10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 2005
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 of registrant as specified in charter)

Delaware	52-0729657
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
11126 McCormick Road, Hunt Valley, Maryland	21031
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:  (410) 229-1000

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

Yes  ýNo  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  oNo  ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  oNo  ý

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of February 3, 2006, was 4,137,527.

TESSCO TECHNOLOGIES INCORPORATED

Index to Form 10-Q

Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of December 25, 2005 and March 27, 2005
		Consolidated Statements of Income for the periods ended December 25, 2005 and December 26, 2004
		Consolidated Statements of Cash Flows for the periods ended December 25, 2005 and December 26, 2004
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
Part II	Other Information
	Item 1.	Legal Proceedings
	Item 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

Part I.  Financial Information

Item 1.  Financial Statements

TESSCO TECHNOLOGIES INCORPORATED

Consolidated Balance Sheets

	December 25, 2005		March 27, 2005
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	3,880,800
Trade accounts receivable, net	44,251,600		60,907,400
Product inventory	49,048,800		60,832,600
Deferred tax asset	2,170,000		2,170,000
Prepaid expenses and other current assets	2,903,200		2,828,400
Total current assets	98,373,600		130,619,200
Property and equipment, net	25,443,200		26,193,000
Goodwill	2,452,200		2,452,200
Other long-term assets	1,182,700		1,292,800
Total assets	$	127,451,700	$	160,557,200
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	42,820,200	$	82,618,000
Accrued expenses and other current liabilities	7,212,500		6,638,400
Revolving credit facility	3,561,000		—
Current portion of long-term debt	444,000		362,600
Total current liabilities	54,037,700		89,619,000
Deferred tax liability	3,536,700		3,561,300
Long-term debt, net of current portion	4,647,800		5,000,700
Other long-term liabilities	1,468,900		1,554,100
Total liabilities	63,691,100		99,735,100
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock	—		—
Common stock	49,300		48,900
Additional paid-in capital	24,496,800		23,578,600
Treasury stock, at cost	(9,521,100)		(7,454,400)
Retained earnings	48,706,400		44,649,000
Accumulated other comprehensive income	29,200		—
Total shareholders’ equity	63,760,600		60,822,100
Total liabilities and shareholders’ equity	$	127,451,700	$	160,557,200

See accompanying notes.

3

TESSCO TECHNOLOGIES INCORPORATED

Consolidated Statements of Income

	Fiscal Quarters Ended				Nine Months Ended
	December 25, 2005		December 26, 2004		December 25, 2005		December 26, 2004
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenues	$	94,811,900	$	135,825,100	$	380,768,000	$	362,119,800
Cost of goods sold	70,849,000		111,420,400		302,416,400		292,344,200
Gross profit	23,962,900		24,404,700		78,351,600		69,775,600
Selling, general and administrative expenses	22,004,200		21,569,300		71,507,500		61,867,900
Income from operations	1,958,700		2,835,400		6,844,100		7,907,700
Interest, net	125,600		37,100		192,700		114,400
Income before provision for income taxes	1,833,100		2,798,300		6,651,400		7,793,300
Provision for income taxes	714,900		1,091,400		2,594,000		3,039,400
Net income	$	1,118,200	$	1,706,900	$	4,057,400	$	4,753,900
Basic earnings per share	$	0.27	$	0.41	$	0.96	$	1.10
Diluted earnings per share	$	0.26	$	0.40	$	0.95	$	1.08
Basic weighted average shares outstanding	4,187,500		4,211,000		4,220,800		4,340,900
Diluted weighted average shares outstanding	4,263,000		4,233,700		4,280,100		4,406,300

See accompanying notes.

4

TESSCO TECHNOLOGIES INCORPORATED

Consolidated Statements of Cash Flows

	Nine Months Ended
	December 25, 2005		December 26, 2004
	(unaudited)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,057,400	$	4,753,900
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,279,000		3,137,300
Deferred taxes and other non-cash items	777,600		512,400
Decrease (increase) in trade accounts receivable	16,655,800		(6,712,100)
Decrease (increase) in product inventory	11,783,800		(13,817,300)
(Increase) decrease in prepaid expenses and other current assets	(74,800)		92,000
(Decrease) increase in trade accounts payable	(39,797,800)		14,884,400
Increase in accrued expenses and other current liabilities	574,100		60,500
Net cash (used in) provided by operating activities	(2,744,900)		2,911,100
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	(2,524,600)		(3,413,800)
Net cash used in investing activities	(2,524,600)		(3,413,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from revolving credit facility	3,561,000		—
Payments on long-term debt	(271,500)		(183,300)
Net proceeds from issuance of stock	165,900		316,600
Purchase of treasury stock	(2,066,700)		(2,856,200)
Net cash provided by (used in) financing activities	1,388,700		(2,722,900)
Net decrease in cash and cash equivalents	(3,880,800)		(3,225,600)
CASH AND CASH EQUIVALENTS, beginning of period	3,880,800		6,765,600
CASH AND CASH EQUIVALENTS, end of period	$	—	$	3,540,000

See accompanying notes.

