was estimated with the following assumptions:

		Three Months Ended
		June 30, 2007				June 24, 2006
Assumptions:
Option life		5 years				5 years
Risk-free interest rate			4.58	%			4.83	%
Stock volatility			149	%			162	%
Dividend yield			-0-				-0-

There were 16,500 options granted during the nine months ended June 30, 2007. The following table summarizes share-based compensation costs included in the Company’s consolidated statement of income for the periods ended June 30, 2007:

		Three months				Nine Months
Cost of sales		$	1,769			$	5,159
Selling, general and administrative			14,788				46,457
Product development costs			7,993				22,697
Total share-based compensation expense before tax		$	24,550			$	74,313

As of June 30, 2007, there was approximately $192,542 of unrecognized compensation costs related to options granted. The unrecognized compensation will be recognized over a period of approximately five years.

The Company had the following stock option plans outstanding as of June 30, 2007: the Technical Communications Corporation 1991 Stock Option Plan, the 2001 Stock Option Plan and the 2005 Non-Statutory Stock Option Plan. There were 850,000 shares authorized under these plans. Vesting periods are at the discretion of the Board of Directors and typically range between one and five years. Options under these plans are granted at fair market value and have a term of five or ten years from the date of grant. As of June 30, 2007, there were no shares available for new option grants under the 1991 Stock Option Plan or the 2001 Stock Option Plan, and there were 56,500 shares available for grant under the 2005 Non-Statutory Stock Option Plan. Shares issued as a result of stock option exercises will be funded through treasury stock or through the issuance of new shares.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

The following tables summarize stock option activity during the first nine months of fiscal year 2007:

		Options Outstanding
		Number of				Weighted Average				Weighted Average
		Shares				Exercise Price				Contractual Life
Outstanding at October 1, 2006			627,234			$	3.29
Grants			16,500
Exercises			(6,900	)
Cancellations			(21,000	)
Outstanding at June 30, 2007			615,834			$	3.11			4.8 years

Information related to the stock options outstanding as of June 30, 2007 is as follows:

						Weighted-
						Average												Exercisable
						Remaining				Weighted-				Exercisable				Weighted-
Range of		Number of				Contractual				Average				Number of				Average
Exercise Prices		Shares				Life (years)				Exercise Price				Shares				Exercise Price
$0.01 - $1.00			165,134				5.26			$	0.96				165,134			$	0.96
$1.01-$2.00			1,200				4.55				1.27				1,200				1.27
$2.01-$3.00			68,200				5.61				2.56				55,320				2.47
$3.01-$4.00			302,800				5.23				3.73				248,400				3.75
$4.01-$5.00			23,500				1.43				4.96				22,000				4.96
$5.01-$10.00			55,000				1.49				6.12				50,000				6.22
			615,834				4.80			$	3.11				542,054			$	3.04

The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 30, 2007 was $1,120,994. The intrinsic value of the options exercised during the nine months ended June 30, 2007 was $18,996. Nonvested common stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.

Accounting for Income Taxes

The preparation of our consolidated financial statements requires an estimate of income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may subject the Company to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatments of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. The Company must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. The Company has recorded a full valuation allowance against our deferred tax assets of $3.7 million as of June 30, 2007 and September 30, 2006, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates the Company may need to adjust its valuation allowance, which could materially impact its financial condition and results of operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Because the Company sells products into foreign countries with the assistance of local representatives, it has not been subject to any foreign taxes in recent years. Also, it is not anticipated that the Company will be subject to foreign taxes in the near future.

Newly Issued Pronouncements

In November 2005, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company is considering whether to adopt the alternative transition method provided in the FSP for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in-capital pool (“APIC pool”) related to the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R). The Company is evaluating which transition method it will use for calculating its APIC pool. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. Until and unless the Company elects the transition method described in the FSP, the transition method provided in SFAS No. 123(R) will be used.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is required to be adopted for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, that FIN 48 will have on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing the statement to determine the impact and materiality of its adoption by the Company, if any.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), providing guidance on quantifying financial statement misstatement and implementation when first applying this guidance. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years still existing in the current year’s ending balance sheet. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact, if any, that SAB No. 108 will have on its financial statements.

