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  **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 March 31, 2007**   o **Transition report under Section 13 or 15(d) of the Exchange Act****For the transition period from                      to                     ****CommissionFile 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 (I.R.S. Employer Identification No.)incorporation or organization)     100 Domino Drive, Concord, MA 01742-2892   (Address of principal executive offices) (Zip Code)Issuer’s telephone number, including area code: (978) 287-5100N/A(Former name, former address and former fiscal year,if changed since last report)Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ No oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No þState the number of shares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date. Number of shares of Common Stock, $.10 par value, outstanding as of May11, 2007: 1,378,735Transitional Small Business Disclosure Format (check one): Yes o No þ  
 
 

 
INDEX           Page **PART I** **Financial Information**           Item 1. Financial Statements:             Condensed Consolidated Balance Sheets as ofMarch 31, 2007 (unaudited) and September 30, 2006  2          Condensed Consolidated Statements of Operations for theThree months ended March 31, 2007 and March 25, 2006 (unaudited)  3          Condensed Consolidated Statements of Operations for theSix months ended March 31, 2007 and March 25, 2006 (unaudited)  4          Condensed Consolidated Statements of Cash Flows for theSix months ended March 31, 2007 and March 25, 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
 
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Item 1. Financial StatementsTECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIESCondensed Consolidated Balance Sheets           March 31, 2007  September 30, 2006   (Unaudited)     Assets        Current Assets:        Cash and cash equivalents $1,980,396  $1,870,713 Accounts receivable — trade, less allowance fordoubtfulaccounts of $70,000  247,682   206,320 Inventories  1,670,430   1,504,613 Other current assets  63,241   92,298        Total current assets  3,961,749   3,673,944                 Equipment and leasehold improvements  5,108,464   5,077,732 Less: accumulated depreciation and amortization  (5,009,333)  (4,994,339)       Equipment and leasehold improvements, net  99,131   83,393                 Total Assets $4,060,880  $3,757,337                 Liabilities and Stockholders’ Equity        Current Liabilities:        Accounts payable $136,580  $113,954 Accrued liabilities        Accrued compensation and related expenses  259,131   150,836 Accrued expenses  183,857   262,673        Total current liabilities  579,568   527,463                 Stockholders’ Equity:        Common stock, par value $.10 per share;7,000,000 shares authorized; 1,377,067 shares issuedand outstanding at March 31, 2007 and 1,371,691shares issued and outstanding at September 30, 2006  137,707   137,169 Additional paid-in capital  1,462,516   1,406,700 Retained earnings  1,881,089   1,686,005        Total stockholders’ equity  3,481,312   3,229,874                 Total Liabilities and Stockholders’ Equity $4,060,880  $3,757,337        *The accompanying notes are an integral part of these condensed consolidated financial statements.*
 
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIESCondensed Consolidated Statements of Operations(Unaudited)           Three Months Ended   March 31, 2007  March 25, 2006        Net sales $1,288,150  $1,004,856 Cost of sales  319,015   415,364        Gross profit  969,135   589,492          Operating expenses:        Selling, general andadministrative expenses  408,337   425,380 Product development costs  268,153   334,532        Total operating expenses  676,490   759,912                 Operating income (loss)  292,645   (170,420)                Other income (expense):        Interest income  19,801   10,315 Interest expense  (312)  (200)Other  —   900        Total other income:  19,489   11,015                 Net income (loss) before provision for income taxes  312,134   (159,405)         Provision for income taxes  —   —                 Net income (loss) $312,134  $(159,405)                Net income (loss) per common share:        Basic $0.23  $(0.12)Diluted $0.20  $(0.12)         Weighted average shares:        Basic  1,375,505   1,368,912 Diluted  1,534,338   1,368,912 *The accompanying notes are an integral part of these condensed consolidated financial statements.*
 
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIESCondensed Consolidated Statements of Operations(Unaudited)           Six Months Ended   March 31, 2007  March 25, 2006        Net sales $2,049,810  $1,918,526 Cost of sales  547,847   786,793        Gross profit  1,501,963   1,131,733          Operating expenses:        Selling, general andadministrative expenses  860,173   865,712 Product development costs  486,945   547,822        Total operating expenses  1,347,118   1,413,534                 Operating income (loss)  154,845   (281,801)                Other income (expense):        Interest income  40,863   18,325 Interest expense  (624)  (917)Other  —   1,350        Total other income:  40,239   18,758                 Net income (loss) before provision for income taxes  195,084   (263,043)         Provision for income taxes  —   —                 Net income (loss) $195,084  $(263,043)                Net income (loss) per common share:        Basic $0.14  $(0.19)Diluted $0.13  $(0.19)         Weighted average shares:        Basic  1,373,828   1,367,811 Diluted  1,527,610   1,367,811 *The accompanying notes are an integral part of these condensed consolidated financial statements.*
 