5

TESSCO Technologies Incorporated

Notes to Consolidated Financial Statements

December 25, 2005

(Unaudited)

Note 1.  Description of Business and Basis of Presentation

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO or the Company), is a leading provider of integrated product and supply chain solutions to the professionals that design, build, run, maintain and use wireless, mobile, fixed and in-building systems.  The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive Internet and information technology.  Approximately 98% of the Company’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 interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented.  These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations.  The results of operations presented in the accompanying interim financial statements are not necessarily representative of operations for an entire year.  The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 27, 2005.

Note 2.  Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”  This statement requires companies to expense stock options and other equity compensation instruments using fair value methods.  Under the provisions of SFAS No. 123R, the amount of tax benefit relating to stock compensation included in operating cash flows for the period prior to the effective date will be reported in financing cash flows once the statement becomes effective.  The Company adopted the fair value expense recognition provisions of SFAS No. 123 on March 29, 2004.  Accordingly, other than the timing issue discussed below, the adoption of SFAS No. 123R is not expected to have a material impact on the Company’s consolidated financial position or results of operations.  Currently, the Company records stock compensation expense based on actual forfeitures as opposed to estimated; however, SFAS No. 123R will require the Company to use estimated forfeitures, and therefore, could have a material impact on the timing of stock compensation expense.  SFAS No. 123R is effective for the Company beginning in fiscal 2007.  SFAS No. 123R allows for either prospective or retrospective recognition of compensation expense.  The Company anticipates adopting the standard using the prospective method.

Further, in March 2005, the SEC issued Staff Accounting Bulleting (SAB) No. 107 regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provided the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB No. 107 provides guidance related to share-based payment transactions with non-employees, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of

6

compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Management’s Discussion and Analysis subsequent to adoption of the SFAS No. 123R.  (See Note 3 for additional discussion regarding SFAS No. 123.)

Note 3.  Stock Awards

Effective March 29, 2004, the Company elected to adopt the fair value provisions of SFAS No. 123 using the modified prospective method in accordance with SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.”  Accordingly, beginning in fiscal 2005, the Company began expensing stock options and other equity compensation instruments using fair value methods.  Stock-based employee compensation cost recognized in fiscal 2005 and fiscal 2006 are the same as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all awards granted after August 1, 1995.

In accordance with SFAS No. 123, the fair value of the Company’s stock options is determined using the Black-Scholes option pricing model, based upon facts and assumptions existing at the date of grant.  The value of each option at the date of grant is amortized as compensation expense over the option vesting period.  This occurs without regard to subsequent changes in stock price, volatility or interest rates over time, provided that the option remains outstanding. This model, and other option pricing models, were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  The Company’s options are not traded and have certain vesting restrictions.  The use of different models could result in differences in the amounts and timing of expense.

Beginning in fiscal 2005, the Company’s equity-based compensation philosophy and practice shifted away from awarding stock options to granting performance-based and time-vested stock grants.  Accordingly, in April 2004, the Company’s Board of Directors established a Performance Stock Unit Award Program under the Company’s Amended and Restated 1994 Stock and Incentive Plan (the 1994 Plan).  Under the program, Performance Stock Units (PSUs) have been granted to selected individuals. Each PSU entitles the recipient to earn TESSCO common stock, but only after earnings per share and, for non-director employee participants, individual performance targets are met over a defined performance cycle. Once earned, shares vest and are issued over a specified period of time determined at the time of the grant, provided that the recipient remains employed by or associated with the Company at the time of share issuance.  Earnings per share targets, which take into account the earnings impact of this program, are set by the Board of Directors in advance for the complete performance cycle at levels designed to grow shareowner value, and for those PSUs which are based upon multiple year performance cycles, typically represent continual increases in earnings per share.  If actual performance does not reach the minimum annual and/or cumulative threshold targets, no shares are issued. Under SFAS No. 123, the Company records compensation expense on its PSUs over the vesting period, based on the number of shares management estimates will ultimately be issued.  Accordingly, the Company determines the periodic financial statement compensation expense based upon the stock price at the PSU grant date, management’s projections of future EPS performance over the performance cycle, and the resulting amount of estimated share grants, net of actual forfeitures.  Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change significantly in future periods.  Also, as discussed in Note 2, the adoption of SFAS No. 123R in fiscal 2007 will require the Company to record stock compensation expense based on estimated forfeitures as opposed to actual.  This change could have a material impact on the timing of stock compensation expense.

