**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

Washington, D.C.20549

#### **FORM10-Q**

 

| x                                                  |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE**                                  |
|----------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                               |   | **SECURITIES EXCHANGE ACT OF 1934**                                                           |
|                                               |   | ** **                                                                                    |
| **For the  quarterly period ended July 1, 2007**   |
| **OR**                                             |
|                                               |   | ** **                                                                                    |
| o                                                  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                               |   | ** **                                                                                    |
| **For the  transition period from _____ to _____** |

 

**Commission file number 0-24746**

 

**TESSCO Technologies Incorporated**

(Exact name ofregistrant 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’s  telephone number, including area code: |   | **(410)  229-1000**  |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to filing requirements for 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).   Large accelerated filer o         Acceleratedfiler o         Non-Accelerated Filer x

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

The number of shares of the registrant’s Common Stock,$.01 par value per share, outstanding as of August 1, 2007, was 5,492,240.

 

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**TESSCO Technologies Incorporated**

**Index to Form 10-Q**
| **Part I**   | ** ** | **Financial  Information** |
|--------------|------------|----------------------------|
|         |       |                       |   |   |
|         |       | Item 1.                    |   | Financial Statements |
|         |       |                       |   |   |
|         |       | Item 2.                    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |       |                       |   |   |
|         |       | Item 3.                    |   | Quantitative and Qualitative 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 Technologies IncorporatedConsolidated Balance Sheets**
| ** **                                         | ** ** | **July 1, 2007** | ** **  | **April 1, 2007** | ** ** |
|----------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|
| ** **                                         | ** ** | **(unaudited)**            | ** **  | **(audited)**               | ** ** |
| **ASSETS**                                         |       |                       |        |                        |       |
| Current  assets:                                   |       |                       |        |                        |       |
| Cash and cash equivalents                          |       | $                          | 2,929,500   |                        | $          | 4,176,300 |   |
| Trade accounts receivable, net                     |       | 56,555,900                 |        | 44,859,600                  |       |
| Product inventory, net                             |       | 43,819,300                 |        | 37,448,800                  |       |
| Deferred tax asset                                 |       | 3,460,100                  |        | 3,460,100                   |       |
| Prepaid expenses and other current assets          |       | 2,501,100                  |        | 1,959,500                   |       |
| Total current assets                               |       | 109,265,900                |        | 91,904,300                  |       |
|                                               |       |                       |        |                        |       |
| Property  and equipment, net                       |       | 23,707,000                 |        | 24,256,300                  |       |
| Goodwill,  net                                     |       | 5,141,700                  |        | 5,008,300                   |       |
| Other  long-term assets                            |       | 2,550,100                  |        | 2,513,800                   |       |
| Total assets                                       |       | $                          | 140,664,700 |                        | $          | 123,682,700 |   |
|                                               |       |                       |        |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**     |       |                       |        |                        |       |
| Current  liabilities:                              |       |                       |        |                        |       |
| Trade accounts payable                             |       | $                          | 66,398,000  |                        | $          | 47,257,700 |   |
| Payroll, benefits and taxes                        |       | 3,517,500                  |        | 6,658,500                   |       |
| Income and sales taxes                             |       | 2,570,600                  |        | 2,960,800                   |       |
| Accrued expenses and other current liabilities     |       | 976,900                    |        | 1,143,800                   |       |
| Current portion of long-term debt                  |       | 357,300                    |        | 356,200                     |       |
| Total current liabilities                          |       | 73,820,300                 |        | 58,377,000                  |       |
|                                               |       |                       |        |                        |       |
| Deferred  tax liability                            |       | 2,700,400                  |        | 2,700,400                   |       |
| Long-term  debt, net of current portion            |       | 4,113,400                  |        | 4,203,200                   |       |
| Other  long-term liabilities                       |       | 1,386,400                  |        | 1,250,800                   |       |
| Total liabilities                                  |       | 82,020,500                 |        | 66,531,400                  |       |
|                                               |       |                       |        |                        |       |
| Commitments  and contingencies                     |       |                       |        |                        |       |
|                                               |       |                       |        |                        |       |
| Shareholders’  equity:                        |       |                       |        |                        |       |
| Preferred stock                                    |       | —                     |        | —                      |       |
| Common stock                                       |       | 77,800                     |        | 75,800                      |       |
| Additional paid-in capital                         |       | 29,535,100                 |        | 27,463,700                  |       |
| Treasury stock                                     |       | (28,621,600                | )           | (27,216,200                 | )          |
| Retained earnings                                  |       | 57,600,200                 |        | 56,806,300                  |       |
| Accumulated other comprehensive income, net of tax |       | 52,700                     |        | 21,700                      |       |
| Total shareholders’ equity                    |       | 58,644,200                 |        | 57,151,300                  |       |
| Total  liabilities and shareholders’ equity   |       | $                          | 140,664,700 |                        | $          | 123,682,700 |   |

 

See accompanying notes.

3

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** **

**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Statements of Income**
| ** **                                   | ** ** | **Three Months Ended** | ** **  |
|----------------------------------------------|------------|-----------------------------|-------------|
| ** **                                   | ** ** | **July 1, 2007**  | ** **  | **June 25, 2006** | ** ** |
| ** **                                   | ** ** | **(unaudited)**             | ** **  | **(unaudited)** | ** ** |
|                                         |       |                        |        |   |   |
| Revenues                                     |       | $                           | 124,430,100 |   | $ | 111,940,300 |   |
| Cost of goods sold                           |       | 96,269,100                  |        | 83,855,200 |   |
| Gross profit                                 |       | 28,161,000                  |        | 28,085,100 |   |
|                                         |       |                        |        |   |   |
| Selling, general and administrative expenses |       | 26,668,800                  |        | 24,968,100 |   |
| Income from operations                       |       | 1,492,200                   |        | 3,117,000 |   |
| Interest, net                                |       | 60,900                      |        | 155,300 |   |
| Income before provision for  income taxes    |       | 1,431,300                   |        | 2,961,700 |   |
| Provision for income taxes                   |       | 565,300                     |        | 1,108,300 |   |
| Net income                                   |       | $                           | 866,000     |   | $ | 1,853,400 |   |
| Basic earnings per share                     |       | $                           | 0.16        |   | $ | 0.30 |   |
| Diluted earnings per share                   |       | $                           | 0.15        |   | $ | 0.29 |   |
|                                         |       |                        |        |   |   |
| Basic weighted average shares outstanding    |       | 5,419,300                   |        | 6,270,700 |   |
|                                         |       |                        |        |   |   |
| Diluted  weighted average shares outstanding |       | 5,694,400                   |        | 6,413,600 |   |

 

See accompanying notes.

