** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly periodended December 24, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the transition period from                to               **

** **

**Commission file number0-24746**

** **

**TESSCO Technologies Incorporated**

(Exact name of registrant as specified in charter)

 

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

 

Registrant’stelephone number, including area code  **(410)229-1000**

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to filing requirementsfor the past 90 days.

Yes x    No o

Indicate by check mark if the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer (as definedin Rule 12b-2 of the Act).  Largeaccelerated filer o   Acceleratedfiler o   Non-AcceleratedFiler x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).

Yes o    No x

Thenumber of shares of the registrant’s Common Stock, $.01 par value per share,outstanding as of January 31, 2007, was 5,301,668.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**Index to Form 10-Q**

 
| **Part I**  | ** ** | **Financial Information** |
|-------------|------------|---------------------------|
|        |       |                      |   |   |
|        |       | Item 1.                   |   | Financial Statements |
|        |       |                      |   |   |
|        |       |                      |   | Consolidated  Balance Sheets as of December 24, 2006 (unaudited) and March 26, 2006 |
|        |       |                      |   |   |
|        |       |                      |   | Unaudited Consolidated Statements of Income for the  periods ended December 24, 2006 and December 25, 2005 |
|        |       |                      |   |   |
|        |       |                      |   | Unaudited Consolidated Statements of Cash Flows for  the periods ended December 24, 2006 and December 25, 2005 |
|        |       |                      |   |   |
|        |       |                      |   | Notes to Consolidated Financial Statements |
|        |       |                      |   |   |
|        |       | Item 2.                   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|        |       |                      |   |   |
|        |       | Item 3.                   |   | Quantitative  and Qualitative Disclosures about Market Risk |
|        |       |                      |   |   |
|        |       | Item 4.                   |   | Controls and  Procedures |
|        |       |                      |   |   |
| **Part II** | ** ** | **Other Information**     |
|        |       |                      |   |   |
|        |       | Item  1.                  |   | Legal  Proceedings |
|        |       |                      |   |   |
|        |       | Item 1A.             |   | Risk  Factors |
|        |       |                      |   |   |
|        |       | Item 2.                   |   | Unregistered  Sales of Equity Securities and Use of Proceeds |
|        |       |                      |   |   |
|        |       | Item 3.                   |   | Defaults upon  Senior Securities |
|        |       |                      |   |   |
|        |       | Item 4.                   |   | Submission of  Matters to a Vote of Security Holders |
|        |       |                      |   |   |
|        |       | Item  5.                  |   | Other  Information |
|        |       |                      |   |   |
|        |       | Item  6.                  |   | Exhibits |
|        |       |                      |   |   |
| ** **  |       | Signature                 | ** ** | ** ** |
|        |       |                      |   |   |

 

2

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**Part I.  Financial Information**

**Item 1.  Financial Statements**

**TESSCO TECHNOLOGIESINCORPORATED**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                                                                       | ** ** | **December 24,  2006** | ** **  | **March 26,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|--------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **(unaudited)**             | ** **  | ** **               | ** ** |
| **ASSETS**                                                                                                                                                                                                                       |       |                        |        |                     |       |
| Current  assets:                                                                                                                                                                                                                 |       |                        |        |                     |       |
| Cash and cash equivalents                                                                                                                                                                                                        |       | $                           | —      |                     | $          | 2,286,900 |   |
| Trade accounts receivable, net                                                                                                                                                                                                   |       | 53,634,900                  |        | 43,576,500               |       |
| Product inventory                                                                                                                                                                                                                |       | 59,883,700                  |        | 47,615,700               |       |
| Deferred tax asset                                                                                                                                                                                                               |       | 2,396,000                   |        | 2,396,000                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                        |       | 4,009,500                   |        | 2,799,200                |       |
| Total current assets                                                                                                                                                                                                             |       | 119,924,100                 |        | 98,674,300               |       |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| Property  and equipment, net                                                                                                                                                                                                     |       | 24,252,100                  |        | 24,619,800               |       |
| Goodwill,  net                                                                                                                                                                                                                   |       | 4,093,700                   |        | 2,452,200                |       |
| Other  long-term assets                                                                                                                                                                                                          |       | 2,477,300                   |        | 1,054,100                |       |
| Total assets                                                                                                                                                                                                                     |       | $                           | 150,747,200 |                     | $          | 126,800,400 |   |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                                   |       |                        |        |                     |       |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| Current  liabilities:                                                                                                                                                                                                            |       |                        |        |                     |       |
| Trade accounts payable                                                                                                                                                                                                           |       | $                           | 68,704,700  |                     | $          | 44,984,000 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                   |       | 12,595,600                  |        | 7,543,400                |       |
| Revolving credit facility                                                                                                                                                                                                        |       | 5,629,400                   |        | —                   |       |
| Current portion of long-term debt                                                                                                                                                                                                |       | 355,300                     |        | 442,500                  |       |
| Total current liabilities                                                                                                                                                                                                        |       | 87,285,000                  |        | 52,969,900               |       |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| Deferred  tax liability                                                                                                                                                                                                          |       | 2,785,300                   |        | 2,785,300                |       |
| Long-term  debt, net of current portion                                                                                                                                                                                          |       | 4,292,500                   |        | 4,559,400                |       |
| Other  long-term liabilities                                                                                                                                                                                                     |       | 1,400,400                   |        | 1,379,000                |       |
| Total liabilities                                                                                                                                                                                                                |       | 95,763,200                  |        | 61,693,600               |       |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| Commitments  and contingencies                                                                                                                                                                                                   |       |                        |        |                     |       |
|                                                                                                                                                                                                                             |       |                        |        |                     |       |
| Shareholders’  equity:                                                                                                                                                                                                      |       |                        |        |                     |       |
| Preferred stock, $.01 par value, 500,000 authorized and no shares  issued and outstanding                                                                                                                                        |       | —                      |        | —                   |       |
| Common stock, $.01 par value, 15,000,000 shares authorized; 7,706,152  shares issued and 5,450,170 shares outstanding as of December 24, 2006 and  7,441,046 shares issued and 6,228,876 shares outstanding as of March 26, 2006 |       | 68,400                      |        | 49,600                   |       |
| Additional paid-in capital                                                                                                                                                                                                       |       | 26,869,700                  |        | 24,748,700               |       |
| Treasury stock, at cost 2,255,982 shares as of December 24, 2006 and  1,212,170 shares as of March 26, 2006                                                                                                                      |       | (27,216,200                 | )           | (9,521,100               |       |
| Retained earnings                                                                                                                                                                                                                |       | 55,238,500                  |        | 49,764,200               |       |
| Accumulated other comprehensive income, net of tax                                                                                                                                                                               |       | 23,600                      |        | 65,400                   |       |
| Total shareholders’ equity                                                                                                                                                                                                  |       | 54,984,000                  |        | 65,106,800               |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                 |       | $                           | 150,747,200 |                     | $          | 126,800,400 |   |

 

See accompanying notes.

3

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**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Statements of Income**
| ** **                                   | ** ** | **Fiscal Quarters Ended** | ** **  | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------|-------------|---------------------------------|------------|
| ** **                                   | ** ** | **December 24,  2006**         | ** **  | **December 25,  2005**     | ** ** | **December 24,  2006** | ** ** | **December 25,  2005** | ** ** |
| ** **                                   | ** ** | **(unaudited)**                     | ** **  | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Revenues                                     |       | $                                   | 134,716,700 |                            | $          | 94,811,900 |   | $ | 365,312,700 |   | $ | 380,768,000 |   |
| Cost of goods sold                           |       | 101,838,200                         |        | 70,849,000                      |       | 274,319,200 |   | 302,416,400 |   |
| Gross profit                                 |       | 32,878,500                          |        | 23,962,900                      |       | 90,993,500 |   | 78,351,600 |   |
| Selling, general and administrative expenses |       | 29,730,700                          |        | 22,004,200                      |       | 81,554,600 |   | 71,507,500 |   |
| Income from operations                       |       | 3,147,800                           |        | 1,958,700                       |       | 9,438,900 |   | 6,844,100 |   |
| Interest, net                                |       | 323,800                             |        | 125,600                         |       | 659,600 |   | 192,700 |   |
| Income before provision for  income taxes    |       | 2,824,000                           |        | 1,833,100                       |       | 8,779,300 |   | 6,651,400 |   |
| Provision for income taxes                   |       | 1,059,100                           |        | 714,900                         |       | 3,305,000 |   | 2,594,000 |   |
| Net income                                   |       | $                                   | 1,764,900   |                            | $          | 1,118,200 |   | $ | 5,474,300 |   | $ | 4,057,400 |   |
| Basic earnings per share                     |       | $                                   | 0.33        |                            | $          | 0.18 |   | $ | 0.93 |   | $ | 0.64 |   |
| Diluted earnings per share                   |       | $                                   | 0.31        |                            | $          | 0.17 |   | $ | 0.89 |   | $ | 0.63 |   |
| Basic weighted average shares outstanding    |       | 5,320,600                           |        | 6,281,300                       |       | 5,915,500 |   | 6,331,200 |   |
| Diluted  weighted average shares outstanding |       | 5,629,300                           |        | 6,394,500                       |       | 6,127,000 |   | 6,420,200 |   |

 

See accompanying notes.

4

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**TESSCO TECHNOLOGIESINCORPORATED**

**Consolidated Statements of Cash Flows**
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **December 24,  2006**     | ** ** | **December 25,  2005** | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                        |       |                            |       |   |   |
| Net income                                                                                   |       | $                               | 5,474,300  |   | $ | 4,057,400 |   |
| Adjustments to reconcile net  income to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                |       | 3,525,000                       |       | 3,279,000 |   |
| Non-cash stock compensation  expense                                                         |       | 1,571,900                       |       | 752,700 |   |
| Deferred taxes and other  non-cash items                                                     |       | 113,500                         |       | 24,900 |   |
| Change in trade accounts  receivable                                                         |       | (8,372,900                      | )          | 16,655,800 |   |
| Change in product inventory                                                                  |       | (11,371,400                     | )          | 11,783,800 |   |
| Change in prepaid expenses and  other current assets                                         |       | (1,193,100                      | )          | (74,800 | ) |
| Change in trade accounts  payable                                                            |       | 22,439,300                      |       | (39,797,800 | ) |
| Change in accrued expenses and  other current liabilities                                    |       | 2,752,000                       |       | 574,100 |   |
| Net cash provided by (used in)  operating activities                                         |       | 14,938,600                      |       | (2,744,900 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash flows from investing activities:                                                        |       |                            |       |   |   |
| Purchases of property and  equipment                                                         |       | (2,944,800                      | )          | (2,524,600 | ) |
| Acquisition of business in  purchase transaction                                             |       | (4,533,300                      | )          | — |   |
| Net cash used in investing  activities                                                       |       | (7,478,100                      | )          | (2,524,600 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash flows from financing activities:                                                        |       |                            |       |   |   |
| Net borrowings from revolving  credit facility                                               |       | 5,629,400                       |       | 3,561,000 |   |
| Payments on long-term debt                                                                   |       | (354,100                        | )          | (271,500 | ) |
| Net proceeds from issuance of  stock                                                         |       | 338,400                         |       | 165,900 |   |
| Purchase of treasury stock                                                                   |       | (17,695,100                     | )          | (2,066,700 | ) |
| Excess tax benefit from  stock-based compensation                                            |       | 229,500                         |       | — |   |
| Bank overdraft                                                                               |       | 2,104,500                       |       | — |   |
| Net cash (used in) provided by  financing activities                                         |       | (9,747,400                      | )          | 1,388,700 |   |
|                                                                                         |       |                            |       |   |   |
| Net decrease in cash and cash  equivalents                                                   |       | (2,286,900                      | )          | (3,880,800 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash and cash equivalents, beginning of period                                               |       | 2,286,900                       |       | 3,880,800 |   |
|                                                                                         |       |                            |       |   |   |
| Cash  and cash equivalents, end of period                                                    |       | $                               | —     |   | $ | — |   |

 

See accompanying notes.

