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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 26, 2010**

 

**or**

 

** ̈****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to          **

 

**Commission File Number:0-24746**

 

**TESSCO TECHNOLOGIES INCORPORATED**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **52-0729657**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (I.R.S Employer

Identification No.) |
|                                                            |       |                                 |
| **11126 McCormick Road, Hunt  Valley, Maryland**                | ** ** | **21031**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

**(410) 229-1000**

(Registrant’s telephone number, including areacode)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrantsubmitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

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

 

The number of shares of the registrant’s Common Stock,$0.01 par value per share, outstanding as of October 29, 2010, was7,542,064.

 

 

 

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**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 Disclosure 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.                    | (Removed and  Reserved)                                                                      |   |
|             |                       |                                                                                         |   |
|             | Item 5.                    | Other Information.                                                                           |   |
|             |                       |                                                                                         |   |
|             | Item  6.                   | Exhibits.                                                                                    |   |
|             |                       |                                                                                         |   |
|             | Signatures                 | ** **                                                                                   | ** ** |

 

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**PART I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements.**

 

**TESSCO TECHNOLOGIES INCORPORATED**

**Consolidated Balance Sheets**

 
| ** **                                        | ** ** | **September 26,********2010** | ** **  | **March 28,********2010** | ** ** |
|---------------------------------------------------|------------|------------------------------------|-------------|--------------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**                    | ** **  | ** **                     | ** ** |
| **ASSETS**                                        |       |                               |        |                           |       |
|                                              |       |                               |        |                           |       |
| Current  assets:                                  |       |                               |        |                           |       |
| Cash  and cash equivalents                        |       | $                                  | 482,100     |                           | $          | 7,658,700 |   |
| Trade  accounts receivable, net                   |       | 83,753,800                         |        | 60,675,000                     |       |
| Product  inventory, net                           |       | 57,577,300                         |        | 44,991,500                     |       |
| Deferred  tax assets                              |       | 4,615,000                          |        | 4,615,000                      |       |
| Prepaid  expenses and other current assets        |       | 3,210,600                          |        | 1,597,000                      |       |
| Total  current assets                             |       | 149,638,800                        |        | 119,537,200                    |       |
|                                              |       |                               |        |                           |       |
| Property  and equipment, net                      |       | 21,394,800                         |        | 20,679,900                     |       |
| Goodwill,  net                                    |       | 11,684,700                         |        | 9,017,700                      |       |
| Other  long-term assets                           |       | 1,999,600                          |        | 2,111,900                      |       |
| Total  assets                                     |       | $                                  | 184,717,900 |                           | $          | 151,346,700 |   |
|                                              |       |                               |        |                           |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**    |       |                               |        |                           |       |
|                                              |       |                               |        |                           |       |
| Current  liabilities:                             |       |                               |        |                           |       |
| Trade  accounts payable                           |       | $                                  | 90,025,800  |                           | $          | 59,548,900 |   |
| Payroll,  benefits and taxes                      |       | 6,094,800                          |        | 8,974,200                      |       |
| Income  and sales tax liabilities                 |       | 3,663,000                          |        | 2,528,000                      |       |
| Accrued  expenses and other current liabilities   |       | 1,495,600                          |        | 1,312,900                      |       |
| Current  portion of long-term debt                |       | 382,100                            |        | 380,000                        |       |
| Total  current liabilities                        |       | 101,661,300                        |        | 72,744,000                     |       |
|                                              |       |                               |        |                           |       |
| Deferred  tax liabilities                         |       | 3,650,800                          |        | 3,650,800                      |       |
| Long-term  debt, net of current portion           |       | 3,094,600                          |        | 3,328,000                      |       |
| Other  long-term liabilities                      |       | 1,618,500                          |        | 1,978,700                      |       |
| Total  liabilities                                |       | 110,025,200                        |        | 81,701,500                     |       |
|                                              |       |                               |        |                           |       |
| Commitments  and Contingencies                    |       |                               |        |                           |       |
|                                              |       |                               |        |                           |       |
| Shareholders’  equity:                       |       |                               |        |                           |       |
| Preferred  stock                                  |       | —                             |        | —                         |       |
| Common  stock                                     |       | 83,400                             |        | 81,500                         |       |
| Additional  paid-in capital                       |       | 39,279,200                         |        | 36,937,700                     |       |
| Treasury  stock                                   |       | (44,051,900                        | )           | (42,819,400                    | )          |
| Retained  earnings                                |       | 79,449,800                         |        | 75,543,000                     |       |
| Accumulated  other comprehensive loss, net of tax |       | (67,800                            | )           | (97,600                        | )          |
| Total  shareholders’ equity                  |       | 74,692,700                         |        | 69,645,200                     |       |
| Total  liabilities and shareholders’ equity  |       | $                                  | 184,717,900 |                           | $          | 151,346,700 |   |

 

See accompanyingnotes.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**UnauditedConsolidated Statements of Income**

 
| ** **                                    | ** ** | **Fiscal Quarters Ended** | ** **  | **Six Months Ended**     | ** ** |
|-----------------------------------------------|------------|-------------------------------------|-------------|------------------------------------|------------|
| ** **                                    | ** ** | **September 26,********2010**  | ** **  | **September 27,********2009** | ** ** | **September 26,********2010** | ** ** | **September 27,********2009** | ** ** |
|                                          |       |                                |        |                               |       |   |   |   |   |
| Revenues                                      |       | $                                   | 165,026,400 |                               | $          | 132,953,700 |   | $ | 306,979,000 |   | $ | 241,755,000 |   |
| Cost  of goods sold                           |       | 128,256,400                         |        | 101,340,200                        |       | 237,859,200 |   | 181,125,900 |   |
| Gross  profit                                 |       | 36,770,000                          |        | 31,613,500                         |       | 69,119,800 |   | 60,629,100 |   |
| Selling,  general and administrative expenses |       | 31,203,600                          |        | 27,322,300                         |       | 60,115,300 |   | 53,083,700 |   |
| Income  from operations                       |       | 5,566,400                           |        | 4,291,200                          |       | 9,004,500 |   | 7,545,400 |   |
| Interest,  net                                |       | 129,800                             |        | 76,300                             |       | 207,600 |   | 185,600 |   |
| Income  before provision for income taxes     |       | 5,436,600                           |        | 4,214,900                          |       | 8,796,900 |   | 7,359,800 |   |
| Provision  for income taxes                   |       | 2,090,900                           |        | 1,622,400                          |       | 3,381,700 |   | 2,855,200 |   |
| Net  income                                   |       | $                                   | 3,345,700   |                               | $          | 2,592,500 |   | $ | 5,415,200 |   | $ | 4,504,600 |   |
| Basic  earnings per share                     |       | $                                   | 0.44        |                               | $          | 0.35 |   | $ | 0.72 |   | $ | 0.61 |   |
| Diluted  earnings per share                   |       | $                                   | 0.43        |                               | $          | 0.34 |   | $ | 0.69 |   | $ | 0.59 |   |
|                                          |       |                                |        |                               |       |   |   |   |   |
| Cash  dividends declared per common share     |       | $                                   | 0.10        |                               | $          | 0.07 |   | $ | 0.20 |   | $ | 0.07 |   |

 

See accompanyingnotes.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**UnauditedConsolidated Statements of Cash Flows**

 
| ** **                                                                                                       | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 26,  2010**   | ** ** | **September 27,  2009** | ** ** |
|                                                                                                             |       |                           |       |   |   |
| Cash  flows from operating activities:                                                                           |       |                           |       |   |   |
| Net  income                                                                                                      |       | $                              | 5,415,200  |   | $ | 4,504,600 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                               |       |                           |       |   |   |
| Depreciation  and amortization                                                                                   |       | 2,098,800                      |       | 2,024,300 |   |
| Non-cash  stock compensation expense                                                                             |       | 1,363,100                      |       | 1,151,800 |   |
| Deferred  income taxes and other                                                                                 |       | (276,900                       | )          | 948,200 |   |
| Change  in trade accounts receivable                                                                             |       | (23,078,800                    | )          | (12,564,900 | ) |
| Change  in product inventory                                                                                     |       | (12,585,800                    | )          | (12,969,200 | ) |
| Change  in prepaid expenses and other current assets                                                             |       | (1,613,600                     | )          | 263,400 |   |
| Change  in trade accounts payable                                                                                |       | 30,661,900                     |       | 26,395,700 |   |
| Change  in payroll, benefits and taxes                                                                           |       | (2,879,400                     | )          | (81,500 | ) |
| Change  in income and sales tax liabilities                                                                      |       | 1,135,000                      |       | 867,300 |   |
| Change  in accrued expenses and other current liabilities                                                        |       | 337,800                        |       | 1,426,200 |   |
| Net  cash provided by operating activities                                                                       |       | 577,300                        |       | 11,965,900 |   |
|                                                                                                             |       |                           |       |   |   |
| Cash  flows from investing activities:                                                                           |       |                           |       |   |   |
| Purchases  of property and equipment                                                                             |       | (2,754,900                     | )          | (917,800 | ) |
| Additional  earn-out payments on acquired businesses                                                             |       | (2,852,000                     | )          | (2,382,000 | ) |
| Net  cash used in investing activities                                                                           |       | (5,606,900                     | )          | (3,299,800 | ) |
|                                                                                                             |       |                           |       |   |   |
| Cash  flows from financing activities:                                                                           |       |                           |       |   |   |
| Payments  on long-term debt                                                                                      |       | (231,300                       | )          | (191,100 | ) |
| Proceeds  from debt issuance                                                                                     |       | —                         |       | 250,000 |   |
| Proceeds  from issuance of stock                                                                                 |       | 73,600                         |       | 57,600 |   |
| Cash  dividends paid                                                                                             |       | (1,508,400                     | )          | (491,800 | ) |
| Purchases  of treasury stock and repurchases of stock from employees and directors for  minimum tax withholdings |       | (1,232,500                     | )          | (101,800 | ) |
| Debt  issue costs                                                                                                |       | —                         |       | (175,000 | ) |
| Excess  tax benefit (loss) from stock-based compensation                                                         |       | 751,600                        |       | (220,800 | ) |
| Net  cash used in financing activities                                                                           |       | (2,147,000                     | )          | (872,900 | ) |
|                                                                                                             |       |                           |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                            |       | (7,176,600                     | )          | 7,793,200 |   |
|                                                                                                             |       |                           |       |   |   |
| Cash  and cash equivalents, beginning of period                                                                  |       | 7,658,700                      |       | 599,800 |   |
|                                                                                                             |       |                           |       |   |   |
| Cash  and cash equivalents, end of period                                                                        |       | $                              | 482,100    |   | $ | 8,393,000 |   |

 

See accompanying notes.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**Notes to Unaudited Consolidated Financial Statements**

**September 26, 2010**

 

**Note 1. Description ofBusiness and Basis of Presentation**

 

TESSCO TechnologiesIncorporated, a Delaware corporation (TESSCO, we, or the Company), architectsand delivers innovative product and value chain solutions, at lower costs, tosupport wireless 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. Over 99% of the Company’s sales are made in UnitedStates Dollars.