4

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**TESSCO Technologies Incorporated**

**Consolidated Statements of Cash Flows**
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **July 1, 2007**       | ** ** | **June 25, 2006** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                  | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                              |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 866,000    |   | $ | 1,853,400 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 1,229,900                        |       | 1,138,100 |   |
| Non-cash stock compensation  expense                                               |       | 576,800                          |       | 529,600 |   |
| Deferred taxes and other  non-cash items                                           |       | (36,300                          | )          | 53,100 |   |
| Change in trade accounts  receivable                                               |       | (11,696,300                      | )          | 3,075,800 |   |
| Change in product inventory                                                        |       | (6,370,500                       | )          | (7,223,800 | ) |
| Change in prepaid expenses and  other current assets                               |       | (489,800                         | )          | 446,200 |   |
| Change in trade accounts  payable                                                  |       | 20,677,400                       |       | 7,698,500 |   |
| Change in payroll, benefits  and taxes                                             |       | (3,141,000                       | )          | (1,413,700 | ) |
| Change in income and sales tax                                                     |       | (390,200                         | )          | 433,700 |   |
| Change in accrued expenses and  other current liabilities                          |       | (166,900                         | )          | (266,800 | ) |
| Net cash provided by operating  activities                                         |       | 1,059,100                        |       | 6,324,100 |   |
|                                                                               |       |                             |       |   |   |
| Cash flows from investing activities:                                              |       |                             |       |   |   |
| Purchases of property and  equipment                                               |       | (637,900                         | )          | (999,400 | ) |
| Additional earn-out payments  on acquired businesses                               |       | (1,670,500                       | )          | (3,924,900 | ) |
| Net cash used in investing  activities                                             |       | (2,308,400                       | )          | (4,924,300 | ) |
|                                                                               |       |                             |       |   |   |
| Cash flows from financing activities:                                              |       |                             |       |   |   |
| Payments on long-term debt                                                         |       | (88,700                          | )          | (91,300 | ) |
| Proceeds from issuance of  stock                                                   |       | 393,100                          |       | 46,500 |   |
| Purchase of treasury stock                                                         |       | (1,405,400                       | )          | (178,800 | ) |
| Excess tax benefit from  stock-based compensation                                  |       | 1,103,500                        |       | 101,500 |   |
| Net cash provided by (used in)  financing activities                               |       | 2,500                            |       | (122,100 | ) |
|                                                                               |       |                             |       |   |   |
| Net (decrease) increase in  cash and cash equivalents                              |       | (1,246,800                       | )          | 1,277,700 |   |
|                                                                               |       |                             |       |   |   |
| Cash and cash equivalents, beginning of period                                     |       | 4,176,300                        |       | 2,286,900 |   |
|                                                                               |       |                             |       |   |   |
| Cash  and cash equivalents, end of period                                          |       | $                                | 2,929,500  |   | $ | 3,564,600 |   |

 

See accompanying notes.

5

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**TESSCO Technologies Incorporated**

**Notes to Consolidated Financial Statements**

**July 1, 2007**

**(Unaudited)**

**Note 1.  Description of Business and Basis ofPresentation**

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 April 1, 2007.

**Note 2.  Recently Issued Accounting Pronouncements**

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)No. 157, “Fair Value Measurements,” which provides guidance for using fairvalue to measure assets and liabilities. The standard also responds to investors’ requests for expandedinformation about the extent to which companies measure assets and liabilitiesat fair value, the information used to measure fair value, and the effect offair value measurements on earnings. The standard applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue. The standard does not expand the use of fair value in any newcircumstances.  SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years.  The Company isreviewing SFAS No. 157 to determine the impact of adoption on its financialstatements.

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

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

On May 31, 2007, the Company replaced its previouslyexisting $30 million revolving line of credit facility with a new $50 millionrevolving line of credit facility with SunTrust Bank and Wachovia Bank,N.A.  The previous facility wasestablished in September 2003 and had a term expiring in September 2007, wasunsecured and had provided for monthly payments of interest accruing at a LIBORrate plus an applicable margin ranging from 1.5% to 2.0%.  The new facility has a term expiring in May2010, with interest also payable monthly at a LIBOR rate plus an applicable margin,which ranges from 1.25% to 2.75%.  Likethe replaced facility, borrowing availability under this new facility isdetermined in accordance with a borrowing base. This new facility includes financial covenants, including a minimumtangible net worth, minimum cash flow coverage of debt service, and a maximumfunded debt to EBITDA ratio.  Thesefinancial covenants also apply to the existing term loan secured by the Company’sHunt Valley, Maryland facility.  The newfacility also limits the Company’s ability to engage in certain transactions oractivities, including (but not limited to) 

6

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investments and acquisitions, sales of assets, paymentof dividends, issuance of additional debt and other matters.  At July 1, 2007 and April 1, 2007, theCompany had no outstanding balances on its current or previous revolving lineof credit facility.

**Note 4.  Stock Compensation**

The Company’s selling, general and administrative expenses for the threemonths ended July 1, 2007 and June 25, 2006 includes $576,800 and $529,600,respectively, of stock compensation expense. Stock compensation expense is primarily related to our Performance StockUnit (PSU) Program.  In addition, theCompany recorded an excess tax benefit directly to shareholders’ equity of$1,103,500, primarily related to the 159,206 PSUs which vested during the threemonths ended July 1, 2007.

**Performance Stock Units: **The followingtable summarizes the activity under the Company’s PSU program:

|                                                                                    | ** ** | **Three Months Ended  July 1, 2007** | ** ** | **Weighted Average  Fair Value at Grant** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Shares available  for issue under outstanding PSUs, non-vested beginning of period |       | 870,172                                                  |       | $                                                             | 10.15      |   |
| Granted                                                                            |       | 173,000                                                  |       | 24.36                                                         |       |
| Vested                                                                             |       | (159,206                                                 | )          | 10.59                                                         |       |
| Forfeited/canceled                                                                 |       | (449,721                                                 | )          | 9.25                                                          |       |
| Shares available for  issue under outstanding PSUs, non-vested end of period       |       | 434,245                                                  |       | 16.58                                                         |       |
|                                                                                    |            |                                                          |            |                                                               |            |  |

 

Of the 434,245 shares availablefor issue under outstanding PSUs but not yet vested as of July 1, 2007, 261,245shares have been earned, and assuming the respective participants remainemployed by or affiliated with the Company on these dates, these shares willvest and be issued on or about May 1 of 2008, 2009 and 2010.