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)           Six Months Ended   March 31, 2007  March 25, 2006        Operating Activities:        Net income (loss) $195,084  $(263,043)         Adjustments to reconcile net income to net cashprovided by operating activities:        Depreciation and amortization  14,994   17,631 Stock-based compensation  49,763   —          Changes in assets and liabilities:        Accounts receivable  (41,362)  859,097 Inventories  (165,817)  247,270 Other current assets  29,057   5,035 Accounts payable and other accrued liabilities  52,105   237,927                 Net cash provided by operating activities  133,824   1,103,917                 Investing Activities:        Additions to equipment and leasehold improvements  (30,732)  (6,866)                Net cash used in investing activities  (30,732)  (6,866)                Financing Activities:        Proceeds from stock issuance  6,591   7,549                 Net cash provided by financing activities  6,591   7,549                 Net increase in cash and cash equivalents  109,683   1,104,600          Cash and cash equivalents at beginning of theperiod  1,870,713   1,199,175                 Cash and cash equivalents at the end of the period $1,980,396  $2,303,775                 *Supplemental Disclosures:*                 Interest paid $416  $917 Income taxes paid  —   2,650 *The accompanying notes are an integral part of these condensed consolidated financial statements.*
 
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENT OF FAIR PRESENTATIONInterim Financial Statements. The accompanying unaudited condensed consolidated financialstatements of Technical Communications Corporation (the “Company” or “TCC”) and its wholly-ownedsubsidiary include all adjustments which are, in the opinion of management, necessary for a fairpresentation of the results of operations for the periods presented and in order to make thefinancial 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 yearending September 29, 2007.Certain footnote disclosures normally included in financial statements prepared in accordance withgenerally accepted accounting principles have been condensed or omitted as allowed by Securitiesand Exchange Commission rules and regulations. The accompanying unaudited condensed consolidatedfinancial statements should be read in conjunction with the Company’s audited consolidatedfinancial statements and the notes thereto in the Company’s Annual Report on Form 10-KSB for thefiscal year ended September 30, 2006.Based on today’s product cost structure and operating expenses, we believe that current cash andaccounts receivable balances along with the current backlog are sufficient to provide resources tooperate the Company through the end of fiscal year 2007. Our profitability during the secondquarter and six months ended March 31, 2007 causes us to be optimistic about future sales growthand other possible sources of financing, including private equity funding or future public stockofferings. However, there is no assurance that any of these goals can be achieved.Basis of Presentation The accompanying consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts andtransactions have been eliminated in consolidation.NOTE 1.Summary of Significant Accounting Policies and Significant Judgments andEstimatesThe discussion and analysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of these consolidatedfinancial statements requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported revenues and expenses during the reportedperiods.On an ongoing basis, management evaluates its estimates and judgments, including but not limited tothose related to revenue recognition, receivable reserves, inventory reserves and income taxes.Management bases its estimates on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates under different assumptions orconditions.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)The accounting policies that management believes are most critical to aid in fullyunderstanding and evaluating our reported financial results include the following:**Revenue Recognition**The Company recognizes revenue from product sales in accordance with Staff Accounting BulletinNo.101, “Revenue Recognition,” as updated by Staff Accounting Bulletin No. 104 and EmergingIssues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF00-21”). 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 wehave determined that collection of the fee is probable. Title to the product generally passesupon shipment of the product, as the products are shipped FOB shipping point, except forcertain foreign shipments. If the product requires installation to be performed by TCC, allrevenue related to the product is deferred and recognized upon the completion of theinstallation. The Company provides for a warranty reserve at the time the product revenue isrecognized.If a contract involves the provision of multiple elements and the elements qualify forseparation under EITF 00-21, total estimated contract revenue is allocated to each elementbased on the relative fair value of each element provided. The amount of revenue allocated toeach element is limited to the amount that is not contingent upon the delivery of anotherelement in the future. Revenue is then recognized for each element as described above forproduct revenue.The Company performs funded research and development and product development for commercialcompanies and government agencies under both cost reimbursement and fixed-price contracts.Cost reimbursement contracts provide for the reimbursement of allowable costs and, in somesituations, the payment of a fee. These contracts may contain incentive clauses providing forincreases or decreases in the fee depending on how actual costs compare with a budget. Revenuefrom 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 theproportion of costs incurred to the total estimated costs for the contract. In each type ofcontract, the Company receives periodic progress payments or payment upon reaching interimmilestones. 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 contractrevenue and contract costs for commercial product development contracts indicate a loss, aprovision for the entire loss on the contract is recorded. Any losses incurred in performingfunded research and development projects are recognized as funded research and developmentexpenses as incurred.Cost of product revenue includes material, labor and overhead. Costs incurred in connectionwith funded research and development and other revenue arrangements are included in cost ofsales.**Inventory**The Company values inventory at the lower of actual cost to purchase and/or manufacture or thecurrent estimated market value of the inventory. A review is periodically performed ofinventory quantities on hand and the Company records a provision for excess and/or obsoleteinventory based primarily on the estimated forecast of product demand, as well as historicalusage. Due to the custom and specific nature of certain products, demand and usage for theseproducts and materials can fluctuate significantly. A significant decrease in demand for theseproducts could result in a short-term increase in the cost of inventory purchases and anincrease of excess inventory quantities on hand. In addition, the Company’s industry ischaracterized by rapid technological change, frequent new product development and rapid productobsolescence, any of which could result in an increase in the amount of obsolete inventoryquantities on hand. Therefore, although the Company makes every effort to ensure the accuracyof its forecasts of future product demand, any significant unanticipated change in demand ortechnological developments could have a significant negative impact on the value of inventoryand would reduce our reported operating results.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)**Accounts Receivable**Accounts receivable are reduced by an allowance for amounts that may become uncollectible inthe future. The estimated allowance for uncollectible amounts is based primarily on a specificanalysis of accounts in the receivable portfolio and historical write-off experience. Whilemanagement believes the allowance to be adequate, if the financial condition of our customerswere to deteriorate, resulting in any impairment of their ability to make payments, additionalallowances may be required, which would reduce net income.**Stock-Based Compensation**Effective October 1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123(R), “Share-Based Payment” and related interpretations (“SFAS No.123R”) using the modified prospective method and accordingly has not restated prior periodresults. SFAS No. 123R established the method for accounting for equity instruments issued inexchange for employee services. Under SFAS No. 123R, share-based compensation cost is measuredat the grant date based on the calculated fair value of the award. The expense is recognizedover the employees’ requisite service period, generally the vesting period of the award. SFASNo. 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 anoperating activity.Prior to the adoption of SFAS No. 123R, the Company accounted for stock options issued toemployees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations. The Company also provided the disclosuresrequired under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosures” (“SFAS No. 148”). As a result, no expense wasreflected in net income for the six months ended March 25, 2006 for stock options, as alloptions granted had an exercise price equal to the market value of the underlying common stockon the date of grant.The table below reflects our pro forma net income and earnings per share for the periods shownhad 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.           March 25, 2006   (unaudited)   3 months  6 months        Net loss, as reported $(159,405) $(263,043)Add: Stock-based employee compensationexpense included in net loss  —   — Deduct: Stock-based employee compensationexpense determined under fair-value method  (24,263)  (61,551)       Pro forma net loss $(183,668) $(324,594)                Basic loss per share        As reported $(0.12) $(0.19)Pro forma $(0.13) $(0.24)                Diluted loss per share        As reported $(0.12) $(0.19)Pro forma $(0.13) $(0.24)       
 