 

In management’s opinion, theaccompanying interim consolidated financial statements of the Company includeall adjustments, consisting only of normal, recurring adjustments, necessaryfor a fair presentation of the Company’s financial position for the interimperiods presented. These statements are presented in accordance with the rules andregulations of the United States Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures normally included in the Company’sannual financial statements have been omitted from these statements, as permittedunder the applicable rules and regulations. The results of operationspresented in the accompanying interim consolidated financial statements are notnecessarily representative of operations for an entire year. The informationincluded in this Form 10-Q should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended March 28, 2010.

 

**Note 2. Recently IssuedAccounting Pronouncements**

 

In January 2010, the FASB issued updatedaccounting guidance related to fair value measurements and disclosures whichrequires a number of additional disclosures regarding fair value measurements,including the amount of transfers between Levels 1 and 2 of the fair valuehierarchy, the reasons for transfers in or out of Level 3 of the fair valuehierarchy and activity for recurring Level 3 measures. In addition, theamendment clarifies certain existing disclosure requirements related to thelevel at which fair value disclosures should be disaggregated and therequirement to provide disclosures about the valuation techniques and inputsused in determining the fair value of assets or liabilities classified asLevels 2 or 3. The standard is effective for interim and annual reportingperiods beginning after December 15, 2009, except for the disclosuresabout purchases, sales, issuances and settlements in the roll forward ofactivity in Level 3 fair value measurements, which is effective for fiscalyears beginning after December 15, 2010 with early adoption permitted. Theadoption of the standard update did not have a material impact on the Company’sconsolidated financial statements.

 

**Note 3. Stock Split Effectedin the Form of a Dividend**

 

On May 26, 2010, the Company issued a stockdividend in order to effect a three-for-two stock split of the Company’s commonstock. All share and earnings per share numbers prior to the May 26, 2010stock split (including without limitation all share and share-related numbersincluded in Notes 4, 6 and 10 below) have been retroactively restated toreflect the stock dividend for all periods presented. The number of authorizedshares remains at 15,000,000.

 

**Note 4. Stock Compensation**

 

The Company’s selling,general and administrative expenses for the fiscal quarter and six months endedSeptember 26, 2010 includes $805,900 and $1,363,100, respectively, ofnon-cash stock compensation expense. The Company’s selling, general andadministrative expenses for the fiscal quarter and six months ended September 27,2009 includes $596,300 and $1,151,800, respectively, of non-cash stockcompensation expense. Stock compensation expense is primarily related to ourPerformance Stock Unit (PSU) Program. In addition, the Company recorded anexcess tax benefit (loss) directly to shareholders’ equity of $751,600 and($220,800), primarily related to the PSUs which vested during the six monthsended September 26, 2010 and September 27, 2009, respectively.

 

**Performance Stock Units:**The following table summarizes the activityunder the Company’s PSU program for the first six months of fiscal year 2011:

 

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| ** **                                                                         | ** ** | **Six Months Ended  September 26, 2010** | ** ** | **Weighted Average  Fair Value at Grant  Date** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Shares available for issue  under outstanding PSUs, non-vested beginning of period |       | 679,627                                                      |       | $                                                                   | 6.75       |   |
| Granted                                                                            |       | 274,500                                                      |       | 16.00                                                               |       |
| Vested                                                                             |       | (238,163                                                     | )          | 7.24                                                                |       |
| Forfeited/cancelled                                                                |       | (12,375                                                      | )          | 6.47                                                                |       |
| Shares available for issue  under outstanding PSUs, non-vested end of period       |       | 703,589                                                      |       | $                                                                   | 10.19      |   |

 

Of the 703,589 shares available for issuance underoutstanding PSUs, but not yet vested as of September 26, 2010, 429,840shares have been earned, and assuming the respective participants remainemployed by or associated with the Company on these dates, these shares willvest and be issued ratably on or about May 1 of 2011, 2012 and 2013.

 

The PSUs cancelled during fiscal year 2011 primarilyrelated to the fiscal year 2010 grant of PSUs, which had a 1-year measurementperiod (fiscal year 2010). Of the PSUs cancelled, PSUs covering 10,500 shareswere cancelled because the applicable individual fiscal 2010 performancetargets were not fully satisfied for certain non-director employeeparticipants. In addition, 1,125 non-vested shares related to the fiscal year2010 grant of PSUs were forfeited and 750 shares related to the fiscal year2011 grant of PSUs were cancelled due to a participant no longer being employedby the Company. Per the provisions of the Second Amended and Restated 1994Stock and Incentive Plan (the “1994 Plan”), the shares related to these PSUswere added back to the 1994 Plan and became available for future issuance.

 

During fiscal year 2011, the Compensation Committee ofthe Board of Directors, with the concurrence of the full Board of Directors,granted additional PSUs to select key individuals and directors, providing themwith the opportunity to earn up to 274,500 additional shares of the Company’scommon stock in the aggregate (of which 750 PSUs have since been cancelled dueto a participant no longer being employed by the Company), depending uponwhether certain threshold or goal earnings per share targets are met, subjectto individual performance for employees (independent directors are not subjectto individual performance factors). These PSUs have only one measurement year(fiscal year 2011), with any shares earned at the end of fiscal year 2011 tovest and be issued 25% on or about May 1 of each of 2011, 2012, 2013 and2014, provided that the respective participants remain employed by orassociated with the Company on each such date.

 

If the maximum target of PSUs granted in fiscal year2011 is assumed to be earned, total unrecognized compensation costs on theseand all other earned but unvested PSU’s would be approximately $3.7 million asof September 26, 2010 and would be expensed through fiscal year 2014.

 

**Stock Options:** In accordance with the FASB standardregarding stock compensation and share-based payments, the fair value of theCompany’s stock options has been determined using the Black-Scholes-Mertonoption pricing model, based upon facts and assumptions existing at the date ofgrant. Outstanding stock options have exercise prices equal to the market priceof the Company’s common stock on the grant date.

 

The fair value of eachoption at the date of grant is amortized as compensation expense over theoption service or vesting period. This occurs without regard to subsequentchanges in stock price, volatility or interest rates over time, provided thatthe option remains outstanding. As of September 26, 2010, all outstandingstock options are fully vested. The following table summarizes the pertinentoption information for outstanding options for the six months ended September 26,2010:

 
| ** **                                  | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding, beginning of  period           |       | 180,000    |       | $                                              | 5.26       |   |
| Granted                                     |       | —     |       | —                                         |       |
| Exercised                                   |       | —     |       | —                                         |       |
| Cancelled                                   |       | —     |       | —                                         |       |
| Outstanding and  exercisable, end of period |       | 180,000    |       | 5.26                                           |       |
|                                             |            |            |            |                                                |            |  |

 

**Restricted Stock:** In fiscal year 2007, the Company granted225,000 shares of the Company’s common stock to its Chairman and ChiefExecutive Officer as a restricted stock award under the 1994 Plan. These sharesvest ratably over ten

 

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fiscal years based onservice, beginning on the last day of fiscal year 2007 and ending on the lastday of fiscal year 2016, subject, however, to the terms applicable to theaward, including terms providing for possible acceleration of vesting upondeath, disability, change in control or certain other events. The weightedaverage fair value for these shares at the grant date was $10.56. As of September 26,2010, 135,000 shares remain unvested and there was no activity related to theserestricted shares during the first six months of fiscal year 2011. As of September 26,2010, there was approximately $1.3 million of total unrecognized compensationcosts related to this issuance of restricted stock. Unrecognized compensationcosts are expected to be recognized ratably over a period of approximately sixyears. Also in fiscal year 2011, restricted stock units covering 22,500 shareswere issued to various non-executive employees. These shares vest on the lastday of fiscal year 2014, provided the employees are still employed by theCompany on that date. The weighted average fair value for these shares at thegrant date was $16.13. As of September 26, 2010, there was approximately$0.2 million of total unrecognized compensation costs related to this issuanceof restricted stock. Unrecognized compensation costs are expected to berecognized ratably over a period of approximately four years. No other sharesof restricted stock are currently issued as awards under the 1994 Plan.

 

**Note 5. Fair Value ofFinancial Instruments**

 

The Company complies with the FASB standard regardingfair value measurement and disclosure requirements for assets and liabilitiescarried at fair value.  Accordingly,assets and liabilities carried at fair value are classified and disclosed inone of the following three categories:

 

·                  Level 1: Quoted prices (unadjusted) in active markets for identicalassets or liabilities.

·                  Level 2: Inputs other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly or indirectly. Theseinclude quoted prices for similar assets or liabilities in active markets, andquoted prices for identical or similar assets or liabilities in markets thatare not active.

·                  Level 3: Unobservable inputs for the asset or liability that reflect thereporting entity’s own assumptions about the inputs used in pricing the assetor liability.

 

The following table presents information about assetsand liabilities recorded at fair value on the Company’s Consolidated BalanceSheet:

 
| ** **                                | ** ** | **Balance at  September 26,  2010** | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets********(Level 1)** | ** ** | **Significant  Other  Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                                      |       |                                          |       |                                                                                                  |       |                                                             |       |                                                        |       |
| **Liabilities:**                          |       |                                          |       |                                                                                                  |       |                                                             |       |                                                        |       |
| Interest rate swap  agreement, net of tax |       | $                                             | 67,800     |                                                                                                  | $          | —                                                           |       | $                                                           | 67,800     |   | $ | — |   |
| Total liabilities at fair  value          |       | $                                             | 67,800     |                                                                                                  | $          | —                                                           |       | $                                                           | 67,800     |   | $ | — |   |

 

On October 1,2005, the Company entered into a receive variable/pay fixed interest rate swapon a total notional amount of $4.2 million with Wachovia Bank, NationalAssociation to avoid the risks associated with fluctuating interest rates onthe Company’s existing term loan, which bears interest at a floating rate ofLIBOR plus 1.75%, and to eliminate the variability in the cash outflow forinterest payments. The interest rate swap agreement locks the interest rate forthe outstanding principal balance of the loan at 6.38% through June 30,2011. The Company anticipates retaining at least some portion of the interestrate swap agreement whose notional amount outstanding amortizes down over theperiod of the interest rate swap at a rate which matches the Company’s debtprincipal payments throughout the period of the term loan. As such, no amountof the loss on the agreement, currently recorded in other comprehensive income(loss), has been, or is anticipated to be reclassified into earnings. There wasno payment due or received at inception of the swap. No hedge ineffectivenesswill be recognized as the interest rate swap’s provisions match the applicableprovisions of the term bank loan. This cash flow hedge qualified for hedgeaccounting using the short-cut method since the swap terms match the criticalterms of the hedged debt. The Company’s fair value of its interest rate swap isderived from valuation models commonly used for derivatives. Valuation modelsrequire a variety of inputs, including contractual terms, market fixed prices,inputs from forward price yield curves, notional quantities, measures of volatilityand correlations of such inputs. The Company’s derivatives trade in liquidmarkets, and as such, model inputs can generally be verified and do not involvesignificant management judgment.