The vast majority of the PSUs canceled duringthe quarter related to the 2005 grant of PSUs which had a 3-year measurementperiod.  During that period, actual earnings per share on a cumulativebasis exceeded the threshold level, but did not reach the goal level, and thus,the underlying shares not earned from those PSUs were cancelled.  Per theprovisions of the 1994 Stock and Incentive Plan, the shares related to thesePSUs were added back to the Plan and became available for future issuance.

OnJune 6, 2007, the Compensation Committee, with the concurrence of the fullBoard of Directors, granted additional PSUs to selected key individuals andDirectors, providing them with the opportunity to earn up to 173,000 additionalshares of the Company’s common stock in the aggregate, depending upon whethercertain threshold or goal earnings per share targets are met, subject toindividual performance for non-Director employees.  These PSUs have only one measurement year(fiscal year 2008), with any shares earned at the end of fiscal year 2008 tovest 25% on or about May 1 of 2008, 2009, 2010 and 2011, provided that theparticipant remains employed by or associated with the Company on each suchdate.

Asof July 1, 2007, there was approximately $2.5 million of total unrecognizedcompensation costs related to PSUs.  Ifthe maximum target of PSUs outstanding were assumed to be earned, totalunrecognized compensation costs would be approximately $6.7 million.

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

7

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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 for the three months ended July 1, 2007:

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

 

**Note 5.  Income Taxes**

Effective April 2, 2007, the Company adopted FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes.”  As a result of the adoption of FIN 48, theCompany recognized a $72,100 decrease in beginning retained earnings as ofApril 2, 2007.  As of April 2, 2007, theCompany had total gross unrecognized tax benefits of approximately $319,000,all of which, if recognized, would favorably affect the effective income taxrate in future periods. It is reasonably possible that within the next twelvemonths the Company’s unrecognized tax benefits related to certain state taxissues and the timing of certain deductions may decrease by approximately$200,000, as a result of the expiration of statutes of limitations.  During the three months ended July 1, 2007,there were no material increases or decreases in unrecognized tax benefits.

The Company’s historical accounting policy with respect to interest andpenalties related to tax uncertainties has been to classify these amounts asincome taxes, and the Company continued this classification upon the adoptionof FIN 48.  As of April 2, 2007, the total amount of accrued interest andpenalties related to uncertain tax positions recognized in the consolidatedbalance sheet was $148,600.  The total amount of interest and penaltiesrelated to tax uncertainties recognized in the statement of income for the threemonths ended ended July 1, 2007 was $10,300.

The Company files income tax returns in the U.S. federal, state andlocal jurisdictions.  Income tax returnsfiled for fiscal years 2003 and earlier are no longer subject to examination byU.S. federal, state and local tax authorities. No federal, state and local income tax returns are currently underexamination. Certain income tax returns for fiscal years 2004 through 2006remain open to examination by U.S. federal, state and local tax authorities.

**Note 6.  Earnings Per Share**

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

|                                                          | ** ** | **Fiscal Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                               | ** ** | **July 1, 2007**          | ** ** | **June 25, 2006** | ** ** |
|                                                     |       |                                |       |   |   |
| Basic weighted average common shares outstanding         |       | 5,419,300                           |       | 6,270,700 |   |
| Effect of dilutive common  stock equivalents outstanding |       | 275,100                             |       | 142,900 |   |
| Diluted  weighted average common shares outstanding      |       | 5,694,400                           |       | 6,413,600 |   |

 

As of July 1, 2007, stock options with respect to 135,000 shares ofcommon stock were outstanding. All outstanding options and earned but unvestedPSUs were included in the computation of diluted earnings per share because allsuch instruments were dilutive.

**Note 7.  Business Segments**

The Company evaluates revenue, gross profit and inventory in threebusiness segments:  (1) Networkinfrastructure products, which are used to build, repair and upgrade wirelesstelecommunications, computing and Internet networks, and generally complementradio frequency transmitting and switching equipment provided directly byoriginal equipment 

8

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manufacturers (OEMs); (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; and (3) Installation, test and maintenance products, which areused to install, tune, maintain and repair wireless communicationsequipment.  Within the mobile devices andaccessories line of business, the Company sells to both commercial and consumermarkets.  The network infrastructure andinstallation, test and maintenance lines of business sell primarily tocommercial markets.  Beginning in fiscalyear 2008, the Company expanded its regular review within each segment fromthree to four customer categories.  Thesecategories are:  1) commercial publiccarriers and network operators, 2) commercial resellers, 3) commercialself-maintained users and governments and 4) consumers.  These categories 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 Resellers.  Resellersinclude dealers and resellers that sell, install and service cellular telephone, 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.

·                  Commercial Self-Maintained Users and Governments. Self-maintained users (SMUs) and government customers include commercialentities such as major utilities and transportation companies, repair centers,and federal agencies and state and local governments, including public safety organizations.

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

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 to acquisitionswithin its network infrastructure line of business.
| ** **                             | ** ** | **Network  Infrastructure**          | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(Amounts in thousands)** | ** ** |
| **Fiscal  Quarter ended July 1, 2007** |       |                                 |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                  |       |                                 |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators  |       | $                                    | 11,425     |                                          | $          | 581                                               |       | $         | 2,606      |   | $ | 14,612 |   |
| Resellers                              |       | 17,567                               |       | 57,048                                        |       | 2,383                                             |       | 76,998    |       |
| SMUs and Governments                   |       | 10,943                               |       | 3,243                                         |       | 16,439                                            |       | 30,625    |       |
| Total Commercial  Revenues             |       | 39,935                               |       | 60,872                                        |       | 21,428                                            |       | 122,235   |       |
| Consumer Revenues                      |       | —                               |       | 2,195                                         |       | —                                            |       | 2,195     |       |
| Total Revenues                         |       | $                                    | 39,935     |                                          | $          | 63,067                                            |       | $         | 21,428     |   | $ | 124,430 |   |
|                                   |       |                                 |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:              |       |                                 |       |                                          |       |                                              |       |      |       |
| Public Carriers and Network Operators  |       | $                                    | 2,677      |                                          | $          | 164                                               |       | $         | 677        |   | $ | 3,518 |   |
| Resellers                              |       | 4,205                                |       | 11,409                                        |       | 800                                               |       | 16,414    |       |
| SMUs and Governments                   |       | 2,820                                |       | 1,061                                         |       | 3,475                                             |       | 7,356     |       |
| Total Commercial  Gross Profit         |       | 9,702                                |       | 12,634                                        |       | 4,952                                             |       | 27,288    |       |
| Consumer Gross  Profit                 |       | —                               |       | 873                                           |       | —                                            |       | 873       |       |
| Total Gross  Profit                    |       | $                                    | 9,702      |                                          | $          | 13,507                                            |       | $         | 4,952      |   | $ | 28,161 |   |
|                                   |       |                                 |       |                                          |       |                                              |       |      |       |
| Product  Inventory                     |       | $                                    | 17,099     |                                          | $          | 23,133                                            |       | $         | 3,587      |   | $ | 43,819 |   |