5

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**TESSCO Technologies Incorporated**

**Notes to Consolidated Financial Statements**

**December 24, 2006**

(Unaudited)
| **Note 1. Description of Business and Basis of Presentation** |
|---------------------------------------------------------------|

 

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO or theCompany), is a leading provider of integrated product and supply chainsolutions to the professionals that design, build, run, maintain and usewireless, mobile, fixed and in-building systems. The Company provides marketingand sales services, knowledge and supply chain management, product solutiondelivery and control systems utilizing extensive Internet and informationtechnology.  Approximately 97% of theCompany’s sales are made to customers in the United States.  The Company takes orders in several ways,including phone, fax, online and through electronic data interchange.

In management’s opinion, the accompanying interimfinancial statements of the Company include all adjustments, consisting only ofnormal, recurring adjustments, necessary for a fair presentation of the Company’sfinancial position for the interim periods presented.  These statements are presented in accordancewith the rules and regulations of the Securities and Exchange Commission(SEC).  Certain information and footnotedisclosures normally included in the Company’s annual financial statements havebeen omitted from these statements, as permitted under the applicable rules andregulations.  The results of operationspresented in the accompanying interim financial statements are not necessarilyrepresentative of operations for an entire year.  The information included in this Form 10-Qshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s Form 10-K for the fiscal year ended March 26, 2006.
| **Note 2. Recently Issued Accounting Pronouncements** |
|-------------------------------------------------------|

 

In July 2006, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertaintyin Income Taxes,” which clarifies the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. The Company will adopt FIN 48 as of April 2, 2007.  The Company is reviewing FIN 48 to determinethe impact of adoption on its financial statements.

In September 2006, the FASB issued FASB StatementNo. 157, “Fair Value Measurements” (FASB 157), which provides guidance forusing fair value to measure assets and liabilities.  The standard also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings. The standardapplies whenever other standards require (or permit) assets or liabilities tobe measured at fair value. The standard does not expand the use of fair valuein any new circumstances.  The Companywill adopt FASB 157 as of April 2, 2007. The Company does not believe that the new standard will have a materialimpact on its financial statements.

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108 “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (SAB 108), to address diversity in practicein quantifying financial statement misstatements and the potential for thebuild up of improper amounts on the balance sheet. SAB 108 identifies theapproach that registrants should take when evaluating the effects of unadjustedmisstatements on each financial statement, the circumstances under whichcorrections of misstatements should result in a revision to financialstatements and disclosures related to the correction of misstatements. SAB 108is effective for financial statements for an interim period of the first fiscalyear ending after November 16, 2006. The adoption of SAB 108 duringthe third quarter of the Company’s 2007 fiscal year did not havean affect on its consolidated financial statements.
| **Note 3. Stock Split Effected in the Form of a Dividend** |
|------------------------------------------------------------|

 

On November 29, 2006, the Company issued a stock dividend in order toeffect a three-for-two stock split of the Company’s common stock.  All share and earnings per share numbersprior to the November 29, 2006 stock split (including without limitation allshare and share-related numbers included in Note 5 below) have beenretroactively restated to reflect the stock dividend for all periodspresented.  The number of authorizedshares remains at 15 million.

6

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# ** **

| **Note 4. Borrowings Under Revolving Credit Facility and Long-Term Debt** |
|---------------------------------------------------------------------------|

 

On April 28, 2003, the Company established a stock buybackprogram.  During the first nine months offiscal year 2007, the Company purchased 1,043,813 shares of its outstandingcommon stock pursuant to the stock buyback program.  Of the 1,043,813 shares repurchased duringthe first nine months of the fiscal year, 944,363 shares were purchased forapproximately $15.7 million in one transaction with a large former shareholder.  This transaction significantly reduced shareholders’equity, and because the purchase price was funded with borrowings under theCompany’s revolving credit facility, it also increased total liabilities.  Prior to entering into this transaction, theCompany discussed the proposed transaction, the anticipated borrowingsnecessary to consummate the transaction and its possible impact on the Company’sfinancial condition, with Wachovia Bank, N.A. and SunTrust Bank, the lendersunder the Company’s revolving credit facility and term loan.  As a result of the transaction, the Companydid not meet the Maximum Total Liabilities to Tangible Net Worth covenant underthe terms of its revolving credit facility and term loan at the end of thesecond quarter of fiscal year 2007.  TheCompany requested and received a waiver of the covenant from the banks for thesecond fiscal quarter.  At the end of thethird quarter of fiscal year 2007, the Company also did not meet the MaximumTotal Liabilities to Tangible Net Worth covenant; and, the Company once againrequested and received a waiver from the banks that allowed the Company toavoid a covenant violation under these loans for the third fiscal quarter.  If the Company does not comply, oranticipates that it will not comply, with this or any other covenant under itsrevolving credit facility for the fourth quarter of fiscal 2007 or any futurequarter, the Company would expect to work closely with the banks to attempt toobtain additional waivers, as necessary. Although the Company projects that it will comply with the debt covenantat the end of the fourth quarter of fiscal year 2007, there can be no assurancethat the Company will comply with the covenant as of the end of the fourth quarterof fiscal year 2007or any future quarter or, if not, that the banks will provideanother waiver.  If the Company does notcomply and if the banks refuse to provide another waiver, the Company wouldviolate the covenant, which would result in the occurrence of an event ofdefault under the terms of these loans, whereupon the balance outstanding underboth of these loans, as well as the balances outstanding under the Company’sother debt agreements, would become payable in full and the Company’s abilityto borrow under its existing revolving credit facility would beeliminated.  In such an instance,management would seek to obtain other sources of comparable financing, theavailability (or terms) of which cannot be assured, either in a timely manneror at all.
| **Note 5. Stock Compensation** |
|--------------------------------|

 

Effective March 27, 2006, the Company adopted Statement of FinancialAccounting Standards (SFAS) No. 123R, “Share-Based Payment,” using the modifiedprospective application transition method. Because the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”which the Company had previously adopted effective March 29, 2004, and SFASNo. 123R are generally consistent with respect to the Company’sshare-based payments (other than as described below), the adoption of SFASNo. 123R did not have a material impact on the Company’s financialposition, results of operations or cash flows.

SFAS No. 123R requires the Company to include in its calculation ofperiodic stock compensation expense an estimate of future forfeitures.  Prior to fiscal year 2007, in accordance withSFAS No. 123, the Company only included forfeitures in its calculation of stockcompensation expense when the awards were actually forfeited.  The inclusion of estimated in lieu of actualforfeitures did not have a material impact on the Company’s financial positionor results of operations for the quarter and the nine months ended December 24,2006.  Prior to the adoption of SFASNo. 123R, benefits of tax deductions in excess of recognized compensationcosts were reported as operating cash flows. SFAS No. 123R requires excesstax benefits be reported as a financing cash flow.

The Company’s selling, general and administrative expenses for the threemonths and nine months ended December 24, 2006 includes $579,900 and$1,571,900, respectively, of stock compensation expense.  The Company’s selling, general andadministrative expenses for the three months and nine months ended December 25,2005 includes $188,700 and $752,700, respectively, of stock compensationexpense.  Provision for income taxes forthe three months and nine months ended December 24, 2006 includes $217,500 and$591,000, respectively, of income tax benefits related to our stock-basedcompensation arrangements.  Provision forincome taxes for the three months and nine months ended December 25, 2005includes $73,600 and $293,600, respectively, of income tax benefits related toour stock-based compensation arrangements. Stock compensation expense isprimarily related to our Performance Stock Unit Program as described below.

7

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The Company’s stock incentive plan is the Amendedand Restated 1994 Stock and Incentive Plan (the 1994 Plan).  The 1994 Plan allows for the grant of awardsin respect of an aggregate of 1,758,750 shares of the Company’s common stock.As of December 24, 2006, 128,282 shares were available for issue in respect ofawards available for future grant under the 1994 Plan. The 1994 Plan allows forthe grant of incentive stock options, nonqualified stock options, stockappreciation rights, restricted stock and restricted stock units and otherperformance awards.  No additional awardscan be made under the 1994 Plan after July 22, 2009, without shareholderapproval of an extension of the plan term. Options, restricted stock and Performance Stock Unit (PSU) awards have beengranted as awards under the 1994 Plan. Shares which are subject to outstanding PSU or other awards under thePlan, and which are not earned, are returned to the 1994 Plan and becomeavailable for future issuance.

**PerformanceStock Units: **Beginning in fiscal year 2005, the Company’sequity-based compensation philosophy and practice shifted away from awardingstock options to granting performance-based and time-vested stock grants.  Accordingly, in April 2004, the Company’sBoard of Directors established a Performance Stock Unit Award Program under the1994 Plan.  Under the program,Performance Stock Units (PSUs) have been granted to selected individuals. EachPSU entitles the participant to earn TESSCO common stock, but only afterearnings per share and, for non-director employee participants, individualperformance targets are met over a defined performance cycle. Performancecycles, which are fixed for each grant at the date of grant, range from one tothree years.  Once earned, shares vestand are issued over a specified period of time determined at the time of thegrant, provided that the participant remains employed by or associated with theCompany at the time of share issuance. Earnings per share targets, which take into account the earnings impactof this program, are set by the Board of Directors in advance for the completeperformance cycle at levels designed to grow shareowner value, and for thosePSUs which are based upon multiple year performance cycles, typically representcontinual increases in earnings per share. If actual performance does not reach the minimum annual or cumulativethreshold targets, no shares are issued. Under SFAS No. 123R, the Companyrecords compensation expense on its PSUs over the service period, based on thenumber of shares management estimates will ultimately be issued.  Accordingly, the Company determines theperiodic financial statement compensation expense based upon the stock price atthe PSU grant date, management’s projections of future EPS performance over theperformance cycle, and the resulting amount of estimated share issuances, netof estimated forfeitures.  Future changesin factors impacting the ultimate number of shares granted could cause theseestimates to change significantly in future periods.  The Company estimated the forfeiture rateprimarily based on historical experience. The Company’s calculated estimated forfeiturerate was approximately 4%.

The following table summarizes the activity under the Company’s PSUprogram for the nine months ended December 24, 2006:

|                                                     | ** ** | **2006**         | ** ** | **Weighted Average  Fair Value at Grant** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|---------------------------------------------------------------|------------|
| Outstanding  shares, non-vested beginning of period |       | 642,188          |       | $                                                             | 9.15       |   |
| Granted                                             |       | 225,000          |       | 12.87                                                         |       |
| Outstanding  shares, non-vested end of period       |       | 867,188          |       | $                                                             | 10.11      |   |
| Vesting period                                      |       | May 1, 2006-2010 |       |                                                          |       |

 

Of the 867,188 outstanding shares covered by PSUs,140,039 shares are earned but not yet issued and will vest and be issuedratably on or about May 1 of 2007 and 2008, provided that the recipient remainsemployed by or associated with the Company at the time of issuance.  The remaining 727,149 may or may not beearned depending upon: (1) whether cumulative and/or annual earnings per shareperformance of the Company reaches or exceeds at least the thresholdperformance targets; (2) the extent to which participants meet applicableindividual performance targets; and (3) the participants remain employed by orassociated with the Company for all or a portion of the performance cycles andvesting periods.

In May 2006, 79,304 shares were earned and becamevested related to fiscal year 2005 and/or fiscal year 2006 performance.  Unrecognized compensation expense based onthe current expectation of targets to be achieved as of December 24, 2006 forPSUs expected to be earned is $3.2 million. These costs are expected to be recognized over a weighted average periodof 2.6 years.  If the maximum target ofPSUs outstanding were assumed to be earned, total unrecognized compensationcosts would be $8.0 million.

8

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**Stock Options:**  For the threemonths ended December 24, 2006, options for 750 shares were forfeited at anaverage exercise price of $15.96.  Nooptions were forfeited in the three months ended December 25, 2005.  In accordance with SFAS No. 123R, the fairvalue of the Company’s stock options have been determined using theBlack-Scholes-Merton option pricing model, based upon facts and assumptionsexisting at the date of grant.  Stockoptions granted have exercise prices equal to the market price of the Company’scommon stock on the grant date.