 

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The carrying amounts of cash and cash equivalents,trade accounts receivable, product inventory, trade accounts payable, accruedexpenses and other current liabilities approximate their fair values as of September 26,2010 and March 28, 2010 due to their short term nature.

 

Fair value of long-term debt, calculated using currentinterest rates and future principal payments, as of September 26, 2010 andMarch 28, 2010 is estimated as follows:

 
| ** **                                                     | ** ** | **September 26, 2010** | ** ** | **March 28, 2010** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                     | ** ** | **Carrying  Amount**             | ** ** | **Fair********Value**        | ** ** | **Carrying  Amount** | ** ** | **Fair********Value** | ** ** |
| Note payable to a Bank                                         |       | $                                | 3,112,500  |                         | $          | 3,050,400 |   | $ | 3,225,000 |   | $ | 3,121,000 |   |
| Note payable to the  Maryland EconomicDevelopment  Corporation |       | $                                | 146,700    |                         | $          | 144,200 |   | $ | 253,900 |   | $ | 248,100 |   |
| Note payable to Baltimore  County                              |       | $                                | 217,500    |                         | $          | 192,900 |   | $ | 229,100 |   | $ | 201,900 |   |

 

**Note 6. Earnings Per Share**

 

Effective March 30,2009, the Company complied with the FASB standard regarding the accounting forparticipating securities. The standard requires the Company to use thetwo-class method to calculate earnings per share. Under the two-class method,earnings per common share are computed by dividing the sum of the distributedearnings to common shareholders and undistributed earnings allocated to commonshareholders by the weighted average number of common shares outstanding forthe period. In applying the two-class method, undistributed earnings areallocated to both common shares and participating securities based on theweighted average shares outstanding during the period.

 

The following table presentsthe calculation of basic and diluted earnings per common share:

 
| ** **                                                                       | ** ** | **Fiscal Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| **Amounts in thousands, expect per share amounts** | ** ** | **September 26,  2010**       | ** ** | **September 27,  2009**   | ** ** | **September 26,  2010** | ** ** | **September 27,  2009** | ** ** |
| Earnings  per share — Basic:                                                |       |                               |       |                           |       |   |   |   |   |
| Net  earnings                                                                    |       | $                                  | 3,346      |                           | $          | 2,593 |   | $ | 5,415 |   | $ | 4,505 |   |
| Less:  Distributed and undistributed earnings allocated tononvested stock        |       | (60                                | )          | (56                            | )          | (97 | ) | (97 | ) |
| Earnings  available to common shareholders — Basic                          |       | $                                  | 3,286      |                           | $          | 2,537 |   | $ | 5,318 |   | $ | 4,408 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Weighted  average common shares outstanding — Basic                         |       | 7,396                              |       | 7,211                          |       | 7,390 |   | 7,188 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Earnings  per common share — Basic                                          |       | $                                  | 0.44       |                           | $          | 0.35 |   | $ | 0.72 |   | $ | 0.61 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Earnings  per share — Diluted:                                              |       |                               |       |                           |       |   |   |   |   |
| Net  earnings                                                                    |       | $                                  | 3,346      |                           | $          | 2,593 |   | $ | 5,415 |   | $ | 4,505 |   |
| Less:  Distributed and undistributed earnings allocated tononvested stock        |       | (58                                | )          | (54                            | )          | (80 | ) | (94 | ) |
| Earnings  available to common shareholders — Diluted                        |       | $                                  | 3,288      |                           | $          | 2,539 |   | $ | 5,335 |   | $ | 4,411 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Weighted  average common shares outstanding — Basic                         |       | 7,396                              |       | 7,211                          |       | 7,390 |   | 7,188 |   |
| Effect  of dilutive options                                                      |       | 321                                |       | 257                            |       | 347 |   | 238 |   |
| Weighted  average common shares outstanding — Diluted                       |       | 7,717                              |       | 7,468                          |       | 7,737 |   | 7,426 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Earnings  per common share — Diluted                                        |       | $                                  | 0.43       |                           | $          | 0.34 |   | $ | 0.69 |   | $ | 0.59 |   |
|                                                                             |       |                               |       |                           |       |   |   |   |   |
| Anti-dilutive  equity awards not included above                                  |       | —                             |       | —                         |       | — |   | — |   |

 

**Note 7. Business Segments**

 

The Company evaluatesrevenue, gross profit and inventory in three business segments: (1) Network infrastructure products are used to build, repair and upgradewireless telecommunications, computing and Internet networks. Products includebase station antennas, cable and transmission lines, fixed and mobile broadbandequipment, wireless local area

 

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network (WLAN) products, wireless networking,filtering systems, small towers, lightning protection devices, connectors,security and surveillance products, power systems and miscellaneous hardware.Our network infrastructure service offering includes connector installation,custom jumper assembly, filter product tuning, site kitting, logisticsintegration and wireless network training. (2) Mobile devices andaccessory products include cellular phone and data device accessories such asreplacement batteries, cases, speakers, mobile amplifiers, power supplies, headsets,mounts, car antennas, music accessories and data and memory cards as well astwo-way radios and related accessories. Retail merchandising displays,promotional programs, customized order fulfillment services andaffinity-marketing programs, including providing outsourced call centers andprivate label Internet sites, complement our mobile devices and accessoryproduct offering. (3) Installation, test and maintenance products are usedto install, tune, maintain and repair wireless communications equipment.Products include sophisticated analysis equipment and various frequency-,voltage- and power-measuring devices, as well as an assortment of tools,hardware, GPS, safety and replacement and component parts and supplies requiredby service technicians. Within themobile devices and accessories line of business, the Company sells to bothcommercial and consumer markets. The network infrastructure and installation,test and maintenance lines of business sell primarily to commercial markets.The Company also regularly reviews its results of operations in threecommercial customer categories and the consumer customer category, as describedfurther below:

 

·                  Commercial Public Carriers and NetworkOperators.Public carriers and network operators include systems operators that aregenerally responsible for building and maintaining the infrastructure systemand provide airtime service to individual subscribers.

 

·                  Commercial Resellers. Resellers include dealers and resellers thatsell, install and/or service cellular telephone, wireless networking, broadband andtwo-way radio communications equipment primarily for the enterprise market, andto a lesser extent, the consumer market. These resellers include local andnational value-added resellers and retailers, as well as sales and installationcenters operated by cellular and paging carriers.

 

·                  Commercial Self-Maintained Users andGovernments.Self-maintained user (SMU) and government customers include commercial entitiessuch as major utilities and transportation companies, federal agencies andstate and local governments.

 

·                  Consumers. Consumers include customers that buy through anyof our affinity partner relationships or directly from our consumer website,YourWirelessSource.comTM.

 

The Company measures segmentperformance based on segment gross profit. The segment operations develop theirproduct offering, pricing and strategies, which are collaborative with oneanother and the centralized sales and marketing function. Therefore, theCompany does not segregate assets, other than inventory, for internalreporting, evaluating performance or allocating capital. In addition, theCompany has allocated all goodwill and indefinite lived intangible assets tothe applicable segments (and reporting units within segments, where applicable)for purposes of its annual impairment tests. The Company’s goodwill at September 26,2010 relates to acquisitions within its Network Infrastructure line ofbusiness. Product delivery revenue and certain cost of sales expenses have beenallocated to each segment based on a percentage of revenues and/or grossprofit, as applicable.

 

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Segment activity for the second quarter of fiscalyears 2011 and 2010 is as follows:

 
| **(Amounts in thousands)**              | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Fiscal Quarter ended  September 26, 2010** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial revenues:                              |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and network operators             |       | $                           | 19,054     |                                          | $          | 677                                               |       | $         | 4,187      |   | $ | 23,918 |   |
| Resellers                                         |       | 24,581                      |       | 84,147                                        |       | 1,737                                             |       | 110,465   |       |
| SMUs and governments                              |       | 18,302                      |       | 3,432                                         |       | 5,120                                             |       | 26,854    |       |
| Total commercial revenues                         |       | 61,937                      |       | 88,256                                        |       | 11,044                                            |       | 161,237   |       |
| Consumer revenues                                 |       | —                      |       | 3,789                                         |       | —                                            |       | 3,789     |       |
| Total revenues                                    |       | $                           | 61,937     |                                          | $          | 92,045                                            |       | $         | 11,044     |   | $ | 165,026 |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial gross profit:                          |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and network operators             |       | $                           | 4,485      |                                          | $          | 162                                               |       | $         | 841        |   | $ | 5,488 |   |
| Resellers                                         |       | 6,296                       |       | 15,572                                        |       | 490                                               |       | 22,358    |       |
| SMUs and governments                              |       | 4,866                       |       | 948                                           |       | 1,796                                             |       | 7,610     |       |
| Total commercial gross profit                     |       | 15,647                      |       | 16,682                                        |       | 3,127                                             |       | 35,456    |       |
| Consumer gross profit                             |       | —                      |       | 1,314                                         |       | —                                            |       | 1,314     |       |
| Total gross profit                                |       | $                           | 15,647     |                                          | $          | 17,996                                            |       | $         | 3,127      |   | $ | 36,770 |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Selling, general and administrative expenses      |       |                        |       |                                          |       |                                              |       | 31,203    |       |
| Income from operations                            |       |                        |       |                                          |       |                                              |       | 5,567     |       |
| Interest, net                                     |       |                        |       |                                          |       |                                              |       | 130       |       |
| Income before provision for income taxes          |       |                        |       |                                          |       |                                              |       | 5,437     |       |
| Provision for income taxes                        |       |                        |       |                                          |       |                                              |       | 2,091     |       |
| Net income                                        |       |                        |       |                                          |       |                                              |       | $         | 3,346      |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Product inventory                                 |       | $                           | 28,392     |                                          | $          | 26,132                                            |       | $         | 3,053      |   | $ | 57,577 |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| **Fiscal Quarter ended  September 27, 2009** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial revenues:                              |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and network operators             |       | $                           | 14,001     |                                          | $          | 537                                               |       | $         | 2,303      |   | $ | 16,841 |   |
| Resellers                                         |       | 19,596                      |       | 63,707                                        |       | 1,946                                             |       | 85,249    |       |
| SMUs and governments                              |       | 13,462                      |       | 3,490                                         |       | 9,959                                             |       | 26,911    |       |
| Total commercial revenues                         |       | 47,059                      |       | 67,734                                        |       | 14,208                                            |       | 129,001   |       |
| Consumer revenues                                 |       | —                      |       | 3,953                                         |       | —                                            |       | 3,953     |       |
| Total revenues                                    |       | $                           | 47,059     |                                          | $          | 71,687                                            |       | $         | 14,208     |   | $ | 132,954 |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial gross profit:                          |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and network operators             |       | $                           | 3,395      |                                          | $          | 142                                               |       | $         | 583        |   | $ | 4,120 |   |
| Resellers                                         |       | 5,408                       |       | 13,404                                        |       | 449                                               |       | 19,261    |       |
| SMUs and governments                              |       | 3,776                       |       | 1,058                                         |       | 2,262                                             |       | 7,096     |       |
| Total commercial gross profit                     |       | 12,579                      |       | 14,604                                        |       | 3,294                                             |       | 30,477    |       |
| Consumer gross profit                             |       | —                      |       | 1,136                                         |       | —                                            |       | 1,136     |       |
| Total gross profit                                |       | $                           | 12,579     |                                          | $          | 15,740                                            |       | $         | 3,294      |   | $ | 31,613 |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Selling, general and administrative expenses      |       |                        |       |                                          |       |                                              |       | 27,322    |       |
| Income from operations                            |       |                        |       |                                          |       |                                              |       | 4,291     |       |
| Interest, net                                     |       |                        |       |                                          |       |                                              |       | 76        |       |
| Income before provision for income taxes          |       |                        |       |                                          |       |                                              |       | 4,215     |       |
| Provision for income taxes                        |       |                        |       |                                          |       |                                              |       | 1,622     |       |
| Net income                                        |       |                        |       |                                          |       |                                              |       | $         | 2,593      |   |
|                                              |       |                        |       |                                          |       |                                              |       |      |       |
| Product inventory                                 |       | $                           | 22,538     |                                          | $          | 22,319                                            |       | $         | 4,653      |   | $ | 49,510 |   |