 

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| ** **                                                      | ** ** | **Network  Infrastructure**          | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation,  Test and  Maintenance** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **(Amounts in thousands)** | ** ** |
| **Fiscal Quarter ended June 25, 2006** | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Commercial  Revenues:                                           |       |                                 |       |                                          |       |                                          |       |       |       |
| Public Carriers and Network Operators                           |       | $                                    | 12,268     |                                          | $          | 704                                           |       | $          | 4,244      |   | $ | 17,216 |   |
| Resellers                                                       |       | 15,354                               |       | 37,989                                        |       | 2,662                                         |       | 56,005     |       |
| SMUs and Governments                                            |       | 10,083                               |       | 3,170                                         |       | 23,948                                        |       | 37,201     |       |
| Total Commercial  Revenues                                      |       | 37,705                               |       | 41,863                                        |       | 30,854                                        |       | 110,422    |       |
| Consumer  Revenues                                              |       | —                               |       | 1,518                                         |       | —                                        |       | 1,518      |       |
| Total Revenues                                                  |       | $                                    | 37,705     |                                          | $          | 43,381                                        |       | $          | 30,854     |   | $ | 111,940 |   |
|                                                            |       |                                 |       |                                          |       |                                          |       |       |       |
| Commercial Gross  Profit:                                       |       |                                 |       |                                          |       |                                          |       |       |       |
| Public Carriers and Network Operators                           |       | $                                    | 2,814      |                                          | $          | 197                                           |       | $          | 944        |   | $ | 3,955 |   |
| Resellers                                                       |       | 3,717                                |       | 7,567                                         |       | 608                                           |       | 11,892     |       |
| SMUs and Governments                                            |       | 2,572                                |       | 908                                           |       | 8,001                                         |       | 11,481     |       |
| Total Commercial  Gross Profit                                  |       | 9,103                                |       | 8,672                                         |       | 9,553                                         |       | 27,328     |       |
| Consumer Gross  Profit                                          |       | —                               |       | 757                                           |       | —                                        |       | 757        |       |
| Total Gross  Profit                                             |       | $                                    | 9,103      |                                          | $          | 9,429                                         |       | $          | 9,553      |   | $ | 28,085 |   |
|                                                            |       |                                 |       |                                          |       |                                          |       |       |       |
| Product Inventory                                               |       | $                                    | 16,730     |                                          | $          | 18,561                                        |       | $          | 20,445     |   | $ | 55,736 |   |

** **

**Note 8.  Customer Concentration**

The Company’s future results could be negatively impacted by the lossof certain customer and/or vendor relationships.  For the three months ended July 1, 2007,sales of products to the Company’s top customer relationship, AT&T Mobility(formerly Cingular Wireless LLC), accounted for 26% and 23% of total revenues and total gross profits,respectively.  For the threemonths ended July 1, 2007, sales of products related to the Company’s topvendor relationship, the Nokia Inc. (Nokia) repair and replacement componentrelationship, accounted for 10% and 9% oftotal revenues and total gross profits, respectively.  The Nokia relationship is a completesupply chain relationship and, therefore, we have no alternative sources ofsupply, and our purchases, and ultimately our resale of these products, isdependent upon the continuation of the Nokia relationship.  We also sell products other than Nokia repairand replacement materials to many of these customers.  Absent this arrangement with Nokia, we wouldmaintain the ability to sell these other products to these customers.

**Note 9.  Subsequent Events**

OnJuly 2, 2007, the Company acquired the net assets and business of NetForceSolutions, Inc. (NetForce), a provider of technical and sales trainingsolutions to wireless, telecommunications, and networking industries.  The purchase includes substantially all thenon-cash business assets for an initial cash payment of approximately $650,000and additional cash earn-out payments of up to approximately $2.8 million over a four-year period, contingent on theachievement of certain earnings thresholds. The unaudited revenues earned by NetForce for calendar year 2006, priorto the acquisition, amounted to less than 1 percent of the amount of theCompany’s total revenue for fiscal year 2007.

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

This commentary should be read in conjunction with theManagement’s Discussion and Analysis of Financial Condition and Results ofOperations from the Company’s Form 10-K for the fiscal year ended April 1,2007.

**Business Overviewand Environment**

TESSCO Technologies Incorporated (TESSCO or theCompany) is a leading provider of integrated product and supply chain solutionsto the professionals that design, build, run, maintain and use wireless mobile,fixed and in-building systems.  Althoughwe sell products to customers in over 100 countries, approximately 97% of oursales are made to customers in the United States.  We have operations and office facilities inHunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.  Due to the diversity in our business, we arenot significantly affected by seasonality. However, sales to our retailers generally peak in our second and thirdquarters in preparation for the winter holiday season.  Also, our network infrastructure sales aretypically affected by weather conditions in the United States, especially inour first quarter.