NOTE 2. Inventories

Inventories consisted of the following:

		June 30, 2007				September 30, 2006
		(unaudited)
Finished Goods		$	3,429			$	62,773
Work in Process			577,351				481,226
Raw Materials			1,201,510				960,614
		$	1,782,290			$	1,504,613

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

NOTE 3. Earnings (Loss) Per Share

In accordance with SFAS No. 128, “Earnings Per Share,” basic and diluted earnings (loss) per share were calculated as follows (unaudited):

		June 30, 2007								June 24, 2006
		3 months				9 months				3 months				9 months
Net income (loss)		$	108,638			$	303,722			$	114,396			$	(148,647	)
Weighted average shares — basic			1,376,695				1,374,423				1,371,441				1,369,021
Dilutive effect of stock options			219,127				147,270				157,066				—
Weighted average shares — diluted			1,595,822				1,521,693				1,528,508				1,369,021
Basic income (loss) per share		$	0.08			$	0.22			$	0.08			$	(0.11	)
Diluted income (loss) per share		$	0.07			$	0.20			$	0.07			$	(0.11	)

Outstanding potentially dilutive stock options, which were not included in the earnings (loss) per share calculations, as their inclusion would have been anti-dilutive, were 76,500 for the three month period and 204,500 for the nine month period at June 30, 2007, and 216,200 for the three month period and 591,234 for the nine month period at June 24, 2006.

NOTE 4. Major Customers and Export Sales

During the quarter ended June 30, 2007, the Company had three customers that represented 96% (50%, 24% and 22%, respectively) of net sales as compared to the same period in fiscal 2006 where two customers represented 84% (56% and 28%, respectively) of net sales. During the nine months ended June 30, 2007, the Company had two customers that represented 58% (44% and 14%, respectively) of net sales as compared to the same period in fiscal 2006 where three customers represented 61% (33%, 14% and 14%, respectively) of net sales.

A breakdown of foreign and domestic net sales is as follows (unaudited):

		June 30, 2007								June 24, 2006
		3 months				9 months				3 months				9 months
Domestic		$	1,104,711			$	2,754,292			$	106,782			$	702,005
Foreign			14,820				415,049				1,026,637				2,349,940
Total sales		$	1,119,531			$	3,169,341			$	1,133,419			$	3,051,945

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

The Company sold products into 14 countries during the nine months ended June 30, 2007 and 19 countries during the nine months ended June 24, 2006. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our foreign revenues by country as a percentage of total foreign revenue.

		June 30, 2007								June 24, 2006
		3 months				9 months				3 months				9 months
		(unaudited)								(unaudited)
Indonesia			—				28.1	%			61.8	%			43.0	%
Sweden			—				23.7	%			—				0.5	%
Bahrain			—				17.1	%			—				—
Italy			—				13.5	%			—				1.0	%
Morocco			14.0	%			3.2	%			—				18.0	%
Thailand			33.3	%			1.2	%			—				—
Venezuela			—				—				31.1	%			18.2	%
Colombia			37.0	%			1.5	%			—				7.8	%
Other			15.7	%			11.7	%			7.1	%			11.5	%

A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows:

		June 30, 2007								June 24, 2006
		3 months				9 months				3 months				9 months
		(unaudited)								(unaudited)
North America (excluding the U.S.)			—				—				0.9	%			0.4	%
Central and South America			37.0	%			1.5	%			31.1	%			26.2	%
Europe			2.5	%			42.2	%			6.2	%			5.5	%
Mid-East and Africa			21.6	%			26.8	%			—				20.8	%
Far East			38.9	%			29.5	%			61.8	%			47.1	%