7

Based on fiscal 2005 performance, 137,520 shares were earned under previously issued PSUs, of which 35,509 shares have vested and been issued.  Since the establishment of the PSU program in April 2004, PSUs covering 16,933 earned but unissued shares were cancelled as a result of the recipients no longer being employed by the Company.  As of December 25, 2005, PSUs covering an aggregate of 610,140 shares of the Company’s common stock remained outstanding.  Of these shares, 85,078 shares are earned but not yet issued and will vest and be issued ratably on or about May 1 of 2006, 2007 and 2008, provided that the recipient remains employed by or associated with the Company at the time of issuance.  The remaining 525,062 shares may be earned depending upon: (1) whether cumulative and/or annual earnings per share performance of the Company from fiscal 2005 through 2007, as applicable to the respective PSUs, reaches or exceeds at least the threshold performance targets; (2) the extent to which current participants meet applicable individual performance goals; and (3) whether the participants remain employed by or associated with the Company for all or a portion of the period ended May 2008.  Any shares earned based on fiscal 2006 performance will vest and be issued on or about May 1 of 2006, 2007 and 2008, provided that the recipient remains employed by or associated with the Company at the time of issuance.  Any shares earned based on fiscal 2007 performance will vest and be issued on or about May 1 of 2007 and 2008, again provided that the recipient remains employed by or associated with the Company at the time of issuance.

The table below presents the stock compensation expense recognized by the Company in the fiscal quarter and nine months ended December 25, 2005 and December 26, 2004.  Stock compensation expense, which is primarily associated with the PSUs and, to a lesser extent, stock options, is included in selling, general and administrative expense in the unaudited Consolidated Statements of Income.

	December 25, 2005		December 26, 2004
Fiscal quarter ended	$	188,700	$	127,600
Nine months ended	744,700		785,900

During the fiscal quarter and nine months ended December 25, 2005, the Company issued an additional 3,404 shares and 12,727 shares, respectively, of Company stock related to stock option exercises, team member stock purchases and 401(k) Plan matches.

Note 4.  Earnings Per Share

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

	Fiscal Quarters Ended		Nine Months Ended
	December 25, 2005	December 26, 2004	December 25, 2005	December 26, 2004
Basic weighted average common shares outstanding	4,187,500	4,211,000	4,220,800	4,340,900
Dilutive common shares outstanding	75,500	22,700	59,300	65,400
Diluted weighted average common shares outstanding	4,263,000	4,233,700	4,280,100	4,406,300

As of December 25, 2005, stock options with respect to 186,000 shares of common stock were outstanding, of which options in respect to 150,000 shares were then currently exercisable. The weighted average exercise price of all outstanding options at December 25, 2005 was $12.38.  No options have

8

been granted since April 2003.  Of these options, options to purchase 28,000 shares of common stock at a weighted average exercise price of $20.02 per share were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

Note 5.  Business Segments

The Company evaluates revenue, gross profit and inventory as three business segments:  (1) Network infrastructure products, which are used to build, repair and upgrade wireless telecommunications, computing and Internet networks, and generally complement radio frequency transmitting and switching equipment provided directly by original equipment manufacturers (OEMs); (2) Mobile devices and accessory products, which include cellular telephones and other data devices, pagers and two-way radios and related accessories such as replacement batteries, cases, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices; and (3) Installation, test and maintenance products, which are used to install, tune, maintain and repair wireless communications equipment.  Within the mobile devices and accessories line of business, the Company sells to both commercial and consumer markets.  The network infrastructure and installation, test and maintenance lines of business sell primarily to commercial markets.  Beginning in fiscal 2005, the Company also began regularly reviewing its commercial results of operations in two customer categories.  These two customer categories and the consumer customer category, for which results of operations are also separately reviewed, are described further below:

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

•Commercial Self-Maintained Users, Governments and Resellers.  Self-maintained user (SMU) and government customers include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments, including public safety organizations. Resellers include dealers and resellers that sell, install and service cellular telephone, paging and two-way radio communications equipment primarily for the consumer and small business markets.  These resellers include local and national proprietorships and retailers, as well as sales and installation centers operated by cellular and paging carriers.

•Consumers. Consumers include customers that buy through any of our affinity partner relationships or directly from our consumer website, YourWirelessSource.com^TM.

The Company measures segment performance based on segment gross profit.  The segment operations develop their product offering, pricing and strategies, which are collaborative with one another and the centralized sales and marketing function.  Therefore, the Company does not segregate assets, other than inventory, for internal reporting, evaluating performance or allocating capital.  Product delivery revenue and certain cost of sales expenses have been allocated to each segment based on a percentage of revenues and gross profit to agree to financial statement revenue and gross profit.