We offer a wide range of products that are classified intothree business segments: network infrastructure; mobile devices andaccessories; and installation, test and maintenance.  Network infrastructure products, which aresold to our commercial customers, are used to build, repair and upgrade wirelesstelecommunications, computing and Internet networks. Sales of traditionalnetwork infrastructure products, such as cable, transmission lines and antennasare in part dependent on capital spending in the wireless communicationsindustry.  However, we have also beengrowing our offering of wireless broadband and network equipment products,which are not as dependent on the overall capital spending of theindustry.  Mobile devices and accessoryproducts include cellular telephones and other data devices, pagers and two-wayradios and related accessories.  Mobiledevices and 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. Approximately 51% of all of our mobile devices andaccessory product sales for the first three months of fiscal year 2008 weregenerated from sales to AT&T Mobility (AT&T) (formerly CingularWireless LLC).  Installation, test andmaintenance products, which are sold to our commercial customers, are used toinstall, tune, maintain and repair wireless communications equipment.Approximately 59% of all of our installation, test and maintenance sales forthe first three months of fiscal year 2008 were generated from the sales ofreplacement parts and materials for original equipment manufacturers, primarilyNokia, Inc. (Nokia).  The remainder ofthis segment is made up of sophisticated analysis equipment and variousfrequency-, voltage- and power-measuring devices, as well as an assortment oftools, 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. Beginning in fiscal year 2008, we expanded our regular review within eachsegment from three to four categories. These categories are:  1) commercialpublic carriers and network operators, 2) commercial resellers, 3) commercialself-maintained users and governments and 4) consumers.  These categories are described further below:

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

·                                          Commercial Resellers. Resellers include dealers and resellersthat sell, install and service cellular telephone, paging and two-way radiocommunications equipment primarily for the consumer and small businessmarkets.  These resellers include localand national proprietorships and retailers, as well as sales and installationcenters operated by cellular and paging carriers.

·                                          Commercial Self-Maintained Users (SMUs)and Governments.  SMUs and government customers include commercialentities such as major utilities and transportation companies, federal agenciesand state and local governments, including public safety organizations.

·                                          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 newcompetitors entering the market is high. Consolidation of

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larger wireless carriershas and will most likely continue to impact our current and potential customerbase.  In addition, the agreements orarrangements with our customers or vendors looking to us for product and supplychain solutions are typically of limited duration and are terminable by eitherparty upon several months or otherwise relatively short notice.  Our ability to maintain these relationshipsis subject to competitive pressures and challenges.  We believe, however, that our strength inservice, the breadth and depth of our product offering, our informationtechnology system, our large customer base and purchasing relationships withapproximately 350 manufacturers provide us with a significant competitiveadvantage over new entrants to the market. 

Our first quarterrevenues increased by 11.2% compared to the first quarter of last year.  This growth was driven by our networkinfrastructure and mobile devices and accessories commercial lines ofbusiness.  Gross profits also increasedin our network infrastructure and mobile devices and accessories commercial linesof business as compared with the first quarter of last year.  However, these increases were essentiallyoffset by a decline in our installation, test and maintenance line of businessdue to gross profits from our Nokia relationship returning to historical levelsas we had discussed in previous quarters. This flat gross profit, combined with an increase in operating expensesto support our growth initiatives and increased order volumes, resulted in a53.3% decline in net income over the prior-year quarter.

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** **

**Results ofOperations**

The following table summarizes the unaudited resultsof our operations for the three months ended July 1, 2007 and June 25, 2006:
| ** **                                              | ** ** | **Three Months Ended**                                                | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **July 1, 2007**                                                      | ** ** | **June 25, 2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                              | ** ** | **(Amounts in thousands, except per share data)** | ** ** |
| Commercial Revenues                                     |       |                                                                            |       |   |   |   |   |   |   |
| Network  Infrastructure:                                |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | $                                                                               | 11,425     |   | $ | 12,268 |   | $ | (843 | ) | (6.9 | )% |
| Resellers                                               |       | 17,567                                                                          |       | 15,354 |   | 2,213 |   | 14.4 | % |
| SMUs and  Governments                                   |       | 10,943                                                                          |       | 10,083 |   | 860 |   | 8.5 | % |
| Total Network  Infrastructure                           |       | 39,935                                                                          |       | 37,705 |   | 2,230 |   | 5.9 | % |
| Mobile Devices  and Accessories:                        |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | 581                                                                             |       | 704 |   | (123 | ) | (17.5 | )% |
| Resellers                                               |       | 57,048                                                                          |       | 37,989 |   | 19,059 |   | 50.2 | % |
| SMUs and  Governments                                   |       | 3,243                                                                           |       | 3,170 |   | 73 |   | 2.3 | % |
| Total Mobile  Devices and Accessories                   |       | 60,872                                                                          |       | 41,863 |   | 19,009 |   | 45.4 | % |
| Installation,  Test and Maintenance:                    |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | 2,606                                                                           |       | 4,244 |   | (1,638 | ) | (38.6 | )% |
| Resellers                                               |       | 2,383                                                                           |       | 2,662 |   | (279 | ) | (10.5 | )% |
| SMUs and  Governments                                   |       | 16,439                                                                          |       | 23,948 |   | (7,509 | ) | (31.4 | )% |
| Total  Installation, Test and Maintenance               |       | 21,428                                                                          |       | 30,854 |   | (9,426 | ) | (30.6 | )% |
| Total Commercial  Revenues                              |       | 122,235                                                                         |       | 110,422 |   | 11,813 |   | 10.7 | % |
| Consumer Revenues -  Mobile Devices and Accessories     |       | 2,195                                                                           |       | 1,518 |   | 677 |   | 44.6 | % |
| Total Revenues                                          |       | $                                                                               | 124,430    |   | $ | 111,940 |   | $ | 12,490 |   | 11.2 | % |
|                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Commercial Gross Profit                                 |       |                                                                            |       |   |   |   |   |   |   |
| Network  Infrastructure:                                |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | $                                                                               | 2,677      |   | $ | 2,814 |   | $ | (137 | ) | (4.9 | )% |
| Resellers                                               |       | 4,205                                                                           |       | 3,717 |   | 488 |   | 13.1 | % |
| SMUs and Governments                                    |       | 2,820                                                                           |       | 2,572 |   | 248 |   | 9.6 | % |
| Total Network  Infrastructure                           |       | 9,702                                                                           |       | 9,103 |   | 599 |   | 6.6 | % |
| Mobile Devices  and Accessories:                        |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | 164                                                                             |       | 197 |   | (33 | ) | (16.8 | )% |
| Resellers                                               |       | 11,409                                                                          |       | 7,567 |   | 3,842 |   | 50.8 | % |
| SMUs and  Governments                                   |       | 1,061                                                                           |       | 908 |   | 153 |   | 16.9 | % |
| Total Mobile  Devices and Accessories                   |       | 12,634                                                                          |       | 8,672 |   | 3,962 |   | 45.7 | % |
| Installation,  Test and Maintenance:                    |       |                                                                            |       |   |   |   |   |   |   |
| Public Carriers  and Network Operators                  |       | 677                                                                             |       | 944 |   | (267 | ) | (28.3 | )% |
| Resellers                                               |       | 800                                                                             |       | 608 |   | 192 |   | 31.6 | % |
| SMUs and Governments                                    |       | 3,475                                                                           |       | 8,001 |   | (4,526 | ) | (56.6 | )% |
| Total  Installation, Test and Maintenance               |       | 4,952                                                                           |       | 9,553 |   | (4,601 | ) | (48.2 | )% |
| Total Commercial Gross  Profit                          |       | 27,288                                                                          |       | 27,328 |   | (40 | ) | (0.1 | )% |
| Consumer Gross Profit -  Mobile Devices and Accessories |       | 873                                                                             |       | 757 |   | 116 |   | 15.3 | % |
| Total Gross Profit                                      |       | 28,161                                                                          |       | 28,085 |   | 76 |   | 0.3 | % |
|                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Selling, general and  administrative expenses           |       | 26,669                                                                          |       | 24,968 |   | 1,701 |   | 6.8 | % |
| Income from  operations                                 |       | 1,492                                                                           |       | 3,117 |   | (1,625 | ) | (52.1 | )% |
| Interest, net                                           |       | 61                                                                              |       | 155 |   | (94 | ) | (60.6 | )% |
| Income before  provision for income taxes               |       | 1,431                                                                           |       | 2,962 |   | (1,531 | ) | (51.7 | )% |
| Provision for income  taxes                             |       | 565                                                                             |       | 1,109 |   | (544 | ) | (49.1 | )% |
| Net income                                              |       | $                                                                               | 866        |   | $ | 1,853 |   | $ | (987 | ) | (53.3 | )% |
| Diluted earnings per  share                             |       | $                                                                               | 0.15       |   | $ | 0.29 |   | $ | (0.14 | ) | (48.3 | )% |

