** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

#### **FORM 10-Q**

 
| **x**                                                                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  | ** ** |
|------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------------|
|                                                                                                 |                                                                                          |       |
| **For the quarterly period ended  September 30, 2007**                                               |
|                                                                                                 |                                                                                          |       |
| **OR**                                                                                               |
|                                                                                                 |                                                                                          |       |
| **o**                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|                                                                                                 |                                                                                          |       |
| **For the transition period  from             to** |

 

**Commissionfile number 0-24746**

 

# ***TESSCOTECHNOLOGIES INCORPORATED***

(Exact name ofregistrant as specified in charter)

 

| **Delaware**                                                     | ** ** | **52-0729657**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |
|                                                             |       |                               |
| **11126  McCormick Road, Hunt Valley, Maryland**                 | ** ** | **21031**                          |
| (Address of  principal executive offices)                        |       | (Zip Code)                         |

 

Registrant’s telephone number, including area code:  **(410) 229-1000**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to filing requirementsfor the past 90 days.Yes  x          No o

 

Indicateby check mark if the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Largeaccelerated filer o  Accelerated filer o   Non-Accelerated Filer x

 

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

 

Thenumber of shares of the registrant’s Common Stock, $.01 par value per share,outstanding as of November 1, 2007, was 5,152,159.

 

** **

----

 

**TESSCO TECHNOLOGIES INCORPORATED**

**Index to Form 10-Q**

 
| **Part I**  | **Financial Information** | ** **                                                                                  |
|-------------|---------------------------|---------------------------------------------------------------------------------------------|
|        |                      |                                                                                        |   |
|        | Item 1.                   | Financial Statements                                                                        |   |
|        |                      |                                                                                        |   |
|        | Item 2.                   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|        |                      |                                                                                        |   |
|        | Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|        |                      |                                                                                        |   |
|        | Item 4.                   | Controls and  Procedures                                                                    |   |
|        |                      |                                                                                        |   |
| **Part II** | **Other Information**     | ** **                                                                                  |
|        |                      |                                                                                        |   |
|        | Item 1.                   | Legal Proceedings                                                                           |   |
|        |                      |                                                                                        |   |
|        | Item 1A.                  | Risk Factors                                                                                |   |
|        |                      |                                                                                        |   |
|        | Item 2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|        |                      |                                                                                        |   |
|        | Item 3.                   | Defaults  Upon Senior Securities                                                            |   |
|        |                      |                                                                                        |   |
|        | Item 4.                   | Submission  of Matters to a Vote of Security Holders                                        |   |
|        |                      |                                                                                        |   |
|        | Item 5.                   | Other Information                                                                           |   |
|        |                      |                                                                                        |   |
|        | Item 6.                   | Exhibits                                                                                    |   |
|        |                      |                                                                                        |   |
|        | Signature                 |                                                                                        |   |

 

2

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**Part I. Financial Information**

 

**Item 1. Financial Statements.**

 

**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Balance Sheets**

 
| ** **                                         | ** ** | **September 30,  2007** | ** **  | **April 1,  2007** | ** ** |
|----------------------------------------------------|------------|------------------------------|-------------|-------------------------|------------|
| ** **                                         | ** ** | **(unaudited)**              | ** **  | **(audited)**           | ** ** |
| **ASSETS**                                         |       |                         |        |                    |       |
|                                               |       |                         |        |                    |       |
| Current assets:                                    |       |                         |        |                    |       |
| Cash and cash equivalents                          |       | $                            | 2,390,800   |                    | $          | 4,176,300 |   |
| Trade accounts receivable, net                     |       | 54,899,300                   |        | 44,859,600              |       |
| Product inventory, net                             |       | 50,360,400                   |        | 37,448,800              |       |
| Deferred tax asset                                 |       | 3,460,100                    |        | 3,460,100               |       |
| Prepaid expenses and other current assets          |       | 3,693,100                    |        | 1,959,500               |       |
| Total current assets                               |       | 114,803,700                  |        | 91,904,300              |       |
|                                               |       |                         |        |                    |       |
| Property and equipment, net                        |       | 24,003,000                   |        | 24,256,300              |       |
| Goodwill, net                                      |       | 5,056,400                    |        | 5,008,300               |       |
| Other long-term assets                             |       | 2,788,900                    |        | 2,513,800               |       |
| Total assets                                       |       | $                            | 146,652,000 |                    | $          | 123,682,700 |   |
|                                               |       |                         |        |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**     |       |                         |        |                    |       |
|                                               |       |                         |        |                    |       |
| Current liabilities:                               |       |                         |        |                    |       |
| Trade accounts payable                             |       | $                            | 71,453,400  |                    | $          | 47,257,700 |   |
| Payroll, benefits and taxes                        |       | 3,026,800                    |        | 6,658,500               |       |
| Income and sales taxes                             |       | 2,909,500                    |        | 2,960,800               |       |
| Accrued expenses and other current liabilities     |       | 1,165,800                    |        | 1,143,800               |       |
| Revolving line of credit                           |       | 4,384,400                    |        | —                  |       |
| Current portion of long-term debt                  |       | 358,300                      |        | 356,200                 |       |
| Total current liabilities                          |       | 83,298,200                   |        | 58,377,000              |       |
|                                               |       |                         |        |                    |       |
| Deferred tax liability                             |       | 2,700,400                    |        | 2,700,400               |       |
| Long-term debt, net of current portion             |       | 4,023,500                    |        | 4,203,200               |       |
| Other long-term liabilities                        |       | 1,505,400                    |        | 1,250,800               |       |
| Total liabilities                                  |       | 91,527,500                   |        | 66,531,400              |       |
|                                               |       |                         |        |                    |       |
| Commitments and contingencies                      |       |                         |        |                    |       |
|                                               |       |                         |        |                    |       |
| Shareholders’ equity:                         |       |                         |        |                    |       |
| Preferred stock                                    |       | —                       |        | —                  |       |
| Common stock                                       |       | 78,000                       |        | 75,800                  |       |
| Additional paid-in capital                         |       | 30,182,200                   |        | 27,463,700              |       |
| Treasury stock                                     |       | (33,454,300                  | )           | (27,216,200             | )          |
| Retained earnings                                  |       | 58,316,600                   |        | 56,806,300              |       |
| Accumulated other comprehensive income, net of tax |       | 2,000                        |        | 21,700                  |       |
| Total shareholders’ equity                    |       | 55,124,500                   |        | 57,151,300              |       |
| Total liabilities and shareholders’ equity    |       | $                            | 146,652,000 |                    | $          | 123,682,700 |   |

 

Seeaccompanying notes.

 

3

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**TESSCO TECHNOLOGIES INCORPORATED**

**Consolidated Statements ofIncome**

 
| ** **                                   | ** ** | **Fiscal Quarters Ended** | ** **  | **Six Months Ended**      | ** ** |
|----------------------------------------------|------------|---------------------------|-------------|---------------------------|------------|
| ** **                                   | ** ** | **September 30,****2007** | ** **  | **September 24,****2006** | ** ** | **September 30,****2007** | ** ** | **September 24,****2006** | ** ** |
| ** **                                   | ** ** | **(unaudited)**           | ** **  | **(unaudited)**           | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                         |       |                      |        |                      |       |   |   |   |   |
| Revenues                                     |       | $                         | 132,518,300 |                      | $          | 118,655,700 |   | $ | 256,948,400 |   | $ | 230,596,000 |   |
| Cost of goods sold                           |       | 103,837,700               |        | 88,625,800                |       | 200,106,800 |   | 172,481,000 |   |
| Gross profit                                 |       | 28,680,600                |        | 30,029,900                |       | 56,841,600 |   | 58,115,000 |   |
| Selling, general and administrative expenses |       | 27,340,000                |        | 26,855,800                |       | 54,008,800 |   | 51,823,900 |   |
| Income from operations                       |       | 1,340,600                 |        | 3,174,100                 |       | 2,832,800 |   | 6,291,100 |   |
| Interest, net                                |       | 115,900                   |        | 180,500                   |       | 176,800 |   | 335,800 |   |
| Income before provision for  income  taxes   |       | 1,224,700                 |        | 2,993,600                 |       | 2,656,000 |   | 5,955,300 |   |
| Provision for income taxes                   |       | 508,300                   |        | 1,137,600                 |       | 1,073,600 |   | 2,245,900 |   |
| Net income                                   |       | $                         | 716,400     |                      | $          | 1,856,000 |   | $ | 1,582,400 |   | $ | 3,709,400 |   |
| Basic earnings per share                     |       | $                         | 0.13        |                      | $          | 0.30 |   | $ | 0.29 |   | $ | 0.60 |   |
| Diluted earnings per share                   |       | $                         | 0.13        |                      | $          | 0.29 |   | $ | 0.28 |   | $ | 0.58 |   |
| Basic weighted average shares outstanding    |       | 5,328,100                 |        | 6,155,300                 |       | 5,374,400 |   | 6,213,000 |   |
| Diluted weighted average shares outstanding  |       | 5,538,600                 |        | 6,338,000                 |       | 5,616,500 |   | 6,375,800 |   |

 

See accompanying notes.

