The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements and notes thereto appearing elsewhere herein.

Forward-Looking Statements

The following discussion may contain statements that are not purely historical. Such 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 ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to the effect of foreign political unrest; future changes in export laws or regulations; changes in technology; 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 this Form 10-K for the fiscal year ended September 29, 2012 and the "Risk Factors" section included herein.

Overview

TCC designs, manufactures, markets and sells communications security equipment that utilizes 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. Revenue is generated principally from the sale of these products, which have traditionally been to foreign governments either through direct sale, pursuant to a U.S. government contract or made as a sub-contractor to domestic corporations under contract with the U.S. government. However, we have also sold these products to commercial entities and U.S. government agencies. In addition to product sales, we generate revenues from contract engineering services performed for certain government agencies, both domestic and foreign, and commercial entities.

Critical 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 amounts of revenues and expenses during the reporting periods.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventory reserves, receivable reserves, income taxes and stock-based compensation. 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 value of assets and liabilities that are not readily apparent from other sources. By their nature estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material.

The accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include those listed below. For a more detailed discussion, see Note 2 in the Notes to Consolidated Financial Statements included herewith.

Revenue Recognition

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 where title passes upon entry of the product into the first port in the buyer's country. If the product requires installation to be performed by TCC, all revenue related to the product is deferred and recognized upon completion of the installation. We provide for a warranty reserve at the time the product revenue is recognized.

We perform funded research and development and technology 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 that are expected to exceed one year in duration, revenue is recognized pursuant to the proportional performance method based upon the proportion of actual costs incurred to the total estimated costs for the contract. In each type of contract, we receive periodic progress payments or payments upon reaching interim milestones, and we retain the rights to the intellectual property developed in government contracts. 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 a product development contract 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.

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

Inventory

We value our inventory at the lower of actual cost (based on first-in, first-out (FIFO)), to purchase and/or manufacture or the current estimated market value (based on the estimated selling prices, less the cost to sell) of the inventory. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as historical usage. Due to the custom and specific nature of certain of our products, demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase in excess inventory quantities on hand. In addition, our 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 we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant negative impact on the value of our inventory and would reduce our reported operating results.

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 an impairment of their ability to make payments, additional allowances may be required, which would reduce net income.

Accounting for Income Taxes

The preparation of our consolidated financial statements requires us to estimate our 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. We 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. We have recorded a valuation allowance against our deferred tax assets of $1.1 million as of September 29, 2012 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 or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operation.

Due to the nature of our current operations in foreign countries (selling products into these countries with the assistance of local representatives), the Company has not been subject to any foreign taxes in recent years. Also, it is not anticipated that we will be subject to foreign taxes in the near future.

Stock Based Compensation

We record the compensation expense for all share-based payments based on the grant date fair value. We expense share-based compensation over the employee's requisite service period, generally the vesting period of the award.

The choice of a valuation technique, and the approach utilized to develop the underlying assumptions for that technique, involve significant judgments. These judgments reflect management's assessment of the most accurate method of valuing the stock options we issue, based on our historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. Our judgments could change over time as additional information becomes available to us, or the facts underlying our assumptions change. Any change in our judgments could have a material effect on our financial statements. We believe that our estimates incorporate all relevant information available at the time made and represent a reasonable approximation in light of the difficulties involved in valuing non-traded stock options.

Results of Operations

Year ended September 29, 2012 as compared to year ended September 24, 2011

Net Sales

Net sales for the years ended September 29, 2012 and September 24, 2011 were $8,117,000 and $12,102,000, respectively, a decrease of $3,985,000 or 33%. Sales for fiscal 2012 consisted of $7,160,000, or 88%, from domestic sources and $957,000, or 12%, from international customers as compared to fiscal 2011, in which sales consisted of $11,808,000, or 98%, from domestic sources and $294,000, or 2%, from international customers.

Foreign sales consisted of shipments to seven different countries during the year ended September 29, 2012 and six different countries during the year ended September 24, 2011. 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:

                                         2012          2011
                        Saudi Arabia   $ 406,000     $  60,000
                        Jordan           316,000         4,000
                        Egypt            179,000            -
                        Thailand          51,000        90,000
                        Bahrain            2,000        88,000
                        France                -         48,000
                        Other              3,000         4,000

                                       $ 957,000     $ 294,000

Revenue for the year ended September 29, 2012 was primarily derived from the sale of the Company's narrowband radio encryptors to a U.S. radio manufacturer for deployment into Afghanistan

amounting to $5,710,000 and to an additional domestic customer amounting to $113,000. In addition we sold our secure telephone, fax, and data encryptors to a foreign customer amounting to $314,000 and we had sales of our frame relay and internet protocol encryptor products to three customers amounting to $225,000 during the year. We also had sales of our link encryptors into the Middle East for $93,000, sold spare parts to three foreign customers amounting to $287,000 and shipped our high speed bulk encryptors amounting to $1,173,000 under a contract with a domestic customer.