 

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Segment activity for the first six months of fiscalyears 2011 and 2010 is as follows:

 
| **(Amounts in thousands)**          | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Six  Months ended September 26, 2010** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial revenues:                          |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and  network operators        |       | $                           | 36,658     |                                          | $          | 1,160                                             |       | $         | 7,811      |   | $ | 45,629 |   |
| Resellers                                     |       | 45,357                      |       | 152,145                                       |       | 3,644                                             |       | 201,146   |       |
| SMUs and governments                          |       | 34,644                      |       | 8,210                                         |       | 9,790                                             |       | 52,644    |       |
| Total commercial revenues                     |       | 116,659                     |       | 161,515                                       |       | 21,245                                            |       | 299,419   |       |
| Consumer revenues                             |       | —                      |       | 7,560                                         |       | —                                            |       | 7,560     |       |
| Total revenues                                |       | $                           | 116,659    |                                          | $          | 169,075                                           |       | $         | 21,245     |   | $ | 306,979 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial gross profit:                      |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and  network operators        |       | $                           | 8,448      |                                          | $          | 296                                               |       | $         | 1,642      |   | $ | 10,386 |   |
| Resellers                                     |       | 11,976                      |       | 28,351                                        |       | 958                                               |       | 41,285    |       |
| SMUs and governments                          |       | 9,321                       |       | 2,202                                         |       | 3,311                                             |       | 14,834    |       |
| Total commercial gross  profit                |       | 29,745                      |       | 30,849                                        |       | 5,911                                             |       | 66,505    |       |
| Consumer gross profit                         |       | —                      |       | 2,615                                         |       | —                                            |       | 2,615     |       |
| Total gross profit                            |       | $                           | 29,745     |                                          | $          | 33,464                                            |       | $         | 5,911      |   | $ | 69,120 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Selling, general and  administrative expenses |       |                        |       |                                          |       |                                              |       | 60,115    |       |
| Income from operations                        |       |                        |       |                                          |       |                                              |       | 9,005     |       |
| Interest, net                                 |       |                        |       |                                          |       |                                              |       | 208       |       |
| Income before provision  for income taxes     |       |                        |       |                                          |       |                                              |       | 8,797     |       |
| Provision for income taxes                    |       |                        |       |                                          |       |                                              |       | 3,382     |       |
| Net income                                    |       |                        |       |                                          |       |                                              |       | $         | 5,415      |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product Inventory                             |       | $                           | 28,392     |                                          | $          | 26,132                                            |       | $         | 3,053      |   | $ | 57,577 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| **Six  Months ended September 27, 2009** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial revenues:                          |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and  network operators        |       | $                           | 24,551     |                                          | $          | 1,004                                             |       | $         | 5,019      |   | $ | 30,574 |   |
| Resellers                                     |       | 36,388                      |       | 110,331                                       |       | 3,827                                             |       | 150,546   |       |
| SMUs and governments                          |       | 25,910                      |       | 6,724                                         |       | 20,818                                            |       | 53,452    |       |
| Total commercial revenues                     |       | 86,849                      |       | 118,059                                       |       | 29,664                                            |       | 234,572   |       |
| Consumer revenues                             |       | —                      |       | 7,183                                         |       | —                                            |       | 7,183     |       |
| Total revenues                                |       | $                           | 86,849     |                                          | $          | 125,242                                           |       | $         | 29,664     |   | $ | 241,755 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial gross profit:                      |       |                        |       |                                          |       |                                              |       |      |       |
| Public carriers and  network operators        |       | $                           | 6,074      |                                          | $          | 263                                               |       | $         | 1,259      |   | $ | 7,596 |   |
| Resellers                                     |       | 10,320                      |       | 25,727                                        |       | 920                                               |       | 36,967    |       |
| SMUs and governments                          |       | 7,348                       |       | 2,036                                         |       | 4,593                                             |       | 13,977    |       |
| Total commercial gross  profit                |       | 23,742                      |       | 28,026                                        |       | 6,772                                             |       | 58,540    |       |
| Consumer gross profit                         |       | —                      |       | 2,089                                         |       | —                                            |       | 2,089     |       |
| Total gross profit                            |       | $                           | 23,742     |                                          | $          | 30,115                                            |       | $         | 6,772      |   | $ | 60,629 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Selling, general and  administrative expenses |       |                        |       |                                          |       |                                              |       | 53,084    |       |
| Income from operations                        |       |                        |       |                                          |       |                                              |       | 7,545     |       |
| Interest, net                                 |       |                        |       |                                          |       |                                              |       | 185       |       |
| Income before provision  for income taxes     |       |                        |       |                                          |       |                                              |       | 7,360     |       |
| Provision for income taxes                    |       |                        |       |                                          |       |                                              |       | 2,855     |       |
| Net income                                    |       |                        |       |                                          |       |                                              |       | $         | 4,505      |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product Inventory                             |       | $                           | 22,538     |                                          | $          | 22,319                                            |       | $         | 4,653      |   | $ | 49,510 |   |

 

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**Note 8. Comprehensive Income**

 

The components of total comprehensive income were asfollows:

 
| ** **                                         | ** ** | **Fiscal Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **September 26,  2010**       | ** ** | **September 27,  2009**   | ** ** | **September 26,  2010** | ** ** | **September 27,  2009** | ** ** |
|                                               |       |                               |       |                           |       |   |   |   |   |
| Net  Income                                        |       | $                                  | 3,345,700  |                           | $          | 2,592,500 |   | $ | 5,415,200 |   | $ | 4,504,600 |   |
| Change  in value of interest rate swap, net of tax |       | 12,300                             |       | 4,000                          |       | 29,800 |   | 20,800 |   |
| Total  comprehensive income                        |       | $                                  | 3,358,000  |                           | $          | 2,596,500 |   | $ | 5,445,000 |   | $ | 4,525,400 |   |

 

**Note 9. Borrowings UnderRevolving Credit Facility**

 

On April 28, 2010, the Company and its primaryoperating subsidiaries, as borrowers, executed and delivered a FourthModification Agreement (the “Fourth Amendment”), with SunTrust Bank andWachovia Bank, National Association, amending the Credit Agreement for theCompany’s existing unsecured revolving credit facility.  Pursuant to the Fourth Amendment, the amountof dividend payments allowed to be made by the Company under the CreditFacility was increased from $2.5 million to $5.0 million in any 12 monthperiod, assuming continued compliance by the Company with the otherwiseapplicable terms of the Credit Agreement. Pursuant to the relevant documents,the financial covenants included in the Credit Agreement for the unsecuredrevolving credit facility are also applicable to the Company’s existing TermLoan with the same lenders. Accordingly, the Fourth Amendment also has theeffect of amending the financial covenants applicable to the Term Loan.

 

**Note 10. Stock Buyback**

 

On April 28, 2003, the Company’s Board ofDirectors approved a stock buyback program. As of September 26, 2010, theBoard of Directors had authorized the purchase of up to 3,593,350 shares ofoutstanding common stock under the stock buyback program. Shares may bepurchased from time to time in the open market, by block purchase, or throughnegotiated transactions, or possibly other transactions managed bybroker-dealers. No time limit has been set for completion or expiration of theprogram. As of September 26, 2010, the Company had purchased 3,505,187shares under the stock buyback program for approximately $30.7 million, or anaverage of $8.76 per share. Of the total shares repurchased under the stockbuyback program, 2,300 shares were repurchased in the first six months of fiscalyear 2011 for approximately $32,100. As of September 26, 2010, 88,163shares remained available for repurchase under this program.

 

The Company also withholds shares from its employeesand directors, at their request, equal to the minimum federal and state taxwithholdings related to vested performance stock units, stock option exercisesand restricted stock awards. For the six months ended September 26, 2010and September 27, 2009 the allocated value of the shares withheld totaled$1,200,400 and $101,800, respectively.

 

**Note 11. CustomerConcentration**

 

The Company’s future results could be negativelyimpacted by the loss of certain customer and/or vendor relationships. For thefiscal quarter and six months ended September 26, 2010, sales of productsto the Company’s top customer relationship, AT&T Mobility, accounted for 31% and 28% of total revenues, respectively.For the fiscal quarter and six months ended September 27, 2009, sales ofproducts to the Company’s top customer relationship, AT&T Mobility, accountedfor 30% and 26% of total revenues,respectively. For both the fiscal quarter and six months ended September 26,2010, no customer other than AT&T Mobility accounted for more than 4% oftotal consolidated revenues.

 

**Note 12. Subsequent Events**

 

On September 29, 2010, the Company declared aquarterly cash dividend of ten cents ($0.10) per share of common stock, parvalue $0.01 per share, of the Company, payable on November 24, 2010, toshareholders of record as of November 10, 2010. Any future declaration ofdividends and the establishment of any corresponding record and payment datesremains subject to further determination from time to time by the Board ofDirectors.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

This commentary should be read in conjunction with theManagement’s Discussion and Analysis of Financial Condition and Results ofOperations from the Company’s Annual Report on Form 10-K for the fiscalyear ended March 28, 2010.