9

(Amounts in thousands)	Network Infrastructure		Mobile Devices and Accessories		Installation, Test and Maintenance		Total
Fiscal Quarter ended December 25, 2005
Commercial Revenues:
Public Carriers and Network Operators	$	15,090	$	891	$	4,530	$	20,511
SMUs, Governments and Resellers	26,981		32,217		12,816		72,014
Total Commercial Revenues	42,071		33,108		17,346		92,525
Consumer Revenues	—		2,287		—		2,287
Total Revenue	$	42,071	$	35,395	$	17,346	$	94,812
Commercial Gross Profit:
Public Carriers and Network Operators	$	3,621	$	236	$	1,092	$	4,949
SMUs, Governments and Resellers	5,834		7,725		4,343		17,902
Total Commercial Gross Profit	9,455		7,961		5,435		22,851
Consumer Gross Profit	—		1,112		—		1,112
Total Gross Profit	$	9,455	$	9,073	$	5,435	$	23,963
Product Inventory	$	18,403	$	14,044	$	16,602	$	49,049
Fiscal Quarter ended December 26, 2004
Commercial Revenues:
Public Carriers and Network Operators	$	14,251	$	754	$	3,320	$	18,325
SMUs, Governments and Resellers	20,004		17,798		12,493		50,295
Total Commercial Revenues	34,255		18,552		15,813		68,620
Consumer Revenues	—		67,205		—		67,205
Total Revenue	$	34,255	$	85,757	$	15,813	$	135,825
Commercial Gross Profit:
Public Carriers and Network Operators	$	3,370	$	211	$	749	$	4,330
SMUs, Governments and Resellers	4,788		4,814		3,174		12,776
Total Commercial Gross Profit	8,158		5,025		3,923		17,106
Consumer Gross Profit	—		7,299		—		7,299
Total Gross Profit	$	8,158	$	12,324	$	3,923	$	24,405
Product Inventory	$	19,505	$	28,514	$	6,785	$	54,804

10

(Amounts in thousands)	Network Infrastructure		Mobile Devices and Accessories		Installation, Test and Maintenance		Total
Nine Months ended December 25, 2005
Commercial Revenues:
Public Carriers and Network Operators	$	43,241	$	2,171	$	12,698	$	58,110
SMUs, Governments and Resellers	72,791		78,644		35,805		187,240
Total Commercial Revenues	116,032		80,815		48,503		245,350
Consumer Revenues	—		135,418		—		135,418
Total Revenue	$	116,032	$	216,233	$	48,503	$	380,768
Commercial Gross Profit:
Public Carriers and Network Operators	$	10,285	$	598	$	3,027	$	13,910
SMUs, Governments and Resellers	16,601		19,935		11,851		48,387
Total Commercial Gross Profit	26,886		20,533		14,878		62,297
Consumer Gross Profit	—		16,055		—		16,055
Total Gross Profit	$	26,886	$	36,588	$	14,878	$	78,352
Product Inventory	$	18,403	$	14,044	$	16,602	$	49,049
Nine Months ended December 26, 2004
Commercial Revenues:
Public Carriers and Network Operators	$	42,703	$	2,466	$	12,248	$	57,417
SMUs, Governments and Resellers	57,505		51,669		34,223		143,397
Total Commercial Revenues	100,208		54,135		46,471		200,814
Consumer Revenues	—		161,306		—		161,306
Total Revenue	$	100,208	$	215,441	$	46,471	$	362,120
Commercial Gross Profit:
Public Carriers and Network Operators	$	10,004	$	686	$	2,964	$	13,654
SMUs, Governments and Resellers	13,669		13,928		8,971		36,568
Total Commercial Gross Profit	23,673		14,614		11,935		50,222
Consumer Gross Profit	—		19,554		—		19,554
Total Gross Profit	$	23,673	$	34,168	$	11,935	$	69,776
Product Inventory	$	19,505	$	28,514	$	6,785	$	54,804

11

Note 6.  Long-Term Debt

On October 1, 2005, the Company entered into a receive variable/pay fixed interest rate swap on a total notional amount of $4.2 million with Wachovia Bank, N.A. to avoid the risks associated with fluctuating interest rates on the Company’s existing term bank loan, which bears interest at a floating rate of LIBOR plus 1.75%, and to eliminate the variability in the cash outflow for interest payments.  The interest rate swap agreement locks the interest rate for the outstanding principal balance of the loan at 6.38% through July 1, 2011.  There was no payment due or received at inception of the swap.  No hedge ineffectiveness will be recognized as the interest rate swaps’ provisions match the applicable provisions of the term bank loan.  This cash flow hedge qualified for hedge accounting using the short-cut method since the swap terms match the critical terms of the hedged debt.  The fair value of this interest rate swap at December 25, 2005 of $29,200 is included in Other Long-Term Assets and Accumulated Other Comprehensive Income on the Company’s Consolidated Balance Sheet.

Note 7.  Commitments and Contingencies

In the third quarter of 2004, the Company ceased using its leased distribution and office space in Hunt Valley, Maryland, adjacent to the Company’s Global Logistics Center.  The Company consolidated the operations which had been undertaken in this facility into its Global Logistics Center.  Monthly rent of approximately $45,000 is due through March 2006.  The liability representing the fair value of continuing lease obligations related to this vacated facility was $139,000 and $553,300 at December 25, 2005 and March 27, 2005, respectively. The change during the period is related to the reduction of the recorded liability resulting from lease payments and amortization of the fair value discount.

Lawsuits and claims are filed against the Company from time to time in the ordinary course of business.  The Company does not believe that any lawsuits or claims pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on the Company’s financial condition or results of operations.