 

4

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**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Statements of CashFlows**

 
| ** **                                                                                               | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                               | ** ** | **September 30,  2007** | ** ** | **September 24,  2006** | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)**         | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                                    |       |                    |       |   |   |
| Net income                                                                                               |       | $                       | 1,582,400  |   | $ | 3,709,400 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                       |       |                    |       |   |   |
| Depreciation and amortization                                                                            |       | 2,433,300               |       | 2,320,300 |   |
| Non-cash stock compensation expense                                                                      |       | 1,079,700               |       | 991,900 |   |
| Deferred taxes and other non-cash items                                                                  |       | 37,200                  |       | 60,500 |   |
| Change in trade accounts receivable                                                                      |       | (9,741,700              | )          | 846,700 |   |
| Change in product inventory                                                                              |       | (12,911,600             | )          | (10,832,500 | ) |
| Change in prepaid expenses and other current assets                                                      |       | (257,000                | )          | (614,400 | ) |
| Change in trade accounts payable                                                                         |       | 25,723,800              |       | 11,342,100 |   |
| Change in payroll, benefits and taxes                                                                    |       | (3,643,900              | )          | 1,372,600 |   |
| Change in income and sales tax                                                                           |       | (1,414,800              | )          | 222,400 |   |
| Change in accrued expenses and other current liabilities                                                 |       | 22,000                  |       | (41,500 | ) |
| Net cash provided by operating activities                                                                |       | 2,909,400               |       | 9,377,500 |   |
|                                                                                                     |       |                    |       |   |   |
| Cash flows from investing activities:                                                                    |       |                    |       |   |   |
| Purchases of property and equipment                                                                      |       | (1,974,600              | )          | (2,054,600 | ) |
| Acquisition of business in purchase transaction and additional earn-out  payments on acquired businesses |       | (2,330,000              | )          | (3,933,300 | ) |
| Net cash used in investing activities                                                                    |       | (4,304,600              | )          | (5,987,900 | ) |
|                                                                                                     |       |                    |       |   |   |
| Cash flows from financing activities:                                                                    |       |                    |       |   |   |
| Net borrowings from revolving line of credit                                                             |       | 4,384,400               |       | 7,935,400 |   |
| Payments on long-term debt                                                                               |       | (177,600                | )          | (264,700 | ) |
| Proceeds from issuance of stock                                                                          |       | 507,000                 |       | 95,400 |   |
| Purchase of treasury stock                                                                               |       | (6,238,100              | )          | (16,000,600 | ) |
| Excess tax benefit from stock-based compensation                                                         |       | 1,134,000               |       | 101,500 |   |
| Bank overdraft                                                                                           |       | —                  |       | 2,456,500 |   |
| Net cash used in financing activities                                                                    |       | (390,300                | )          | (5,676,500 | ) |
|                                                                                                     |       |                    |       |   |   |
| Net decrease in cash and cash equivalents                                                                |       | (1,785,500              | )          | (2,286,900 | ) |
|                                                                                                     |       |                    |       |   |   |
| Cash and cash equivalents, beginning of period                                                           |       | 4,176,300               |       | 2,286,900 |   |
|                                                                                                     |       |                    |       |   |   |
| Cash and cash equivalents, end of period                                                                 |       | $                       | 2,390,800  |   | $ | — |   |

 

Seeaccompanying notes.

 

5

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**TESSCO Technologies Incorporated**

**Notes toConsolidated Financial Statements**

**September 30, 2007**

(Unaudited)

 

# ***Note 1. Description of Business and Basisof Presentation***

# * *

TESSCOTechnologies Incorporated, a Delaware corporation (TESSCO or the Company), is aleading provider of integrated product and supply chain solutions to theprofessionals that design, build, run, maintain and use wireless, mobile, fixedand in-building systems. The Company provides marketing and sales services,knowledge and supply chain management, product-solution delivery and controlsystems utilizing extensive Internet and information technology. Approximately97% of the Company’s sales are made to customers in the United States. TheCompany takes orders in several ways, including phone, fax, online and throughelectronic data interchange.

 

In management’s opinion, the accompanying interimfinancial statements of the Company include all adjustments, consisting only ofnormal, recurring adjustments, necessary for a fair presentation of the Company’sfinancial position for the interim periods presented. These statements arepresented in accordance with the rules and regulations of the Securities andExchange Commission (SEC). Certain information and footnote disclosuresnormally included in the Company’s annual financial statements have beenomitted from these statements, as permitted under the applicable rules andregulations. The results of operations presented in the accompanying interimfinancial statements are not necessarily representative of operations for anentire year. The information included in this Form 10-Q should be read inconjunction with the financial statements and notes thereto included in theCompany’s Form 10-K for the fiscal year ended April 1, 2007.

 

# ***Note 2. Recently Issued AccountingPronouncements***

# * *

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)No. 157, “Fair Value Measurements,” which provides guidance for using fairvalue to measure assets and liabilities. The standard also responds toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. Thestandard applies whenever other standards require (or permit) assets orliabilities to be measured at fair value. The standard does not expand the useof fair value in any new circumstances. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. The Company is reviewing SFAS No. 157 to determine the impact ofadoption on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities – Including anAmendment of FASB Statement No. 115.” SFAS No. 159 permits an entity to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. Entities that elect the fair value option will reportunrealized gains and losses in earnings at each subsequent reporting date. SFASNo. 159 is effective for fiscal years beginning after November 15, 2007. TheCompany is reviewing SFAS No. 159 to determine the impact of adoption on itsfinancial statements.

 

###### **Note 3. Borrowings Under Revolving Credit Facilityand Long-Term Debt**

###### ** **

# *On May 31, 2007, theCompany replaced its previously existing $30 million revolving line of creditfacility with a new $50 million revolving line of credit facility with SunTrustBank and Wachovia Bank, N.A. The previous facility was established in September2003 and had a term expiring in September 2007, was unsecured and had providedfor monthly payments of interest accruing at a LIBOR rate plus an applicablemargin ranging from 1.5% to 2.0%. The new facility has a term expiring in May2010, with interest also payable monthly at a LIBOR rate plus an applicablemargin, which ranges from 1.25% to 2.75%. Like the replaced facility, borrowingavailability under this new facility is determined in accordance with aborrowing base. This new facility includes financial covenants, including aminimum tangible net worth, minimum cash flow coverage of debt service, and amaximum funded debt to EBITDA ratio. These financial covenants also apply tothe existing term loan secured by the Company’s Hunt Valley, Maryland facility.The new facility also limits the Company’s ability to engage in certaintransactions or activities, including (but not limited to) investments andacquisitions, sales of assets, payment of dividends, issuance of additionaldebt and other matters. At*

 

6

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# *September 30, 2007, theCompany had a balance of $4.4 million outstanding on its current revolving lineof credit facility. At April 1, 2007, the Company had no outstanding balance onits revolving line of credit facility.*

# * *

# ***Note 4. Stock Compensation***

# * *

TheCompany’s selling, general and administrative expenses for the fiscal quarterand six months ended September 30, 2007 includes $502,900 and $1,079,700,respectively, of stock compensation expense. The Company’s selling, general andadministrative expenses for the fiscal quarter and six months ended September24, 2006 includes $462,400 and $991,900, respectively, of stock compensationexpense. Stock compensation expense is primarily related to our PerformanceStock Unit (PSU) Program. In addition, the Company recorded an excess taxbenefit directly to shareholders’ equity of $1,134,000, primarily related tothe 164,831 PSUs which vested during the six months ended September 30, 2007.

 

**PerformanceStock Units: **The following table summarizes the activityunder the Company’s PSU program:

 
| ** **                                                                         | ** ** | **2007** | ** ** | **Weighted Average  Fair Value at Grant** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|-------------------------------------------|------------|
| Shares available  for issue under outstanding PSUs, non-vested beginning of period |       | 870,172  |       | $                                         | 10.15      |   |
| Granted                                                                            |       | 183,000  |       | 24.11                                     |       |
| Vested                                                                             |       | (164,831 | )          | 10.67                                     |       |
| Forfeited/cancelled                                                                |       | (454,310 | )          | 9.25                                      |       |
| Shares available  for issue under outstanding PSUs, non-vested end of period       |       | 434,031  |       | 16.78                                     |       |
|                                                                                    |            |          |            |                                           |            |  |

 

Of the 434,031 shares availablefor issuance under outstanding PSUs but not yet vested as of September 30,2007, 251,031 shares have been earned, and assuming the respective participantsremain employed by or associated with the Company on these dates, these shareswill vest and be issued on or about May 1 of 2008, 2009 and 2010.

 

The vast majority of the PSUs cancelledduring fiscal year 2008, 449,701 shares, related to the 2005 grant of PSUswhich had a 3-year measurement period.  During that period, actualearnings per share on a cumulative basis exceeded the threshold level, but didnot reach the goal level, and thus, the underlying shares not earned from thosePSUs were cancelled.  Per the provisions of the 1994 Stock and IncentivePlan, the shares related to these PSUs were added back to the Plan and becameavailable for future issuance.

 

Duringfiscal year 2008, the Compensation Committee of the Board of Directors, withthe concurrence of the full Board of Directors, granted additional PSUs toselected key individuals and Directors, providing them with the opportunity toearn up to 183,000 additional shares of the Company’s common stock in theaggregate, depending upon whether certain threshold or goal earnings per sharetargets are met, subject to individual performance for non-Director employees. ThesePSUs have only one measurement year (fiscal year 2008), with any shares earnedat the end of fiscal year 2008 to vest 25% on or about May 1 of 2008, 2009,2010 and 2011, provided that the participant remains employed by or associatedwith the Company on each such date.

 

Asof September 30, 2007, there was approximately $2.0 million of totalunrecognized compensation costs related to PSUs. If the maximum target of PSUsoutstanding were assumed to be earned, total unrecognized compensation costswould be approximately $6.4 million.

 

**Stock Options:**  Inaccordance with SFAS No. 123R, the fair value of the Company’s stock optionshave been determined using the Black-Scholes-Merton option pricing model, basedupon facts and assumptions existing at the date of grant. Stock options grantedhave exercise prices equal to the market price of the Company’s common stock onthe grant date.

 

7

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Thevalue of each option at the date of grant is amortized as compensation expenseover the option service period. This occurs without regard to subsequent changesin stock price, volatility or interest rates over time, provided that theoption remains outstanding. As of September 30, 2007, all outstanding stockoptions are fully vested. The following table summarizes the pertinent optioninformation for outstanding options for the six months ended September 30,2007:

 
| ** **                                  | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding,  beginning of period           |       | 185,000    |       | $                                              | 8.07       |   |
| Granted                                     |       | —     |       | —                                         |       |
| Exercised                                   |       | (50,000    | )     | 7.33                                           |       |
| Cancelled                                   |       | —     |       | —                                         |       |
| Outstanding and  exercisable, end of period |       | 135,000    |       | 8.34                                           |       |
|                                             |            |            |            |                                                |            |  |

 

# ***Note 5. Acquisition***

# * *

On July 2, 2007, the Company acquired the net assets and business ofNetForce Solutions, Inc. (NetForce), a provider of technical and sales trainingsolutions to wireless, telecommunications, and networking industries. Thepurchase included substantially all the non-cash business assets for an initialcash payment of approximately $650,000 and additional cash earn-out payments ofup to approximately $2.8 million over a four-year period, contingent on the achievementof certain earnings thresholds. The unaudited revenues earned by NetForce forcalendar year 2006, prior to the acquisition, amounted to less than 1 percentof the amount of the Company’s total revenue for fiscal year 2007.