 

**Business Overview and Environment**

 

TESSCO Technologies Incorporated (TESSCO, we, or theCompany) architects and delivers innovative product and value chain solutions,at lower costs, to support wireless systems. Although we sell products tocustomers in many countries, approximately 97% of our sales are made to customersin the United States. We have operations and office facilities in Hunt Valley,Maryland, Reno, Nevada and San Antonio, Texas.

 

Our second quarter revenues increased by 24.1%compared to the second quarter of the last fiscal year. This increase was drivenby growth in our network infrastructure and mobile devices and accessoriescommercial lines of business, partially offset by a decline in ourinstallation, test and maintenance commercial line of business. In the secondquarter AT&T Mobility, our largest customer, accounted for 31% of totalrevenues. No other customer accounted formore than 4% of total consolidated revenues. Our second quarter grossprofits increased by 16.3% compared to the second quarter of last fiscal year,driven by growth in our network infrastructure and mobile devices andaccessories commercial lines of business, partially offset by a decline in ourinstallation, test and maintenance commercial line of business. Selling,general and administrative expenses increased by 14.2% over the prior yearquarter, primarily related to people costs and freight costs related toincreased order volume. Consequently, net income increased by 29.0% and dilutedearnings per share grew by 26.5% over the prior-year quarter.

 

The current global financial crisis — which hasincluded, among other things, significant reductions in available capital andliquidity from banks and other providers of credit, substantial reductionsand/or fluctuations in equity and currency values worldwide, significant decreasesin consumer confidence and consumer and business spending, rising unemploymentand concerns that the worldwide economy may experience a prolonged recessionaryperiod — may materially adversely affect our customers’ access to capital orwillingness to spend capital on our products, and/or their levels of cashliquidity with which to pay for our products. Our strong second quarter revenuegrowth was driven by a 4% growth in the average number of monthly buyingcustomers and a 21% increase in the average dollars purchased for each buyingcustomer compared to the same period of fiscal year 2010. Accordingly, while webelieve that the economy continues to show signs of improvement and we believewe are starting to win a larger percentage of our customers’ business, we alsobelieve that our customers are continuing to experience difficulty in thecurrent economic environment. In addition, the current global financial crisismay materially adversely affect our suppliers’ access to capital and liquidity,which may in turn adversely impact their ability to maintain inventories,production levels, and/or product quality, or cause them to raise prices orlower production levels, or result in their ceasing operation. The impact ofthe crisis on our liquidity is further discussed below under the heading “Liquidityand Capital Resources.”

 

The wireless communications distribution industry iscompetitive and fragmented, and is comprised of several national distributors.In addition, many manufacturers sell direct. Barriers to entry for distributorsare relatively low, particularly in the mobile devices and accessories market,and the risk of new competitors entering the market is high. Consolidation oflarger wireless carriers has and will most likely continue to impact ourcurrent and potential customer base. In addition, the agreements orarrangements with our customers or vendors looking to us for product and supplychain solutions are typically of limited duration and are terminable by eitherparty upon several months, or otherwise short notice. Our ability to maintainthese relationships is subject to competitive pressures and challenges. Thenature of our business is that, from time to time, we experience the loss andchanges in the business habits of significant customer and vendor relationshipsand may continue to do so in the future. We believe, however, that our strengthin service, the breadth and depth of our product offering, our informationtechnology system, and our large customer base and purchasing relationshipswith approximately 420 manufacturers, provide us with a significant competitiveadvantage over new entrants to the market.

 

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**Results of Operations**

 

The following table summarizes the unaudited resultsof our operations for the fiscal quarter and six months ended September 26,2010 and September 27, 2009:

 
| ** **                                                                  | ** ** | **Fiscal Quarters Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
| **(Amounts in thousands, except per share  data)** | ** ** | **September 26,  2010**        | ** ** | **September 27,  2009**   | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **September 26,  2010** | ** ** | **September 27,  2009** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
| Commercial  Revenues                                                        |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                       |       | $                                   | 19,054     |                           | $          | 14,001 |   | $ | 5,053 |   | 36.1 | % | $ | 36,658 |   | $ | 24,551 |   | $ | 12,107 |   | 49.3 | % |
| Resellers                                                                   |       | 24,581                              |       | 19,596                         |       | 4,985 |   | 25.4 | % | 45,357 |   | 36,388 |   | 8,969 |   | 24.6 | % |
| SMUs and Governments                                                        |       | 18,302                              |       | 13,462                         |       | 4,840 |   | 36.0 | % | 34,644 |   | 25,910 |   | 8,734 |   | 33.7 | % |
| Total  Network Infrastructure                                               |       | 61,937                              |       | 47,059                         |       | 14,878 |   | 31.6 | % | 116,659 |   | 86,849 |   | 29,810 |   | 34.3 | % |
| Mobile  Devices and Accessories:                                            |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public  Carriers and Network Operators                                      |       | 677                                 |       | 537                            |       | 140 |   | 26.1 | % | 1,160 |   | 1,004 |   | 156 |   | 15.5 | % |
| Resellers                                                                   |       | 84,147                              |       | 63,707                         |       | 20,440 |   | 32.1 | % | 152,145 |   | 110,331 |   | 41,814 |   | 37.9 | % |
| SMUs  and Governments                                                       |       | 3,432                               |       | 3,490                          |       | (58 | ) | (1.7 | )% | 8,210 |   | 6,724 |   | 1,486 |   | 22.1 | % |
| Total  Mobile Devices and Accessories                                       |       | 88,256                              |       | 67,734                         |       | 20,522 |   | 30.3 | % | 161,515 |   | 118,059 |   | 43,456 |   | 36.8 | % |
| Installation,  Test and Maintenance:                                        |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public  Carriers and Network Operators                                      |       | 4,187                               |       | 2,303                          |       | 1,884 |   | 81.8 | % | 7,811 |   | 5,019 |   | 2,792 |   | 55.6 | % |
| Resellers                                                                   |       | 1,737                               |       | 1,946                          |       | (209 | ) | (10.7 | )% | 3,644 |   | 3,827 |   | (183 | ) | (4.8 | )% |
| SMUs  and Governments                                                       |       | 5,120                               |       | 9,959                          |       | (4,839 | ) | (48.6 | )% | 9,790 |   | 20,818 |   | (11,028 | ) | (53.0 | )% |
| Total  Installation, Test and Maintenance                                   |       | 11,044                              |       | 14,208                         |       | (3,164 | ) | (22.3 | )% | 21,245 |   | 29,664 |   | (8,419 | ) | (28.4 | )% |
| Total  Commercial Revenues                                                  |       | 161,237                             |       | 129,001                        |       | 32,236 |   | 25.0 | % | 299,419 |   | 234,572 |   | 64,847 |   | 27.6 | % |
| Consumer  Revenues - Mobile Devices and Accessories                         |       | 3,789                               |       | 3,953                          |       | (164 | ) | (4.1 | )% | 7,560 |   | 7,183 |   | 377 |   | 5.2 | % |
| Total  Revenues                                                             |       | $                                   | 165,026    |                           | $          | 132,954 |   | $ | 32,072 |   | 24.1 | % | $ | 306,979 |   | $ | 241,755 |   | $ | 65,224 |   | 27.0 | % |
|                                                                        |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  Gross Profit                                                    |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                       |       | $                                   | 4,485      |                           | $          | 3,395 |   | $ | 1,090 |   | 32.1 | % | $ | 8,448 |   | $ | 6,074 |   | $ | 2,374 |   | 39.1 | % |
| Resellers                                                                   |       | 6,296                               |       | 5,408                          |       | 888 |   | 16.4 | % | 11,976 |   | 10,320 |   | 1,656 |   | 16.0 | % |
| SMUs and Governments                                                        |       | 4,866                               |       | 3,776                          |       | 1,090 |   | 28.9 | % | 9,321 |   | 7,348 |   | 1,973 |   | 26.9 | % |
| Total  Network Infrastructure                                               |       | 15,647                              |       | 12,579                         |       | 3,068 |   | 24.4 | % | 29,745 |   | 23,742 |   | 6,003 |   | 25.3 | % |
| Mobile  Devices and Accessories:                                            |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public  Carriers and Network Operators                                      |       | 162                                 |       | 142                            |       | 20 |   | 14.1 | % | 296 |   | 263 |   | 33 |   | 12.5 | % |
| Resellers                                                                   |       | 15,572                              |       | 13,404                         |       | 2,168 |   | 16.2 | % | 28,351 |   | 25,727 |   | 2,624 |   | 10.2 | % |
| SMUs  and Governments                                                       |       | 948                                 |       | 1,058                          |       | (110 | ) | (10.4 | )% | 2,202 |   | 2,036 |   | 166 |   | 8.2 | % |
| Total  Mobile Devices and Accessories                                       |       | 16,682                              |       | 14,604                         |       | 2,078 |   | 14.2 | % | 30,849 |   | 28,026 |   | 2,823 |   | 10.1 | % |
| Installation,  Test and Maintenance:                                        |       |                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public  Carriers and Network Operators                                      |       | 841                                 |       | 583                            |       | 258 |   | 44.3 | % | 1,642 |   | 1,259 |   | 383 |   | 30.4 | % |
| Resellers                                                                   |       | 490                                 |       | 449                            |       | 41 |   | 9.1 | % | 958 |   | 920 |   | 38 |   | 4.1 | % |
| SMUs  and Governments                                                       |       | 1,796                               |       | 2,262                          |       | (466 | ) | (20.6 | )% | 3,311 |   | 4,593 |   | (1,282 | ) | (27.9 | )% |
| Total  Installation, Test and Maintenance                                   |       | 3,127                               |       | 3,294                          |       | (167 | ) | (5.1 | )% | 5,911 |   | 6,772 |   | (861 | ) | (12.7 | )% |
| Total  Commercial Gross Profit                                              |       | 35,456                              |       | 30,477                         |       | 4,979 |   | 16.3 | % | 66,505 |   | 58,540 |   | 7,965 |   | 13.6 | % |
| Consumer  Gross Profit - Mobile Devices and Accessories                     |       | 1,314                               |       | 1,136                          |       | 178 |   | 15.7 | % | 2,615 |   | 2,089 |   | 526 |   | 25.2 | % |
| Total  Gross Profit                                                         |       | 36,770                              |       | 31,613                         |       | 5,157 |   | 16.3 | % | 69,120 |   | 60,629 |   | 8,491 |   | 14.0 | % |
| Selling,  general and administrative expenses                               |       | 31,203                              |       | 27,322                         |       | 3,881 |   | 14.2 | % | 60,115 |   | 53,084 |   | 7,031 |   | 13.2 | % |
| Income  from operations                                                     |       | 5,567                               |       | 4,291                          |       | 1,276 |   | 29.7 | % | 9,005 |   | 7,545 |   | 1,460 |   | 19.4 | % |
| Interest,  net                                                              |       | 130                                 |       | 76                             |       | 54 |   | 71.1 | % | 208 |   | 185 |   | 23 |   | 12.4 | % |
| Income  before provision for income taxes                                   |       | 5,437                               |       | 4,215                          |       | 1,222 |   | 29.0 | % | 8,797 |   | 7,360 |   | 1,437 |   | 19.5 | % |
| Provision  for income taxes                                                 |       | 2,091                               |       | 1,622                          |       | 469 |   | 28.9 | % | 3,382 |   | 2,855 |   | 527 |   | 18.5 | % |
| Net  income                                                                 |       | $                                   | 3,346      |                           | $          | 2,593 |   | $ | 753 |   | 29.0 | % | $ | 5,415 |   | $ | 4,505 |   | $ | 910 |   | 20.2 | % |
| Diluted  earnings per share                                                 |       | $                                   | 0.43       |                           | $          | 0.34 |   | $ | 0.09 |   | 26.5 | % | $ | 0.69 |   | $ | 0.59 |   | $ | 0.10 |   | 16.9 | % |

 

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**Second Quarter of Fiscal Year2011 Compared with Second Quarter of Fiscal Year 2010**

 

**Revenues.**Revenues for the second quarter of fiscal year 2011 increased 24.1% ascompared with the second quarter of fiscal year 2010, primarily due to a 25.0%increase in commercial revenues, partially offset by a 4.1% decrease inconsumer revenues. Sales increased in our network infrastructure and mobiledevices and accessories lines of business, but were partially offset bydecreased sales in our installation, test and maintenance line of business.