Revenue for fiscal 2011 was derived from the sale of the Company's narrowband radio encryptors to a U.S. radio manufacturer amounting to $8,160,000 and to an additional domestic customer amounting to $262,000. Billings under programs for engineering services work amounting to $211,000 also were recognized during the period. In addition, we made the final shipment under a contract with CECOM amounting to $610,000 during fiscal 2011. We also sold our secure data link encryptors to a domestic customer amounting to $630,000 and we shipped our high speed bulk encryptors amounting to $1,710,000 under a contract with a domestic customer.

Gross Profit

Gross profit for fiscal year 2012 was $6,278,000, a decrease of $3,532,000 or 36%, compared to gross profit of $9,810,000 for fiscal year 2011. Gross profit expressed as a percentage of sales was 77% in fiscal year 2012 compared to 81% in the prior year. The decrease in gross profit as a percentage of sales was primarily associated with lower sales volume in fiscal 2012 of our higher margin radio encryptors.

Operating Costs and Expenses

Selling, General and Administrative

Selling, general and administrative expenses for fiscal 2012 were $3,310,000, compared to $2,813,000 for fiscal 2011. This increase of $497,000 or 18% was attributable to an increase in selling and marketing expenses of $604,000 offset by a decrease in general and administrative expenses of $107,000 during the 2012 fiscal year.

The increase in selling and marketing costs during fiscal 2012 was attributable to increases in product evaluation expenses of $328,000, travel expenses of $51,000, and personnel-related costs of $67,000. Additionally, there were increases in third party sales and marketing agreements of $30,000 and outside sales commissions of $46,000. There were also increases in engineering support costs of $37,000, product demonstration costs of $25,000 and bid and proposal efforts of $13,000 during the period.

The decrease in general and administrative costs during fiscal 2012 was primarily attributable to a decrease in personnel-related costs of $139,000. This decrease was partially offset by an increase in bank and investment fees of $6,000 and charitable contributions of $20,000.

Product Development

Product development costs for fiscal 2012 were $4,421,000, compared to $3,530,000 for fiscal 2011, an increase of $891,000 or 25%. This increase was primarily attributable to increases in outside contractor costs of $1,281,000, recruiting costs of $81,000 and project material costs of $156,000. These increases were partially offset by decreases in personnel-related costs of $136,000 and an increase in engineering support of business development activities, which decreased product development costs by approximately $504,000 for the 2012 fiscal year. The increased costs were incurred primarily for the development of the CX7211 high speed internet protocol encryptor.

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 invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was no billable engineering services revenue generated during fiscal 2012 and $211,000 generated during fiscal 2011.

It is anticipated that cash from operations will fund our near-term research and development and marketing activities. We also believe that, in the long term, based on current billable activities, cash from operations will be sufficient to meet the development goals of the Company, although we can give no assurances. Although expected to decrease in fiscal 2013, any increase in activities - either billable or new

product related - will require additional resources, which we may not be able to fund through cash from operations. In circumstances where resources will be insufficient, the Company will look to other sources of financing, including debt and/or equity investments.

Net Income

The Company generated a net loss of $841,000 for fiscal 2012, as compared to net income of $2,269,000 for fiscal 2011. This decrease in net income is primarily attributable to a 33% decrease in sales and a 22% increase in operating expenses during fiscal 2012. The Company recorded an income tax benefit of $597,000 during fiscal 2012 based on its expected effective tax rate of 41.5% for the 2012 fiscal year. This compares to an income tax provision of $1,200,000 recorded in the year ended September 24, 2011.

The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of September 29, 2012, 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 decreased by $7,176,000 to $2,056,000 as of September 29, 2012, from a balance of $9,232,000 at September 24, 2011. This decrease was primarily attributable to the investment of cash in short-term marketable securities of $5,295,000, the payment of cash dividends of $733,000, capital acquisitions of $193,000, a net loss of $841,000, a decrease in accounts payable and accrued expenses of $616,000 and increases in accounts receivable and income taxes receivable of $513,000 and $509,000, respectively. The decreases were partially offset by the proceeds from the maturity of marketable securities of $626,000 and a decrease in inventory of $646,000.