 

The Company has included the financial results of NetForce in itsconsolidated financial statements beginning July 2, 2007 (Acquisition Date). Proforma results have not been presented as the impact of the acquisition is notmaterial and did not involve a significant amount of assets. This business isincluded in the installation, test and maintenance segment.

 

# *For the period of July 2, 2007through September 30, 2007, no additional earn-out has been accrued, becauseapplicable annual fiscal year 2008 targets have not been met as of September30, 2007.*

# * *

# ***Note 6. Income Taxes***

# * *

EffectiveApril 2, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes.”  As aresult of the adoption of FIN 48, the Company recognized a $72,100 decrease inbeginning retained earnings as of April 2, 2007. As of April 2, 2007, theCompany had total gross unrecognized tax benefits of approximately $319,000,all of which, if recognized, would favorably affect the effective income taxrate in future periods. It is reasonably possible that within the next twelvemonths the Company’s unrecognized tax benefits related to certain state taxissues and the timing of certain deductions may decrease by approximately$200,000, as a result of the expiration of statutes of limitations. During thefiscal quarter ended September 30, 2007, there were no material increases ordecreases in unrecognized tax benefits.

 

TheCompany’s historical accounting policy with respect to interest and penaltiesrelated to tax uncertainties has been to classify these amounts as incometaxes, and the Company continued this classification upon the adoption of FIN48.  As of April 2, 2007, the total amount of accrued interest andpenalties related to uncertain tax positions recognized in the consolidatedbalance sheet was $26,200. The total amount of interest and penalties relatedto tax uncertainties recognized in the statement of income for the fiscalquarter and six months ended September 30, 2007 was $25,800 and $36,100,respectively.

 

TheCompany files income tax returns in the U.S. federal, state and localjurisdictions. Income tax returns filed for fiscal years 2003 and earlier areno longer subject to examination by U.S. federal, state and local taxauthorities. No federal, state and local income tax returns are currently underexamination. Certain income tax returns for fiscal years 2004 through 2006remain open to examination by U.S. federal, state and local tax authorities.

 

8

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# ***Note 7. Earnings Per Share***

# * *

The dilutive effect of all options and PSUsoutstanding has been determined by using the treasury stock method. Theweighted average shares outstanding is calculated as follows:

 
| ** **                                              | ** ** | **Fiscal Quarters Ended** | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **September 30,  2007**   | ** ** | **September 24,  2006** | ** ** | **September 30,  2007** | ** ** | **September 24,  2006** | ** ** |
|                                                    |       |                      |       |                    |       |   |   |   |   |
| Basic weighted average common shares outstanding        |       | 5,328,100                 |       | 6,155,300               |       | 5,374,400 |   | 6,213,000 |   |
| Effect of dilutive common stock equivalents outstanding |       | 210,500                   |       | 182,700                 |       | 242,100 |   | 162,800 |   |
| Diluted weighted average common shares outstanding      |       | 5,538,600                 |       | 6,338,000               |       | 5,616,500 |   | 6,375,800 |   |

 

Asof September 30, 2007, stock options with respect to 135,000 shares of commonstock were outstanding. All outstanding options and earned but unvested PSUswere included in the computation of diluted earnings per share because all suchinstruments were dilutive.

 

# ***Note 8. Business Segments***

# * *

TheCompany evaluates revenue, gross profit and inventory in three businesssegments:  (1) Network infrastructureproducts, which are used to build, repair and upgrade wirelesstelecommunications, computing and Internet networks, and generally complementradio frequency transmitting and switching equipment provided directly byoriginal equipment manufacturers (OEMs); (2) Mobile devices and accessoryproducts, which include data devices, pagers and two-way radios and relatedaccessories such as replacement batteries, cases, speakers, mobile amplifiers,power supplies, headsets, mounts, car antennas and various wireless datadevices; and (3) Installation, test and maintenance products, which are used toinstall, tune, maintain and repair wireless communications equipment. Withinthe mobile devices and accessory products line of business, the Company sellsto both commercial and consumer markets. The network infrastructure andinstallation, test and maintenance lines of business sell primarily tocommercial markets. Beginning in fiscal year 2008, the Company expanded itsregular review within each segment from three to four customer categories. Thesecategories are:  (1) commercial publiccarriers and network operators; (2) commercial resellers; (3) commercialself-maintained users and governments; and (4) consumers. These categories aredescribed further below:

 

•                  Commercial Public Carriers and Network Operators. Public carriers and network operators includesystems operators that are generally responsible for building and maintainingthe infrastructure system and provide airtime service to individual subscribers.

•                  Commercial Resellers. Resellers include dealers and resellers that sell,install and service cellular telephone, paging and two-way radio communications equipment primarilyfor the consumer and small business markets. These resellers include local andnational proprietorships and retailers, as well as sales and installationcenters operated by cellular and paging carriers.

•                  Commercial Self-Maintained Users and Governments. Self-maintained users (SMUs) and governmentcustomers include commercial entities such as major utilities andtransportation companies, repair centers, and federal agencies and state andlocal governments, including public safety organizations.

•                  Consumers. Consumers include customers that buy through anyaffinity partner relationships or directly from our consumer website,YourWirelessSource.comTM.

 

TheCompany measures segment performance based on segment gross profit. The segmentoperations develop their product offering, pricing and strategies, which arecollaborative with one another and the centralized sales and marketing function.Therefore, the Company does not segregate assets, other than inventory, forinternal reporting, evaluating performance or allocating capital. Productdelivery revenue and certain cost of sales expenses have been allocated to eachsegment based on a percentage of revenues and/or gross profit, as applicable. TheCompany’s goodwill at September 30, 2007 relates to acquisitions within itsnetwork infrastructure line of business.

 

9

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| **(Amounts in thousands)**         | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Fiscal  Quarter ended September 30, 2007** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                        |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators       |       | $                           | 11,471     |                                          | $          | 568                                               |       | $         | 3,420      |   | $ | 15,459 |   |
| Resellers                                    |       | 18,289                      |       | 60,878                                        |       | 2,281                                             |       | 81,448    |       |
| SMUs and  Governments                        |       | 12,494                      |       | 3,520                                         |       | 16,626                                            |       | 32,640    |       |
| Total Commercial  Revenues                   |       | 42,254                      |       | 64,966                                        |       | 22,327                                            |       | 129,547   |       |
| Consumer  Revenues                           |       | —                      |       | 2,971                                         |       | —                                            |       | 2,971     |       |
| Total Revenues                               |       | $                           | 42,254     |                                          | $          | 67,937                                            |       | $         | 22,327     |   | $ | 132,518 |   |
|                                         |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                    |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators       |       | $                           | 2,801      |                                          | $          | 160                                               |       | $         | 834        |   | $ | 3,795 |   |
| Resellers                                    |       | 4,513                       |       | 11,040                                        |       | 663                                               |       | 16,216    |       |
| SMUs and  Governments                        |       | 3,214                       |       | 1,103                                         |       | 3,313                                             |       | 7,630     |       |
| Total Commercial  Gross Profit               |       | 10,528                      |       | 12,303                                        |       | 4,810                                             |       | 27,641    |       |
| Consumer Gross  Profit                       |       | —                      |       | 1,040                                         |       | —                                            |       | 1,040     |       |
| Total Gross  Profit                          |       | $                           | 10,528     |                                          | $          | 13,343                                            |       | $         | 4,810      |   | $ | 28,681 |   |
|                                         |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                           |       | $                           | 19,326     |                                          | $          | 27,236                                            |       | $         | 3,798      |   | $ | 50,360 |   |
|                                         |       |                        |       |                                          |       |                                              |       |      |       |
| **Fiscal  Quarter ended September 24, 2006** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                        |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators       |       | $                           | 11,868     |                                          | $          | 603                                               |       | $         | 3,016      |   | $ | 15,487 |   |
| Resellers                                    |       | 17,286                      |       | 47,469                                        |       | 2,631                                             |       | 67,386    |       |
| SMUs and  Governments                        |       | 14,129                      |       | 3,536                                         |       | 16,342                                            |       | 34,007    |       |
| Total Commercial  Revenues                   |       | 43,283                      |       | 51,608                                        |       | 21,989                                            |       | 116,880   |       |
| Consumer  Revenues                           |       | —                      |       | 1,776                                         |       | —                                            |       | 1,776     |       |
| Total Revenues                               |       | $                           | 43,283     |                                          | $          | 53,384                                            |       | $         | 21,989     |   | $ | 118,656 |   |
|                                         |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                    |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators       |       | $                           | 2,943      |                                          | $          | 192                                               |       | $         | 807        |   | $ | 3,942 |   |
| Resellers                                    |       | 4,578                       |       | 9,403                                         |       | 610                                               |       | 14,591    |       |
| SMUs and  Governments                        |       | 3,355                       |       | 1,063                                         |       | 6,236                                             |       | 10,654    |       |
| Total Commercial  Gross Profit               |       | 10,876                      |       | 10,658                                        |       | 7,653                                             |       | 29,187    |       |
| Consumer Gross  Profit                       |       | —                      |       | 843                                           |       | —                                            |       | 843       |       |
| Total Gross  Profit                          |       | $                           | 10,876     |                                          | $          | 11,501                                            |       | $         | 7,653      |   | $ | 30,030 |   |
|                                         |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                           |       | $                           | 16,902     |                                          | $          | 22,545                                            |       | $         | 19,898     |   | $ | 59,345 |   |