The value of each option at the date of grant is amortized ascompensation expense over the option service period.  This occurs without regard to subsequentchanges in stock price, volatility or interest rates over time, provided thatthe option remains outstanding.  Thefollowing table summarizes the pertinent option information for outstandingoptions:

 

|                                   | ** ** | ** ** | ** ** | **Nine months ended December 24, 2006** | ** ** | ** **                                                  | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price**                       | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Outstanding,  beginning of period |       | 240,000    |       | $                                                                | 8.34       |                                                        |       |   |   |   |
| Exercised                         |       | 36,750     |       | 7.02                                                             |       |                                                        |       |   |   |
| Forfeited                         |       | 11,250     |       | 17.44                                                            |       |                                                        |       |   |   |
| Outstanding, end  of period       |       | 192,000    |       | $                                                                | 8.06       |                                                        | 3.81       |   | $ | 2,376,000 |   |
| Exercisable, end of  period       |       | 168,000    |       | $                                                                | 8.49       |                                                        | 3.60       |   | $ | 2,005,600 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value (the difference between theclosing stock price on the last trading day of the third quarter of fiscal year2007 and the exercise price, multiplied by the number of in-the-money options)that would have been received by the option holders had all option holdersexercised their options on December 24, 2006. This amount changes based on the fair market value of TESSCO’s stock.

As of December 24, 2006, there was $22,400 of totalunrecognized compensation costs related to stock options. These costs areexpected to be recognized over a weighted average period of less than one year.

**Restricted Stock:**  During thesecond quarter of fiscal year 2007, the Company granted 150,000 shares of theCompany common stock to its Chairman and Chief Executive Officer as arestricted stock award under the 1994 Plan. These shares vest ratably over ten fiscal years, beginning on the lastday of fiscal year 2007 and ending on the last day of fiscal year 2016,subject, however, to the terms applicable to the award, including termsproviding for possible acceleration of vesting or forfeiture.  The weighted average fair value for theseshares at the grant date was $15.84.  Noother shares of restricted stock are currently issued as awards under the 1994Plan.  As of December 24, 2006, there wasapproximately $2.2 million of total unrecognized compensation costs related torestricted stock.  If these shares vestratably, these unrecognized compensation costs are expected to be recognizedover a weighted average period of approximately 9.5 years.

**TeamMember Stock Purchase Plan:**  During fiscal year 2000, the Companyadopted the Team Member Stock Purchase Plan. This plan permits eligibleemployees to purchase up to an aggregate of 300,000 shares of the Company’scommon stock at 85% of the lower of the market price on the first day of asix-month period or the market price on the last day of that same six-monthperiod.  The Company’s expenses relatingto this plan are for its administration and expense associated with the fairvalue of this benefit in accordance with SFAS No. 123R.  Expenses incurred for the Team Member StockPurchase Plan during the three months and nine months ended December 24, 2006related to SFAS No. 123R was $100 and $8,500, respectively.  During the three months and nine months endedDecember 24, 2006, 28 and 5,845 shares, respectively, were sold to employeesunder this plan, having a weighted average market value of $10.34 and $8.65.
| **Note 6. Acquisition** |
|-------------------------|

 

On April 21, 2006, the Company acquired substantially all the non-cashnet assets of TerraWave Solutions, Ltd. and its commonly owned affiliate,GigaWave Technologies, Ltd. for an initial cash payment of approximately $3.8million, and additional cash earn-out payments over a four-year period,contingent on the achievement of certain minimum earnings thresholds ($1.5million of the $3.8 million cash amount paid at closing is a non-refundableprepayment against future earn-out payments, if any, amortizable over thefour-year period).  To the extent thatcertain minimum earnings thresholds are not achieved, the Company will not beable to recover this prepayment.  Themaximum amount of contingent future earn-out payments (after subtracting the$1.5 million prepayment) is $15.5 million. Contingent payments made under the terms of the purchase agreement aretreated as an additional cost of the acquired businesses and additionalgoodwill is recorded.  Additionally,acquisition related transaction costs, primarily comprised of legal andaccounting fees totaled $89,500.

9

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The TerraWave business (TerraWave), now owned by TESSCO, designs,configures and offers 802.11 Wi-Fi products and accessories, many of which arebranded under TerraWave’s private label. Some of the TerraWave-branded products are sold with products of CiscoSystems under Cisco’s Strategic Technology Integrator program.  The GigaWave business (GigaWave), now ownedby TESSCO, provides curriculum development and hands-on, instructor-ledtraining courses for the Wireless Local Area Network (WLAN) industry. GigaWavedevelops and delivers wireless networking courseware for Cisco Systems,allowing IT professionals to obtain Cisco Wireless Certifications.   Both of these businesses are included in theCompany’s network infrastructure segment.

The Company has included the financial results of TerraWave and GigaWavein its consolidated financial statements beginning April 21, 2006 (AcquisitionDate).  Pro forma results have not beenpresented as the impact of the acquisition is not material and did not involvea significant amount of assets.

This acquisition has been accounted for as a business combination inaccordance with SFAS No. 141, “Business Combinations.”  Under business combination accounting, thetotal preliminary purchase price was allocated to TerraWave and GigaWave’s nettangible and identifiable intangible assets based on their estimated fairvalues as of April 21, 2006.  The excessof the purchase price over the net tangible and identifiable intangible assetswas recorded as goodwill.  Thepreliminary purchase price was allocated as set forth below:

| Trade accounts receivable         |   | $         | 1,685,500 |   |
|-----------------------------------|--------|-----------|-----------|--------|
| Product  inventory                |   | 896,600   |      |
| Prepaid expenses                  |   | 17,200    |      |
| Identifiable  intangible assets   |   | 1,630,000 |      |
| Goodwill                          |   | 519,000   |      |
| Fixed assets                      |   | 139,600   |      |
| Trade accounts  payable           |   | (758,900  | )         |
| Accrued expenses                  |   | (195,700  | )         |
| Total preliminary  purchase price |   | $         | 3,933,300 |   |

 

In performing its preliminary purchase price allocation, the Companyconsidered, among other factors, its intention for future use of acquiredassets, analyses of historical financial performance and estimates of futureperformance of TerraWave and GigaWave. The Company’s estimate of the fair valueof intangible assets was based, in part, on a valuation completed by anindependent valuation specialist, and estimates and assumptions provided by management.The identified intangible assets consisted of service-marks, covenants not tocompete and customer contracts and relationships.  Based upon the preliminary purchase priceallocation, the trademarks are estimated to have an approximate fair value of$850,000 and an indefinite life, the customer contacts are estimated to have anapproximate fair value of $490,000 and an estimated useful life of four yearsand the covenants not to compete are estimated to have an approximate fairvalue of $290,000 and an estimated useful life of six years.  Goodwill noted above is expected to bedeductible for tax purposes.  The primaryfactors contributing to a purchase price that resulted in the recognition ofgoodwill included expansion of the WLAN product line, expansion of markets forTESSCO’s existing products, the acquired employee force and the expansion ofTESSCO’s training business.

For the period of April 21, 2006 through December 24, 2006, an additional$1,122,500 has been accrued for additional earn-out based on achievement ofcertain earnings thresholds.  This amounthas been recorded as goodwill and has been or will be paid out in accordancewith the terms of the purchase agreement. In accordance with the acquisition agreement, this amount is net of$375,000 (one quarter of the $1.5 million prepayment) of the non-refundableprepayment against future earn-out payments discussed above.

10

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# ** **

| **Note 7. Earnings Per Share** |
|--------------------------------|

** **

The dilutive effect of all outstanding options,restricted stock and PSUs has been determined by using the treasury stockmethod.  The weighted average sharesoutstanding is calculated as follows:
| ** **                                                 | ** ** | **Fiscal Quarters Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **December 24,  2006**         | ** ** | **December 25,  2005**     | ** ** | **December 24,  2006** | ** ** | **December 25,  2005** | ** ** |
|                                                       |       |                                |       |                            |       |   |   |   |   |
| Basic weighted average common shares outstanding           |       | 5,320,600                           |       | 6,281,300                       |       | 5,915,500 |   | 6,331,200 |   |
| Dilutive common shares outstanding — PSUs             |       | 156,000                             |       | 53,800                          |       | 79,800 |   | 35,200 |   |
| Dilutive common shares outstanding — stock options    |       | 129,100                             |       | 59,400                          |       | 108,100 |   | 53,800 |   |
| Dilutive common shares outstanding — restricted stock |       | 23,600                              |       | —                |       | 23,600 |   | — |   |
| Diluted  weighted average common shares outstanding        |       | 5,629,300                           |       | 6,394,500                       |       | 6,127,000 |   | 6,420,200 |   |

 

As of December 24, 2006, stock options with respect to 192,000 shares ofcommon stock were outstanding. All outstanding options were included in thecomputation of diluted earnings per share because the options’ exercise priceswere less than the average market price of the common shares and, therefore,were not antidilutive.
| **Note 8. Business Segments** |
|-------------------------------|

 

The Company evaluates revenue, gross profit and inventory as threebusiness segments:

(1)******    **Network infrastructure products, which areused to build, repair and upgrade wireless telecommunications, computing andInternet networks, and generally complement radio frequency transmitting andswitching equipment provided directly by original equipment manufacturers(OEMs).  Results from the recentlyacquired businesses of TerraWave and GigaWave are included in networkinfrastructure.

(2)******      **Mobile devices and accessory products, whichinclude cellular telephones and other data devices, pagers and two-way radiosand related accessories such as replacement batteries, cases, speakers, mobileamplifiers, power supplies, headsets, mounts, car antennas and various wirelessdata devices.

(3)******      **Installation, test and maintenance products,which are used to install, tune, maintain and repair wireless communicationsequipment.

Within the mobile devices and accessories line of business, the Companysells to both commercial and consumer markets. The network infrastructure and installation, test and maintenance linesof business sell primarily to commercial markets.  The Company also regularly reviews itscommercial results of operations in two customer categories.  These two customer categories and theconsumer customer category, for which results of operations are also separatelyreviewed, are described further below:

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

·                  Commercial Self-Maintained Users, Governments andResellers.  Self-maintained user (SMU) andgovernment customers include commercial entities such as major utilities andtransportation companies, federal agencies and state and local governments,including public safety organizations. Resellers include dealers and resellersthat sell, install and service cellulartelephone, paging and two-way radiocommunications equipment primarily for the consumer and small businessmarkets.  These resellers include localand national proprietorships and retailers, as well as sales and installationcenters operated by cellular and paging carriers.