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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 fordetermining the estimated fair value for the stock awards. The Black-Scholes method ofvaluation requires several assumptions: (1) the expected term of the stock award, (2) theexpected future stock volatility over the expected term and (3) risk-free interest rate. Theexpected term represents the expected period of time the Company believes the options will beoutstanding based on historical information. Estimates of expected future stock pricevolatility are based on the historic volatility of the Company’s common stock and the risk freeinterest rate is based on the U.S. Treasury Note rate. The fair value of options at date ofgrant was estimated with the following assumptions:           **Three Months Ended**   **March 31, 2007**  **March 25, 2006** Assumptions:        Option life 5 years  5 years Risk-free interest rate  4.625%  4.375%Stock volatility  150%  164%Dividend yield  -0-   -0- There were 10,000 options granted during the three months ended March 31, 2007. Thefollowing table summarizes share-based compensation costs included in the Company’sconsolidated statement of income for the periods ended March 31, 2007:           **Three months**  **Six Months**  Cost of sales $1,675  $3,390 Selling, general and administrative  14,416   31,669 Product development costs  7,277   14,704        Total share-based compensation expense before tax $23,368  $49,763        Asof March 31, 2007, there was approximately $186,228 of unrecognized compensation costsrelated to options granted. The unrecognized compensation will be recognized over a period ofapproximately five years.The Company had the following stock option plans outstanding as of March 31, 2007: theTechnical Communications Corporation 1991 Stock Option Plan, the 2001 Stock Option Plan and the2005 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 oneand five years. Options under these plans are granted at fair market value and have a term offive or ten years from the date of grant. As of March 31, 2007, there were no shares availablefor new option grants under the 1991 Plan and there were 5,000 and 63,000 shares available forgrant under the 2001 Stock Option Plan and 2005 Non-Statutory Stock Option Plan, respectively.Shares issued as a result of stock option exercises will be funded through treasury stock orthrough the issuance of new shares.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)The following tables summarize stock option activity during the first six months of fiscalyear 2007:               **Options Outstanding**   **Number of**  **Weighted Average**  **Weighted Average**   **Shares**  **Exercise Price**  **Contractual Life** **Outstanding at October 1, 2006**  627,234  $3.29     Grants  10,000         Exercises  (5,000)        Cancellations  —                     **Outstanding at March 31, 2007**  632,234  $3.32   4.84             Information related to the stock options outstanding as of March 31, 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  167,034   5.51  $0.96   167,034  $0.96 $1.01   - $  2.00  2,200   2.62   1.23   2,200   1.23 $2.01   - $  3.00  68,200   5.86   2.56   53,120   2.44 $3.01   - $  4.00  302,800   5.48   3.73   257,700   3.75 $4.01   - $  5.00  22,000   1.10   4.95   22,000   4.95 $5.01   - $10.00  58,000   0.79   6.64   58,000   6.64 $10.01 - $15.00  12,000   0.09   11.85   12,000   11.85                       632,234   4.84  $3.32   572,054  $3.30                    The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisableoptions as of March 31, 2007 was $292,144. The intrinsic value of the options exercised duringthe six months ended March 31, 2007 was $5,538. Nonvested common stock options are subject tothe 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 taxesin 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 theUnited States. The income tax accounting process involves estimating our actual currentexposure together with assessing temporary differences resulting from differing treatments ofitems, such as deferred revenue, for tax and accounting purposes. These differences result inthe recognition of deferred tax assets and liabilities. The Company must then record avaluation allowance to reduce our deferred tax assets to the amount that is more likely thannot to be realized.Significant management judgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities, and any valuation allowance recorded against deferred taxassets. The Company has recorded a full valuation allowance against our deferred tax assets of$3.7 million as of March 31, 2007 and September 30, 2006, due to uncertainties related to ourability to utilize these assets. The valuation allowance is based on our estimates of taxableincome 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 itsvaluation allowance, which could materially impact its financial condition and results ofoperations.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)Because the Company sells products into foreign countries with the assistance of localrepresentatives, it has not been subject to any foreign taxes in recent years. Also, it is notanticipated 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-BasedPayment Awards.” The Company is considering whether to adopt the alternative transition methodprovided in the FSP for calculating the tax effects of stock-based compensation pursuant toSFAS No. 123(R). The alternative transition method includes simplified methods to establishthe beginning balance of the additional paid-in-capital pool (“APIC pool”) related to theexcess tax benefits available to absorb tax deficiencies recognized subsequent to the adoptionof SFAS No. 123(R). The Company is evaluating which transition method it will use forcalculating its APIC pool. An entity may take up to one year from the later of its initialadoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its availabletransition alternatives and make its one-time election. Until and unless the Company electsthe transition method described in the FSP, the transition method provided in SFAS N0. 123(R)will be used.In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practiceassociated 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 incometaxes and is required to be adopted for fiscal years beginning after December 15, 2006. TheCompany is currently evaluating the impact, if any, that FIN 48 will have on its financialstatements.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a frameworkfor 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 iscurrently reviewing the statement to determine the impact and materiality of its adoption bythe Company, if any.In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current Year FinancialStatements” (“SAB No. 108”), providing guidance on quantifying financial statement misstatementand implementation when first applying this guidance. Under SAB No. 108, companies shouldevaluate a misstatement based on its impact on the current year income statement, as well asthe cumulative effect of correcting such misstatements that existed in prior years stillexisting in the current year’s ending balance sheet. SAB No. 108 is effective for fiscal yearsending after November 15, 2006. The Company is currently evaluating the impact, if any, thatSAB No. 108 will have on its financial statements.NOTE 2.InventoriesInventories consisted of the following:           March 31, 2007  September 30, 2006   (unaudited)     Finished Goods $3,849  $62,773 Work in Process  560,928   481,226 Raw Materials  1,105,653   960,614          $1,670,430  $1,504,613        
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)NOTE 3.Earnings (Loss) Per ShareIn accordance with SFAS No. 128, “Earnings Per Share,” basic and diluted earnings (loss) per sharewere calculated as follows (unaudited):                   March 31, 2007  March 25, 2006   3 months  6 months  3 months  6 months              Net income (loss) $312,134  $195,084  $(159,405) $(263,043)             Weighted average shares — basic  1,375,505   1,373,828   1,368,912   1,367,811 Dilutive effect of stock options  158,833   153,782   —   —              Weighted average shares — diluted  1,534,338   1,527,610   1,368,912   1,367,811                               Basic income (loss) per share $0.23  $0.14  $(0.12) $(0.19)Diluted income (loss) per share $0.20  $0.13  $(0.12) $(0.19)Outstanding potentially dilutive stock options, which were not included in the earnings (loss) pershare calculations, as their inclusion would have been anti-dilutive, were 327,036 at March 31,2007 and 581,909 at March 25, 2006.NOTE 4.Major Customers and Export SalesDuring the quarter ended March 31, 2007, the Company had three customers that represented 98% (48%,26% and 24%, respectively) of net sales as compared to the same period in fiscal 2006 where fourcustomers represented 73% (41%, 11%, 11% and 10%, respectively) of net sales. During the six monthsended March 31, 2007, the Company had three customers that represented 77% (40%, 22% and 15%,respectively) of net sales as compared to the same period in fiscal 2006 where two customersrepresented 42% (22%, and 20%, respectively) of net sales.A breakdown of foreign and domestic net sales is as follows (unaudited):                   March 31, 2007  March 25, 2006   3 months  6 months  3 months  6 months              Domestic $1,272,410  $1,649,581  $223,106  $595,223 Foreign  15,740   400,229   781,750   1,323,303              Total sales $1,288,150  $2,049,810  $1,004,856  $1,918,526              
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)The Company sold products into 13 countries during the six months ended March 31, 2007 and 16countries during the six months ended March 25, 2006. A sale is attributed to a foreign countrybased on the location of the contracting party. The table below summarizes our foreign revenues bycountry as a percentage of total foreign revenue.                   March 31, 2007  March 25, 2006   3 months  6 months  3 months  6 months   (unaudited)  (unaudited) Indonesia  (19.1)%  29.1%  12.9%  28.5%Sweden  —   24.6%  —   — Bahrain  —   17.7%  —   — Italy  —   14.0%  1.7%  1.8%Morocco  44.2%  2.8%  52.8%  32.1%Tunisia  29.8%  1.2%  —   0.3%Slovakia  26.3%  4.7%  —   2.2%Austria  10.2%  0.4%  1.2%  0.8%Venezuela  —   —   14.2%  8.2%India  —   —   12.4%  7.3%Colombia  —   0.2%  —   13.9%Other  8.6%  5.3%  4.8%  4.9%Asummary of foreign revenue, as a percentage of total foreign revenueby geographic area, is as follows:                   March 31, 2007  March 25, 2006   3 months  6 months  3 months  6 months   (unaudited)  (unaudited) North America(excluding the U.S.)  —   —   —   — Central and South America  —   0.2%  14.2%  22.4%Europe  36.4%  43.7%  2.9%  4.9%Mid-East and Africa  82.6%  27.0%  57.6%  36.9%Far East  (19.0)%  29.1%  25.3%  35.8%
 