 

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** **

**First Quarter ofFiscal Year 2008 Compared with First Quarter of Fiscal Year 2007**

**Revenues. **Revenues for the first quarter of fiscal year 2008increased 11.2% as compared with the first quarter of fiscal year 2007,primarily due to a 10.7% growth in commercial revenues and a 44.6% increase inconsumer revenues.  While we grew ourcommercial sales in our network infrastructure and mobile devices andaccessories lines of business, sales in our installation, test and maintenancecommercial line of business decreased.

Network infrastructuresales increased 5.9% as compared with the first quarter of fiscal year 2007,primarily due to an increase in sales of site support, wireless local areanetwork (WLAN) and broadband products.  Ourgrowth in sales of network infrastructure product was in sales to SMUs andgovernments and resellers, as we have focused on diversification beyond thetraditional infrastructure carrier customer. Although we believe the market for our network infrastructure productswill continue to grow, there can be no assurance that these trends willcontinue.

Sales in the mobiledevices and accessories line of business increased 45.4% in the first quarterof fiscal year 2008, as compared with the prior-year period.  The increase was due to a 45.4% increase incommercial sales, and a 44.6% increase in consumer sales.  The increase in commercial revenues formobile devices and accessories, which are sold primarily to resellers, but alsoto SMUs and governments and public carriers and network operators, wasprimarily due to increased sales to a large national tier-one carrier, as wellas other smaller resellers and users.

Revenues from ourinstallation, test and maintenance line of business had a 30.6% decrease fromthe prior-year quarter, primarily due to a large decrease in sales of repairparts related to our major repair components relationship with Nokia.

**GrossProfit. **Gross profit for the first quarter of fiscal year 2008increased 0.3% as compared with the first quarter of fiscal year 2007. Totalcommercial gross profit decreased 0.1%, while consumer gross profit increased15.3% over the prior year.  Gross profitmargin decreased to 22.6% in the first quarter of fiscal year 2008 from 25.1%in first quarter of fiscal year 2007. Gross profit margin in our network infrastructure segment increased from24.1% in the first quarter of fiscal year 2007 to 24.3% in the first quarter offiscal year 2008.  In our installation,test and maintenance segment, gross profit margin decreased to 23.1% in thefirst quarter of fiscal year 2008 from 31.0% in the first quarter of fiscalyear 2007, primarily due to price changes related to our Nokiarelationship.  Gross profit margin in ourmobile devices and accessories segment decreased to 21.4% in the first quarterof this fiscal year from 21.7% in the first quarter of last year due to lowermargins on our consumer business. Commercial gross profit margin for our mobile devices and accessoriesincreased from 20.7% in the first quarter of last fiscal year to 20.8% for thefirst quarter of this fiscal year. Generally, our gross margins by product within these segments have beensustained, except as noted above, and these variations are related to sales mixwithin the segment product offerings.  Weaccount for inventory at the lower of cost or market, and as a result,write-offs/write-downs occur due to damage, deterioration, obsolescence,changes in prices and other causes.

Our ongoing ability 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 AT&Tand 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.

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses increased by 6.8% in the first quarter offiscal year 2008 as compared with the first quarter of fiscal year 2007.  Selling, general and administrative expensesas a percentage of revenues decreased to 21.4% in the first quarter of fiscalyear 2008 from 22.3% in the first quarter of fiscal year 2007.  The largest factors contributing to theincrease in total selling, general and 

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administrative expenseswere increased labor costs and expenses related to business generationactivities in support of our continued increased focus on our commercialbusiness during the first quarter of fiscal year 2008.

Labor cost increases wereprimarily related to sales management and fulfillment.  These labor costs were offset by decreasedaccruals related to our reward programs.  Total labor costs, including benefits, increased by approximately$303,200 from the first quarter of fiscal year 2007 to the first quarter offiscal year 2008.

Marketing expenseincreased in the first quarter of fiscal year 2008 as compared with the firstquarter of fiscal year 2007, primarily due to costs related to the SolutionGuide and market development funds expensed in relation to our AT&T andother retail arrangements.  Totalmarketing and sales promotion expenses increased by approximately $378,600 fromthe first quarter of fiscal year 2007 to first quarter of fiscal year 2008.

Freightcosts increased by approximately $200,400 due to higher revenues and ordervolumes.

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 $92,500 and $339,800 for the first quarterended July 1, 2007 and June 25, 2006, respectively.