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

11

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The Company measures segment performance based on segment grossprofit.  The segment operations developtheir product offering, pricing and strategies, which are collaborative withone another and the centralized sales and marketing function.  Therefore, the Company does not segregateassets, other than inventory, for internal reporting, evaluating performance orallocating capital.  Product deliveryrevenue and certain cost of sales expenses have been allocated to each segmentbased on a percentage of revenues and/or gross profit, as applicable.  All of the Company’s goodwill relates toacquisitions within its network infrastructure line of business.

 
| ***(Amounts in thousands)***      | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Fiscal  Quarter ended December 24, 2006** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                       |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators       |       | $                           | 14,965     |                                          | $          | 663                                               |       | $         | 3,434      |   | $ | 19,062 |   |
| SMUs, Governments and Resellers             |       | 29,905                      |       | 62,805                                        |       | 20,868                                            |       | 113,578   |       |
| Total Commercial  Revenues                  |       | 44,870                      |       | 63,468                                        |       | 24,302                                            |       | 132,640   |       |
| Consumer  Revenues                          |       | —                      |       | 2,077                                         |       | —                                            |       | 2,077     |       |
| Total Revenues                              |       | $                           | 44,870     |                                          | $          | 65,545                                            |       | $         | 24,302     |   | $ | 134,717 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                   |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators       |       | $                           | 3,413      |                                          | $          | 199                                               |       | $         | 856        |   | $ | 4,468 |   |
| SMUs, Governments and Resellers             |       | 7,445                       |       | 15,045                                        |       | 5,140                                             |       | 27,630    |       |
| Total Commercial  Gross Profit              |       | 10,858                      |       | 15,244                                        |       | 5,996                                             |       | 32,098    |       |
| Consumer Gross  Profit                      |       | —                      |       | 780                                           |       | —                                            |       | 780       |       |
| Total Gross  Profit                         |       | $                           | 10,858     |                                          | $          | 16,024                                            |       | $         | 5,996      |   | $ | 32,878 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |
| Product Inventory                           |       | $                           | 19,079     |                                          | $          | 21,442                                            |       | $         | 19,363     |   | $ | 59,884 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |
| **Fiscal  Quarter ended December 25, 2005** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                       |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators       |       | $                           | 15,103     |                                          | $          | 913                                               |       | $         | 4,576      |   | $ | 20,592 |   |
| SMUs, Governments and Resellers             |       | 26,939                      |       | 32,219                                        |       | 12,775                                            |       | 71,933    |       |
| Total Commercial  Revenues                  |       | 42,042                      |       | 33,132                                        |       | 17,351                                            |       | 92,525    |       |
| Consumer  Revenues                          |       | —                      |       | 2,287                                         |       | —                                            |       | 2,287     |       |
| Total Revenues                              |       | $                           | 42,042     |                                          | $          | 35,419                                            |       | $         | 17,351     |   | $ | 94,812 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                   |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators       |       | $                           | 3,617      |                                          | $          | 241                                               |       | $         | 1,099      |   | $ | 4,957 |   |
| SMUs, Governments and Resellers             |       | 5,815                       |       | 7,598                                         |       | 4,329                                             |       | 17,742    |       |
| Total Commercial  Gross Profit              |       | 9,432                       |       | 7,839                                         |       | 5,428                                             |       | 22,699    |       |
| Consumer Gross  Profit                      |       | —                      |       | 1,264                                         |       | —                                            |       | 1,264     |       |
| Total Gross  Profit                         |       | $                           | 9,432      |                                          | $          | 9,103                                             |       | $         | 5,428      |   | $ | 23,963 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                          |       | $                           | 18,403     |                                          | $          | 14,044                                            |       | $         | 16,602     |   | $ | 49,049 |   |
|                                        |       |                        |       |                                          |       |                                              |       |      |       |

 

12

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| ***(Amounts in thousands)***   | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Nine  Months ended December 24, 2006** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                    |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators    |       | $                           | 39,166     |                                          | $          | 2,051                                             |       | $         | 10,757     |   | $ | 51,974 |   |
| SMUs, Governments and Resellers          |       | 86,640                      |       | 154,932                                       |       | 66,396                                            |       | 307,968   |       |
| Total Commercial  Revenues               |       | 125,806                     |       | 156,983                                       |       | 77,153                                            |       | 359,942   |       |
| Consumer  Revenues                       |       | —                      |       | 5,371                                         |       | —                                            |       | 5,371     |       |
| Total Revenue                            |       | $                           | 125,806    |                                          | $          | 162,354                                           |       | $         | 77,153     |   | $ | 365,313 |   |
|                                     |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators    |       | $                           | 9,103      |                                          | $          | 603                                               |       | $         | 2,600      |   | $ | 12,306 |   |
| SMUs, Governments and Resellers          |       | 20,375                      |       | 34,699                                        |       | 21,259                                            |       | 76,333    |       |
| Total Commercial  Gross Profit           |       | 29,478                      |       | 35,302                                        |       | 23,859                                            |       | 88,639    |       |
| Consumer Gross  Profit                   |       | —                      |       | 2,354                                         |       | —                                            |       | 2,354     |       |
| Total Gross  Profit                      |       | $                           | 29,478     |                                          | $          | 37,656                                            |       | $         | 23,859     |   | $ | 90,993 |   |
|                                     |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                       |       | $                           | 19,079     |                                          | $          | 21,442                                            |       | $         | 19,363     |   | $ | 59,884 |   |
|                                     |       |                        |       |                                          |       |                                              |       |      |       |
| **Nine  Months ended December 25, 2005** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                    |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators    |       | $                           | 43,584     |                                          | $          | 2,222                                             |       | $         | 12,762     |   | $ | 58,568 |   |
| SMUs, Governments and Resellers          |       | 72,398                      |       | 78,630                                        |       | 35,755                                            |       | 186,783   |       |
| Total Commercial  Revenues               |       | 115,982                     |       | 80,852                                        |       | 48,517                                            |       | 245,351   |       |
| Consumer  Revenues                       |       | —                      |       | 135,417                                       |       | —                                            |       | 135,417   |       |
| Total Revenue                            |       | $                           | 115,982    |                                          | $          | 216,269                                           |       | $         | 48,517     |   | $ | 380,768 |   |
|                                     |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators    |       | $                           | 10,224     |                                          | $          | 609                                               |       | $         | 3,042      |   | $ | 13,875 |   |
| SMUs, Governments and Resellers          |       | 16,647                      |       | 19,513                                        |       | 11,838                                            |       | 47,998    |       |
| Total Commercial  Gross Profit           |       | 26,871                      |       | 20,122                                        |       | 14,880                                            |       | 61,873    |       |
| Consumer Gross  Profit                   |       | —                      |       | 16,479                                        |       | —                                            |       | 16,479    |       |
| Total Gross  Profit                      |       | $                           | 26,871     |                                          | $          | 36,601                                            |       | $         | 14,880     |   | $ | 78,352 |   |
|                                     |       |                        |       |                                          |       |                                              |       |      |       |
| Product Inventory                        |       | $                           | 18,403     |                                          | $          | 14,044                                            |       | $         | 16,602     |   | $ | 49,049 |   |

#  

| **Note 9. Customer Concentration** |
|------------------------------------|

 

The Company’s future results could be negatively impacted by the lossof certain customer and/or vendor relationships.  For the three months and nine months endedDecember 24, 2006, sales of products to the Company’s top customerrelationship, Cingular Wireless LLC (Cingular), accounted for 26% and 21% of total revenues, respectively, and23% and 16% of total gross profits, respectively.  This Cingular relationship began in the thirdquarter of fiscal year 2006, but was not a significant contributor to theCompany’s revenues and gross profits for the three month and nine months endedDecember 25, 2005.  For the threemonths and nine months ended December 24, 2006, sales of products related tothe Company’s top vendor relationship, the Nokia Inc. (Nokia) repair andreplacement component relationship, accounted for 10% and 12% of total revenues, respectively, and 10% and 17% of totalgross profits, respectively.  TheNokia relationship is a complete supply chain relationship and, therefore, wehave no alternative sources of supply, and our purchases, and ultimately ourresale of these products, is dependent upon the continuation of the Nokiarelationship.  We also sell productsother than Nokia repair and replacement materials to many of thesecustomers.  Absent this arrangement withNokia, we would maintain the ability to sell these other products to thesecustomers. At December 24, 2006, repair andcomponent parts purchased from Nokia accounted for 26% of the dollar value ofthe total product inventory, based on the purchase price for theinventory.  Beginning in the fourthquarter of fiscal year 2007, inventory related to this relationship will beheld on consignment and no longer owned by the Company.

13

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In September 2005, T-Mobile, previously the Company’s largest customerrelationship, transitioned the TESSCO provided e-commerce marketing and salessystem to their own in-house web solution and alternative third-party logisticsprovider, and accordingly, revenues from this relationship ceased.  Thisaffinity relationship did not account for any revenues or gross profits in thefirst nine months of fiscal year 2007. In the third quarter of fiscal year 2006, T-Mobile did not account forany significant revenues or gross profits; however, T-Mobile accounted for 34%and 16% of total revenues and total gross profits, respectively, in the firstnine months of fiscal year 2006.
| **Note 10. Subsequent Events** |
|--------------------------------|

 

On January 23, 2007, theCompany entered into a First Amendment to Agreement of Lease, which among otherthings, provides for a six month extension, until November 30, 2007, of thelease term provided for under the Agreement of Lease, dated November 3, 2003,between the Company and the Atrium Building LLC.  The base rental rate is $124,732 per monthfor the extended period.

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

This commentaryshould be read in conjunction with the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations from the Company’s Form 10-K forthe fiscal year ended March 26, 2006.

**BusinessOverview and Environment**

TESSCOTechnologies Incorporated (TESSCO) is a leading provider of integrated productand supply chain solutions to the professionals that design, build, run,maintain and use wireless mobile, fixed and in-building systems.  Although we sell products to customers inover 100 countries, approximately 97% of our sales are made to customers in theUnited States.  We have operations andoffice facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio,Texas.  Due to the diversity in ourbusiness, we are not significantly affected by seasonality.

We offer a widerange of products that are classified into three business segments: networkinfrastructure; mobile devices and accessories; and installation, test andmaintenance.

·                                          Network infrastructure products, whichare sold to our commercial customers, are used to build, repair and upgradewireless telecommunications, computing and Internet networks. Sales oftraditional network infrastructure products, such as cable, transmission linesand antennas are in part dependent on capital spending in the wirelesscommunications industry.  However, wehave also been growing our offering of wireless broadband and network equipmentproducts, which are not as dependent on the overall capital spending of theindustry.  The acquisition of TerraWaveand GigaWave in late April 2006 further broadened our WLAN product and serviceoffering in this segment.

·                                          Mobile devices and accessory productsinclude cellular telephones and other data devices, pagers and two-way radiosand related accessories.  Mobile devicesand accessory products are widely sold to commercial customers andconsumers.  Commercial customers includeretail stores, value-added resellers and dealers.  Consumers are primarily reached through ouraffinity partnerships, where we offer services including customized orderfulfillment, outsourced call centers, and building and maintaining privatelabel Internet sites.

·                                          Installation, test and maintenanceproducts, which are sold to our commercial customers, are used to install,tune, maintain and repair wireless communications equipment. Approximately 54%and 56% of all of our installation, test and maintenance sales for the firstthree months and nine months of fiscal year 2007, respectively, were generatedfrom the sales of replacement parts and materials for original equipmentmanufacturers, primarily Nokia Inc. (Nokia). The arrangements on which these relationships are based, like many ofour other customer and vendor arrangements, are of limited duration and areterminable by either party upon several months or otherwise short notice. Theremainder of this segment is made up of sophisticated analysis equipment andvarious frequency-, voltage- and power-measuring devices, as well as anassortment of tools, hardware and supplies required by service technicians.  Both our repair and replacement parts salesand consumer sales through our affinity partnerships are reliant onrelationships with a small number of vendors.

14

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We view our customer basein three major categories:

·                                          Commercial Public Carriers and NetworkOperators  Public carriers and network operators includesystems operators that are generally responsible for building and maintainingthe infrastructure system and provide airtime service to individualsubscribers.

·                                          Commercial Self-Maintained Users (SMUs),Governments and Resellers  SMUs and government customersinclude commercial entities such as major utilities and transportationcompanies, federal agencies and state and local governments, including publicsafety organizations. Resellers include dealers and resellers that sell, installand service cellular telephone, paging and two-way radio communicationsequipment primarily for the consumer and small business markets.  These resellers include local and nationalproprietorships and retailers, as well as sales and installation centersoperated by cellular and paging carriers.

·                                          Consumers  Consumers arecustomers buying through any of our affinity-partner relationships or directlyfrom our consumer website, YourWirelessSource.comTM.

The wirelesscommunications distribution industry is competitive and fragmented, and iscomprised of several national distributors. In addition, many manufacturerssell direct. Barriers to entry for distributors are relatively low,particularly in the mobile devices and accessory market, and the risk of new competitorsentering the market is high. Consolidation of larger wireless carriers has and will most likelycontinue to impact our current and potential customer base.  In addition, the agreements or arrangementswith our customers or vendors looking to us for product and supply chainsolutions are typically of limited duration and are terminable by either partyupon several months notice.  Our abilityto maintain these relationships is subject to competitive pressures andchallenges.  We believe, however, thatour strength in service, the breadth and depth of our product offering, ourinformation technology system, our large customer base and purchasingrelationships with approximately 350 manufacturers provide us with asignificant competitive advantage over new entrants to the market. 