 

10

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| **(Amounts in thousands)**     | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test   and Maintenance** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------------------------------|------------|---------------------------------------------------------|------------|-----------|------------|
| **Six  Months ended September 30, 2007** |       |                        |       |                                |       |                                                    |       |      |       |
| Commercial  Revenues:                    |       |                        |       |                                |       |                                                    |       |      |       |
| Public Carriers  and Network Operators   |       | $                           | 22,896     |                                | $          | 1,149                                                   |       | $         | 6,026      |   | $ | 30,071 |   |
| Resellers                                |       | 35,856                      |       | 117,926                             |       | 4,664                                                   |       | 158,446   |       |
| SMUs and  Governments                    |       | 23,437                      |       | 6,763                               |       | 33,065                                                  |       | 63,265    |       |
| Total Commercial  Revenues               |       | 82,189                      |       | 125,838                             |       | 43,755                                                  |       | 251,782   |       |
| Consumer Revenues                        |       | —                      |       | 5,166                               |       | —                                                  |       | 5,166     |       |
| Total Revenues                           |       | $                           | 82,189     |                                | $          | 131,004                                                 |       | $         | 43,755     |   | $ | 256,948 |   |
|                                     |       |                        |       |                                |       |                                                    |       |      |       |
| Commercial Gross  Profit:                |       |                        |       |                                |       |                                                    |       |      |       |
| Public Carriers  and Network Operators   |       | $                           | 5,478      |                                | $          | 324                                                     |       | $         | 1,511      |   | $ | 7,313 |   |
| Resellers                                |       | 8,718                       |       | 22,449                              |       | 1,463                                                   |       | 32,630    |       |
| SMUs and  Governments                    |       | 6,034                       |       | 2,164                               |       | 6,788                                                   |       | 14,986    |       |
| Total Commercial  Gross Profit           |       | 20,230                      |       | 24,937                              |       | 9,762                                                   |       | 54,929    |       |
| Consumer Gross  Profit                   |       | —                      |       | 1,913                               |       | —                                                  |       | 1,913     |       |
| Total Gross  Profit                      |       | $                           | 20,230     |                                | $          | 26,850                                                  |       | $         | 9,762      |   | $ | 56,842 |   |
|                                     |       |                        |       |                                |       |                                                    |       |      |       |
| Product  Inventory                       |       | $                           | 19,326     |                                | $          | 27,236                                                  |       | $         | 3,798      |   | $ | 50,360 |   |
|                                     |       |                        |       |                                |       |                                                    |       |      |       |
| **Six  Months ended September 24, 2006** |       |                        |       |                                |       |                                                    |       |      |       |
| Commercial  Revenues:                    |       |                        |       |                                |       |                                                    |       |      |       |
| Public Carriers  and Network Operators   |       | $                           | 24,095     |                                | $          | 1,258                                                   |       | $         | 7,266      |   | $ | 32,619 |   |
| Resellers                                |       | 32,673                      |       | 85,490                              |       | 5,302                                                   |       | 123,465   |       |
| SMUs and  Governments                    |       | 24,167                      |       | 6,763                               |       | 40,288                                                  |       | 71,218    |       |
| Total Commercial  Revenues               |       | 80,935                      |       | 93,511                              |       | 52,856                                                  |       | 227,302   |       |
| Consumer  Revenues                       |       | —                      |       | 3,294                               |       | —                                                  |       | 3,294     |       |
| Total Revenues                           |       | $                           | 80,935     |                                | $          | 96,805                                                  |       | $         | 52,856     |   | $ | 230,596 |   |
|                                     |       |                        |       |                                |       |                                                    |       |      |       |
| Commercial Gross  Profit:                |       |                        |       |                                |       |                                                    |       |      |       |
| Public Carriers  and Network Operators   |       | $                           | 5,745      |                                | $          | 377                                                     |       | $         | 1,757      |   | $ | 7,879 |   |
| Resellers                                |       | 8,265                       |       | 17,023                              |       | 1,215                                                   |       | 26,503    |       |
| SMUs and  Governments                    |       | 5,899                       |       | 1,996                               |       | 14,239                                                  |       | 22,134    |       |
| Total Commercial  Gross Profit           |       | 19,909                      |       | 19,396                              |       | 17,211                                                  |       | 56,516    |       |
| Consumer Gross  Profit                   |       | —                      |       | 1,599                               |       | —                                                  |       | 1,599     |       |
| Total Gross  Profit                      |       | $                           | 19,909     |                                | $          | 20,995                                                  |       | $         | 17,211     |   | $ | 58,115 |   |
|                                     |       |                        |       |                                |       |                                                    |       |      |       |
| Product  Inventory                       |       | $                           | 16,902     |                                | $          | 22,545                                                  |       | $         | 19,898     |   | $ | 59,345 |   |

 

# ***Note 9. Stock Buyback***

# * *

On April 28, 2003, theCompany’s Board of Directors approved a stock buyback program, authorizing thepurchase of up to 675,000 shares of its outstanding common stock. On October20, 2005 and July 17, 2006, the Board of Directors amended the program,authorizing the purchase of an additional 675,000 and 600,000 shares,respectively, of outstanding common stock. On July 26, 2007 and August 14, 2007, the Board of Directorsauthorized the purchase of an additional 144,867 and 300,700 shares,respectively, of outstanding common stock under the stock buyback program. Afteraccounting for the actions of the Board of Directors in authorizing thepurchase of the additional shares, a total of 2,395,567 shares have beenauthorized for repurchase. Shares may be purchased from time to time inthe open market, by block purchase, or through negotiated transactions, orpossibly other transactions managed by broker-dealers. No time limit has beenset for completion of the program. As of September 30, 2007, the Company hadpurchased 2,140,974

 

11

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shares for approximately$28.3 million, or an average of $13.20 per share. Of the total sharesrepurchased, 346,107 shares had been repurchased in the first six months of fiscalyear 2008 at an average price of $13.96 per share.

 

# ***Note 10. Customer Concentration***

# * *

TheCompany’s future results could be negatively impacted by the loss of certaincustomer and/or vendor relationships. For the fiscal quarter and six monthsended September 30, 2007, sales of products to the Company’s top customerrelationship, AT&T Mobility (formerly Cingular Wireless LLC), accounted for 25% of total revenues and 21% and 22% of totalgross profits, respectively. For the fiscal quarter and six months endedSeptember 30, 2007, sales of products related to the Company’s top vendorrelationship, the Nokia Inc. (Nokia) repair and replacement componentrelationship, accounted for 9% of totalrevenues and 7% and 8% of total gross profits, respectively. The Nokiarelationship is a complete supply chain relationship and, therefore, theCompany has no alternative sources of supply, and the Company's purchases, andultimately its resale of these products, is dependent upon the continuation ofthe Nokia relationship. The Company also sells products other than Nokia repairand replacement materials to many of these customers. Absent this arrangementwith Nokia, the Company would maintain the ability to sell these other productsto these customers.

 

12

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

This commentary should be read in conjunctionwith the Management’s Discussion and Analysis of Financial Condition andResults of Operations from the Company’s Form 10-K for the fiscal year endedApril 1, 2007.

 

**Business Overview andEnvironment**

 

TESSCO Technologies Incorporated (TESSCO or theCompany) is a leading provider of integrated product and supply chain solutionsto the professionals that design, build, run, maintain and use wireless mobile,fixed and in-building systems. Although we sell products to customers in over100 countries, approximately 97% of our sales are made to customers in theUnited States. We have operations and office facilities in Hunt Valley,Maryland, Reno, Nevada and San Antonio, Texas. Due to the diversity of ourbusiness, we are not significantly affected by seasonality. However, sales toour retailers generally peak in our second and third quarters in preparationfor the winter holiday season. Also, our network infrastructure sales aretypically affected by weather conditions in the United States, especially inour first quarter.

 

We offer a wide range of products that are classified intothree business segments: network infrastructure; mobile devices andaccessories; and installation, test and maintenance. Network infrastructureproducts, which are sold to our commercial customers, are used to build, repairand upgrade wireless telecommunications, computing and Internet networks. Salesof traditional network infrastructure products, such as cable, transmissionlines and antennas are in part dependent on capital spending in the wirelesscommunications industry. However, we have also been growing our offering ofwireless broadband and network equipment products, which are not as dependenton the overall capital spending of the industry. Mobile devices and accessoryproducts include data devices, pagers and two-way radios and related accessories.Mobile devices and accessory products are widely sold to commercial customersand consumers. Commercial customers include retail stores, value-addedresellers and dealers. Consumers are primarily reached through our affinitypartnerships, where we offer services including customized order fulfillment,outsourced call centers, and building and maintaining private label Internetsites. Approximately 50% of all of our mobile devices and accessory productsales for the fiscal quarter and six months ended September 30, 2007 weregenerated from sales to AT&T Mobility (AT&T) (formerly CingularWireless LLC). Installation, test and maintenance products, which are sold toour commercial customers, are used to install, tune, maintain and repairwireless communications equipment. Approximately 50% of all of ourinstallation, test and maintenance sales for the fiscal quarter and six monthsended September 30, 2007 were generated from the sales of replacement parts andmaterials for original equipment manufacturers, primarily Nokia, Inc. (Nokia). Theremainder of this segment is made up of sophisticated analysis equipment andvarious frequency-, voltage- and power-measuring devices, as well as anassortment of tools, hardware and supplies required by service technicians. Bothour repair and replacement parts sales and consumer sales through our affinitypartnerships are reliant on relationships with a small number of vendors. Beginning infiscal year 2008, we expanded our regular review within each segment from threeto four categories. These categories are: (1) commercial public carriers and network operators; (2) commercialresellers; (3) commercial self-maintained users and governments; and (4)consumers. These categories are described further below:

 

•                                          Commercial Public Carriers and NetworkOperators. Publiccarriers and network operators include systems operators that are generallyresponsible for building and maintaining the infrastructure system and provideairtime service to individual subscribers.