**Interest,Net.**  Net interest expense decreased from $155,300in the first quarter of fiscal year 2007 to $60,900 in the first quarter offiscal year 2008, primarily due to decreased borrowings on our revolving creditfacility.

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the first quarter offiscal year 2008 was 39.5% as compared with 37.4% in the first quarter offiscal year 2007.  The increase in thetax rate is primarily attributable to changes in our state tax effectiverate.  As a result of the factorsdiscussed above, net income and diluted earnings per share for the firstquarter of fiscal year 2008 decreased 53.3% and 48.3%, respectively, comparedto the prior-year quarter.

**Liquidity andCapital Resources**

|                                                       | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **July 1, 2007**       | ** ** | **June 25, 2006** | ** ** |
| Cash flow  provided by operating activities           |       | $                                | 1,059,100  |   | $ | 6,324,100 |   |
| Cash flow used  in investing activities               |       | (2,308,400                       | )          | (4,924,300 | ) |
| Cash flow  provided by (used in) financing activities |       | 2,500                            |       | (122,100 | ) |
| Net (decrease) increase  in cash and cash equivalents |       | $                                | (1,246,800 | ) | $ | 1,277,700 |   |

 

We generated $1.1 millionof net cash from operating activities in the first three months of fiscal year2008 compared with $6.3 million in the first three months of fiscal year2007.  In the first three months offiscal year 2008, our cash inflow from operating activities was primarilydriven by net income, net of deprecation and amortization, and a significantincrease in trade accounts payable, partially offset by increases in productinventory and trade accounts receivable and a decrease in payroll, benefits andtaxes as our fiscal year 2007 bonuses were paid.  The increase in trade accounts receivable andtrade accounts payable was primarily due to significant inventory purchases andsales related to our AT&T relationship in the final month of thequarter.  The increase in inventory wasprimarily related to device accessories.

Capital expenditures of$637,900 in the first three months of fiscal year 2008 were down fromexpenditures of $999,400 in the first three months of fiscal year 2007.  In both periods, capital expendituresprimarily consisted of investment in information technology and, in fiscal year2007, training equipment.

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 

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(after subtracting the $1.5 million prepayment) is $15.5 million.  Contingent payments made under the terms ofthe purchase agreement are treated as an additional cost of the acquiredbusinesses and additional goodwill has been and will continue to berecorded.  For the period ended July 1,2007, approximately $1.7 million was paid for additional earn-out based onachievement of certain earnings thresholds in accordance with the terms of thepurchase agreement.  As of July 1, 2007,there is no accrual for additional earn-out payments, because applicable fiscalyear 2008 targets have not been met as of July 1, 2007.

Net cash providedby financing activities was $2,500 in the first three months of fiscal year2008 compared with a net cash outflow from financing activities of $122,100 forthe first three months of fiscal year 2007. Our cash inflow from financing activities was primarily driven by taxdeductions of stock based compensation in excess of the compensation costsrecognized for those awards and additional proceeds from the issuance of stock,mostly offset by treasury stock transactions with employees and directors forminimum tax withholdings.  The shareswere either withheld from or delivered to the Company by employees or directorsupon stock option exercises or in connection with vested PSU awards, in orderto pay related minimum tax withholding liabilities.

To minimizeinterest expense, our policy is to use excess available cash to pay down anybalance on our revolving credit facility. We expect to meet short-term and long-term liquidity needs throughoperating cash flow, supplemented by our revolving credit facility.  In doing so, the balance on our revolvingcredit facility could increase depending on our working capital and other cashneeds.  If we were to undertake anacquisition or other major capital purchases that require funds in excess ofits existing sources of liquidity, we would look to sources of funding fromadditional credit facilities, debt and/or equity issuances.  There can be no assurances that suchadditional future sources of funding would be available on terms acceptable tous, if at all.

On May 31, 2007, wereplaced our previously existing $30 million revolving line of credit facilitywith a new $50 million revolving line of credit facility with both SunTrustBank and Wachovia Bank, N.A.  Theprevious facility was established in September 2003 and had a term expiring inSeptember 2007, was unsecured and had provided for monthly payments of interestaccruing at a LIBOR rate plus an applicable margin ranging from 1.5% to2.0%.  The new facility has a termexpiring May 2010, with interest payable monthly at the LIBOR rate plus anapplicable margin, which ranges from 1.25% to 2.75%.  Like the replaced facility, borrowingavailability under this new facility is determined in accordance with aborrowing base.  This new facilityincludes financial covenants, including a minimum tangible net worth, minimumcash flow coverage of debt service, and a maximum funded debt to EBITDA ratio.  These financial covenants also apply to theexisting term loan secured by our Hunt Valley, Maryland facility.  The new facility also limits our ability toengage in certain transactions or activities, including (but not limited to)investments and acquisitions, sales of assets, payment of dividends, issuanceof additional debt and other matters.

On May 1, 2007, weentered into a Second Amendment of Agreement of Lease with Atrium Building LLC,which among other things, provided for an extension, from November 30, 2007 toDecember 31, 2012, of the lease term provided for under the Agreement of Lease,dated November 3, 2003, as previously amended January 23, 2007, under which welease approximately 94,000 square feet in Timonium, Maryland, where ourcorporate and administrative offices are located.  The rental rate rangesfrom $124,700 to $144,600 per month at the close of the extended term.  The contractual cash obligations under thisamendment as of July 1, 2007 are $1,122,600, $3,068,900, $3,255,800 and$1,267,700 for fiscal years 2008, 2009 through 2010, 2011 through 2012, andthereafter, respectively.

On June 1, 2007, we entered into a Lease withMERRITT/BAVAR-VA, LLC under which we lease approximately 66,000 square feet ofoffice and warehouse space in Hunt Valley, Maryland, adjacent to our GlobalLogistics Center, for a term beginning July 1, 2007 and expiring July 31,2011.  The monthly rental fee ranges from$35,700 to $38,500 throughout the lease term. The contractual cash obligationsunder this agreement as of July 1, 2007 are $285,700, $882,300 and $611,700 forfiscal years 2008, 2009 through 2010, and 2011 through 2012, respectively.

**Recent AccountingPronouncements**

Effective April 2, 2007, we adopted FASB Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing theminimum recognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance on derecognition, 

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measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition.  As a resultof the adoption of FIN 48, we recognized a $72,100 decrease in beginningretained earnings as of April 2, 2007. As of April 2, 2007, we had total grossunrecognized tax benefits of approximately $319,000, all of which, ifrecognized, would favorably affect the effective income tax rate in futureperiods.