Note 8.  Customer Concentration

In September 2005, T-Mobile, previously the Company’s largest customer relationship, transitioned the TESSCO provided e-commerce marketing and sales system to their own in-house web solution and alternative third-party logistics provider, and accordingly, revenues from this relationship ceased.  In the third quarter of fiscal 2006, this affinity relationship did not account for any significant revenues or gross profits; however, T-Mobile accounted for 34% and 16% of total revenues and  total gross profits respectively, in the first nine months of fiscal 2006.  T-Mobile accounted for 47% and 41% of total revenues and 23% and 21% of total gross profits in the third quarter and first nine months of fiscal 2005, respectively.  At December 25, 2005, there was no inventory, trade accounts receivable or accounts payable relating to this relationship included on the Company’s Consolidated Balance Sheet.  The final settlement of these assets and liabilities was completed in the third quarter of fiscal 2006.

Note 9.  Reclassifications

Certain reclassifications have been made to the prior year Consolidated Financial Statements to conform with the current year presentation.

12

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended March 27, 2005.

Business Overview and Environment

TESSCO Technologies Incorporated (TESSCO) is a leading provider of integrated product and supply chain solutions to the professionals that design, build, run, maintain and use wireless mobile, fixed and in-building systems.  Although we sell products to customers in over 100 countries, approximately 98% of our sales are made to customers in the United States.  We have operations and office facilities in both Hunt Valley, Maryland and Reno, Nevada.  Due to the diversity in our business, we are not significantly affected by seasonality.

We offer a wide range of products that are classified into three business segments: network infrastructure, mobile devices and accessories, and installation, test and maintenance.  Network infrastructure products, which are sold to our commercial customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products, such as cable, transmission lines and antennas are in part dependent on capital spending in the wireless communications industry.  However, we have also been growing our offering of wireless broadband and network equipment products, which are not as dependent on the overall capital spending of the industry.  Mobile devices and accessory products include cellular telephones and other mobile devices, pagers and two-way radios and related accessories.  Mobile devices and accessory products are widely sold to commercial customers and consumers.  Commercial customers include retail stores, value-added resellers and dealers.  Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Installation, test and maintenance products, which are sold to our commercial customers, are used to install, tune, maintain and repair wireless communications equipment. Approximately 50% of all of our installation, test and maintenance sales are generated from the sales of replacement parts and materials for original equipment manufacturers such as Nokia, Inc. (Nokia).  The arrangement on which this relationship is based, like many of our other customer and vendor arrangements, is of limited duration and is terminable by either party upon several months or otherwise short notice.  The remainder of this segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware and supplies required by service technicians.  Both our repair and replacement parts sales and consumer sales through our affinity partnerships are reliant on relationships with a small number of vendors. 

 We view our customer base in three major categories:

•Commercial Public Carriers and Network operators.  Public carriers and network operators include systems operators that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers.

•Commercial Self-Maintained Users (SMUs), Governments and Resellers.  SMUs and government customers include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments, including public safety organizations. Resellers include dealers and resellers that sell, install and service cellular telephone, paging and two-way radio communications equipment primarily for the consumer and small business markets.  These resellers include local and national proprietorships and retailers, as well as sales and installation centers operated by cellular and paging carriers.

•Consumers.  Consumers are customers buying through any of our affinity-partner relationships or directly from our consumer website, YourWirelessSource.com^TM.

13

The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high.  Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base.  In addition, the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months notice.  Our ability to maintain these relationships is subject to competitive pressures and challenges.  We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and purchasing relationships with approximately 350 manufacturers provide us with a significant competitive advantage over new entrants to the market.

In mid-September 2005, T-Mobile USA (T-Mobile), previously our largest affinity and overall customer relationship, substantially completed the transition of the TESSCO provided e-commerce marketing and sales system to their own in-house web solution and alternative third-party logistics provider, and thus revenues ceased from this relationship.  The third quarter of fiscal 2006 did not include any significant revenues and gross profits from this affinity relationship.  At the end of the second fiscal quarter of 2006, we began to shed dedicated expenses related to this relationship, which included: freight out and distribution supplies; compensation and benefit costs related to fulfillment and returns processing, in-bound call center, program management, and credit and collections; credit card fees and bad debt expenses related to cash collections directly from end users; and e-commerce expenses.  As a result of the termination of the relationship, total revenues and gross profits decreased 31% and 16%, respectively, from the second quarter of fiscal 2006; however, commercial sales and gross profits increased 17% and 12%, respectively, in the same time period.  Total selling, general and administrative expenses also decreased as compared with the second quarter of fiscal 2006 by 14%, due primarily to the expense reductions discussed above.