Our third quarterrevenues increased by 42.1% compared to the third quarter of last year.  This growth was driven by growth in each ofour commercial lines of business.  Grossprofits also increased in all of our commercial lines of business as comparedwith the third quarter of last year.

15

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**Results ofOperations**

The followingtable summarizes the unaudited results of our operations for the three monthsand nine months ended December 24, 2006 and December 25, 2005:
| ** **                                                                        | ** ** | **Fiscal Quarters Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ***(Amounts in thousands, except per share data)*** | ** ** | **December 24,  2006**         | ** ** | **December 25,  2005**     | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **December 24,  2006** | ** ** | **December 25,  2005** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
| Commercial  Revenues                                                              |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network Infrastructure:                                                           |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | $                                   | 14,965     |                            | $          | 15,103 |   | $ | (138 | ) | (0.9 | )% | $ | 39,166 |   | $ | 43,584 |   | $ | (4,418 | ) | (10.1 | )% |
| SMUs, Governments and Resellers                                                   |       | 29,905                              |       | 26,939                          |       | 2,966 |   | 11.0 | % | 86,640 |   | 72,398 |   | 14,242 |   | 19.7 | % |
| Total Network Infrastructure                                                      |       | 44,870                              |       | 42,042                          |       | 2,828 |   | 6.7 | % | 125,806 |   | 115,982 |   | 9,824 |   | 8.5 | % |
| Mobile Devices and Accessories:                                                   |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | 663                                 |       | 913                             |       | (250 | ) | (27.4 | )% | 2,051 |   | 2,222 |   | (171 | ) | (7.7 | )% |
| SMUs, Governments and Resellers                                                   |       | 62,805                              |       | 32,219                          |       | 30,586 |   | 94.9 | % | 154,932 |   | 78,630 |   | 76,302 |   | 97.0 | % |
| Total Mobile Devices and Accessories                                              |       | 63,468                              |       | 33,132                          |       | 30,336 |   | 91.6 | % | 156,983 |   | 80,852 |   | 76,131 |   | 94.2 | % |
| Installation, Test and Maintenance:                                               |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | 3,434                               |       | 4,576                           |       | (1,142 | ) | (25.0 | )% | 10,757 |   | 12,762 |   | (2,005 | ) | (15.7 | )% |
| SMUs, Governments and Resellers                                                   |       | 20,868                              |       | 12,775                          |       | 8,093 |   | 63.4 | % | 66,396 |   | 35,755 |   | 30,641 |   | 85.7 | % |
| Total Installation, Test and Maintenance                                          |       | 24,302                              |       | 17,351                          |       | 6,951 |   | 40.1 | % | 77,153 |   | 48,517 |   | 28,636 |   | 59.0 | % |
| Total Commercial  Revenues                                                        |       | 132,640                             |       | 92,525                          |       | 40,115 |   | 43.4 | % | 359,942 |   | 245,351 |   | 114,591 |   | 46.7 | % |
| Consumer Revenues  - Mobile Devices and Accessories                               |       | 2,077                               |       | 2,287                           |       | (210 | ) | (9.2 | )% | 5,371 |   | 135,417 |   | (130,046 | ) | (96.0 | )% |
| Total Revenues                                                                    |       | $                                   | 134,717    |                            | $          | 94,812 |   | $ | 39,905 |   | 42.1 | % | $ | 365,313 |   | $ | 380,768 |   | $ | (15,455 | ) | (4.1 | )% |
|                                                                              |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Gross  Profit                                                          |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network Infrastructure:                                                           |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | $                                   | 3,413      |                            | $          | 3,617 |   | $ | (204 | ) | (5.6 | )% | $ | 9,103 |   | $ | 10,224 |   | $ | (1,121 | ) | (11.0 | )% |
| SMUs, Governments and Resellers                                                   |       | 7,445                               |       | 5,815                           |       | 1,630 |   | 28.0 | % | 20,375 |   | 16,647 |   | 3,728 |   | 22.4 | % |
| Total Network Infrastructure                                                      |       | 10,858                              |       | 9,432                           |       | 1,426 |   | 15.1 | % | 29,478 |   | 26,871 |   | 2,607 |   | 9.7 | % |
| Mobile Devices and Accessories:                                                   |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | 199                                 |       | 241                             |       | (42 | ) | (17.4 | )% | 603 |   | 609 |   | (6 | ) | (1.0 | )% |
| SMUs, Governments and Resellers                                                   |       | 15,045                              |       | 7,598                           |       | 7,447 |   | 98.0 | % | 34,699 |   | 19,513 |   | 15,186 |   | 77.8 | % |
| Total Mobile Devices and Accessories                                              |       | 15,244                              |       | 7,839                           |       | 7,405 |   | 94.5 | % | 35,302 |   | 20,122 |   | 15,180 |   | 75.4 | % |
| Installation, Test and Maintenance:                                               |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers and Network Operators                                             |       | 856                                 |       | 1,099                           |       | (243 | ) | (22.1 | )% | 2,600 |   | 3,042 |   | (442 | ) | (14.5 | )% |
| SMUs, Governments and Resellers                                                   |       | 5,140                               |       | 4,329                           |       | 811 |   | 18.7 | % | 21,259 |   | 11,838 |   | 9,421 |   | 79.6 | % |
| Total Installation, Test and Maintenance                                          |       | 5,996                               |       | 5,428                           |       | 568 |   | 10.5 | % | 23,859 |   | 14,880 |   | 8,979 |   | 60.3 | % |
| Total Commercial  Gross Profit                                                    |       | 32,098                              |       | 22,699                          |       | 9,399 |   | 41.4 | % | 88,639 |   | 61,873 |   | 26,766 |   | 43.3 | % |
| Consumer Gross  Profit - Mobile Devices and Accessories                           |       | 780                                 |       | 1,264                           |       | (484 | ) | (38.3 | )% | 2,354 |   | 16,479 |   | (14,125 | ) | (85.7 | )% |
| Total Gross  Profit                                                               |       | 32,878                              |       | 23,963                          |       | 8,915 |   | 37.2 | % | 90,993 |   | 78,352 |   | 12,641 |   | 16.1 | % |
| Selling, general  and administrative expenses                                     |       | 29,730                              |       | 22,004                          |       | 7,726 |   | 35.1 | % | 81,554 |   | 71,508 |   | 10,046 |   | 14.0 | % |
| Income from operations                                                            |       | 3,148                               |       | 1,959                           |       | 1,189 |   | 60.7 | % | 9,439 |   | 6,844 |   | 2,595 |   | 37.9 | % |
| Interest, net                                                                     |       | 324                                 |       | 126                             |       | 198 |   | NM |   | 660 |   | 193 |   | 467 |   | NM |   |
| Income before provision for income taxes                                          |       | 2,824                               |       | 1,833                           |       | 991 |   | 54.1 | % | 8,779 |   | 6,651 |   | 2,128 |   | 32.0 | % |
| Provision for  income taxes                                                       |       | 1,059                               |       | 715                             |       | 344 |   | 48.1 | % | 3,305 |   | 2,594 |   | 711 |   | 27.4 | % |
| Net income                                                                        |       | $                                   | 1,765      |                            | $          | 1,118 |   | $ | 647 |   | 57.9 | % | $ | 5,474 |   | $ | 4,057 |   | $ | 1,417 |   | 34.9 | % |
| Diluted earnings  per share                                                       |       | $                                   | 0.31       |                            | $          | 0.17 |   | $ | 0.14 |   | 82.4 | % | $ | 0.89 |   | $ | 0.63 |   | $ | 0.26 |   | 41.3 | % |

 

NM - not meaningful

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**Third Quarter ofFiscal Year 2007 Compared with Third Quarter of Fiscal Year 2006**

**Revenues. **Revenues for the third quarter of fiscal year 2007increased 42.1% as compared with the third quarter of fiscal year 2006,primarily due to a 43.4% growth in commercial revenues, partially offset by a9.2% decrease in consumer revenues. While consumer sales in our mobile devices and accessories line ofbusiness declined, we grew sales in all of our commercial lines of business.

Sales in the mobiledevices and accessories line of business increased 85.1% in the third quarterof fiscal year 2007, as compared with the prior-year period.  The increase was due to a 91.6% increase incommercial sales, partially offset by a 9.2% decrease in consumer sales.  The increase in commercial revenues formobile devices and accessories, which are sold primarily to SMUs, governmentsand resellers, but also to public carriers and network operators, was primarilydue to increased sales of accessory products to carrier and independent retailcustomers.  During the third quarter offiscal year 2006, we began supplying several new wireless carrier customers,including Cingular Wireless LLC.

Network infrastructuresales increased 6.7% as compared with the third quarter of last year, primarilydue to an increase in sales of wireless local area network (WLAN) products andradio frequency products.  Theseincreases were largely a result of our acquisition of TerraWave and GigaWave,which primarily offer WLAN products and training.    Our growth in sales of networkinfrastructure product was in sales to SMUs, governments and resellers, as wehave focused on diversification beyond the traditional infrastructure carriercustomer.  Although we believe the marketfor our network infrastructure products will continue to grow, there can be noassurance that these trends will continue.

Revenues from ourinstallation, test and maintenance line of business had a 40.1% increase fromthe prior-year quarter, primarily due to large sales of repair parts related toour expanded major repair components relationship with Nokia.  Going forward, we expect that revenues fromsales of these repair components will not continue at this level, but willreturn to levels more consistent with those experienced in the first ninemonths of last fiscal year.

**GrossProfit. **Gross profit for the third quarter of fiscal year 2007increased 37.2% as compared with the third quarter of fiscal year 2006. Totalcommercial gross profit grew 41.4%, while consumer gross profit decreased38.3%.  Gross profit margin decreased to24.4% in the third quarter of fiscal year 2007 from 25.3% in third quarter offiscal year 2006.  Gross profit margin inour network infrastructure segment increased from 22.4% in the third quarter offiscal year 2006 to 24.2% in the third quarter of fiscal year 2007.  In our installation, test and maintenancesegment, gross profit margin decreased to 24.7% in the third quarter of fiscalyear 2007 from 31.3% in the third quarter of fiscal year 2006, primarily due tomore repair parts revenue being accounted for on a gross basis versus a netbasis.  Generally, our gross margins byproduct within these segments have been sustained and these variations arerelated to sales mix within the segment product offerings.  Gross profit margin in our mobile devices andaccessories segment decreased to 24.4% in the third quarter of this fiscal yearfrom 25.7% in the third quarter of last year due to lower margins on ourconsumer business.  Commercial grossprofit margin for our mobile devices and accessories increased from 23.7% inthe third quarter of last fiscal year to 24.0% for the third quarter of thisfiscal year, which is attributable to sales mix within the productoffering.  We account for inventory atthe lower of cost or market, and as a result, write-offs/write-downs occur dueto damage, deterioration, obsolescence, changes in prices and other causes.

Our ongoing ability toearn revenues and gross profits from customers and vendors looking to us forproduct and supply chain solutions is dependent upon a number of factors.  The terms, and accordingly the factors,applicable to each affinity relationship often differ.  Among these factors are the strength of thecustomer’s or vendor’s business, the supply and demand for the product orservice, including price stability, changing customer or vendor requirements,and our ability to support the customer or vendor and to continuallydemonstrate that we can improve the way they do business.  In addition, the agreements or arrangementson which our affinity relationships are based are typically of limitedduration, and are terminable by either party upon several months or otherwiserelatively short notice.  These affinityrelationships could also be affected by wireless carrier consolidation.