 

Network infrastructure sales increased 31.6% ascompared with the second quarter of fiscal year 2010, as a result of higher salesof radio frequency propagation and site support products and higher sales ofbroadband products across all of our market categories.

 

Sales in the mobile devices and accessories line ofbusiness increased 28.4% in the second quarter of fiscal year 2011, as comparedwith the same period last year. The increase was due to a 30.3% increase incommercial sales, partially offset by a 4.1% decrease in consumer sales. Theincrease in commercial revenues for mobile devices and accessories, which aresold primarily to resellers, was due to increased sales to a large nationaltier-one carrier, AT&T Mobility, as well as smaller resellers and users.Sales of mobile devices and accessories to public carriers and networkoperators also increased but were partially offset by a decline in sales toSMUs and governments.

 

Revenues from our installation, test and maintenanceline of business decreased 22.3% from the corresponding prior-year quarter,primarily due to a decline in sales of repair parts related to our major repaircomponents relationship with Nokia. Sales of test equipment products increasedto public carriers and network operators and self-maintained users, but werepartially offset by decreased sales to resellers. Sales of tools and supplyproducts increased to resellers and public carriers and network operators, butwere partially offset by decreased sales to self-maintained users. As discussedin prior reports, as a result of the evolution of our relationship with Nokia,sales of Nokia product pursuant to this relationship have become less materialto our consolidated financial statements. Nokia had notified us of their intentto terminate our arrangement effective September 30, 2010. Accordingly,revenues and gross profits from this relationship have ceased. During thesecond quarter of fiscal year 2011, revenues from the Nokia relationshiprepresented less than 1% of total consolidated revenues. At its peak in fiscal2007, this relationship accounted for, on a gross basis, 11% of totalconsolidated revenues.

 

**Gross Profit.**Gross profit for the second quarter of fiscal year 2011 increased 16.3%as compared with the second quarter of fiscal year 2010. Total commercial grossprofit increased 16.3%, while consumer gross profit increased 15.7%. Grossprofit margin decreased to 22.3% in the second quarter of fiscal year 2011 ascompared to 23.8% in the second quarter of fiscal year 2010. Gross profitmargin in our network infrastructure segment decreased from 26.7% in the secondquarter of fiscal year 2010 to 25.3% in the second quarter of fiscal year 2011.This decrease in gross profit margin was largely a result of lower margin salesof products related to larger carrier builds during this quarter as comparedwith last year’s second quarter. Gross profit margin in our mobile devices andaccessories segment decreased to 19.6% in the second quarter of this fiscalyear from 22.0% in the second quarter of last fiscal year. This decrease wasprimarily attributable to the commercial gross profit margin in our mobile devicesand accessories line of business, which decreased to 18.9% in the secondquarter of fiscal year 2011 from 21.6% for the second quarter of fiscal year2010, principally due to product mix and a significant increase in lower marginsales to AT&T Mobility. Consumer gross profit margin in our mobile devicesand accessories line of business increased to 34.7% in the second quarter ofthis fiscal year from 28.8% for the second quarter of last fiscal year. Grossprofit margin in our installation, test and maintenance line of businessincreased from 23.2% in the second quarter of fiscal year 2010 to 28.3% in thesecond quarter of fiscal year 2011, primarily due to the large reduction in ourNokia relationship discussed above. Generally, our gross margins by productwithin these segments have been sustained, except as noted above, and 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 ongoing ability to earn revenues and gross profitsfrom customers and vendors looking to us for product and supply chain solutionsis dependent upon a number of factors. The terms, and accordingly the factors,applicable to each relationship often differ. Among these factors are thestrength of the customer’s or vendor’s business, the supply and demand for theproduct or service, including price stability, changing customer or vendorrequirements, and our ability to

 

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support the customer or vendor and to continuallydemonstrate that we can improve the way they do business. In addition, theagreements or arrangements on which our customer and vendor relationships arebased are typically of limited duration, typically do not include anyobligation in respect of any specific product purchase or sale and areterminable by either party upon several months or otherwise relatively shortnotice. The nature of our business is that, from time to time, we experiencethe loss and changes in the business habits of significant customer and vendorrelationships, and we may continue to do so in the future. Our customerrelationships could also be affected by wireless carrier consolidation or theglobal financial crisis.

 

As total revenues and gross profits from largercustomer and vendor relationships, including AT&T Mobility, increase, weoccasionally experience and expect to continue to experience pricing pressuresthat may adversely affect future results. In an effort to mitigate the overalleffect of these pressures and to meet these consistent challenges, we arefocused on our continuing efforts to grow revenues and gross profits from othercustomer and vendor relationships.

 

**Selling, General and AdministrativeExpenses.**Total selling, general andadministrative expenses increased by 14.2% in the second quarter of fiscal year2011 as compared with the second quarter of fiscal year 2010. Selling, generaland administrative expenses as a percentage of revenues decreased to 18.9% inthe second quarter of fiscal year 2011 from 20.6% in the second quarter offiscal year 2010 primarily as a result of a significant increase in revenuespartially offset by increased selling, general and administrative expenses. Thelargest factors contributing to the increase in total selling, general andadministrative expenses were increased compensation, freight and marketing andsales promotion expenses during the second quarter of fiscal year 2011.

 

Total compensation costs, including benefits and bonusexpense, increased approximately $2.0 million, or 12.9%, in the second quarterof fiscal year 2011 as compared to the second quarter of fiscal year 2010.Compensation costs primarily increased due to increased business generation andfulfillment activities as compared to last year’s second quarter, as well asincreased variable sales compensation based on increased gross profit andhigher compensation paid to temporary workers.

 

Freight expense increased by approximately $1.2million, or 39.3%, due to higher sales and increased packages shipped in thesecond quarter of fiscal year 2011 as compared to fiscal year 2010.

 

Marketing and sales promotion expenses increased byapproximately $277,800, or 11.8%, in the second quarter of fiscal year 2011 ascompared with the second quarter of fiscal year 2010, primarily due to increasedmarket development funds expensed in relation to our AT&T Mobility andother retail arrangements, as well as trade show and travel and entertainmentexpenses, partially offset by decreased expenses related to our hard copycatalog, *The WirelessGuide*®.

 

We continually evaluate the credit worthiness of ourexisting customer receivable portfolio and provide an appropriate reserve basedon this evaluation. We also evaluate the credit worthiness of prospective andcurrent customers and make decisions regarding extension of credit terms tosuch customers based on this evaluation. Accordingly, we recorded a provisionfor bad debts of $379,500 and $299,900 for the second quarter ended September 26,2010 and September 27, 2009, respectively.

 

**Interest, Net.** Net interest expense increased from $76,300 in the second quarter offiscal year 2010 to $129,800 in the second quarter of fiscal year 2011,primarily due to increased average borrowings on our revolving line of creditfacility.

 

**Income Taxes, Net Income and DilutedEarnings per Share.**The effective tax rateremained flat at 38.5% in the second quarter of fiscal year 2011 as comparedwith the second quarter of fiscal year 2010. As a result of the factorsdiscussed above, net income for the second quarter of fiscal year 2011increased 29.0% and diluted earnings per share increased 26.5% compared to thecorresponding prior-year quarter.

 

**First Six Months of FiscalYear 2011 Compared with First Six Months of Fiscal Year 2010**

 

**Revenues.**Revenues for the first six months of fiscal year 2011 increased 27.0% ascompared with the first six months of fiscal year 2010, primarily due to a27.6% increase in commercial revenues, and to a much lesser extent, a 5.2%increase in consumer revenues. Sales increased in our network infrastructureand mobile devices and accessories lines of business, but were partially offsetby decreased sales in our installation, test and maintenance line of business.

 

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Sales in the network infrastructure line of businessincreased 34.3% in the first six months of fiscal year 2011, as compared withthe prior-year period. The increase was primarily the result of higher sales ofradio frequency propagation and site support products and higher sales ofbroadband products across all of our market categories.

 

Mobile devices and accessories sales increased ascompared with the first six months of fiscal year 2010, primarily due to a36.8% increase in commercial sales, and to a much lesser extent, a 5.2%increase in consumer sales. Sales in the commercial mobile devices andaccessories line of business increased across all market categories.

 

Revenues from our installation, test and maintenanceline of business had a 28.4% decrease from the prior year, primarily due to adecline in sales of repair parts related to our major repair componentsrelationship with Nokia.  Sales of testequipment decreased to resellers and self-maintained users, partially offset byincreased sales to public carriers and network operators. Sales of tools andsupply products increased across all of our market categories. As discussed inprior reports, as a result of the evolution of our relationship with Nokia,sales of Nokia product pursuant to this relationship have become less materialto our consolidated financial statements. Nokia had notified us of their intentto terminate our arrangement effective September 30, 2010. Accordingly,revenues and gross profits from this relationship have ceased. During the firstsix months of fiscal year 2011, revenues from the Nokia relationshiprepresented less than 1% of total consolidated revenues. At its peak in fiscal2007, this relationship accounted for, on a gross basis, 11% of totalconsolidated revenues.