During fiscal 2012, the Company paid special cash dividends totaling $733,000. The payment of these dividends was based on the profits generated by the Company in recent years. In addition, in December 2012 the Company's Board of Directors declared a dividend of $0.10 per share of common stock outstanding. The dividend is payable in cash on December 28, 2012 to all shareholders of record on December 20, 2012. It is not the Company's intention to pay dividends on a regular basis unless future profits warrant such actions.

It is anticipated that our cash balances and cash generated from operations will be sufficient to fund our near-term research and development and marketing activities. We also believe that, in the long term, an anticipated improvement of business prospects, current billable activities and cash from operations will be sufficient to meet the development goals of the Company, although we can give no assurances. Although expected to decrease in fiscal 2013, any increase in activities - either billable or new product related - will require additional resources, which we may not be able to fund through cash from operations. In circumstances where resources will be insufficient, the Company will look to other sources of financing, including debt and/or equity investments.

The Company paid $32,000 during the fiscal year ended September 29, 2012 for current tax estimates of its income tax liability for fiscal year 2012. The Company has recorded refundable income taxes of $859,000 as of September 29, 2012.

The Company's backlog as of September 29, 2012 was approximately $315,000. The orders in backlog are expected to ship during fiscal 2013 depending on customer requirements and product availability.

The Company has a line of credit agreement with Bank of America (the "Bank") for a line of credit not to exceed the principal amount of $600,000. The line is supported by a financing promissory note. 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. There were no cash borrowings against the line during fiscal years 2012 and 2011.

Certain foreign customers require the Company to guarantee bid bonds and 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. At September 29, 2012 the Company had one outstanding letter of credit amounting to $18,000, which is secured by a cash certificate of deposit. At September 24, 2011 there were no outstanding standby letters of credit. The Company generally secures its outstanding standby letters of credit with the line of credit facility with the Bank.

In April 2007, the Company entered into a 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 initial term of the lease was 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 for each renewal term. Rent expense for the years ended September 29, 2012 and September 24, 2011 was $165,000 and $159,000, respectively. On September 30, 2011 the Company exercised its option to extend the lease for the period April 1, 2012 through September 30, 2014.

Research and development efforts are undertaken by the Company primarily on its own initiative. In order to compete successfully, the Company must attract and retain qualified personnel, improve existing products and develop new products. No assurances can be given that the Company will be able to hire and train such technical management and sales personnel or successfully improve and develop its products.

During the years ended September 29, 2012 and September 24, 2011, the Company spent $4,421,000 and $3,530,000, respectively, on internal product development. In fiscal 2012, the Company's internal product development expenses were higher than prior years but in line with its planned commitment to research and development, and reflected the costs of product testing and production readiness efforts. It is expected that development expenses will decrease by about 25% in fiscal 2013 as compared to fiscal 2012.

By the middle of fiscal 2013, the Company anticipates the development of three new products and expects to reorient its development investment toward collaborative product developments with major OEM's. Initial work began in 2012 to establish these technical partnerships and we expect that full-scale development will begin in mid-2013. The resulting products will be imbedded proprietary encryption solutions which will significantly enhance the value of the OEMs products and allow TCC encryption to be carried to the market by major equipment providers.

In 2012, TCC completed systems testing and initiated field testing of our high speed SONET/SDH optical encryptor called the 72B, which provides full-rate encryption capability at 155mbs and 622mbs speeds. This encryptor is designed to be compliant with the Federal Information Processing Standard ("FIPS") level 140-2 and is being offered in three configurations covering applications for commercial telecommunications providers through highly ruggedized military and government requirements. TCC expects that the 72B encryptor family will provide fully interoperable operations between office and harsh field environments.

Also in 2012, TCC substantially completed development of the HSE 6000, a low cost, battery powered man-borne encryptor that provides highly secure communications between personnel and base command units. The HSE 6000 is designed for the rugged environments of military and police operations and can function with most VHF and HF radios systems. The HSE 6000 can interoperate with the TCC DSP 9000 Radio Encryption System which is deployed extensively throughout the world. Customer field testing is expected to begin in early 2013.

In 2011, TCC began development of an advanced, 100Mbs through 1Gbs family of IP encryptors and the KeyNet Optical Management system to service private network markets for government, military and satellite users. This new network product, named the CX7211, is scheduled for installation with initial customers in early 2013. The CX7211 is the first IP encryptor that is expandable, which allows its throughput capacity to be easily increased as network loads increase. TCC believes this feature makes the CX7211 very cost-effective for new installations and very easy to expand when the market demands it.

Other than those stated above, there are no plans for significant internal product development in fiscal 2013 and the Company does not anticipate any significant capital expenditures during the year.

Off-Balance Sheet Arrangements

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

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