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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 arenot purely historical. Certain statements contained herein or as may otherwise be incorporated byreference herein constitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements include but are not limitedto statements regarding anticipated operating results, future earnings, and the Company’s abilityto achieve growth and profitability. Such forward-looking statements involve known and unknownrisks, uncertainties and other factors, including but not limited to future changes in export lawsor 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 thetechnical feasibility and market acceptance of new products; changes in telecommunicationsprotocols; the effects of changing costs, exchange rates and interest rates; and the Company’sability to secure adequate capital resources. Such risks, uncertainties and other factors couldcause the actual results, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievements expressed or implied bysuch 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 Form 10-QSBfor the quarter ended December 30, 2006 and its Annual Report on Form 10-KSB for the fiscal yearended September 30, 2006.**Overview**The Company is in the business of designing, developing, manufacturing, distributing, marketing andselling communications security devices and equipment that utilize various methods of encryption toprotect the information being transmitted. Encryption is a technique for rendering informationunintelligible, which information can then be reconstituted if the recipient possesses the rightdecryption “key”. The Company manufactures several standard secure communications products and alsoprovides custom-designed, special-purpose secure communications products for both domestic andinternational customers. The Company’s products consist primarily of voice, data and facsimileencryptors, and revenue is generated primarily from the sale of these products, which havetraditionally been to foreign governments. However, we have also sold these products to commercialentities and U.S. government agencies. We also generate revenues from contract engineering servicesperformed 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 accountingestimates since September 30, 2006, nor have we adopted any accounting policy that has or will havea material impact on our consolidated financial statements. For further discussion of ouraccounting policies see Note 1, “*Summary of Significant Accounting Policies and SignificantJudgments and Estimates”*in the Notes to Condensed Consolidated Financial Statements in thisQuarterly Report on Form 10-QSB and the Notes to Consolidated Financial Statements in our AnnualReport on Form 10-KSB for the fiscal year ended September 30, 2006.
 