 

**Gross Profit.**Gross profit for the first six months of fiscal year 2011 increased14.0% as compared with the first six months of fiscal year 2010. Totalcommercial gross profit increased 13.6%, while consumer gross profit increased25.2% over the prior year. Gross profit margin decreased to 22.5% in the firstsix months of fiscal year 2011 from 25.1% in the first six months of fiscalyear 2010. Gross profit margin in our network infrastructure segment decreasedfrom 27.3% in the first six months of fiscal year 2010 to 25.5% in the firstsix months of 2011. This decrease in gross profit margin was largely a resultof lower margin sales of products related to larger carrier builds during thefirst six months of this year as compared with the first six months of lastyear. Gross profit margin in our mobile devices and accessories segmentdecreased to 19.8% in the first six months of this fiscal year from 24.0% inthe first six months of last fiscal year, primarily due to product mix in salesto a large tier-one carrier, AT&T Mobility. Commercial gross profit marginfor our mobile devices and accessories decreased to 19.1% in the first sixmonths of this fiscal year from 23.7% for the first six months of last fiscalyear. Consumer gross profit margin for our mobile devices and accessoriesincreased to 34.6% in the first six months of this fiscal year from 29.1% forthe first six months of last fiscal year. In our installation, test andmaintenance segment, gross profit margin increased to 27.8% in the first sixmonths of fiscal year 2011 from 22.8% in the first six months of fiscal year2010. Generally, our gross margins by product within these segments have beensustained, except as noted above, and these variations are related to sales mixwithin the segment product offerings. We account for inventory at the lower ofcost 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 AdministrativeExpenses.**Total selling, general andadministrative expenses increased by 13.2% in the first six months of fiscalyear 2011 as compared with the first six months of fiscal year 2010. Selling,general and administrative expenses as a percentage of revenues decreased to19.6% in the first six months of fiscal year 2011 from 22.0% in the first sixmonths of fiscal year 2010. The largest factors contributing to the increase intotal selling, general and administrative expenses were increased compensation,freight out, and marketing and sales promotion expenses during the first sixmonths of fiscal year 2011.

 

Total compensation costs, including benefits and bonusexpense, increased approximately $4.3 million, or 13.9%, in the first sixmonths of fiscal year 2011 as compared to the first six months of fiscal year2010. Compensation costs primarily increased due to increased businessgeneration and fulfillment activities as compared to the first six months ofthe last fiscal year as well as increased variable sales compensation based onincreased gross profit and higher compensation paid to temporary workers.

 

Freight expense increased by approximately $1.8million, or 29.8%, due to higher sales and increased packages shipped in thefirst six months of fiscal year 2011 as compared to fiscal year 2010.

 

Marketing and sales promotion expenses increased byapproximately $516,000, or 11.8%, in the first six months of fiscal year 2011as compared with the first six months of fiscal year 2010, primarily due to increasedmarket development funds

 

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expensed in relation to our AT&T and other retailarrangements, as well as travel and entertainment expenses, partially offset bydecreased expenses related to our hard copy catalog, *The Wireless Guide*®.

 

We continually evaluate the credit worthiness of ourexisting customer receivable portfolio and provide an appropriate reserve basedon this evaluation. We also evaluate the credit worthiness of prospective andcurrent customers and make decisions regarding extension of credit terms tosuch customers based on this evaluation. Accordingly, we recorded a provisionfor bad debts of $573,800 and $855,900 for first six months of fiscal year 2011and fiscal year 2010, respectively. During the first six months of fiscal year2010, bad debt expense was higher due to additional reserves needed largelyrelated to the downturn in the economy.

 

**Interest, Net.** Net interest expense increased from $185,600 in the first six months offiscal year 2010 to $207,600 in the first six months of fiscal year 2011,primarily due to increased average borrowings on our revolving line of creditfacility.

 

**Income Taxes, Net Income and DilutedEarnings per Share.**The effective tax rate inthe first six months of fiscal year 2011 was 38.4% as compared with 38.8% inthe first six months of fiscal year 2010. The decrease in the tax rate isprimarily attributable to changes in the relationship between non-deductibleexpenses and taxable income as well as changes in our state tax effective rate.As a result of the factors discussed above, net income and diluted earnings pershare for the first six months of fiscal year 2011 increased 20.2% and 16.9%,respectively, compared to the prior year.

 

**Liquidity and CapitalResources**

 
| ** **                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **September 26,  2010**   | ** ** | **September 27,  2009** | ** ** |
| Cash flows provided by  operating activities          |       | $                              | 577,300    |   | $ | 11,965,900 |   |
| Cash flows used in  investing activities              |       | (5,606,900                     | )          | (3,299,800 | ) |
| Cash flows used in  financing activities              |       | (2,147,000                     | )          | (872,900 | ) |
| Net (decrease) increase in  cash and cash equivalents |       | $                              | (7,176,600 | ) | $ | 7,793,200 |   |

 

We generated $577,300 of net cash from operatingactivities in the first six months of fiscal year 2011 compared with $12.0million in the first six months of fiscal year 2010. In the first six months offiscal year 2011, our cash inflow from operating activities was primarilydriven by net income (net of depreciation and amortization and non-cash stockcompensation expense), as well as by a significant increase in accountspayable, largely offset by a significant increase in trade accounts receivableand inventory, as well as a decrease in payroll, benefits and tax accruals. Theincrease in accounts payable is largely due to the timing and credit terms ofinventory receipts. The increase in trade accounts receivable is primarily dueto the timing of sales and collections, as well as the fact that we havegranted extended payment terms to certain large customers. The increasedinventory levels are to support growing sales and to improve our inventoryavailability for our customers, especially in the public carrier and networkoperator market. The decrease in payroll, benefits and tax accruals isprimarily due to the payment of fiscal year 2010 bonus accruals in the firstthree months of fiscal year 2011.

 

Capital expenditures of $2.8 million in the first sixmonths of fiscal year 2011 were up from expenditures of $0.9 million in thefirst six months of fiscal year 2010. In both periods, capital expendituresprimarily consisted of investments in information technology and, in fiscalyear 2011, leasehold improvements and furniture and fixtures for our leasedoffice space in Hunt Valley, Maryland.

 

Additional earn-out payments on acquired businessesrelate to our 2006 acquisition of TerraWave Solutions, Ltd. and its commonlyowed affiliate GigaWave Technologies, Ltd. The final earn-out payment of $2.9million was made during the second quarter of fiscal year 2011.

 

Net cash used in financing activities was $2.1 millionin the first six months of fiscal year 2011 compared with a net cash outflowfrom financing activities of $0.9 million for the first six months of fiscalyear 2010. For the first six months of fiscal year 2011, our cash outflow fromfinancing activities was primarily due to cash dividends paid to shareholdersas well as repurchases of treasury stock and stock from employees and directorsfor minimum tax withholdings related to equity compensation, partially offsetby the excess tax benefit from stock-based compensation. For the first sixmonths of fiscal year 2010, our cash outflow from financing activities wasprimarily due to cash dividends paid to shareholders as

 

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well as an excess tax loss from stock-basedcompensation, partially offset by borrowings on our Baltimore County EconomicDevelopment Revolving Loan Fund. During the first six months of fiscal years2011, we repurchased 2,300 shares of our outstanding common stock pursuant toour stock buyback program. No shares were repurchased during the first sixmonths of fiscal year 2010. From the beginning of our stock buyback program(the first quarter of fiscal year 2004), through the end of the second quarterof fiscal year 2011, a total of 3,505,187 shares have been purchased under thisprogram for approximately $30.7 million, or an average price of $8.76 pershare. The Board of Directors has authorized the purchase of up to 3,593,350shares in the aggregate pursuant to this program, and therefore, 88,163 sharesremained available to be purchased as of the end of the second quarter offiscal year 2011. We expect to fund future purchases, if any, from workingcapital and/or our revolving credit facility. No timetable has been set for thecompletion or expiration of this program.

 

We are party to an unsecured revolving credit facilitywith SunTrust Bank and Wachovia Bank, National Association, with interestpayable monthly at the LIBOR rate plus an applicable margin. Borrowingavailability under this facility is determined in accordance with a borrowingbase, and the applicable credit agreement includes financial covenants,including a minimum tangible net worth, minimum cash flow coverage of debtservice, and a maximum funded debt to EBITDA ratio. These financial covenantsalso apply to the separate but related term loan secured by our Hunt Valley,Maryland facility discussed below. The terms applicable to our revolving creditfacility and term loan also limit our ability to engage in certain transactionsor activities, including (but not limited to) investments and acquisitions,sales of assets, payment of dividends, issuance of additional debt and othermatters. As of September 26, 2010, we had a zero balance outstanding on our$35.0 million revolving credit facility; therefore, we had $35.0 millionavailable on our revolving line of credit facility subject to the limitationsimposed by the borrowing base and our continued compliance with the otherapplicable terms, including the covenants discussed above.

 

This revolving credit facility has been amendedseveral times since its inception and now allows us to repurchase up to $25.0million of our common stock (measured forward to the present date from the dateof inception of the Credit Agreement, May 31, 2007) and allows for the paymentof up to $5.0 million of dividends in any 12 month period. The financialcovenants associated with this credit facility and the related term loan havealso been modified. See Note 9 to the unaudited consolidated financialstatements for additional information regarding this credit facility. As ofSeptember 26, 2010, we had repurchased an aggregate of $13.7 million of commonstock since May 31, 2007, leaving $11.3 million available for futurerepurchases, without the consent of our lenders or a further amendment to theterms of the facility.

 

Pursuant to the relevant documents, the financialcovenants included in the Credit Agreement for the unsecured revolving creditfacility are also applicable to our existing Term Loan with the same lenders,having an original principal amount of $4.5 million and secured by our HuntValley, Maryland facility. Accordingly, these financial covenant modificationsalso have the effect of amending the financial covenants applicable to the TermLoan. The note is payable in monthly installments of principal and interestwith the balance due at maturity on June 30, 2011. At September 26, 2010, theprincipal balance of this term loan was $3.1 million.

 

OnMarch 31, 2009, we entered into a term loan with the Baltimore County EconomicDevelopment Revolving Loan Fund for an aggregate principal amount of $250,000.The term loan is payable in equal monthly installments of principal andinterest of $2,300, with the balance due at maturity on April 1, 2019. The termloan bears interest at 2.00% per annum and is secured by a subordinate positionon our Hunt Valley, Maryland facility. At September 26, 2010, the principalbalance of this term loan was approximately $217,500.

 

Weare also party to an existing note payable outstanding to the Maryland EconomicDevelopment Corporation, which is payable in equal quarterly installments ofprincipal and interest of $37,400, with the balance due at maturity on October10, 2011. The note bears interest at 3.00% per annum and is secured by asubordinate position on Company-owned real property location in Hunt Valley,Maryland. At September 26, 2010, the principal balance of this note wasapproximately $146,700.