14

Results of Operations

The following table summarized the unaudited results of our operations for the fiscal quarter and nine months ended December 25, 2005 and December 26, 2004:

	Fiscal Quarters Ended							Nine Months Ended
(Amounts in thousands, except per share data)	December 25, 2005		December 26, 2004		$ Change		% Change	December 25, 2005		December 26, 2004		$ Change		% Change
Commercial Revenues
Network Infrastructure:
Public Carriers and Network Operators	$	15,090	$	14,251	$	839	5.9%	$	43,241	$	42,703	$	538	1.3%
SMUs, Governments and Resellers	26,981		20,004		6,977		34.9%	72,791		57,505		15,286		26.6%
Total Network Infrastructure	42,071		34,255		7,816		22.8%	116,032		100,208		15,824		15.8%
Mobile Devices and Accessories:
Public Carriers and Network Operators	891		754		137		18.2%	2,171		2,466		(295)		(12.0)%
SMUs, Governments and Resellers	32,217		17,798		14,419		81.0%	78,644		51,669		26,975		52.2%
Total Mobile Devices and Accessories	33,108		18,552		14,556		78.5%	80,815		54,135		26,680		49.3%
Installation, Test and Maintenance:
Public Carriers and Network Operators	4,530		3,320		1,210		36.4%	12,698		12,248		450		3.7%
SMUs, Governments and Resellers	12,816		12,493		323		2.6%	35,805		34,223		1,582		4.6%
Total Installation, Test and Maintenance	17,346		15,813		1,533		9.7%	48,503		46,471		2,032		4.4%
Total Commercial Revenues	92,525		68,620		23,905		34.8%	245,350		200,814		44,536		22.2%
Consumer Revenues - Mobile Devices and Accessories	2,287		67,205		(64,918)		(96.6)%	135,418		161,306		(25,888)		(16.0)%
Total Revenues	$	94,812	$	135,825	$	(41,013)	(30.2)%	$	380,768	$	362,120	$	18,648	5.1%
Commercial Gross Profit
Network Infrastructure:
Public Carriers and Network Operators	$	3,621	$	3,370	$	251	7.4%	$	10,285	$	10,004	$	281	2.8%
SMUs, Governments and Resellers	5,834		4,788		1,046		21.8%	16,601		13,669		2,932		21.4%
Total Network Infrastructure	9,455		8,158		1,297		15.9%	26,886		23,673		3,213		13.6%
Mobile Devices and Accessories:
Public Carriers and Network Operators	236		211		25		11.8%	598		686		(88)		(12.8)%
SMUs, Governments and Resellers	7,725		4,814		2,911		60.5%	19,935		13,928		6,007		43.1%
Total Mobile Devices and Accessories	7,961		5,025		2,936		58.4%	20,533		14,614		5,919		40.5%
Installation, Test and Maintenance:
Public Carriers and Network Operators	1,092		749		343		45.8%	3,027		2,964		63		2.1%
SMUs, Governments and Resellers	4,343		3,174		1,169		36.8%	11,851		8,971		2,880		32.1%
Total Installation, Test and Maintenance	5,435		3,923		1,512		38.5%	14,878		11,935		2,943		24.7%
Total Commercial Gross Profit	22,851		17,106		5,745		33.6%	62,297		50,222		12,075		24.0%
Consumer Gross Profit - Mobile Devices and Accessories	1,112		7,299		(6,187)		(84.8)%	16,055		19,554		(3,499)		(17.9)%
Total Gross Profit	23,963		24,405		(442)		(1.8)%	78,352		69,776		8,576		12.3%
Selling, general and administrative expenses	22,004		21,569		435		2.0%	71,508		61,868		9,640		15.6%
Income from operations	1,959		2,836		(877)		(30.9)%	6,844		7,908		(1,064)		(13.5)%
Interest, net	126		37		89		240.5%	193		114		79		69.3%
Income before provision for income taxes	1,833		2,799		(966)		(34.5)%	6,651		7,794		(1,143)		(14.7)%
Provision for income taxes	715		1,092		(377)		(34.5)%	2,594		3,040		(446)		(14.7)%
Net income	$	1,118	$	1,707	$	(589)	(34.5)%	$	4,057	$	4,754	$	(697)	(14.7)%
Diluted earnings per share	$	0.26	$	0.40	$	(0.14)	(35.0)%	$	0.95	$	1.08	$	(0.13)	(12.0)%

15

Third Quarter of Fiscal 2006 Compared to Third Quarter of Fiscal 2005

Revenues.  Revenues for the third quarter of fiscal 2006 decreased 30% as compared with the third quarter of fiscal 2005, primarily due to a 97% decrease in consumer revenues, partially offset by a 35% growth in commercial revenues.  While total sales in our mobile devices and accessories line of business declined due to the large decrease in consumer sales, we grew sales in all of our commercial lines of business.  Sales in the mobile devices and accessories line of business decreased 59% in the third quarter of fiscal 2006, as compared with the prior-year period.  The decrease was due to a 97% decrease in consumer sales, offset by a 79% increase in commercial sales.  The decrease in consumer sales was attributable to the transition of the TESSCO provided e-commerce marketing and sales system to T-Mobile’s own in-house web solution and alternative third-party logistics provider.  The increase in commercial revenues for mobile devices and accessories, which are sold primarily to SMUs, governments and resellers, but also to public carriers and network operators, was primarily due to increased sales of accessory products to carrier and independent retail customers, as well as strong growth in sales of two-way radio equipment, mounts and antennas.  During the third quarter, we began supplying several new wireless carrier customers, including one large Tier 1 national carrier.