As total revenues andgross profits from larger customer and vendor relationships, including Cingularand Nokia, increase, we occasionally experience and expect to continue toexperience pricing pressures that may adversely affect future results. In aneffort to mitigate the overall effect of these pressures and to meet theseconsistent challenges, we are focused on our continuing efforts to growrevenues and gross profits from other customer and vendor relationships,consistent with and building on what we have accomplished in the first ninemonths of fiscal year 2007.

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses increased by 35.1% in the third quarter offiscal year 2007 as compared with the third quarter of fiscal year 2006.  Selling, general and administrative expensesas a percentage of revenues decreased to 22.1% in the third quarter of fiscalyear 2007 from 23.2% in the third quarter of fiscal year 2006.  The increase in selling, general andadministrative expenses were primarily driven by increased labor expenses,including our reward programs, and increased sales promotion expenses.

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Labor expenses related tobusiness generation activities increased over the prior-year quarter. These increasesare reflective of our increased focus on our commercial business.  Labor costs have also increased over theprior-year quarter due to increased accruals related to our reward programs,including Performance Stock Units (PSU). PSU expense is based on actual resultsto date and management’s current estimates of future performance in relation topre-determined performance targets. Labor costs were also impacted by theacquisition of TerraWave and GigaWave in April 2006.  Total labor costs, including benefits,increased by approximately $3.3 million from the third quarter of fiscal year2006 to the third quarter of fiscal year 2007.

Sales promotion expensesalso increased in the third quarter of fiscal year 2007 as compared with thethird quarter of fiscal year 2006.  Sales promotion expense increased due to costsrelated to increased sales to retail customers. Total marketing and sales promotion expenses increased byapproximately $2.3 million from the third quarter of fiscal year 2006 to thirdquarter of fiscal year 2007.

We continuallyevaluate the credit worthiness of our existing customer receivable portfolioand provide an appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective customers and make decisions regarding extension of credit terms tosuch prospects based on this evaluation. Accordingly, we recorded a provision for (benefit from) bad debts of $302,600 and $(26,600) for the third quarter endedDecember 24, 2006 and December 25, 2005, respectively.

**Interest,Net.**  Net interest expense increased from $125,600in the third quarter of fiscal year 2006 to $323,800 in the third quarter offiscal year 2007, primarily due to increased interest expense on our revolvingcredit facility.  As discussed inLiquidity and Capital Resources, we entered into a receive variable/pay fixedinterest rate swap on our existing bank loan, thus fixing the interest rate onthis loan at 6.38%.  Interest expense onour other debt instruments had only minor variances from year-to-year in total.

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the third quarter offiscal year 2007 was 37.5% as compared with 39.0% in the third quarter offiscal year 2006.  The decrease in the taxrate is primarily attributable to a change in permanent tax differences as apercentage of total pre-tax income and other minor changes.  As a result of the factors discussed abovedriving growth in sales and gross profit, net income and diluted earnings pershare for the third quarter of fiscal year 2007 increased 57.9% and 82.4%,respectively, over the prior-year quarter.

**First Nine Monthsof Fiscal Year 2007 Compared with First Nine Month of Fiscal Year 2006**

**Revenues. **Revenues for the first nine months of fiscal year 2007decreased 4.1% as compared with the first nine months of fiscal year 2006,primarily due to a 96.0% decrease in consumer revenues, substantially offset bya 46.7% growth in commercial revenues. While total sales in our mobile devices and accessories line of businessdeclined due to the large decrease in consumer sales, we grew sales in all ofour commercial lines of business.

Sales in the mobiledevices and accessories line of business decreased 24.9% in the first ninemonths of fiscal year 2007, as compared with the prior-year period.  The decrease was due to a 96.0% decrease inconsumer sales, offset by a 94.2% increase in commercial sales.  The decrease in consumer sales wasattributable to the transition in the first six months of fiscal year 2006 ofthe TESSCO provided e-commerce marketing and sales system to T-Mobile’s ownin-house web solution and alternative third-party logistics provider.  The increase in commercial revenues formobile devices and accessories, which are sold primarily to SMUs, governmentsand resellers, but also to public carriers and network operators, was primarilydue to increased sales of accessory products to carrier and independent retailcustomers.  During the third quarter offiscal year 2006, we began supplying several new wireless carrier customers,including Cingular Wireless LLC.

Network infrastructuresales increased 8.5% as compared with the first nine months of last year,primarily due to an increase in sales of wireless local area network (WLAN) productsand radio frequency products.  Theseincreases were largely a result of our acquisition of TerraWave and GigaWave,which primarily offer WLAN products and training.  The market for broadband and networkequipment products continues to emerge and grow.  The market for radio frequency (RF)propagation products continues to be challenging, especially in cable products;however, our revenue for these products increased over the prior year,primarily driven by growth in antenna systems and tower site support products. 

18

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Our growth in sales ofnetwork infrastructure product was in sales to SMUs, governments and resellers,as we have focused on diversification beyond the traditional infrastructurecarrier customer.  Although we believethe market for our network infrastructure products will continue to grow, therecan be no assurance that these trends will continue.

Revenues from ourinstallation, test and maintenance line of business had a 59.0% increase fromthe prior year, primarily due to large sales of repair parts related to ourexpanded major repair components relationship with Nokia.  Going forward, we expect that revenues fromsales of these repair components will not continue at this level, but willreturn to levels more consistent with those experienced in the first ninemonths of last fiscal year.

**GrossProfit. **Gross profit for the first nine months of fiscal year2007 increased 16.1% as compared with the first nine months of fiscal year2006. Total commercial gross profit grew 43.3%, while consumer gross profitdecreased 85.7% as a result of the transition of the T-Mobile relationship asdiscussed above.  Gross profit marginincreased to 24.9% in the first nine months of fiscal year 2007 from 20.6% infirst nine months of fiscal year 2006. Gross profit margin in our network infrastructure segment increased from23.2% in the first nine months of fiscal year 2006 to 23.4% in the first ninemonths of fiscal year 2007.  In ourinstallation, test and maintenance segment, gross profit margin increased to30.9% in the first nine months of fiscal year 2007 from 30.7% in the first ninemonths of fiscal year 2006.  Generally,our gross margins by product within these segments have been sustained andthese variations are related to sales mix within the segment productofferings.  Gross profit margin in ourmobile devices and accessories segment increased to 23.2% in the first ninemonths of this fiscal year from 16.9% in the first nine months of last year.  This increase is primarily attributable to alarge decrease in low margin consumer sales which had been related to theT-Mobile relationship, and is partially offset by a decrease in gross profitmargin for our commercial sales.  Thedecrease in commercial gross profit margin for our mobile devices and accessories,from 24.9% in the first nine months of last fiscal year to 22.5% for the firstnine months of this fiscal year, is attributable to sales mix within theproduct offering.  We account forinventory at the lower of cost or market, and as a result, write-offs/write-downsoccur due to damage, deterioration, obsolescence, changes in prices and othercauses.

Our ongoing ability toearn revenues and gross profits from customers and vendors looking to us forproduct and supply chain solutions is dependent upon a number of factors.  The terms, and accordingly the factors,applicable to each affinity relationship often differ.  Among these factors are the strength of thecustomer’s or vendor’s business, the supply and demand for the product orservice, including price stability, changing customer or vendor requirements,and our ability to support the customer or vendor and to continuallydemonstrate that we can improve the way they do business.  In addition, the agreements or arrangementson which our affinity relationships are based are typically of limitedduration, and are terminable by either party upon several months or otherwiserelatively short notice.  These affinityrelationships could also be affected by wireless carrier consolidation.

As total revenues andgross profits from larger customer and vendor relationships, including Cingularand Nokia, increase, we occasionally experience and expect to continue toexperience pricing pressures that may adversely affect future results. In aneffort to mitigate the overall effect of these pressures and to meet theseconsistent challenges, we are focused on our continuing efforts to growrevenues and gross profits from other customer and vendor relationships,consistent with and building on what we have accomplished in the first ninemonths of fiscal year 2007.

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses increased by 14.0% in the first nine monthsof fiscal year 2007 as compared with the first nine months of fiscal year2006.  Selling, general andadministrative expenses as a percentage of revenues increased to 22.3% in thefirst nine months of fiscal year 2007 from 18.8% in the first nine months offiscal year 2006, primarily due to the large decrease in consumer revenues andincreased expenses related to business generation activities as discussedbelow, partially offset by decreased freight costs.

The largest factorscontributing to the increase in total selling, general and administrativeexpenses were increased labor expenses related to business generationactivities. These increases are reflective of our increased focus on ourcommercial business.  Labor costs havealso increased over the prior year due to increased accruals related to ourreward programs, including Performance Stock Units (PSU). PSU expense is basedon actual results to date and management’s current estimates of futureperformance in relation to pre-determined performance targets.  Unrecognizedcompensation expense based on the current expectation of targets to be achievedas of December 24, 2006 for PSUs expected to be earned is $3.2 million.  These costs are expected to be recognizedover a weighted average period of 2.6 years. Labor costs were also impacted by the acquisition of TerraWave andGigaWave in April 2006.  Total laborcosts, including benefits, increased by approximately $7.1 million from thefirst nine months of fiscal year 2006 to the first nine months of fiscal year2007.

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Marketing expenses alsoincreased in the first nine months of fiscal year 2007 as compared with thefirst nine months of fiscal year 2006. Near the end of the first quarter of fiscal year 2006, we retained RTCRelationship Marketing, a direct- anddatabase- marketing firm to increase market awareness of TESSCO’s valueproposition and product and solutions offering among potential and existingcustomers.  During the second quarter offiscal year 2007, we began a media campaign utilizing different marketingtechniques to broaden our outreach.  Salespromotion expense also increased due to costs related to increased sales toretail customers.  Total marketingand sales promotion expenses increased by approximately $5.5 million from thefirst nine months of fiscal year 2006 to the first nine months of fiscal year2007.

Freight costs in thefirst nine months of fiscal year 2007 decreased approximately $3.6 million overthe prior year, primarily due to the loss of consumer sales associated with ourT-Mobile relationship which ended in the second quarter of fiscal year2006.  This decrease was partially offsetby the freight costs associated with the increase in commercial sales.

We continuallyevaluate the credit worthiness of our existing customer receivable portfolioand provide an appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective customers and make decisions regarding extension of credit terms tosuch prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of $974,600 and $825,800 for the first ninemonths ended December 24, 2006 and December 25, 2005, respectively.

**Interest,Net.**  Net interest expense increased from $192,700in the first nine months of fiscal year 2006 to $659,600 in the first ninemonths of fiscal year 2007 primarily due to increased interest expense on ourrevolving credit facility, as well as increased interest expense on ourexisting term bank loan due to higher interest rates.  As noted below, we entered into a receivevariable/pay fixed interest rate swap on our existing bank loan, thus fixingthe interest rate on this loan at 6.38%. Interest expense on our other debt instruments had only minor variancesfrom year-to-year in total.

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the first ninemonths of fiscal year 2007 was 37.6% as compared with 39.0% in the first ninemonths of fiscal year 2006.  The decreasein the tax rate is primarily attributable to a change in permanent taxdifferences as a percentage of total pre-tax income and other minorchanges.  As a result of the factorsdiscussed above driving growth in sales and gross profit, net income anddiluted earnings per share for the first nine months of fiscal year 2007increased 34.9% and 41.3%, respectively, over the prior-year quarter.

**Liquidity andCapital Resources**

We generated $14.9million of net cash from operating activities in the first nine months offiscal year 2007 compared with a net cash outflow of $2.7 million in the firstnine months of fiscal year 2006.  In thefirst nine months of fiscal year 2007, our cash inflow from operatingactivities was primarily driven by net income, net of deprecation andamortization, and a significant increase in trade accounts payable, partiallyoffset by increases in product inventory and trade accounts receivable.  The increase in product inventory and tradeaccounts payable was primarily due to our expanded major repair componentsrelationship with Nokia, as well as increased purchases and on-hand inventoryfor our mobile devices and accessories vendors.   AtDecember 24, 2006, repair and component parts purchased from Nokia accountedfor 26% of the dollar value of our total product inventory, based on thepurchase price for the inventory. Beginning in the fourth quarter of fiscal year 2007, inventory relatedto this relationship will be held on consignment and no longer owned by theCompany.  This change in inventory willhave a positive impact on cash flows by reducing inventory, but will be partiallyoffset by a decrease in related trade accounts payable.  Trade accounts receivable increased due tothe timing of sales during the third quarter and collections from ourcustomers, many of whom maintain accounts with open terms.