•                                          Commercial Resellers. Resellers include dealers and resellersthat sell, install and service cellular telephone, paging and two-way radiocommunications equipment primarily for the consumer and small business markets.These resellers include local and national proprietorships and retailers, aswell as sales and installation centers operated by cellular and pagingcarriers.

•                                          Commercial Self-Maintained Users (SMUs)and Governments. SMUsand government customers include commercial entities such as major utilities andtransportation companies, federal agencies and state and local governments,including public safety organizations.

•                                          Consumers. Consumers are customers buying through any of ouraffinity-partner relationships or directly from our consumer website, YourWirelessSource.comTM.

 

The wirelesscommunications distribution industry is competitive and fragmented, and iscomprised of several national distributors. In addition, many manufacturerssell direct. Barriers to entry for distributors are relatively low, particularlyin

 

13

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the mobile devices and accessories market, and the risk of newcompetitors entering the market is high. Consolidation of larger wirelesscarriers has and will most likely continue to impact our current and potentialcustomer base. In addition, the agreements or arrangements with our customersor vendors looking to us for product and supply chain solutions are typicallyof limited duration and are terminable by either party upon several months orotherwise relatively short notice. Our ability to maintain these relationshipsis subject to competitive pressures and challenges. We believe, however, thatour strength in service, the breadth and depth of our product offering, ourinformation technology system, our large customer base and purchasingrelationships with approximately 350 manufacturers provide us with asignificant competitive advantage over new entrants to the market. 

 

Oursecond quarter revenues increased by 11.7% compared to the second quarter oflast year. This growth was driven by our mobile devices and accessoriescommercial line of business. Gross profits also increased in our mobile devicesand accessories commercial line of business as compared with the second quarterof last year. However, the increase in gross profit from our mobile devices andaccessories line of business was more than offset by a decline in ourinstallation, test and maintenance line of business due to gross profits fromour Nokia relationship returning to historical levels as we had discussed inprevious quarters. This overall decrease in gross profit, combined with anincrease in operating expenses to support our growth initiatives and increasedorder volumes, resulted in a 61.4% decline in net income over the prior-yearquarter.

 

14

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**Resultsof Operations**

 

The followingtable summarizes the unaudited results of our operations for the fiscal quarterand six months ended September 30, 2007 and September 24, 2006:

 
| ** **                                                                  | ** ** | **Fiscal  Quarters Ended**   | ** ** | **Six  Months Ended**        | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(Amounts in thousands, except per share  data)** | ** ** | **September 30,  2007** | ** ** | **September 24,  2006** | ** ** | **$   Change** | ** ** | **%  Change** | ** ** | **September 30,  2007** | ** ** | **September 24,  2006** | ** ** | **$   Change** | ** ** | **%  Change** | ** ** |
| Commercial  Revenues                                                        |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | $                            | 11,471     |                         | $          | 11,868 |   | $ | (397 | ) | (3.3 | )% | $ | 22,896 |   | $ | 24,095 |   | $ | (1,199 | ) | (5.0 | )% |
| Resellers                                                                   |       | 18,289                       |       | 17,286                       |       | 1,003 |   | 5.8 | % | 35,856 |   | 32,673 |   | 3,183 |   | 9.7 | % |
| SMUs and  Governments                                                       |       | 12,494                       |       | 14,129                       |       | (1,635 | ) | (11.6 | )% | 23,437 |   | 24,167 |   | (730 | ) | (3.0 | )% |
| Total Network  Infrastructure                                               |       | 42,254                       |       | 43,283                       |       | (1,029 | ) | (2.4 | )% | 82,189 |   | 80,935 |   | 1,254 |   | 1.5 | % |
| Mobile Devices  and Accessories:                                            |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 568                          |       | 603                          |       | (35 | ) | (5.8 | )% | 1,149 |   | 1,258 |   | (109 | ) | (8.7 | )% |
| Resellers                                                                   |       | 60,878                       |       | 47,469                       |       | 13,409 |   | 28.2 | % | 117,926 |   | 85,490 |   | 32,436 |   | 37.9 | % |
| SMUs and  Governments                                                       |       | 3,520                        |       | 3,536                        |       | (16 | ) | (0.5 | )% | 6,763 |   | 6,763 |   | —- |   | 0.0 | % |
| Total Mobile  Devices and Accessories                                       |       | 64,966                       |       | 51,608                       |       | 13,358 |   | 25.9 | % | 125,838 |   | 93,511 |   | 32,327 |   | 34.6 | % |
| Installation,  Test and Maintenance:                                        |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 3,420                        |       | 3,016                        |       | 404 |   | 13.4 | % | 6,026 |   | 7,266 |   | (1,240 | ) | (17.1 | )% |
| Resellers                                                                   |       | 2,281                        |       | 2,631                        |       | (350 | ) | (13.3 | )% | 4,664 |   | 5,302 |   | (638 | ) | (12.0 | )% |
| SMUs and  Governments                                                       |       | 16,626                       |       | 16,342                       |       | 284 |   | 1.7 | % | 33,065 |   | 40,288 |   | (7,223 | ) | (17.9 | )% |
| Total  Installation, Test and Maintenance                                   |       | 22,327                       |       | 21,989                       |       | 338 |   | 1.5 | % | 43,755 |   | 52,856 |   | (9,101 | ) | (17.2 | )% |
| Total Commercial  Revenues                                                  |       | 129,547                      |       | 116,880                      |       | 12,667 |   | 10.8 | % | 251,782 |   | 227,302 |   | 24,480 |   | 10.8 | % |
| Consumer Revenues  - Mobile Devices and Accessories                         |       | 2,971                        |       | 1,776                        |       | 1,195 |   | 67.3 | % | 5,166 |   | 3,294 |   | 1,872 |   | 56.8 | % |
| Total Revenues                                                              |       | $                            | 132,518    |                         | $          | 118,656 |   | $ | 13,862 |   | 11.7 | % | $ | 256,948 |   | $ | 230,596 |   | $ | 26,352 |   | 11.4 | % |
|                                                                        |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Gross  Profit                                                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | $                            | 2,801      |                         | $          | 2,943 |   | $ | (142 | ) | (4.8 | )% | $ | 5,478 |   | $ | 5,745 |   | $ | (267 | ) | (4.6 | )% |
| Resellers                                                                   |       | 4,513                        |       | 4,578                        |       | (65 | ) | (1.4 | )% | 8,718 |   | 8,265 |   | 453 |   | 5.5 | % |
| SMUs and  Governments                                                       |       | 3,214                        |       | 3,355                        |       | (141 | ) | (4.2 | )% | 6,034 |   | 5,899 |   | 135 |   | 2.3 | % |
| Total Network  Infrastructure                                               |       | 10,528                       |       | 10,876                       |       | (348 | ) | (3.2 | )% | 20,230 |   | 19,909 |   | 321 |   | 1.6 | % |
| Mobile Devices and  Accessories:                                            |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 160                          |       | 192                          |       | (32 | ) | (16.7 | )% | 324 |   | 377 |   | (53 | ) | (14.1 | )% |
| Resellers                                                                   |       | 11,040                       |       | 9,403                        |       | 1,637 |   | 17.4 | % | 22,449 |   | 17,023 |   | 5,426 |   | 31.9 | % |
| SMUs and  Governments                                                       |       | 1,103                        |       | 1,063                        |       | 40 |   | 3.8 | % | 2,164 |   | 1,996 |   | 168 |   | 8.4 | % |
| Total Mobile  Devices and Accessories                                       |       | 12,303                       |       | 10,658                       |       | 1,645 |   | 15.4 | % | 24,937 |   | 19,396 |   | 5,541 |   | 28.6 | % |
| Installation,  Test and Maintenance:                                        |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 834                          |       | 807                          |       | 27 |   | (3.3 | )% | 1,511 |   | 1,757 |   | (246 | ) | (14.0 | )% |
| Resellers                                                                   |       | 663                          |       | 610                          |       | 53 |   | 8.7 | % | 1,463 |   | 1,215 |   | 248 |   | 20.4 | % |
| SMUs and  Governments                                                       |       | 3,313                        |       | 6,236                        |       | (2,923 | ) | (46.9 | )% | 6,788 |   | 14,239 |   | (7,451 | ) | (52.3 | )% |
| Total  Installation, Test and Maintenance                                   |       | 4,810                        |       | 7,653                        |       | (2,843 | ) | (37.1 | )% | 9,762 |   | 17,211 |   | (7,449 | ) | (43.3 | )% |
| Total Commercial  Gross Profit                                              |       | 27,641                       |       | 29,187                       |       | (1,546 | ) | (5.3 | )% | 54,929 |   | 56,516 |   | (1,587 | ) | (2.8 | )% |
| Consumer Gross  Profit - Mobile Devices and Accessories                     |       | 1,040                        |       | 843                          |       | 197 |   | 23.4 | % | 1,913 |   | 1,599 |   | 314 |   | 19.6 | % |
| Total Gross  Profit                                                         |       | 28,681                       |       | 30,030                       |       | (1,349 | ) | (4.5 | )% | 56,842 |   | 58,115 |   | (1,273 | ) | (2.2 | )% |
|                                                                        |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                               |       | 27,340                       |       | 26,856                       |       | 484 |   | 1.8 | % | 54,009 |   | 51,824 |   | 2,185 |   | 4.2 | % |
| Income from  operations                                                     |       | 1,341                        |       | 3,174                        |       | (1,833 | ) | (57.8 | )% | 2,833 |   | 6,291 |   | (3,458 | ) | (55.0 | )% |
| Interest, net                                                               |       | 116                          |       | 180                          |       | (64 | ) | (35.6 | )% | 177 |   | 336 |   | (159 | ) | (47.3 | )% |
| Income before  provision for income taxes                                   |       | 1,225                        |       | 2,994                        |       | (1,769 | ) | (59.1 | )% | 2,656 |   | 5,955 |   | (3,299 | ) | (55.4 | )% |
| Provision for  income taxes                                                 |       | 509                          |       | 1,138                        |       | (629 | ) | (55.3 | )% | 1,074 |   | 2,246 |   | (1,172 | ) | (52.2 | )% |
| Net income                                                                  |       | $                            | 716        |                         | $          | 1,856 |   | $ | (1,140 | ) | (61.4 | )% | $ | 1,582 |   | $ | 3,709 |   | $ | (2,127 | ) | (57.3 | )% |
| Diluted earnings  per share                                                 |       | $                            | 0.13       |                         | $          | 0.29 |   | $ | (0.16 | ) | (55.2 | )% | $ | 0.28 |   | $ | 0.58 |   | $ | (0.30 | ) | (51.7 | )% |

 

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###### **Second Quarter of Fiscal Year 2008 Compared withSecond Quarter of Fiscal Year 2007**

###### ** **

**Revenues.**Revenues for thesecond quarter of fiscal year 2008 increased 11.7% as compared with the secondquarter of fiscal year 2007, primarily due to a 10.8% growth in commercialrevenues and, to a much lesser extent, a 67.3% increase in consumer revenues. Whilesales in our network infrastructure line of business declined, sales in our mobiledevices and accessories and installation, test and maintenance lines ofbusiness grew.