The 23% increase in our network infrastructure sales as compared with the third quarter of last year is primarily attributable to an increase in sales of fixed wireless broadband products, antenna systems, and tower site support products.  The market for broadband and network equipment products continues to emerge and grow. During fiscal year 2005, we increased marketing efforts in this area, added several new vendors and improved inventory availability.  The market for radio frequency (RF) propagation products continues to be challenging, especially in cable products; however, our revenue for these products increased over the prior-year quarter, primarily driven by growth in antenna systems and tower site support products. Most of our growth in sales of network infrastructure product was in sales to SMUs, governments and resellers, as we have focused on diversification beyond the traditional infrastructure carrier customer.  Although we believe the market for both broadband and RF propagation products will continue to grow, there can be no assurance that these trends will continue.

Revenues from our installation, test and maintenance line of business had a 10% increase from the prior-year quarter, primarily due to increased sales of test equipment, tools, shop supplies, and safety equipment and apparel, which were offset by decreased revenues from repair parts and components.  Volumes for repair parts and components increased over the prior-year period; however, due to changes in the terms of our arrangement with our largest repair parts and components vendor, a significant portion of these transactions are now accounted for on a net revenue basis and, therefore, revenues declined.

Gross Profit.  Gross profit for the third quarter of fiscal 2006 decreased 2% as compared with the third quarter of fiscal 2005. Total commercial gross profit grew 34%, while consumer gross profit decreased 85% as a result of the transition of the T-Mobile relationship as discussed above.  Gross profit margin increased to 25.3% in the third quarter of fiscal 2006 from 18.0% in third quarter of fiscal 2005.  Gross profit margin in our network infrastructure segment decreased from 23.8% in the third quarter of fiscal 2005 to 22.5% in the third quarter of fiscal 2006.  In our installation, test and maintenance segment, gross profit margin increased to 31.3% in the third quarter of fiscal 2006 from 24.8% in the third quarter of fiscal 2005.  Generally, our gross margins by product within these segments have been sustained and these variations are related to sales mix within the segment product offerings, including repair and replacement parts in our installation, test and maintenance line of business, an increased portion of which was accounted for on a net revenue basis as discussed above.  Gross profit margin in our mobile devices and accessories segment increased to 25.6% in the third quarter of this fiscal year from 14.4% in the third quarter of last year.  This increase is primarily attributable to a large increase in gross profit margin for our consumer sales, offset by a decrease in gross profit margin for our commercial sales.  The increase in gross profit margin for our consumer sales was due to the elimination of sales volume of lower

16

margin handset sales attributable to our affinity relationship with T-Mobile.  The decrease in commercial gross profit margin for our mobile devices and accessories, from 27.1% in the third quarter of last fiscal year to 24.0% for the third quarter of this fiscal year, is attributable to sales mix within the product offering in part due to new retail relationships established during this quarter.  We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.

Our ongoing ability to earn revenues and gross profits from customers and vendors looking to us for product 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 the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business.  In addition, the agreements or arrangements on which our affinity relationships are based are typically of limited duration, and are terminable by either party upon several months or otherwise relatively short notice.  These affinity relationships could also be affected by wireless carrier consolidation.

Selling, General and Administrative Expenses.  Total selling, general and administrative expenses increased by 2% in the third quarter of fiscal 2006 as compared with the third quarter of fiscal 2005.  Selling, general and administrative expenses as a percentage of revenues increased to 23% in the third quarter of fiscal 2006 from 16% in the third quarter of fiscal 2005, primarily due to the significant decrease in consumer revenues discussed above and expenses related to business generation activities as discussed below, partially offset by decreased freight costs.

Compensation costs related to business generation personnel increased over the prior-year quarter and have helped drive the large growth in commercial sales.

Marketing expenses also increased in the third quarter.  In June of fiscal 2006, we retained RTC Relationship Marketing, a direct- and database- marketing firm to increase market awareness of TESSCO’s value proposition and product and solutions offering among potential and existing customers.  In the third quarter of fiscal 2006, we launched several programs designed to increase our base of customers and our customers’ monthly purchases.  There can be no assurance as to the extent that these programs will increase revenues or gross profits.

Freight costs in the third quarter of fiscal 2006 decreased over the prior-year quarter, primarily due to the loss of consumer sales associated with our T-Mobile relationship which ended in the second quarter.  This decrease was partially offset by the freight costs associated with an increase in commercial sales.  Selling, general and administrative expenses also include a reduction of depreciation and amortization expense of approximately $200,000 related to the correction of a useful life applied to an asset in the first six months of fiscal 2006.  This amount is not material to the financial statements of the previously reported interim periods and had no effect on year-to-date depreciation and amortization expense.

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation.  We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation.  During the third quarter, we experienced collections of certain accounts receivable balances previously reserved.  Accordingly, we recorded a (benefit from) provision for bad debts of $(26,570) and $286,800 for the third quarter ended December 26, 2005 and December 26, 2004, respectively.