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**Results of Operations****Three Months ended March 31, 2007 as compared to the Three Months ended March 25, 2006****Net Sales**Net sales for the quarter ended March 31, 2007 were $1,288,000, as compared to $1,005,000 for thequarter ended March 25, 2006, a 28% increase. Sales for the second quarter of fiscal 2007consisted of $1,272,000, or 99%, from domestic sources and $16,000, or 1%, from internationalcustomers as compared to the same period in fiscal 2006, during which sales consisted of $223,000,or 22%, from domestic sources and $782,000, or 78%, from international customers.Foreign sales consisted of shipments to five different countries during the quarter ended March 31,2007 and seven different countries during the quarter ended March 25, 2006. A sale is attributed toa foreign country based on the location of the contracting party. The table below summarizes ourprincipal foreign sales by country, during the second fiscal quarters of 2007 and 2006:           2007  2006 Morocco $7,000  $413,000 Indonesia  —   101,000 Venezuela  —   111,000 India  —   97,000 Other  9,000   60,000          $16,000  $782,000        Revenue for the second quarter of fiscal 2007 was primarily derived from the sale of our narrowbandradio encryptors to two U. S. customers amounting to $613,000 and $308,000, respectively. We alsogenerated $337,500 in revenue as a result of a license agreement with a large domestic radiomanufacturer.Revenue for the second quarter of fiscal 2006 was primarily derived from the sale of our narrowbandradio encryptors for use by a Moroccan customer amounting to $413,000 and to a customer inVenezuela amounting to $111,000. In addition, there were sales of these radio encryptors to twodomestic customers totaling $206,000. We also sold our secure telephone, fax, and data encryptorsto a customer in Indonesia amounting to $101,000 and had a sale of our high speed bulk encryptorsto a customer in India amounting to $97,000*.***Gross Profit**Gross profit for the second quarter of fiscal 2007 was $969,000 as compared to gross profit of$589,000 for the same period of fiscal 2006, an increase of 64%. Gross profit expressed as apercentage of sales was 75% for the second quarter of fiscal 2007 as compared to 59% for the sameperiod in fiscal 2006. The increase in gross profit as a percentage of sales was primarilyassociated with revenue generated from a license agreement with a domestic radio manufacturer inthe second quarter of fiscal 2007.
 