 

Networkinfrastructure sales decreased 2.4% as compared with the second quarter offiscal year 2007, primarily due to a decrease in sales of broadband products partiallyoffset by an increase in sales of antennas, power systems and wireless localarea network (WLAN) products. Our decline in sales of network infrastructureproducts was in sales to public carriers and SMUs and governments, partiallyoffset by an increase in sales to resellers, which is the result of our focuson diversification beyond the traditional infrastructure carrier customer.

 

Sales in themobile devices and accessories line of business increased 27.3% in the secondquarter of fiscal year 2008, as compared with the same period last year. Theincrease was due to a 25.9% increase in commercial sales and, to a much lesserextent, a 67.3% increase in consumer sales. The increase in commercial revenuesfor mobile devices and accessories, which are sold primarily to resellers, butalso to SMUs and governments and public carriers and network operators, wasprimarily due to increased sales to a large national tier-one carrier, as wellas other smaller resellers and users.

 

Revenues from ourinstallation, test and maintenance line of business had a 1.5% increase fromthe prior-year quarter, primarily due to an increase in the sale of tools,supplies and safety products.

 

**GrossProfit.**Grossprofit for the second quarter of fiscal year 2008 decreased 4.5% as comparedwith the second quarter of fiscal year 2007. Total commercial gross profitdecreased 5.3%, while consumer gross profit increased 23.4%. Gross profitmargin decreased to 21.6% in the second quarter of fiscal year 2008 from 25.3%in second quarter of fiscal year 2007. Gross profit margin in our networkinfrastructure segment decreased slightly from 25.1% in the second quarter offiscal year 2007 to 24.9% in the second quarter of fiscal year 2008. Grossprofit margin in our mobile devices and accessories segment decreased to 19.6%in the second quarter of this fiscal year from 21.5% in the second quarter oflast fiscal year. This decline was primarily attributable to the commercialgross profit margin for our mobile devices and accessories, which decreased to18.9% in the second quarter of this fiscal year from 20.7% for the secondquarter of last fiscal year, principally due to product mix in sales to a largetier-one carrier. Consumer gross profit margin for our mobile devices andaccessories decreased to 35.0% in the second quarter of this fiscal year from47.5% for the second quarter of last fiscal year. Gross profit margin in ourinstallation, test and maintenance line of business decreased from 34.8% in thesecond quarter of fiscal year 2007 to 21.5% in the second quarter of fiscalyear 2008. This decline was due primarily to the return to historical levels ofgross profit attributable to our Nokia repair and replacement partsrelationship as a result of price changes as we discussed on previous occasions.Generally, our gross margins by product within these segments have beensustained, except as noted above for gross margins attributable to ourrelationships with a large tier-one carrier and Nokia, and generally thesevariations are related to sales mix within the segment product offerings. Weaccount for inventory at the lower of cost or market, and as a result,write-offs/write-downs occur due to damage, deterioration, obsolescence,changes in prices and other causes.

 

Our ongoingability to earn revenues and gross profits from customers and vendors lookingto us for product and supply chain solutions is dependent upon a number offactors. The terms, and accordingly the factors, applicable to each affinityrelationship often differ. Among these factors are the strength of the customer’sor vendor’s business, the supply and demand for the product or service,including price stability, changing customer or vendor requirements, and ourability to support the customer or vendor and to continually demonstrate thatwe can improve the way they do business. In addition, the agreements orarrangements on which our affinity relationships are based are typically oflimited duration, and are terminable by either party upon several months orotherwise relatively short notice. These affinity relationships could also beaffected by wireless carrier consolidation.

 

As total revenuesand gross profits from larger customer and vendor relationships, includingAT&T and Nokia, increase, we occasionally experience and expect to continueto experience pricing pressures that may adversely affect future results. In aneffort to mitigate the overall effect of these pressures and to meet theseconsistent challenges, we are focused on our continuing efforts to growrevenues and gross profits from other customer and vendor relationships.

 

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**Selling,General and Administrative Expenses.**Total selling, general and administrative expensesincreased by 1.8% in the second quarter of fiscal year 2008 as compared withthe second quarter of fiscal year 2007. Selling, general and administrativeexpenses as a percentage of revenues decreased to 20.6% in the second quarterof fiscal year 2008 from 22.6% in the second quarter of fiscal year 2007. Thelargest factor contributing to the increase in total selling, general andadministrative expenses was increased occupancy costs, labor costs and expensesrelated to business generation activities in support of our continuingincreased focus on our commercial business during the second quarter of fiscalyear 2008.

 

Occupancy costsincreased by approximately $433,400 in the second quarter of fiscal year 2008as compared with the second quarter of fiscal year 2007, primarily due to rentand building maintenance costs related to our lease arrangement for additionaloffice and warehouse space in Hunt Valley, Maryland beginning July 1, 2007.

 

Labor costincreases were primarily related to sales management and fulfillment. Theselabor costs were partially offset by decreased accruals related to our rewardprograms. Total labor costs, including benefits, increased by approximately$328,300 from the second quarter of fiscal year 2007 to the second quarter offiscal year 2008.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation. We also evaluate the creditworthiness of prospective customers and make decisions regarding extension ofcredit terms to such prospects based on this evaluation. Accordingly, werecorded a provision forbad debts of $215,600 and $332,200 for the second quarter ended September 30,2007 and September 24, 2006, respectively.

 

**Interest,Net.**Net interestexpense decreased from $180,500 in the second quarter of fiscal year 2007 to$115,900 in the second quarter of fiscal year 2008, primarily due to decreasedaverage borrowings on our revolving line of credit facility.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.**The effective tax rate in the secondquarter of fiscal year 2008 was 41.5% as compared with 38.0% in the secondquarter of fiscal year 2007. The increase in the tax rate is primarilyattributable to changes in our state tax effective rate. As a result of thefactors discussed above, net income and diluted earnings per share for thesecond quarter of fiscal year 2008 decreased 61.4% and 55.2%, respectively,compared to the prior-year quarter.

 

###### **First Six Months of Fiscal Year 2008 Compared withFirst Six Months of Fiscal Year 2007**

###### ** **

**Revenues.**Revenues for thefirst six months of fiscal year 2008 increased 11.4% as compared with the firstsix months of fiscal year 2007, primarily due to a 10.8% growth in commercialrevenues and, to a lesser extent, a 56.8% increase in consumer revenues. Whilewe grew sales in our network infrastructure and mobile devices and accessorieslines of business, sales in our installation, test and maintenance line ofbusiness decreased.

 

Networkinfrastructure sales increased 1.5% as compared with the first six months offiscal year 2007, primarily due to an increase in sales of site support, WLANand radio frequency products, partially offset by a decline in revenues frombroadband products. Our growth in sales of network infrastructure product wasin sales to resellers, as we have focused on diversification beyond thetraditional infrastructure carrier customer. Although we believe the market forour network infrastructure products will continue to grow, there can be noassurance that these trends will continue.

 

Sales in themobile devices and accessories line of business increased 35.3% in the firstsix months of fiscal year 2008, as compared with the prior-year period. Theincrease was due to a 34.6% increase in commercial sales, and, to a lesserextent, a 56.8% increase in consumer sales. The increase in commercial revenuesfor mobile devices and accessories, which are sold primarily to resellers, butalso to SMUs and governments and public carriers and network operators, wasprimarily due to increased sales to a large national tier-one carrier, as wellas other smaller resellers and users.

 

Revenues from ourinstallation, test and maintenance line of business had a 17.2% decrease fromthe prior year, primarily due to a large decrease in sales of repair partsrelated to our major repair components relationship with Nokia.

 

**GrossProfit.**Grossprofit for the first six months of fiscal year 2008 decreased 2.2% as comparedwith the first six months of fiscal year 2007. Total commercial gross profitdecreased 2.8%, while consumer gross profit increased 19.6% over the prior year.Gross profit margin decreased to 22.1% in the first six months of fiscal year2008 from 25.2% in first

 

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six months offiscal year 2007. Gross profit margin in our network infrastructure segmentremained flat at 24.6% as compared with the first six months of 2007. In ourinstallation, test and maintenance segment, gross profit margin decreased to22.3% in the first six months of fiscal year 2008 from 32.6% in the first sixmonths of fiscal year 2007, primarily due to price changes related to our Nokiarelationship. Gross profit margin in our mobile devices and accessories segmentdecreased to 20.5% in the first six months of this fiscal year from 21.7% inthe first six months of last fiscal year primarily due to product mix in salesto a large tier-one carrier. Commercial gross profit margin for our mobiledevices and accessories decreased to 19.8% in the first six months of lastfiscal year from 20.7% for the first six months of this fiscal year. Consumergross profit margin for our mobile devices and accessories decreased to 37.0%in the first six months of last fiscal year from 48.5% for the first six monthsof this fiscal year. Generally, our gross margins by product within thesesegments have been sustained, except as noted above for gross profitsattributable to our relationships with a large tier-one carrier and Nokia, and generallythese variations are related to sales mix within the segment product offerings.We account for inventory at the lower of cost or market, and as a result,write-offs/write-downs occur due to damage, deterioration, obsolescence,changes in prices and other causes.