Item 2. Management’s Discussion and Analysis or Plan of Operation

Forward-Looking Statements

The following discussion in this Quarterly Report on Form 10-QSB may contain statements that are not purely historical. Certain statements contained herein or as may otherwise be incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to future changes in export laws or regulations; changes in technology; the effect of foreign political unrest; the ability to hire, retain and motivate technical, management and sales personnel; the risks associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols; the effects of changing costs, exchange rates and interest rates; and the Company’s ability to secure adequate capital resources. Such risks, uncertainties and other factors could cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For a more detailed discussion of the risks facing the Company, see the Company’s filings with the Securities and Exchange Commission, including its Forms 10-QSB for the quarters ended March 31, 2007 and December 30, 2006 and its Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006.

Overview

The Company is in the business of designing, developing, manufacturing, distributing, marketing and selling communications security devices and equipment that utilize various methods of encryption to protect the information being transmitted. Encryption is a technique for rendering information unintelligible, which information can then be reconstituted if the recipient possesses the right decryption “key”. The Company manufactures several standard secure communications products and also provides custom-designed, special-purpose secure communications products for both domestic and international customers. The Company’s products consist primarily of voice, data and facsimile encryptors, and revenue is generated primarily from the sale of these products, which have traditionally been to foreign governments. However, we have also sold these products to commercial entities and U.S. government agencies. We also generate revenues from contract engineering services performed for certain government agencies, both domestic and foreign.

Critical Accounting and Significant Judgments and Estimates

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2006 (except for the implementation of SFAS No. 123(R) discussed in Note 1 to the condensed consolidated financial statements), nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 1, “Summary of Significant Accounting Policies and Significant Judgments and Estimates” in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-QSB and the Notes to Consolidated Financial Statements in our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006.

Results of Operations

Three Months ended June 30, 2007 as compared to the Three Months ended June 24, 2006

Net Sales

Net sales for the quarter ended June 30, 2007 were $1,120,000, as compared to $1,113,000 for the quarter ended June 24, 2006. Sales for the third quarter of fiscal 2007 consisted of $1,105,000, or 99%, from domestic sources and $15,000, or 1%, from international customers as compared to the same period in fiscal 2006, during which sales consisted of $107,000, or 9%, from domestic sources and $1,026,000, or 91%, from international customers.

Foreign sales consisted of shipments to six different countries during the quarter ended June 30, 2007 and seven different countries during the quarter ended June 24, 2006. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country, during the third fiscal quarters of 2007 and 2006:

		2007				2006
Morocco		$	2,000				—
Colombia			5,000				—
Thailand			5,000				—
Indonesia			—				634,000
Venezuela			—				319,000
Other			3,000				73,000
		$	15,000			$	1,026,000

Revenue for the third quarter of fiscal 2007 was primarily derived from the sale of our narrowband radio encryptors to two U. S. customers amounting to $557,000 and $250,000, respectively. During the second quarter of fiscal 2007 we finalized a program with the U.S. government for $1.4 million for engineering services work. This project generated $272,000 in revenue during the third quarter ended June 30, 2007.

Revenue for the third quarter of fiscal 2006 was primarily derived from the sale of our secure telephone, fax, and data encryptors to a customer in Indonesia amounting to $634,000 and a sale of our narrowband radio encryptors to a customer in Venezuela amounting to $319,000.

Gross Profit

Gross profit for the third quarter of fiscal 2007 was $750,000 as compared to gross profit of $677,000 for the same period of fiscal 2006, an increase of 11%. Gross profit expressed as a percentage of sales was 67% for the third quarter of fiscal 2007 as compared to 60% for the same period in fiscal 2006. The increase in gross profit as a percentage of sales was primarily associated with revenue generated from the sale of our narrowband radio encryptors in the third quarter of fiscal 2007.

Operating Costs and Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of fiscal 2007 were $407,000, as compared to $332,000 for the same quarter in fiscal 2006. This increase of 23% was primarily attributable to an increase in general and administrative expenses of $40,000 and an increase selling and marketing expenses of $35,000.