 

On July 28, 2009, we announced that our Board ofDirectors determined to commence a dividend program and declared an initialquarterly cash dividend of $0.067 per share of common stock, par value $0.01per share, of the Company. Cash dividends were paid in the same per shareamount on August 26, 2009, November 25, 2009 and March 1, 2010. On June 2, 2010and August 25, 2010, we paid cash dividends of ten cents ($0.10) per share ofcommon stock, par value $0.01 per share, of the Company. On September 29, 2010,we declared a cash dividend of the same amount, ten cents ($0.10) per share ofcommon stock, par value $0.01 per share, of the Company, payable on November24, 2010 to shareholders of

 

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record as of November 10, 2010. Any future declarationof dividends and the establishment of any corresponding record and paymentdates remains subject to further determination from time to time by the Boardof Directors.

 

We believe that our existing cash, payments fromcustomers, and availability under our revolving credit facility will besufficient to support our operations for at least the next twelve months. Tominimize interest expense, our policy is to use excess available cash to paydown any balance on our revolving credit facility. We expect to meet short-termand long-term liquidity needs through operating cash flow, supplemented by ourrevolving credit facility. In doing so, the balance on our revolving creditfacility could increase depending on our working capital and other cash needs.If we were to undertake an acquisition or other major capital purchases thatrequire funds in excess of existing sources of liquidity, we would look tosources of funding from additional credit facilities, debt and/or equityissuances. There can be no assurances that such additional future sources offunding would be available on terms acceptable to us, if at all. As ofSeptember 26, 2010, we do not have any material capital expenditure commitments.

 

In addition, our liquidity could be negativelyimpacted by decreasing revenues and profits resulting from a decrease in demandfor our products or a reduction in capital expenditures by our customers, or bythe weakened financial conditions of our customers or suppliers, in each caseas a result of the downturn in the global economy, among other facts.

 

**Recent AccountingPronouncements**

 

In January 2010, the FASB issued updated accountingguidance related to fair value measurements and disclosures which requires anumber of additional disclosures regarding fair value measurements, includingthe amount of transfers between Levels 1 and 2 of the fair value hierarchy, thereasons for transfers in or out of Level 3 of the fair value hierarchy andactivity for recurring Level 3 measures. In addition, the amendment clarifiescertain existing disclosure requirements related to the level at which fairvalue disclosures should be disaggregated and the requirement to providedisclosures about the valuation techniques and inputs used in determining thefair value of assets or liabilities classified as Levels 2 or 3. The standardis effective for interim and annual reporting periods beginning after December15, 2009, except for the disclosures about purchases, sales, issuances andsettlements in the roll forward of activity in Level 3 fair value measurements,which is effective for fiscal years beginning after December 15, 2010 withearly adoption permitted. The adoption of the standard update did not have amaterial impact on our consolidated financial statements.

 

**Critical Accounting Policiesand Estimates**

 

Our discussion and analysis of our financial conditionand results of operations are based on our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamount of assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. Actual results may differ from theseestimates under different assumptions or conditions.

 

For a detailed discussion on our critical accountingpolicies, please refer to our Annual Report on Form 10-K for the fiscal yearended March 28, 2010.

 

**Off-Balance Sheet Arrangements**

 

We have no materialoff-balance sheet arrangements.

 

**Forward-Looking Statements**

 

This Report may contain forward-looking statements.These forward-looking statements may generally be identified by the use of thewords “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” andsimilar expressions, but the absence of these words or phrases does notnecessarily mean that a statement is not forward looking. Forward looking statementsinvolve a number of risks and uncertainties. Our actual results may differmaterially from those described in or contemplated by any such forward-lookingstatement for a variety of reasons, including those risks identified in ourmost recent Annual Report on Form 10-K and other periodic reports filed withthe Securities and Exchange Commission, under the heading “Risk Factors” andotherwise. Consequently, the reader is cautioned to consider allforward-looking statements in light of the risks to which they are subject.

 

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We are not able to identify or control allcircumstances that could occur in the future that may adversely affect ourbusiness and operating results. Without limiting the risks that we describe inour periodic reports and elsewhere, among the risks that could lead to amaterially adverse impact on our business or operating results are the following:termination or non-renewal of limited duration agreements or arrangements withour vendors and affinity partners which are typically terminable by eitherparty upon several months or otherwise relatively short notice; loss ofsignificant customers or relationships, including affinity relationships; lossof customers either directly or indirectly as a result of consolidation amonglarge wireless service carriers and others within the wireless communicationsindustry; the strength of our customers’, vendors’ and affinity partners’businesses; increasingly negative or prolonged adverse economic conditions,including those adversely affecting consumer confidence or consumer or businessspending, or otherwise adversely affecting our vendors or customers, includingtheir access to capital or liquidity or our customers’ demand for or ability tofund or pay for the purchase of our products and services; 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 andmarket share; our inability to access capital and obtain or retain financing asand when needed; transitional and other risks associated with acquisitions ofcompanies that we may undertake in an effort to expand our business; thepossibility that, for unforeseen reasons, we may be delayed in entering into orperforming, or may fail to enter into or perform, anticipated contracts or mayotherwise be delayed in realizing or fail to realize anticipated revenues oranticipated savings; our inability to protect certain intellectual property,including systems and technologies on which we rely; and our inability to hireor retain for any reason our key professionals, management and staff.

 

**Available Information**

 

Our Internet Website address is: www.tessco.com. Wemake available free of charge through our Website, our Annual Report on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13 or 15(d)of the Exchange Act as soon as reasonably practicable after such documents areelectronically filed with, or furnished to, the Securities and ExchangeCommission. Also available on our Website is our Code of Business Conduct andEthics.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk.**

 

Not Applicable.

 

**Item 4. Controls and Procedures.**

 

TheCompany’s management, with the participation of the Chief Executive Officer(CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended(Exchange Act)) as of the end of the period covered by this quarterly report. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Based on the evaluation of these controls and procedures required byRules 13a-15(b) or 15d-15(b) of the Exchange Act, the Company’s management,including the CEO and CFO, have concluded that, as of the end of the periodcovered by this quarterly report, the Company’s disclosure controls andprocedures were effective to provide reasonable assurance that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand 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.

 

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**PART II.OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

Lawsuits and claims are filed against us from time totime in the ordinary course of business. We do not believe that any lawsuits orclaims currently pending against the Company, individually or in the aggregate,are material, or will have a material adverse affect on our financial conditionor results of operations. In addition, from time to time, we are also subjectto review from federal and state taxing authorities in order to validate theamounts of income, sales and/or use taxes which have been claimed and remitted.No federal, state and local income tax returns are currently under examination.

 

**Item 1A. Risk Factors.**

 

There have been no material changes from the riskfactors as previously disclosed in the Company’s Annual Report on Form 10-K forthe fiscal year ended March 28, 2010. Nevertheless, information that we havedisclosed or will disclose from time to time in our public filings (includingthis Quarterly Report on Form 10-Q and other periodic reports filed under theExchange Act) may provide additional data or information relative to ourpreviously disclosed risk factors.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds.**

** **
| **Period (1)**                         | ** ** | **Total  Number of  Shares  Purchased  (3)** | ** ** | **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)** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| June 28, 2010 through July  25, 2010        |       | 2,300                                             |       | $                                        | 13.96      |                                                                                                                             | 2,300      |                                                                                                                                         | 88,163     |   |
| July 26, 2010 through  August 29, 2010      |       | —                                            |       | N/A                                      |       | —                                                                                                                           |       | 88,163                                                                                                                                       |       |
| August 30, 2010 through  September 26, 2010 |       | —                                            |       | N/A                                      |       | —                                                                                                                           |       | 88,163                                                                                                                                       |       |
| Total                                       |       | 2,300                                             |       | $                                        | 13.96      |                                                                                                                             | 2,300      |                                                                                                                                         | 88,163     |   |

 

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(1)          Periods indicated are fiscal accounting months for the second quarter offiscal year 2011.

(2)          Amounts are as of the end of the fiscal accounting month or quarter, asapplicable.

(3)          To the extent not also reflected under the column headed “Total numberof shares purchased as part of publicly announced plans and programs,” totalnumber of shares purchased represents shares either withheld from or deliveredto the Company by employees or directors upon stock option exercises or inconnection with PSU and restricted stock awards, in order to pay relatedminimum tax liabilities.

 

On April 28, 2003, our Board of Directors announced astock buyback program. As of September 26, 2010, the Board of Directors hasauthorized the purchase of up to 3,593,350 shares of outstanding common stockunder the stock buyback program. During the second quarter of fiscal year 2011,the Company repurchased 2,300 shares of its common stock for approximately$32,100 pursuant to this program. As of September 26, 2010, we had purchased anaggregate of 3,505,187 shares of our outstanding common stock pursuant to thisprogram for approximately $30.7 million, or an average price of $8.76 pershare. Accordingly, as of September 26, 2010, 88,163 shares remained availablefor repurchase under this program. Shares may be purchased from time to timeunder this program in the open market, by block purchase, or through negotiatedtransactions, or possibly other transactions managed by broker-dealers. Notimetable has been set for completion or expiration of the program. Ourrevolving credit facility and term loan with SunTrust Bank and Wachovia Bank,National Association, limit to $25.0 million the aggregate dollar value ofshares that may be repurchased from May 31, 2007 forward. As of September 26,2010, we had the ability to purchase approximately $11.3 million in additionalshares of common stock without violating this covenant.

 

On April 28, 2010, the Company and its primaryoperating subsidiaries, as borrowers, executed and delivered a FourthModification Agreement (the “Fourth Amendment”), with SunTrust Bank andWachovia Bank, National Association, amending the Credit Agreement for theCompany’s existing unsecured revolving credit facility.  Pursuant to the Fourth Amendment, the amountof dividend payments allowed to be made by the Company under the CreditFacility was increased from $2.5 million to $5.0 million in any 12 monthperiod, assuming continued compliance by the Company with the otherwiseapplicable terms of the Credit Agreement.

 

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**Item 3. Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4. (Removed and Reserved)**

 

**Item 5. Other Information.**

 

None.

 

** Item 6. Exhibits.**

 

(a) EXHIBITS:

 
|   | 31.1.1 | Rule 15d-14(a) Certification of Robert B. Barnhill,  Jr., Chief Executive Officer (filed herewith). |
|--------|--------|-----------------------------------------------------------------------------------------------------|
|   | 31.2.1 | Rule 15d-14(a) Certification of David M. Young,  Chief Financial Officer (filed herewith).          |
|   | 32.1.1 | Section  1350 Certification of Robert B. Barnhill, Jr., Chief Executive Officer (filed  herewith).  |
|   | 32.2.1 | Section  1350 Certification of David M. Young, Chief Financial Officer (filed  herewith).           |

 

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**Signature**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                   |   | TESSCO TECHNOLOGIES INCORPORATED             |
|------------------------|--------|----------------------------------------------|
|                   |   |                                         |
|                   |   |                                         |
| Date: November 3, 2010 |   | By:                                          | /s/ David M. Young |
|                   |   | David M. Young                               |
|                   |   | Chief Financial Officer                      |
|                   |   | (principal financial and accounting officer) |

 

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