 

**Selling,General and Administrative Expenses.**Total selling, general and administrative expensesincreased by 4.2% in the first six months of fiscal year 2008 as compared withthe first six months of fiscal year 2007. Selling, general and administrativeexpenses as a percentage of revenues decreased to 21.0% in the first six monthsof fiscal year 2008 from 22.5% in the first six months of fiscal year 2007. Thelargest factors contributing to the increase in total selling, general andadministrative expenses were increased labor costs, occupancy costs andexpenses related to business generation activities in support of our continuedincreased focus on our commercial business during the first six months offiscal year 2008.

 

Labor costincreases were primarily related to sales management and fulfillment. Theselabor costs were partially offset by decreased accruals related to our rewardprograms. Total labor costs, including benefits, increased by approximately$631,500 from the first six months of fiscal year 2007 to the first six monthsof fiscal year 2008.

 

Occupancy costsincreased by approximately $544,900 in the first six months of fiscal year 2008as compared with the first six months of fiscal year 2007, primarily due torent and building maintenance costs related to our lease arrangement for additionaloffice and warehouse space in Hunt Valley, Maryland beginning July 1, 2007.

 

Informationtechnology expense increased by approximately $431,300 in the first six monthsof fiscal year 2008 as compared with the first six months of fiscal year 2007,primarily due to an increase in software maintenance and licenses.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation. We also evaluate the creditworthiness of prospective customers and make decisions regarding extension ofcredit terms to such prospects based on this evaluation. Accordingly, werecorded a provision forbad debts of $308,100 and $672,000 for the first six months of fiscal year 2008and fiscal year 2007, respectively.

 

**Interest,Net.**Net interestexpense decreased from $335,800 in the first six months of fiscal year 2007 to$176,800 in the first six months of fiscal year 2008, primarily due todecreased average borrowings on our revolving line of credit facility.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.**The effective tax rate in the first sixmonths of fiscal year 2008 was 40.4% as compared with 37.7% in the first sixmonths of fiscal year 2007. The increase in the tax rate is primarilyattributable to changes in our state tax effective rate. As a result of thefactors discussed above, net income and diluted earnings per share for thefirst six months of fiscal year 2008 decreased 57.3% and 51.7%, respectively,compared to the prior year.

 

###### **Liquidity and Capital Resources**

 
| ** **                                  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **September 30,  2007** | ** ** | **September 24,  2006** | ** ** |
| Cash flow  provided by operating activities |       | $                       | 2,909,400  |   | $ | 9,377,500 |   |
| Cash flow used  in investing activities     |       | (4,304,600              | )          | (5,987,900 | ) |
| Cash flow used  in financing activities     |       | (390,300                | )          | (5,676,500 | ) |
| Net decrease in  cash and cash equivalents  |       | $                       | (1,785,500 | ) | $ | (2,286,900 | ) |

 

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We generated $2.9million of net cash from operating activities in the first six months of fiscalyear 2008 compared with $9.4 million in the first six months of fiscal year2007. In the first six months of fiscal year 2008, our cash inflow fromoperating activities was primarily driven by net income, net of certainnon-cash elements such as, deprecation and amortization and non-cash stockcompensation, as well as changes in working capital. The working capital changeconsisted of significant inventory purchases and increases to trade accountspayable as we prepare for the winter holiday season and increased stockedproduct offering, including wireless broadband products, as well as an increasein trade accounts receivable due to the timing of sales to our large tier-onecarrier customer.

 

Capitalexpenditures of $2.0 million in the first six months of fiscal year 2008 weredown slightly from expenditures of $2.1 million in the first six months offiscal year 2007. In both periods, capital expenditures primarily consisted ofinvestment in information technology and, in fiscal year 2007, trainingequipment.

 

OnApril 21, 2006, we acquired substantially all the non-cash net assets ofTerraWave Solutions, Ltd. and its commonly owned affiliate, GigaWaveTechnologies, Ltd. for an initial cash payment of approximately $3.8 million,and additional cash earn-out payments over a four-year period, contingent onthe achievement of certain minimum earnings thresholds ($1.5 million of the$3.8 million cash amount paid at closing is a non-refundable prepayment againstfuture earn-out payments, if any, amortizable over the four-year period). Tothe extent that certain minimum earnings thresholds are not achieved, we willnot be able to recover this prepayment. The maximum amount of contingent futureearn-out payments (after subtracting the $1.5 million prepayment) is $15.5million. Contingent payments made under the terms of the purchase agreement aretreated as an additional cost of the acquired businesses and additionalgoodwill has been and will continue to be recorded, if earnings targets areachieved. For the six month period ended September 30, 2007, approximately $1.7million was paid for additional earn-out payments based on the achievement ofcertain earnings thresholds in accordance with the terms of the purchaseagreement. As of September 30, 2007, there is no accrual for additionalearn-out payments, because applicable fiscal year 2008 targets have not beenmet as of September 30, 2007.

 

On July 2, 2007, we acquired the net assets and businessof NetForce Solutions, Inc. (NetForce), a provider of technical and salestraining solutions to wireless, telecommunications, and networking industries. Thepurchase included substantially all the non-cash business assets for an initialcash payment of approximately $650,000 and additional cash earn-out payments ofup to approximately $2.8 million over a four-year period, contingent on theachievement of certain earnings thresholds. As of September 30,2007, there is no accrual for additional earn-out payments, because applicablefiscal year 2008 targets have not been met as of September 30, 2007.

 

Net cash used forfinancing activities was $390,300 in the first six months of fiscal year 2008compared with a net cash outflow for financing activities of $5.7 million forthe first six months of fiscal year 2007. For fiscal year 2008 and fiscal year2007, our cash outflow from financing activities was primarily related totreasury stock purchases, partially offset by net borrowings on our revolvingline of credit. During the first six months of fiscal year 2008, we repurchased346,107 shares of our outstanding common stock pursuant to our stock buybackprogram, compared with 962,663 shares purchased during the first six months offiscal year 2007. From the beginning of our stock buyback program (the firstquarter of fiscal year 2004), through the end of the second quarter of fiscalyear 2008, a total of 2,140,974 shares have been purchased under this programfor approximately $28.3 million, or an average price of $13.20 per share. TheBoard of Directors has authorized the purchase of up to 2,395,567 shares in theaggregate, and therefore, 254,593 shares remained available to be purchased asof the end of the second quarter of fiscal year 2008. We expect to fund futurepurchases, if any, from working capital and/or our revolving credit facility. Notimetable has been set for the completion of this program.

 

We believe that ourexisting cash, payments from customers, and availability under our revolvingline of credit facility will be sufficient to support our operations for theforeseeable future. To minimize interest expense, our policy is to use excessavailable cash to pay down any balance on our revolving line of credit facility.In doing so, the balance on our revolving line of credit facility could increasedepending on our working capital and other cash needs. If we were to undertakean acquisition or other major capital purchases that require funds in excess ofits existing sources of liquidity, we would look to sources of funding fromadditional credit facilities, debt and/or equity issuances. There can be noassurances that such additional future sources of funding would be available onterms acceptable to us, if at all.  

 

We expect to see adecrease in net cash flow from operations during the third quarter of fiscalyear 2008. This is in part a result of the increase in inventory that occurredlate in the second quarter which will be paid during the third quarter, as wellas taking into account certain other payments that are expected to be made

 

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during the third quarteragainst existing accounts payable. These items are included among tradeaccounts payable as of September 30, 2007. We do, however, anticipate thisdecrease in accounts payable to be offset to some extent by anticipatedincreased net income (net of certain non-cash elements such as depreciation andamortization and non-cash stock compensation) and by anticipated cash collections.  There can be no assurances, however, whetheror to what extent these anticipated events will occur and, correspondingly, theextent of any increases.

 

On May 31, 2007,we replaced our previously existing $30 million revolving line of creditfacility with a new $50 million revolving line of credit facility with bothSunTrust Bank and Wachovia Bank, N.A. The previous facility was established inSeptember 2003 and had a term expiring in September 2007, was unsecured and hadprovided for monthly payments of interest accruing at a LIBOR rate plus anapplicable margin ranging from 1.5% to 2.0%. The new facility has a termexpiring May 2010, with interest payable monthly at the LIBOR rate plus anapplicable margin, which ranges from 1.25% to 2.75%. Like the replacedfacility, borrowing availability under this new facility is determined inaccordance with a borrowing base. This new facility includes financialcovenants, including a minimum tangible net worth, minimum cash flow coverageof debt service, and a maximum funded debt to EBITDA ratio. These financialcovenants also apply to the existing term loan secured by our Hunt Valley,Maryland facility. The new facility also limits our ability to engage incertain transactions or activities, including (but not limited to) investmentsand acquisitions, sales of assets, payment of dividends, issuance of additionaldebt and other matters. As of September 30, 2007, we had $45.6 millionavailable on our revolving line of credit facility.

 

On May 1, 2007, weentered into a Second Amendment of Agreement of Lease with Atrium Building LLC,which among other things, provided for an extension, from November 30, 2007 toDecember 31, 2012, of the lease term provided for under the Agreement of Lease,dated November 3, 2003, as previously amended January 23, 2007, under which welease approximately 94,000 square feet in Timonium, Maryland, where ourcorporate and administrative offices are located.  The rental rate rangesfrom $124,700 to $144,600 per month at the close of the extended term. Thecontractual cash obligations under this amendment as of September 30, 2007 are$748,400, $3,068,900, $3,255,800 and $1,267,700 for fiscal years 2008, 2009through 2010, 2011 through 2012, and thereafter, respectively.