The increase in general and administrative costs was primarily attributable to an increase in personnel-related costs of $32,000, including the recognition of stock based compensation expense of $15,000 during the third quarter of 2007, and an increase in recruiting fees of $12,000.

The increase in selling costs was primarily attributable to an increase in bid and proposal efforts of $37,000 and an increase in personnel-related costs of $7,000 as compared to the same period in fiscal 2006.

Product Development Costs

Product development costs for the quarter ended June 30, 2007 were $259,000, compared to $249,000 for the quarter ended June 24, 2006, an increase of $10,000 or 4%. This increase was primarily attributable to an increase in personnel-related costs of $95,000, including stock based-compensation expense of $8,000 and an increase in recruiting costs of $68,000 during the quarter ended June 30, 2007. This increase was partially offset by a decrease in outside consulting services of approximately $13,000, and an increase in billable contract engineering, which decreased product development costs by approximately $147,000 as personnel were redeployed from internal product development efforts to billable contract work.

Product development costs are charged to billable engineering services, bid and proposal efforts or product development. Engineering costs charged to billable projects are recorded as cost of sales and engineering costs charged to bid and proposal efforts are recorded as selling expenses.

The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was $272,000 of billable engineering services revenue generated during the third quarter of fiscal 2007 and none during the same period of fiscal 2006.

Net Income

The Company’s net income was $109,000 for the third quarter of fiscal 2007, as compared to $114,000 for the same period of fiscal 2006. This decrease in income is primarily attributable to a 14% increase in operating expenses partially offset by an 11% increase in gross profit and a 25% increase in interest income. The uncertainty of the timing of customer orders can result in periods with losses, sometimes significant. This uncertainty will continue to make future results difficult to predict. Receiving orders and contracts in a timely manner is essential to the Company’s ability to sustain operations.

The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of June 30, 2007, none of the Company’s monetary assets or liabilities was subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers.

Nine Months ended June 30, 2007 as compared to the Nine Months ended June 24, 2006

Net Sales

Net sales for the nine months ended June 30, 2007 were $3,169,000, as compared to $3,052,000 for the nine months ended June 24, 2006, a 4% increase. Sales for the first nine months of fiscal 2007 consisted of $2,754,000, or 87%, from domestic sources and $415,000, or 13%, from international customers as compared to the same period in fiscal 2006, during which sales consisted of $702,000, or 23%, from domestic sources and $2,350,000, or 77%, from international customers.

Foreign sales consisted of shipments to 14 different countries during the nine months ended June 30, 2007 and 19 different countries during the nine months ended June 24, 2006. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country, during the first three fiscal quarters of fiscal 2007 and 2006:

		2007				2006
Indonesia		$	117,000			$	1,011,000
Sweden			99,000				—
Bahrain			71,000				—
Italy			56,000				24,000
Morocco			13,000				424,000
Venezuela			—				428,000
Colombia			6,000				184,000
Other			53,000				279,000
		$	415,000			$	2,350,000

Revenue for the first nine months of fiscal 2007 was primarily derived from the sale of our narrowband radio encryptors to three U. S. customers amounting to $1,377,000, $308,000 and $259,000, respectively, and a sale of our secure telephone, fax, and data encryptors to a customer in Indonesia amounting to $120,000. Additional sales included an order from a customer in Bahrain for our fax encryptors amounting to $71,000 and $99,000 worth of encryption equipment used in missile testing systems to a customer in Sweden. We also generated $338,000 in revenue as a result of a license agreement with a large domestic radio manufacturer. This customer also purchased $119,000 worth of integrated circuit chips during the period. During the second quarter of fiscal 2007 we finalized a program with the U.S. government valued at $1.4 million for engineering services work. This project has generated $285,000 in revenue through the nine months ended June 30, 2007.