**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.

For a detailed discussionon our critical accounting policies, please refer to our Annual Report on Form10-K for the fiscal year ended April 1, 2007.

**Off-Balance SheetArrangements**

Wehave no material off-balance sheet arrangements.

**Forward-LookingStatements**

This Report may containforward-looking statements. These forward-looking statements may generally beidentified by the use of the words “may,” “will,” “expects,” “anticipates,” “believes,”“estimates,” and similar expressions, but the absence of these words or phrasesdoes not necessarily mean that a statement is not forward looking. Forwardlooking statements involve a number of risks and uncertainties. Our actual resultsmay differ 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.

We are not able toidentify or control all circumstances that could occur in the future that mayadversely affect our business and operating results. Without limiting the risksthat we describe in our periodic reports and elsewhere, among the risks thatcould lead to a materially adverse impact on our business or operating resultsare the following: termination or non-renewal of limited duration agreements orarrangements with our vendors and affinity partners which are typicallyterminable by either party upon several months notice; loss of significantcustomers or relationships, including affinity relationships; loss of customerseither directly or indirectly as a result of consolidation among large wirelessservice carriers and others within the wireless communications industry; thestrength of the customers’, vendors’ and affinity partners’ business; economicconditions that may impact customers’ ability to fund or pay for the purchaseof our products and services, including credit risk; our dependence on arelatively small number of suppliers and vendors, which could hamper ourability to maintain appropriate inventory levels and meet customer demand;failure of our information technology system or distribution system; technologychanges in the wireless communications industry, which could lead 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 

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are electronically filedwith, or furnished to, the Securities and Exchange Commission.  Also available on our Web site is our Code ofBusiness Conduct and Ethics.

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

In October 2005, we entered into aninterest rate swap agreement on our existing bank term loan.  We believe our exposure to market risks,including exchange rate risk, interest rate risk and commodity price risk, isnot material 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.

**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 April 1, 2007.

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**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 first quarter of fiscal year2008.

**Issuer Purchasesof 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) | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 2, 2007  through April 29, 2007    |       | —                                       |       | $                                        | N/A        |                                                                                                                             | —     |                                                                                                                                         | 155,133    |   |
| April 30, 2007  through June 3, 2007 (3) |       | 45,548                                       |       | 27.46                                    |       | —                                                                                                                           |       | 155,133                                                                                                                                      |       |
| June 4, 2007  through July 1, 2007 (3)   |       | 7,328                                        |       | 21.10                                    |       | —                                                                                                                           |       | 155,133                                                                                                                                      |       |
| Total                                    |       | 52,876                                       |       | $                                        | 26.58      |                                                                                                                             | —     |                                                                                                                                         | 155,133    |   |

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(1)             Periods indicated arefiscal accounting months for the first quarter of fiscal year 2008.

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

(3)             Representsshares either withheld from or delivered to the Company by employees ordirectors upon stock option exercises or in connection with PSU awards, inorder to pay related minimum tax liabilities.

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 and July17, 2006, our Board of Directors amended the program and authorized thepurchase of an additional 675,000 and 600,000 shares, respectively, ofoutstanding common stock.  On July 26,2007 and August 14, 2007, our Board of Directors authorized the purchase of anadditional 144,867 and 300,700 shares, respectively, of outstanding commonstock under the stock buyback program. After accounting for the actions of the Board of Directors inauthorizing the purchase of the additional shares, 550,000 shares remainedavailable for repurchase under this program. Shares may be purchased from time to time under this program in the openmarket, by block purchase, or through negotiated transactions, or possiblyother transactions managed by broker-dealers. No timetable has been set for completion of the program.  We did not repurchase any shares of ourcommon stock during the first quarter of fiscal year 2008 under this program;rather, as noted in the above table and associated footnotes, all sharesreflected in the table as being repurchased during the quarter were eitherwithheld from or delivered to the Company by employees or directors upon stockoption exercises or in connection with PSU awards, in order to pay relatedminimum tax liabilities.

**Item 3.  Defaults upon Senior Securities**

None

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

TheCompany held its Annual Meeting of Shareholders at the Company’s facilitylocated in Timonium, Maryland on July 26, 2007. At the meeting, the shareholders were asked to vote on the election ofdirectors and the ratification of the appointment of the Company’s independentregistered public accounting firm.  Eachof these proposals was described in the Company’s Definitive Proxy Statementfiled with the Commission on June 22, 2007.

ELECTIONOF DIRECTORS.  At the meeting, theshareholders re-elected Dennis J. Shaughnessy and elected Jay G. Baitler for athree-year term expiring at the Company’s 2010 Annual Meeting of Shareholdersand until their successors are duly elected and qualify.  The term of office of each of Robert B.Barnhill, Jr., Benn R. Konsynski, John D. Beletic, Daniel Okrent and Morton F.Zifferer, Jr. also continued after the meeting. The votes cast for Messrs. Shaughnessy and Baitler were as follows:
| Dennis J. Shaughnessy |   | 4,252,112 |   | For                 |
|-----------------------|--------|-----------|--------|---------------------|
|                  |   | 576,116   |   | Against or Withheld |
| Jay G. Baitler        |   | 4,748,065 |   | For                 |
|                  |   | 80,163    |   | Against or Withheld |

 

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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.  At the meeting, the shareholders ratified theappointment of Ernst & Young LLP to serve as the independent registeredpublic accounting firm of the Company for the fiscal year ending March 30,2008.  The number of votes “for” was4,817,050, the number of votes “against” or “withheld” was 11,165, and thenumber of shares representing abstentions was 13.

**Item 5.  Other Information**

None.

**Item 6.  Exhibits**

(a)                EXHIBITS:
| 10.1 |   | Second Amendment of Agreement of Lease by and  between Atrim Building, LLC and TESSCO Technologies.                                                                                                                                                      |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Lease dated as of June 1, 2007, by and between  MERRITT/BAVAR-VA, LLC as landlord and the Registrant as tenant (incorporated  by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K  filed with the Commission on June 6, 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: August 15,  2007 |   |   |   | By:                              |   | /s/ David M. Young |
|                   |   |   |   |                             |   | David M. Young |
|                   |   |   |   |                             |   | Chief Financial  Officer |
|                   |   |   |   |                             |   | (principal  financial and accounting officer) |

 

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