 

On June 1, 2007,we entered into a Lease with MERRITT/BAVAR-VA, LLC under which we leaseapproximately 66,000 square feet of office and warehouse space in Hunt Valley,Maryland, adjacent to our Global Logistics Center, for a term beginning July 1,2007 and expiring September 30, 2011. The monthly rental fee ranges from$35,700 to $38,500 throughout the lease term. The contractual cash obligationsunder this agreement as of September 30, 2007 are $214,300, $882,300 and$611,700 for fiscal years 2008, 2009 through 2010, and 2011 through 2012,respectively.

 

###### **Recent Accounting Pronouncements**

###### ** **

EffectiveApril 2, 2007, we adopted Financial Accounting Standards Board (FASB)Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”  FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interestand penalties, accounting in interim periods, disclosure and transition. As a result of the adoption of FIN 48, werecognized a $72,100 decrease in beginning retained earnings as of April 2,2007. As of April 2, 2007, we had total gross unrecognized tax benefits ofapproximately $319,000, all of which, if recognized, would favorably affect theeffective income tax rate in future periods.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standard (SFAS) No. 157, “Fair Value Measurements,” whichprovides guidance for using fair value to measure assets and liabilities. Thestandard also responds to investors’ requests for expanded information aboutthe extent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings. The standard applies whenever other standards require(or permit) assets or liabilities to be measured at fair value. The standarddoes not expand the use of fair value in any new circumstances. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. We are reviewing SFAS No. 157 to determinethe impact of adoption on our financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115.”  SFAS No. 159 permitsan entity to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. Entities thatelect the fair value option will report unrealized gains and losses in earningsat each subsequent reporting date. SFAS No. 159

 

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is effective for fiscal years beginning after November 15, 2007. We arereviewing SFAS No. 159 to determine the impact of adoption on our financialstatements.

 

###### **Critical Accounting Policies and Estimates**

###### ** **

Our discussion andanalysis of our financial condition and results of our operations are based onour unaudited consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities,revenues and expenses and related disclosure of contingent assets andliabilities.  Actual results may differ from these estimates underdifferent assumptions or conditions.

 

For a detaileddiscussion on our critical accounting policies, please refer to our AnnualReport on Form 10-K for the fiscal year ended April 1, 2007.

 

###### **Off-Balance Sheet Arrangements**

###### ** **

We have no material off-balance sheet arrangements.

 

## **Forward-LookingStatements**

## ** **

This Report maycontain forward-looking statements. These forward-looking statements maygenerally be identified by the use of the words “may,” “will,” “expects,” “anticipates,”“believes,” “estimates,” and similar expressions, but the absence of thesewords or phrases does not necessarily mean that a statement is not forwardlooking. Forward looking statements involve a number of risks anduncertainties. Our actual results may differ materially from those described inor contemplated by any such forward-looking statement for a variety of reasons,including those risks identified in our most recent Annual Report on Form 10-Kand other periodic reports filed with the Securities and Exchange Commission,under the heading “Risk Factors” and otherwise. Consequently, the reader iscautioned to consider all forward-looking statements in light of the risks towhich they are subject.

 

We are not able toidentify or control all circumstances that could occur in the future that mayadversely affect our business and operating results. Without limiting the risksthat we describe in our periodic reports and elsewhere, among the risks thatcould lead to a materially adverse impact on our business or operating resultsare the following: termination or non-renewal of limited duration agreements orarrangements with our vendors and affinity partners which are typicallyterminable by either party upon several months notice; loss of significantcustomers or relationships, including affinity relationships; loss of customerseither directly or indirectly as a result of consolidation among large wirelessservice carriers and others within the wireless communications industry; thestrength of the customers’, vendors’ and affinity partners’ business; economicconditions that may impact customers’ ability to fund or pay for the purchaseof our products and services, including credit risk; our dependence on arelatively small number of suppliers and vendors, which could hamper ourability to maintain appropriate inventory levels and meet customer demand;failure of our information technology system or distribution system; technologychanges in the wireless communications industry, which could lead tosignificant inventory obsolescence and/or our inability to offer key productsthat our customers demand; third-party freight carrier interruption; increasedcompetition from competitors, including manufacturers or national and regionaldistributors of the products we sell and the absence of significant barriers toentry which could result in pricing and other pressures on profitability and marketshare; our inability to access capital and obtain financing as and when needed;transitional and other risks associated with acquisitions of companies that wemay undertake in an effort to expand our business; the possibility that, forunforeseen reasons, we may be delayed in entering into or performing, or mayfail to enter into or perform, anticipated contracts or may otherwise bedelayed in realizing or fail to realize anticipated revenues or anticipatedsavings; our inability to protect certain intellectual property, includingsystems and technologies on which we rely; and our inability to hire or retainfor any reason our key professionals, management and staff.

 

## **AvailableInformation**

## ** **

Our Internet Website address is: www.tessco.com. We make available free of charge through ourWeb site, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicableafter such documents

 

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are electronicallyfiled with, or furnished to, the Securities and Exchange Commission. Alsoavailable on our Web site is our Code of Business Conduct and Ethics.

 

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk.**

 

In October2005, we entered into an interest rate swap agreement on our existing bank termloan. We believe our exposure to market risks, including exchange rate risk,interest rate risk and commodity price risk, is not material at the presenttime.

 

###### **Item 4. Controls andProcedures.**

###### ** **

The Company’s ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO) have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (Exchange Act)) as of the end of the period covered by thisquarterly report. A control system, no matter how well designed and operated,can provide only reasonable, not absolute, assurance that the control system’sobjectives will be met. Based on the evaluation of these controls andprocedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, theCompany’s management, including the CEO and CFO, have concluded that, as of theend of the period covered by this quarterly report, the Company’s disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation required to be disclosed by the Company in reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms and to provide reasonable assurance that such information isaccumulated and communicated to the Company’s management, including the Company’sCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure. During the period covered by this quarterly report, there have beenno changes to the Company’s internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**Part II. Other Information**

 

**Item 1. LegalProceedings.**

 

Lawsuits and claimsare filed against us from time to time in the ordinary course of business. Wedo not believe that any lawsuits or claims currently pending against theCompany, individually or in the aggregate, are material, or will have amaterial adverse affect on our financial condition or results of operations.

 

**Item 1A. RiskFactors.**

 

There were no materialchanges in the risk factors previously disclosed in the Company’s Annual Reporton Form 10-K for the fiscal year ended April 1, 2007.

 

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###### **Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

###### ** **

The followingtable sets forth information with respect to purchases of TESSCO common stockby the Company or any affiliated purchasers during the second quarter of fiscalyear 2008.

 

**IssuerPurchases of Equity Securities**

 
| **Period (1)**                                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs (2)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| July 2, 2007  through July 29, 2007           |       | —                                  |       | $                                   | N/A        |                                                                                     | —     |                                                                                       | 600,700    |   |
| July 30, 2007  through September 2, 2007      |       | 342,662                                 |       | 13.95                               |       | 342,662                                                                                  |       | 258,038                                                                                    |       |
| September 3,  2007 through September 30, 2007 |       | 3,445                                   |       | 15.26                               |       | 3,445                                                                                    |       | 254,593                                                                                    |       |
| Total                                         |       | 346,107                                 |       | $                                   | 13.96      |                                                                                     | 346,107    |                                                                                       | 254,593    |   |

 

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(1)          Periods indicatedare fiscal accounting months for the second quarter of fiscal year 2008.

(2)          Values are as ofthe end of the fiscal accounting month or quarter, as applicable.

 

On April 28, 2003,our Board of Directors announced a stock buyback program and authorized thepurchase of up to 675,000 shares of our common stock pursuant to the program. OnOctober 20, 2005 and July 17, 2006, our Board of Directors amended the programand authorized the purchase of an additional 675,000 and 600,000 shares,respectively, of outstanding common stock. On July 26, 2007 and August 14,2007, our Board of Directors authorized the purchase of an additional 144,867and 300,700 shares, respectively, of outstanding common stock under the stockbuyback program. After accounting for the actions of the Board of Directors inauthorizing the purchase of the additional shares, a total of 2,395,567 shareshave been authorized for repurchase. During the second quarter of 2008, theCompany repurchased 346,107 shares of its common stock for approximately $4.8million. All shares repurchased during the second quarter of fiscal year 2008were repurchased under this program. As of September 30, 2007, we had purchasedan aggregate of 2,140,974 shares of our outstanding common stock pursuant tothis program for approximately $28.3 million, or an average price of $13.20 pershare. Accordingly, as of September 30, 2007, 254,593 shares remained availablefor repurchase. Shares may be purchased from time to time under this program inthe open market, by block purchase, or through negotiated transactions, orpossibly other transactions managed by broker-dealers. No timetable has beenset for completion of the program.

 

###### **Item 3. Defaults UponSenior Securities.**

###### ** **

None.

 

###### **Item 4. Submission ofMatters to a Vote of Security Holders.**

###### ** **

Theinformation regarding the submission of matters to a vote of security holders,set forth on page 19 of the Company’s quarterly report on Form 10-Q for thefiscal quarter ended July 1, 2007, filed with the SEC on August 15, 2007, isincorporated herein by reference.

 

###### **Item 5. OtherInformation.**

###### ** **

None.

 

###### **Item 6. Exhibits.**

###### ** **

(A)            EXHIBITS:

 
| 31.1 |   | Rule 15d-14(a)  Certification of Robert B. Barnhill, Jr., Chief Executive Officer. |
|------|--------|------------------------------------------------------------------------------------|
| 31.2 |   | Rule 15d-14(a)  Certification of David M. Young, Chief Financial Officer.          |
| 32.1 |   | Section 1350 Certification of Robert B. Barnhill,  Jr., Chief Executive Officer.   |
| 32.2 |   | Section 1350 Certification of David M. Young, Chief  Financial Officer.            |

 

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**Signature**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                    | TESSCO  TECHNOLOGIES INCORPORATED             |
|-------------------------|-----------------------------------------------|
|                    |                                          |
|                    |                                          |
| Date: November 14, 2007 | By:                                           | /s/ David M. Young |   |
|                    | David  M. Young                               |
|                    | Chief Financial Officer                       |
|                    | (principal  financial and accounting officer) |

 

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