Revenue for the first nine months of fiscal 2006 was primarily derived from the sale of our secure telephone, fax and data encryptors to an Indonesian customer amounting to $1,011,000. We also sold our narrowband radio encryptors for use by a Moroccan customer amounting to $424,000, a sale to a customer in Colombia amounting to $182,000 and a sale to a customer in Venezuela amounting to $428,000. In addition, there were sales of radio encryptors to two domestic customers totaling $206,000 as well as a sale of our high speed bulk encryptors to a customer in India amounting to $97,000. We also sold our executive secure telephones to four domestic customers amounting to $93,000. Additional revenue was derived from our on-going efforts to provide engineering services to the U.S. government; revenue recorded under this program during the first nine months of fiscal 2006 amounted to $88,000.

Gross Profit

Gross profit for the first nine months of fiscal 2007 was $2,252,000 as compared to gross profit of $1,808,000 for the same period of fiscal 2006, an increase of 25%. Gross profit expressed as a percentage of sales was 71% for the first nine months of fiscal 2007 as compared to 59% for the same period in fiscal 2006. The increase in gross profit as a percentage of sales was primarily associated with revenue generated from the license agreement in the second quarter of fiscal 2007 with a military radio manufacturer and several other sales of higher margin products in the first nine months of fiscal 2007.

Operating Costs and Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the first nine months of fiscal 2007 were $1,267,000, as compared to $1,198,000 for the same period in fiscal 2006. This increase of 6% was attributable to an increase in general and administrative expenses of $56,000 and an increase in selling and marketing expenses of $13,000.

The increase in general and administrative costs was primarily attributable to the recognition of stock based compensation expense of $46,000 during the first nine months of 2007 and an increase in recruiting expenses of $12,000, which was offset by a decrease in personnel-related costs of $17,000.

The increase in selling costs was primarily attributable to an increase in bid and proposal efforts of $125,000, an increase in personnel-related costs of $8,000 and an increase in product demonstration and promotional costs of $11,000, offset by a decrease in commissions and third party sales and marketing contracts of $134,000, as compared to the same period in fiscal 2006.

Product Development Costs

Product development costs for the nine months ended June 30, 2007 were $746,000, compared to $797,000 for the nine months ended June 24, 2006, a decrease of $52,000 or 6%. This decrease was primarily attributable to a decrease in outside consulting services of approximately $57,000, and an increase in the amount of engineering expenses charged to bid and proposal and other sales support efforts rather than product development costs during the period of $130,000. In addition there was an increase in billable contract engineering during the first nine months of fiscal 2007, which decreased product development costs by approximately $118,000 as personnel were redeployed from billable contract work to internal product development efforts. This decrease was partially offset by an increase in personnel-related costs of approximately $163,000, including stock based-compensation expense of $23,000 and an increase in recruiting expenses of $67,000 during the nine months ended June 30, 2007.

Product development costs are charged to billable engineering services, bid and proposal efforts or product development. Engineering costs charged to billable projects are recorded as cost of sales and engineering costs charged to bid and proposal efforts are recorded as selling expenses.

The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was $285,000 of billable engineering services revenue generated during the first nine months of fiscal 2007 and $88,000 for the first nine months of fiscal 2006.

Net Income

The Company’s net income was $304,000 for the first nine months of fiscal 2007, as compared to a net loss of $(149,000) for the same period of fiscal 2006. This increase in income is primarily attributable to a 25% increase in gross profit. The uncertainty of the timing of customer orders can result in periods with losses, sometimes significant. This uncertainty will continue to make future results difficult to predict. Receiving orders and contracts in a timely manner is essential to the Company’s ability to sustain operations.

The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of June 30, 2007, none of the Company’s monetary assets or liabilities was subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers.

Liquidity and Capital Resources

Cash and cash equivalents increased by $269,000, or 14%, to $2,140,000 as of June 30, 2007, from a balance of $1,871,000 at September 30, 2006. This increase was attributable in part to net income for the period of $303,000, non-cash expenses of $97,000 and an increase in accounts payable and accrued expenses of $283,000, offset by increases in inventory and accounts receivable of $278,000 and $89,000, respectively.