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**Operating Costs and Expenses***Selling, General and Administrative Expenses*Selling, general and administrative expenses for the second quarter of fiscal 2007 were $408,000,as compared to $425,000 for the same quarter in fiscal 2006. This decrease of 4% was attributableto a decrease in selling and marketing expenses of $33,000 partially offset by an increase ingeneral and administrative expenses of $17,000.The decrease in selling costs was primarily attributable to a decrease in commissions and thirdparty sales and marketing contracts of $72,000, offset by an increase in bid and proposal effortsof $21,000, an increase in personnel-related costs of $7,000 and increases in travel andpromotional expenses of $9,000 as compared to the same period in fiscal 2006.The increase in general and administrative costs was primarily attributable to the recognition ofstock based compensation expense of $13,000 during the second quarter of 2007 and an increase intravel expenses of $6,000, which was offset by a decrease in personnel-related costs of $8,000.*Product Development Costs*Product development costs for the quarter ended March 31, 2007 were $268,000, compared to $335,000for the quarter ended March 25, 2006, a decrease of $67,000 or 20%. This decrease was primarilyattributable to a decrease in outside consulting services of approximately $45,000, and an increasein the amount of engineering expenses charged to bid and proposal and other sales support effortsrather than product development costs during the quarter of $55,000. In addition there was anincrease in billable contract engineering during the second quarter of fiscal 2007, which decreasedproduct development costs by approximately $7,000 as personnel were redeployed from internalproduct development efforts to billable contract work. This decrease was partially offset by anincrease in personnel-related costs of $45,000, including stock based-compensation expense of$7,000 during the quarter ended March 31, 2007.Product development costs are charged to billable engineering services, bid and proposal efforts orproduct development. Engineering costs charged to billable projects are recorded as cost of salesand 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. Inaddition to these programs, the Company also invests in research and development to enhance itsexisting products or to develop new products, as it deems appropriate. There was $13,000 ofbillable engineering services work performed during the second quarter of fiscal 2007 and noneduring the same period of fiscal 2006.**Net Income**The Company’s net income was $312,000 for the second quarter of fiscal 2007, as compared to a netloss of $(159,000) for the same period of fiscal 2006. This increase in income is primarilyattributable to a 28% increase in sales and 11% decrease in operating expenses. The uncertainty ofthe timing of customer orders can result in periods with losses, sometimes significant. Thisuncertainty will continue to make future results difficult to predict. Receiving orders andcontracts 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 earningsin recent years. As of March 31, 2007, none of the Company’s monetary assets or liabilities wassubject to foreign exchange risks. The Company usually includes an inflation factor in its pricingwhen negotiating multi-year contracts with customers.
 