Capital expenditures of $2.9million in the first nine months of fiscal year 2007 were up from expendituresof $2.5 million in the first nine months of fiscal year 2006.  In both periods, capital expendituresprimarily consisted of investment in information technology and, in fiscal year2007, training equipment.

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On April 21, 2006, we acquired substantially all the non-cash net assetsof TerraWave Solutions, Ltd. and its commonly owned affiliate, GigaWaveTechnologies, Ltd. for an initial cash payment of approximately $3.8 million,and additional cash earn-out payments over a four-year period, contingent onthe achievement of certain minimum earnings thresholds ($1.5 million of the$3.8 million cash amount paid at closing is a non-refundable prepayment againstfuture earn-out payments, if any, amortizable over the four-year period).  To the extent that certain minimum earningsthresholds are not achieved, we will not be able to recover thisprepayment.  The maximum amount ofcontingent future earn-out payments (after subtracting the $1.5 millionprepayment) is $15.5 million.  Contingentpayments made under the terms of the purchase agreement will be treated as anadditional cost of the acquired businesses and additional goodwill has been andwill continue to be recorded.  For theperiod of April 21, 2006 through December 24, 2006, $600,000 has been paid foradditional earn-out based on achievement of certain earnings thresholds inaccordance with the terms of the purchase agreement.  An additional earn-out of $522,500 has been accrued but not yet paid.  In accordance with the acquisition agreement,these earn-out amounts are net of $375,000 (one quarter of the $1.5 millionprepayment) of the non-refundable prepayment against future earn-out paymentsdiscussed above. Additionally, acquisition related transaction costs, primarilycomprised of legal and accounting fees, totaled $89,500.

Net cash used forfinancing activities was $9.7 million in the first nine months of fiscal year2007 compared with a net cash inflow from financing activities of $1.4 millionfor the first nine months of fiscal year 2006. Included in the net cash used for financing activities is a bankoverdraft of approximately $2.1 million as of December 24, 2006.  During the first nine months of fiscal year2007, we purchased 1,043,813 shares of our outstanding common stock pursuant toour stock buyback program, compared with 200,700 shares purchased in the firstnine months of fiscal year 2006.  Fromthe beginning of our stock buyback program (the first quarter of fiscal 2004),through the end of the third quarter of fiscal year 2007, a total of 1,794,867shares have been purchased under this program for approximately $23.4 million,or an average price of $13.05 per share. The Board of Directors has authorized the purchase of up to 1,950,000shares in the aggregate, and therefore, 155,133 shares remained available to bepurchased as of the end of the third quarter of fiscal year 2007.  We expect to fund future purchases, if any,from working capital and/or our revolving credit facility.  No timetable has been set for the completionof this program.

Of the 1,043,813 sharesrepurchased during the first nine months of fiscal year 2007, 944,463 shareswere purchased at $16.67 per share for approximately $15.7 million in onetransaction with a large former shareholder. This transaction significantly reduced shareholders’ equity, andbecause the purchase price was funded with borrowings under our revolvingcredit facility, it also increased total liabilities.  Prior to entering into this transaction, wediscussed the proposed transaction, the anticipated borrowings necessary toconsummate the transaction and its possible impact on our financial condition,with Wachovia Bank, N.A. and SunTrust Bank, the lenders under our revolvingcredit facility and term loan.  As aresult of the transaction, we did not meet the Maximum Total Liabilities toTangible Net Worth covenant under the terms of our revolving credit facilityand term loan at the end of the second quarter of fiscal year 2007.  We requested and received a waiver of thecovenant from the banks for the second fiscal quarter.  At the end of the third quarter of fiscalyear 2007, we also did not meet the Maximum Total Liabilities to Tangible NetWorth covenant; and, we again requested and received a waiver from the banksthat allowed us to avoid a covenant violation under these loans for the thirdfiscal quarter.  If we do not comply, oranticipate that we will not comply, with this or any other covenant under ourrevolving credit facility for the fourth quarter of fiscal year 2007 or anyfuture quarter, we would expect to work closely with the banks to attempt toobtain additional waivers, as necessary. Although we project that we will comply with the debt covenant at theend of the fourth quarter of fiscal year 2007, there can be no assurance thatwe will comply with the covenant as of the end of the fourth quarter of fiscalyear 2007 or any future quarter or, if not, that the banks will provide anotherwaiver.  If we do not comply and if thebanks refuse to provide another waiver, we would violate the covenant, whichwould result in the occurrence of an event of default under the terms of theseloans, whereupon the balance outstanding under both of these loans, as well asthe balances outstanding under our other debt agreements, would become payablein full and our ability to borrow under our existing revolving credit facilitywould be eliminated.  In such aninstance, management would seek to obtain other sources of comparablefinancing, the availability (or terms) of which cannot be assured, either in atimely manner or at all.

Previously, and also thenin anticipation of the prospect of continued repurchase of shares under ourstock buyback program, early in the second fiscal quarter we reviewed withWachovia Bank, N.A. and SunTrust Bank the terms applicable to our revolvingcredit facility which had the effect of limiting both aggregate repurchases ofour stock and our ability to use borrowings under the revolving credit facilityto finance repurchases of our stock, to $10 million.  After discussion, the banks agreed to changethe relevant references from $10 million to $25 million.  That agreement was memorialized pursuant tothe terms of a joinder, assumption, ratification and modification agreemententered into with the banks in respect of each of these facilities.  Also as part of that undertaking, and asrequired of us under the terms of the existing documents for the revolvingcredit facility and term loan, we formally agreed with the banks to join asco-borrowers under the revolving credit agreement and term loan severaloperating subsidiaries of ours that had been created more recently, includingthose created in connection with the TerraWave and GigaWave acquisitions, andto update and address other generally routine procedural matters relative tothe documentation for these facilities.

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To minimize interestexpense, our policy is to use excess available cash to pay down any balance onour $30 million revolving credit facility. The balance on our revolving credit facility at December 24, 2006 was $5.6million, and therefore, we had no cash balance at the end of the quarter.  This facility has a term expiring inSeptember 2007, and although we expect to either extend or replace thisfacility, there can be no assurances that we will be able to do so on favorableterms, or at all.  Included in accruedexpenses at the end of the third quarter is approximately $2.1 million ofoutstanding checks in excess of on-hand cash balances.  We expect to meet short-term and long-termliquidity needs through operating cash flow, supplemented by our existingrevolving credit facility.  In doing so,subject to our ability to maintain compliance with our debt covenants, asdiscussed in the preceding paragraph, the balance on our revolving creditfacility could increase depending on our working capital and other cashneeds.  As further discussed above, amongother covenants, we are currently required under our revolving credit facilityto maintain a Maximum Total Liabilities to Tangible Net Worth ratio (asdefined) of no more than 1.75.  Ourongoing ability to borrow under our revolving credit facility is limited toamounts determined in accordance with a borrowing base provided for under thefacility, and is also constrained by the necessity for us to comply with theabove and other credit agreement covenants at the respective measurementdates.  If we were to undertake anacquisition or other major capital purchases that require funds in excess of ourexisting sources of liquidity, we would look to sources of funding fromadditional credit facilities, debt and/or equity issuances.  There can be no assurances that suchadditional future sources of funding would be available on terms acceptable tous, if at all.

OnOctober 1, 2005, we entered into a receive variable/pay fixed interest rateswap on a total notional amount of $4.2 million with Wachovia Bank, N.A. toavoid the risks associated with fluctuating interest rates on our existing termbank loan, which bears interest at a floating rate of LIBOR plus 1.75%, and toeliminate the variability in the cash outflow for interest payments.  The interest rate swap agreement locks theinterest rate for the outstanding principal balance of the loan at 6.38%through July 1, 2011.  There was nopayment due or received at inception of the swap.  No hedge ineffectiveness will be recognizedas the interest rate swaps’ provisions match the applicable provisions of theterm 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.

On January 23, 2007, weentered into a First Amendment to Agreement of Lease, which among other things,provides for a six month extension, until November 30, 2007, of the lease termprovided for under the Agreement of Lease, dated November 3, 2003, between theCompany and the Atrium Building LLC.  Thebase rental rate is $124,732 per month for the extended period.

**CriticalAccounting Policies and Estimates**

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

We have identified thepolicies below as critical to our business operations and the understanding ofour results of operations. For a detailed discussion on the application ofthese and other accounting policies, see the Notes to the ConsolidatedFinancial Statements in our Form 10-K for the fiscal year ended March 26, 2006.

*RevenueRecognition*.  We record revenue when 1) persuasive evidenceof an arrangement exists, 2) delivery has occurred or services have beenrendered, 3) our price to the buyer is fixed and determinable, and 4) collectibilityis reasonably assured. Our revenue recognition policy includes evidence ofarrangements for significant revenue transactions through either receipt of acustomer purchase order or a web-based order. We record revenue when risk of loss has passed to the customer and, inmost cases, shipments are made using FOB shipping terms.  For a small portion of our sales, we use FOBdestination terms and record the revenue when the product is received by thecustomer.  Our prices are always fixed atthe time of sale.  Historically, therehave not been any material concessions provided to or by customers, futurediscounts, or other incentives subsequent to a sale. We sell under normalcommercial terms and, therefore, we only record sales on transactions where collectibiltyis reasonably assured.

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Because our salestransactions meet the conditions set forth in Statement of Financial AccountingStandard (SFAS) No. 48, “Revenue Recognition When Right of Return Exists,” werecognize revenues from sales transactions containing sales returns provisionsat the time of the sale.  Theseconditions require that 1) our price be substantially fixed and determinable atthe date of sale, 2) the buyer is obligated to pay us, and such obligation isnot contingent on their resale of the product, 3) the buyer’s obligation to usdoes not change in the event of theft or physical destruction or damage of theproduct, 4) the buyer has economic substance apart from us, 5) we do not havesignificant obligations for future performance to directly bring about resaleof the product by the buyer, and 6) the amount of future returns can bereasonably estimated.  Because our normalterms and conditions of sale are consistent with conditions 1-5 above, and weare able to perform condition 6, we make a reasonable estimate of productreturns in sales transactions and accrue a sales return reserve based on thisestimate.

Our current andpotential customers are continuing to look for ways to reduce their inventoriesand lower their total costs, including distribution, order taking andfulfillment costs, while still providing their customers excellentservice.  Some of these companies haveturned to us to implement supply chain solutions, including purchasing inventory,assisting in demand forecasting, configuring, packaging, kitting and deliveringproducts and managing customer relations, from order taking through cashcollections.  In performing thesesolutions, we assume varying levels of involvement in the transactions andvarying levels of credit and inventory risk. As our solutions offerings continually evolve to meet the needs of ourcustomers, we constantly evaluate our revenue accounting based on the guidanceset forth in accounting standards generally accepted in the United States.  When applying this guidance in accordancewith Emerging Issues Task Force (EITF) No. 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent,” we look at the following indicators: whetherwe are the primary obligor in the transaction; whether we have generalinventory risk; whether we have latitude in establishing price; the extent towhich we change the product or perform part of the service; whether we haveresponsibility for supplier selection; whether we are involved in thedetermination of product and service specifications; whether we have physicalinventory risk; whether we have credit risk; and whether the amount we earn isfixed.  Each of our customerrelationships is independently evaluated based on the above guidance andrevenue is recorded on the appropriate basis.  Based on a review of the factors above, in the majority of our salesrelationships, we have concluded that we are the principal in the transactionand we record revenue based upon the gross amounts earned and booked. However,we do have certain relationships where we are not the principal and we recordrevenue on a net fee basis, regardless of amounts billed (less than 5% of ourtotal revenue). If applying this revenue recognition guidance resulted inrecording revenue on a different basis from which we have previously concluded,or if the factors above change significantly, revenues could increase ordecrease; however, our gross profit and net income would remain constant.