During the second quarter of fiscal 2007 the Company secured a new order, in the amount of $1.2 million, for our radio encryption products from a long time domestic customer. These encryptors are expected to ship over the next six months and will be deployed in Afghanistan. In addition we finalized an engineering services agreement that we anticipate will generate $1.4 million of revenue over the next twelve months. The profitability recognized during the third quarter and first nine months of fiscal 2007 coupled with these new orders provide an encouraging outlook for the Company.

Backlog at June 30, 2007 amounted to approximately $2,535,000. The orders for encryption products in backlog are expected to ship during the remainder of fiscal 2007, although actual shipments will depend on customer requirements and product availability. The engineering services project will be recognized over a twelve month period.

In November 2004, the Company entered into a line of credit agreement with Bank of America, formerly Fleet National Bank (the “Bank”) for a line of credit not to exceed the principal amount of $600,000, and executed a financing promissory note with respect thereto. The loan is a demand loan with interest payable at the Bank’s prime rate plus 1% on all outstanding balances. The loan is secured by all assets of the Company (excluding consumer goods) and requires the Company to maintain its deposit accounts with the Bank, as well as comply with certain other covenants. The Company believes this line of credit agreement provides it with an important external source of liquidity, if necessary.

Certain foreign customers require the Company to guarantee performance of products sold. These guaranties typically take the form of standby letters of credit. Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year. As of June 30, 2007, the Company had no outstanding standby letters of credit. Any letters of credit outstanding would be secured by the Company’s line of credit facility with the Bank.

In April 2007, the Company entered into a new lease for its current facilities. This lease is for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in this space since 1983. This is the Company’s only facility and houses all manufacturing, research and development, and corporate operations. The term of the lease is for five years through March 31, 2012 at an annual rate of $159,000. In addition the lease contains options to extend the lease for two and one half years through September 30, 2014 and another two and one half years through March 31, 2017, at an annual rate of $171,000. Rent expense for the nine months ended June 30, 2007 was $114,000.

The Company does not anticipate any significant capital expenditures during the remainder of fiscal 2007.

The Company remains on course with its internal product development plans and expects to maintain and possibly increase its investment in internal product development over the next twelve months. We anticipate that the products comprising TCC’s Secure Wireless product line will continue to evolve and respond to new customer requirements. It is also expected that TCC’s CipherTalk Secure Voice encryption and CipherSMS Secure Text Messaging will be applied to additional mobile platforms and that customer specific features will be developed. TCC also plans to continue its work evaluating new product options in the high-speed bulk encryption markets for military applications. Depending on customer demand, TCC may also proceed with the development of variants of its Military Bulk Encryptor, which would address higher speeds and additional interfaces. On-going research and development in support of product improvements and application variants also is expected to continue.

Should the Company choose to embark on a major development program in addition to its traditional research and development activities, engineering staff will have to be added. The Company has sufficient physical resources to support the added staff and believes that adequate technical resources exist in the Boston area to meet potential needs; however, we may need financial resources, in addition to cash from operations, to fund a major new development program.

Based on today’s product cost structure and operating expenses, we believe that current cash and accounts receivable balances, the current backlog and the near term business prospects are sufficient to provide resources to operate the Company for the next 12 months. Our profitability during the third quarter and nine months ended June 30, 2007 causes us to be optimistic about future sales growth and other possible sources of financing, including private equity funding or future public stock offerings. However, there is no assurance that any of these goals can be achieved.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements with any party.

Item 3. Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-QSB. Based on that review and evaluation, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective to ensure that such officers are provided with information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act and that such information is recorded, processed, summarized and reported within the specified time periods.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information

Item 1.   Legal Proceedings

There were no legal proceedings pending against or involving the Company during the period covered by this quarterly report.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

None

Item 5.   Other Information

Not applicable.

Item 6.   Exhibits and Reports on Form 8-K

	31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1		Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

Exhibit
No.		Description
31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002