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**Six Months ended March 31, 2007 as compared to the Six Months ended March 25, 2006****Net Sales**Net sales for the six months ended March 31, 2007 were $2,050,000, as compared to $1,919,000 forthe six months ended March 25, 2006, a 7% increase. Sales for the first six months of fiscal 2007consisted of $1,650,000, or 80%, from domestic sources and $400,000, or 20%, from internationalcustomers as compared to the same period in fiscal 2006, during which sales consisted of $595,000,or 31%, from domestic sources and $1,323,000, or 69%, from international customers.Foreign sales consisted of shipments to 13 different countries during the six months ended March31, 2007 and 16 different countries during the six months ended March 25, 2006. A sale isattributed to a foreign country based on the location of the contracting party. The table belowsummarizes our principal foreign sales by country, during the first six months of fiscal 2007 and2006:           2007  2006 Indonesia $117,000  $377,000 Sweden  99,000   — Bahrain  71,000   — Italy  56,000   24,000 Morocco  11,000   424,000 Venezuela  —   108,000 Colombia  1,000   184,000 Other  45,000   206,000          $400,000  $1,323,000        Revenue for the first six months of fiscal 2007 was primarily derived from the sale of ournarrowband radio encryptors to two U. S. customers amounting to $820,000 and $308,000,respectively, and a sale of our secure telephone, fax, and data encryptors to a customer inIndonesia amounting to $120,000. Additional sales included an order from a customer in Bahrain forour fax encryptors amounting to $71,000 and $99,000 worth of encryption equipment used in missiletesting systems to a customer in Sweden. We also generated $337,500 in revenue as a result of alicense agreement with a large domestic radio manufacturer. This customer also purchased $112,000worth of integrated circuit chips.Revenue for the first six months of fiscal 2006 was primarily derived from the sale of ournarrowband radio encryptors for use by a Moroccan customer amounting to $413,000, a sale to acustomer in Colombia amounting to $182,000 and a sale to a customer in Venezuela amounting to$111,000. In addition, there were sales of these radio encryptors to two domestic customerstotaling $206,000. We also sold our secure telephone, fax, and data encryptors to a customer inIndonesia amounting to $377,000 and our high speed bulk encryptors to a customer in India amountingto $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 servicesto the U.S. government; revenue recorded under this program during the first six months of fiscal2006 amounted to $88,000.**Gross Profit**Gross profit for the first six months of fiscal 2007 was $1,502,000 as compared to gross profit of$1,132,000 for the same period of fiscal 2006, an increase of 33%. Gross profit expressed as apercentage of sales was 73% for the first six months of fiscal 2007 as compared to 59% for the sameperiod in fiscal 2006. The increase in gross profit as a percentage of sales was primarilyassociated with revenue generated from the license agreement in the second quarter of fiscal 2007with a military radio manufacturer and several other sales of higher margin products in the firstsix months of fiscal 2007.
 
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**Operating Costs and Expenses***Selling, General and Administrative Expenses*Selling, general and administrative expenses for the first six months of fiscal 2007 were $860,000,as compared to $866,000 for the same period in fiscal 2006. This decrease of 1% was attributable toa decrease in selling and marketing expense of $22,000, offset by an increase in general andadministrative expenses of $16,000.The increase in general and administrative costs was primarily attributable to the recognition ofstock based compensation expense of $29,000 during the first six months of 2007 and an increase intravel expenses of $7,000, which was offset by a decrease in personnel-related costs of $23,000.The decrease in selling costs was primarily attributable to a decrease in commissions and thirdparty sales and marketing contracts of $130,000, offset by an increase in bid and proposal effortsof $87,000 and an increase in personnel-related costs of $9,000 as compared to the same period infiscal 2006.*Product Development Costs*Product development costs for the six months ended March 31, 2007 were $487,000, compared to$548,000 for the six months ended March 25, 2006, a decrease of $61,000 or 11%. This decrease wasprimarily attributable to a decrease in outside consulting services of approximately $44,000, andan increase in the amount of engineering expenses charged to bid and proposal and other salessupport efforts rather than product development costs during the period of $120,000. This decreasewas partially offset by an increase in personnel-related costs of approximately $68,000, includingstock based-compensation expense of $15,000 during the six months ended March 31, 2007. Inaddition there was a decrease in billable contract engineering during the first six months offiscal 2007, which increased product development costs by approximately $29,000 as personnel wereredeployed from billable contract work to internal product development efforts.Product development costs are charged to billable engineering services, bid and proposal efforts orproduct development. Engineering costs charged to billable projects are recorded as cost of salesand 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. Inaddition to these programs, the Company also invests in research and development to enhance itsexisting products or to develop new products, as it deems appropriate. There was $13,000 ofbillable engineering services work performed during the first six months of fiscal 2007 and $88,000for the first six months of fiscal 2006.**Net Income**The Company’s net income was $195,000 for the first six months of fiscal 2007, as compared to a netloss of $(263,000) for the same period of fiscal 2006. This increase in income is primarilyattributable to a 33% increase in gross profit and a 5% decrease in operating expenses. Theuncertainty of the timing of customer orders can result in periods with losses, sometimessignificant. This uncertainty will continue to make future results difficult to predict. Receivingorders and contracts in a timely manner is essential to the Company’s ability to sustainoperations.The effects of inflation and changing costs have not had a significant impact on sales or earningsin recent years. As of March 31, 2007, none of the Company’s monetary assets or liabilities wassubject to foreign exchange risks. The Company usually includes an inflation factor in its pricingwhen negotiating multi-year contracts with customers.
 