Most of our salesarrangements do not contain multiple elements. However, when we enter into arrangements that do contain multipleelements, we follow the guidance under EITF No. 00-21, “Revenue Arrangementswith Multiple Deliverables.”  Therefore,at the inception of the arrangement, we determine if each deliverable under thearrangement represents a separate unit of accounting.  We do this by determining whether theundelivered items have value to the customer on a stand-alone basis (if it issold separately by any other vendor or the customer could resell the delivereditem on a stand-alone basis), if there is objective and reliable evidence ofthe fair value of the item, and whether the delivery or performance of theundelivered item is considered probable and substantially in our control (incases where the arrangement includes a general right of return relative to thedelivered item).

*Allowancefor Doubtful Accounts*.  We use estimates to determine the amount ofthe allowance for doubtful accounts necessary to reduce accounts receivable andunbilled receivables to their expected net realizable value. We estimate theamount of the required allowance by reviewing the status of past-duereceivables and analyzing historical bad debt trends. Actual collectionexperience has not varied significantly from estimates, due primarily to creditpolicies, collection experience and our stability as it relates to our currentcustomer base.  Typical payments fromcommercial customers are due 30 days from the date of the invoice.  Sales made to consumers are primarily madethrough credit card transactions.  Wecharge-off receivables deemed to be uncollectible to the allowance for doubtfulaccounts.  Accounts receivable balancesare not collateralized.

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*Impairmentof Long-Lived and Indefinite-Lived Assets*.  Our Consolidated Balance Sheet includesgoodwill of approximately $4.1 million. We perform an annual impairment test for goodwill on the first day ofour fourth quarter.  We also periodicallyevaluate our long-lived assets and intangible assets for potential impairmentindicators.  Our judgments regarding theexistence of impairment indicators are based on estimated future cash flows,market conditions, operational performance and legal factors.  Future events, such as significant changes incash flow assumptions, could cause us to conclude that impairment indicatorsexist and that the net book value of goodwill, long-lived assets or intangibleassets are impaired.  Had thedetermination been made that the goodwill asset was impaired, the value of thisasset would have been reduced by an amount up to $4.1 million, resultingin a charge to operations.

*IncomeTaxes*.  We recognize deferred tax assets andliabilities based on the differences between the financial statement carryingamounts and the tax bases of assets and liabilities.  We regularly review our deferred tax assetsfor recoverability.  This review is basedon historical taxable income, projected future taxable income and the expectedtiming of the reversals of existing temporary differences.  Based on this review, we have not establisheda valuation allowance.   If we are unableto generate sufficient taxable income, or if there is a material change in theactual effective tax rates or time period within which the underlying temporarydifferences become taxable or deductible, we could be required to establish avaluation allowance against all or a significant portion of our deferred taxassets, resulting in a substantial increase in our effective tax rate and amaterial adverse impact on our operating results.

In July, 2006, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertaintyin Income Taxes,” which clarifies the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscalyears beginning after December 15, 2006. We are reviewing FIN 48 to determine the impact of adoption on ourfinancial statements.

*Stock-BasedCompensation*.  Effective March 27, 2006, we adoptedStatement of Financial Accounting Standards (SFAS) No. 123R, “Share-BasedPayment,” using the modified prospective application transition method. Becausethe fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation,” which we had previously adopted effective March 29,2004, and SFAS No. 123R are generally consistent with respect to ourshare-based payments (other than as described below), the adoption of SFASNo. 123R did not have a material impact on our financial position, resultsof operations or cash flows.

SFAS No. 123R requires us to include in our calculation of periodic stockcompensation expense an estimate of future forfeitures.  Previously, in accordance with SFAS No. 123,we included forfeitures in our calculation of stock compensation expense whenthe awards were actually forfeited.  Thischange did not have a material impact on our financial position or results of operations for the quarter.  Prior to the adoption of SFAS No. 123R,benefits of tax deductions in excess of recognized compensation costs werereported as operating cash flows. SFAS No. 123R requires excess taxbenefits be reported as a financing cash flow.

**Off-Balance SheetArrangements**

We have no material off-balance sheet arrangements.

**Forward-LookingStatements**

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 lookingstatements involve a number of risks and uncertainties. Our actual results maydiffer materially from those described in or contemplated by any suchforward-looking statement for a variety of reasons, including those risksidentified in our most recent Annual Report on Form 10-K and other periodicreports filed with the Securities and Exchange Commission, under the heading “RiskFactors” and otherwise. 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 toidentify or control all circumstances that could occur in the future that mayadversely affect our business and operating results. Without limiting the risksthat we describe in our periodic reports and elsewhere, among the risks thatcould lead to a materially adverse impact on our business or operating resultsare the following: termination or non-renewal of limited duration agreements orarrangements with our vendors and affinity partners which are typicallyterminable by either party upon several months notice; loss of significantcustomers or relationships, including affinity relationships; loss of customerseither directly or indirectly as a result of consolidation among large wirelessservice carriers and others within the wireless communications industry; thestrength of the customers’, vendors’ and affinity partners’ business; economicconditions that may impact customers’ ability to fund or pay for the purchaseof our products and services, including credit risk; our dependence on arelatively small number of suppliers and vendors, which could hamper ourability to maintain appropriate inventory levels and meet customer demand; failureof our information technology system or distribution system; technology changesin the wireless communications industry, which could lead to significantinventory obsolescence and/or our inability to offer key products that ourcustomers 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 financing as and whenneeded; transitional and other risks associated with acquisitions of companiesthat we may undertake in an effort to expand our business; the possibilitythat, for unforeseen reasons, we may be delayed in entering into or performing,or may fail to enter into or perform, anticipated contracts or may otherwise bedelayed in realizing or fail to realize anticipated revenues or anticipatedsavings; our inability to protect certain intellectual property, includingsystems and technologies on which we rely; and our inability to hire or retainfor any reason our key professionals, management and staff.

**AvailableInformation**

Our Internet Web siteaddress is: www.tessco.com. We make available free of charge through our Website, our annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports filed or furnished pursuantto Section 13 or 15(d) of the Exchange Act as soon as reasonably practicableafter such documents are electronically filed with, or furnished to, theSecurities and Exchange Commission.  Alsoavailable on our Web site is our Code of Business Conduct and Ethics.

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

Asnoted above under the caption “Liquidity and Other Capital Resources,” in October 2005, we entered into aninterest rate swap agreement on our existing bank term loan.  We believe our exposure to market risks, includingexchange rate risk, interest rate risk and commodity price risk, is notmaterial at the present time.

**Item 4.  Controls and Procedures**

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

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**Part II.  Other Information**

**Item 1.  Legal Proceedings**

Lawsuits and claims arefiled against us from time to time in the ordinary course of business.  We do not believe that any lawsuits or claimscurrently pending against the Company, individually or in the aggregate, arematerial, or will have a material adverse affect on our financial condition orresults of operations.

**Item 1A.  Risk Factors**

There were nomaterial changes in the risk factors previously disclosed in the Company’sAnnual Report on Form 10-K for the year ended March 26, 2006.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

The following table setsforth information with respect to purchases of TESSCO common stock by theCompany or any affiliated purchasers during the third quarter of fiscal year2007.

**IssuerPurchases of Equity Securities**

| Period (1)                              | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number of Shares  that May Yet Be  Purchased under  the Plans or  Programs (2)** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 25,  2006 through October 22, 2006 |       | —                                           |       | N/A                                          |       | —                                                                                                                           |       | 236,283                                                                                                                                  |       |
| October 23, 2006  through November 26, 2006  |       | 81,150                                           |       | $                                            | 20.88      |                                                                                                                             | 81,150     |                                                                                                                                     | 155,133    |   |
| November 27,  2006 through December 24, 2006 |       | —                                           |       | N/A                                          |       | —                                                                                                                           |       | 155,133                                                                                                                                  |       |
| Total                                        |       | 81,150                                           |       | $                                            | 20.88      |                                                                                                                             | 81,150     |                                                                                                                                     | 155,133    |   |

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(1)             Periodsindicated are fiscal accounting months for the third quarter of fiscal year2007.

(2)             Valuesare as of the end of the fiscal accounting month or quarter, as applicable.

On April 28, 2003, ourBoard of Directors announced a stock buyback program and authorized thepurchase of up to 675,000 shares of our common stock pursuant to theprogram.  On October 20, 2005, our Boardof Directors amended the program and authorized the purchase of an additional675,000 shares of outstanding common stock. On July 17, 2006, our Board of Directors amended the program andauthorized the purchase of an additional 600,000 shares of outstanding commonstock, and as of that date, 1,950,000 shares have been authorized forrepurchase.  During the third quarter offiscal year 2007, the Company repurchased 81,150 shares of its common stock forapproximately $1.7 million.  As ofDecember 24, 2006, we had purchased an aggregate of 1,794,867 shares of ouroutstanding common stock pursuant to this program for approximately $23.4million, or an average price of $13.05 per share.  Accordingly, up to 155,133 shares remainavailable for repurchase.  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 timetable has beenset for completion of the program.

**Item 3.  Defaults upon Senior Securities**

None

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

None

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**Item 5.  Other Information**

Effective as of February 7, 2007, as part of areview of our organizational documents, our Board of Directors took action (i) toamend our Bylaws and (ii) to correct an error discovered in our Certificationof Incorporation.

The bylaw amendments, among other things, provide theBoard with greater flexibility in calling board meetings and determining thedate and calling adjournments of the annual meeting of stockholders; andestablished what are commonly referred to as “Advance Notice Bylaws,” which setforth procedures pursuant to which a stockholder may nominate an individual tobecome eligible for election as a director, or by which a stockholder maysubmit business for consideration at an annual meeting of the stockholders ofthe Company.  Following these amendments,the Board of Directors adopted Amended and Restated Bylaws reflecting these andother similar changes.

The Certificate of Correction corrects a clericalerror appearing in the Certificate of Amendment to our Certificate ofIncorporation filed with the Delaware Secretary of State on September 6, 1996, andas corrected the Certificate of Amendment now properly reflects action taken bythe stockholders at the annual meeting of the stockholders of the Company heldon July 16, 1996.  As originally filed,the Certificate of Amendment provided for replacement of Article FOURTH of theCertificate of Incorporation in its entirety, when the stockholders hadapproved only the replacement of the *first**paragraph* of Article FOURTH.

**Item 6.  Exhibits**

(a)                EXHIBITS:
| 3.1.5 |   | Certificate of Correction, filed February 7,  2007, to Certificate of Amendment to Certificate of Incorporation of the  Registrant filed September 6, 1999. |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2.1 |   | Second Amended and Restated Bylaws of the Registrant  adopted February 7,  2007.                                                                            |
| 31.1  |   | Rule 15d-14(a) Certification of Robert B. Barnhill,  Jr., Chief Executive Officer.                                                                               |
| 31.2  |   | Rule 15d-14(a) Certification of David M. Young,  Chief Financial Officer.                                                                                        |
| 32.1  |   | Section 1350 Certification of Robert B. Barnhill,  Jr., Chief Executive Officer.                                                                                 |
| 32.2  |   | Section 1350 Certification of David M. Young, Chief  Financial Officer.                                                                                          |

 

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**Signature**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                    |   |   |   | TESSCO TECHNOLOGIES  INCORPORATED            |
|------------------------------------|--------|--------|--------|----------------------------------------------|
|                               |   |   |   |                                         |   |   |
|                               |   |   |   |                                         |   |   |
| Date:  February  7, 2007 |   |   |   | By:                                          |   | /s/ David M. Young |
|                               |   |   |   | David M. Young                               |
|                               |   |   |   | Chief Financial Officer                      |
|                               |   |   |   | (principal financial and accounting officer) |

 

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