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**Liquidity and Capital Resources**Cash and cash equivalents increased by $109,000, or 6%, to $1,980,000 as of March 31, 2007, from abalance of $1,871,000 at September 30, 2006. This increase was attributable in part to net incomefor the period of $195,000, non-cash expenses of $65,000 and an increase in accounts payable andaccrued expenses of $52,000, offset by increases in inventory and accounts receivable of $166,000and $41,000, respectively.During the second quarter of fiscal 2007 the Company secured a new order, in the amount of $1.2million, for our radio encryption products from a long time domestic customer. These encryptors areexpected to ship over the next six months and will be deployed in Afghanistan. In addition wefinalized an engineering services agreement that we anticipate will generate $1.4 million ofrevenue over the next twelve months. The profitability recognized during the second quarter andfirst six months of fiscal 2007 coupled with these new orders provide an encouraging outlook forthe Company.Backlog at March 31, 2007 amounted to approximately $3,054,000. The orders for encryption productsin backlog are expected to ship during fiscal 2007, although actual shipments will depend oncustomer requirements and product availability. The engineering services project will be recognizedover 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 amountof $600,000, and executed a financing promissory note with respect thereto. The loan is a demandloan with interest payable at the Bank’s prime rate plus 1% on all outstanding balances. The loanis secured by all assets of the Company (excluding consumer goods) and requires the Company tomaintain its deposit accounts with the Bank, as well as comply with certain other covenants. TheCompany believes this line of credit agreement provides it with an important external source ofliquidity, if necessary.Certain foreign customers require the Company to guarantee performance of products sold. Theseguaranties typically take the form of standby letters of credit. Guaranties are generally requiredin amounts of 5% to 10% of the purchase price and last in duration from three months to one year.As of March 31, 2007, the Company had no outstanding standby letters of credit. Any letters ofcredit 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 for22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in thisspace since 1983. This is the Company’s only facility and houses all manufacturing, research anddevelopment, 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 fortwo and one half years through September 30, 2014 and another two and one half years through March31, 2017, at an annual rate of $171,000 for each extension period. Rent expense for the six monthsended March 31, 2007 was $74,000.The Company does not anticipate any significant capital expenditures during the remainder of fiscal2007.For the second half of fiscal 2007, the Company expects to maintain and possibly increase itsinvestment in internal product development. We anticipate that the products comprising TCC’sSecure Wireless product line will continue to evolve and respond to new customer requirements. Itis also expected that TCC’s CipherTalk Secure Voice encryption and CipherSMS Secure Text Messagingwill be applied to additional mobile platforms and that customer specific features will bedeveloped. TCC also plans to continue its work evaluating new product options in the high-speedbulk encryption markets for military applications. Depending on customer demand, TCC may alsoproceed with the development of variants of its Military Bulk Encryptor, which would address higherspeeds and additional interfaces. On-going research and development in support of productimprovements and application variants also is expected to continue. Should the Company choose toembark on a major development program in addition to its traditional research and developmentactivities, engineering staff will have to be added. The Company has sufficient physical resourcesto support the added staff and believes that adequate technical resources exist in the Boston areato meet potential needs; however, we may need financial resources, in addition to cash fromoperations, to fund a major new development program.
 
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Based on today’s product cost structure and operating expenses, we believe that current cash andaccounts receivable balances along with the current backlog are sufficient to provide resources tooperate the Company through the end of fiscal year 2007. Our profitability during the secondquarter and six months ended March 31, 2007 causes us to be optimistic about future sales growthand other possible sources of financing, including private equity funding or future public stockofferings. 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 chieffinancial officer have reviewed and evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the periodcovered by this quarterly report on Form 10-QSB. Based on that review and evaluation, the chiefexecutive officer and chief financial officer have concluded that the Company’s current disclosurecontrols and procedures, as designed and implemented, are effective to ensure that such officersare provided with information relating to the Company required to be disclosed in the reports theCompany 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’sinternal control over financial reporting that occurred during the quarter ended March 31, 2007that have materially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.
 
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PART II. Other InformationItem 1. Legal ProceedingsThere were no legal proceedings pending against or involving the Company during theperiod covered by this quarterly report.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsNot applicable.Item 3. Defaults Upon Senior SecuritiesNot applicable.Item 4. Submission of Matters to a Vote of Security HoldersOn February 12, 2007, the Company held its Annual Meeting of Stockholders at the Company’scorporate headquarters in Concord, Massachusetts. At that meeting, one director waselected to serve on the Board of Directors as the Class I director for a term of threeyears expiring at the 2010 Annual Meeting of Stockholders. Mitchell B. Briskin received1,246,537 votes, and 57,242 votes were withheld. Mr. Briskin is joined by Carl H. Guild,Jr., Thomas E. Peoples and Robert T. Lessard on the Board of Directors of the Company.Also at the meeting, stockholders voted to ratify the appointment of Vitale, Caturano &Company, Ltd. as auditors for the Company for the fiscal year ending September 29, 2007.Vitale, Caturano & Company, Ltd. received 1,265,625 votes in favor of its appointment,36,171 votes against and 1,986 shares were not voted.Item 5. Other InformationNot applicable.Item 6. Exhibits and Reports on Form 8-K 31.1 Certification of principal executive officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002  31.2 Certification of principal financial officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002  32.1 Certifications of Chief Executive and ChiefFinancial Officers pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002
 
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SIGNATURESIn accordance with the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.      TECHNICAL COMMUNICATIONS CORPORATION