Interest, net.  Net interest expense for the third quarter of fiscal 2006 increased from the prior-year quarter primarily due to increased interest expense on our revolving credit facility, as well as increased interest expense on our existing term bank loan due to higher interest rates.  As noted below, we entered into a receive variable/pay fixed interest rate swap on our existing bank loan, thus fixing the interest rate on this loan at 6.38%. This fixed rate exceeded the then current variable rate on this loan during the third quarter of fiscal 2005.  Interest expense on our other debt instruments had only minor variances from year-to-year in total.

17

Income Taxes, Net Income and Diluted Earnings Per Share.  The effective tax rates in the third quarter of fiscal 2006 and 2005 were 39%.  As a result of the factors discussed above, net income and diluted earnings per share for the third quarter of fiscal 2006 decreased 35% over the prior-year quarter.

First Nine Months of Fiscal 2006 Compared to First Nine Months of Fiscal 2005

Revenues.  Revenues for the first nine months of fiscal year 2006 grew 5% as compared with fiscal year 2005, driven by growth in each of our three business segments.  Within these segments, our total commercial revenues grew 22% while consumer revenues decreased 16% from the prior-year period as a result of the transition of our T-Mobile relationship as discussed above.

Our mobile devices and accessories revenues grew less than 1% for the first nine months of fiscal 2006 compared with last year’s period. We experienced significant growth in commercial sales of mobile devices and accessory products, which was almost entirely offset by a decline in consumer sales.  Commercial revenues for mobile devices and accessories, which are sold primarily to SMUs, governments and resellers, but also to public carriers and network operators, increased 49% over the prior year, due in part to new product introductions, enhanced merchandising and packaging programs and new wireless carrier retail relationships.  The decrease in consumer sales of mobile devices and accessories was primarily due to transition of our T- Mobile affinity relationship in the second quarter of fiscal 2006. Revenues from the affinity relationship with T-Mobile collectively accounted for approximately 34% of total revenue in the first nine months of fiscal 2006; however, gross profit generated through the T-Mobile relationship represents only 16% of our total gross profit in this same period.

The 16% increase in our network infrastructure sales for the first nine months of this fiscal year over the same period of last year is primarily attributable to an increase in sales of fixed wireless broadband products and radio frequency (RF) propagation products.  The market for broadband and network equipment products continues to emerge and grow.  All of our growth in sales of network infrastructure product was in sales to SMUs, governments and resellers, as we have focused on diversification beyond the traditional infrastructure carrier customer.  Although we believe the market for both broadband and RF propagation products will continue to grow, there can be no assurance that these trends will continue.

Revenues from our installation, test and maintenance line of business increased 4% from the prior nine-month period, primarily due to increased sales of test equipment, tools and safety apparel and equipment, which were offset by decreased revenues from bench equipment and repair parts and components. Volumes for repair parts and components increased over the prior-year period; however, due to changes in the terms of our arrangement with our largest repair parts and components vendor, a significant portion of these transactions are now accounted for on a net revenue basis, and therefore, revenues declined.

Gross Profit.  Gross profit grew 12% in the first nine months of fiscal 2006 compared with the first nine months of fiscal 2005, driven by growth in each of our three business segments. Within these segments, gross profits from our commercial business grew 24%. Gross profit margin increased to 20.6% in the first nine months of fiscal 2006 from 19.3% in the same period of fiscal 2005.  Gross profit margin decreased very slightly in our network infrastructure segment and increased to 30.7% from 25.7% in our installation, test and maintenance segment.  Generally, our gross margins by product within these segments have been sustained and these variations are related to sales mix within the segment product offerings, including repair and replacement parts in our installation, test and maintenance line of business, an increased portion of which was accounted for on a net revenue basis.  Gross profit margin in our mobile devices and accessories segment increased to 16.9% in the first nine months of this fiscal year from 15.9% for the same period of last fiscal year, due to changes in sales mix.  The gross profit margin for our commercial and consumer sales decreased slightly over the prior-year period.  However, due to the loss of lower margin handset sales from our T-Mobile relationship which was transitioned in the second quarter of fiscal 2006 and the strong commercial growth, the first nine months of fiscal 2006 had a larger percentage of higher margin commercial sales than the prior-year

18

period.  The decrease in commercial gross profit margin for our mobile devices and accessories, from 27.0% for the first nine months of last fiscal year to 25.4% for the same period of this fiscal year, is attributable to sales mix within the product offering in part due to new retail relationships established during fiscal 2006.  We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.

Our ongoing ability to earn revenues and gross profits from customers and vendors looking to us for product 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 the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business.  In addition, the agreements or arrangements on which our affinity relationships are based are typically of limited duration, and are terminable by either party upon several months or otherwise relatively short notice.  These affinity relationships could also be affected by wireless carrier consolidation.

Selling, General and Administrative Expenses.  Total selling, general and administrative expenses increased by 16% during the first nine months of fiscal 2006 as compared with the same period of fiscal 2005.  Total selling, general and administrative expenses as a percentage of revenues increased from 17% in fiscal 2005 to 19% in fiscal 2006 due the increase in expense as discussed below.

The largest factors contributing to the increase in total selling, general and administrative expenses were increased freight costs, labor fulfillment costs and expenses related to business generation activities.  These increases are reflective of the large growth in consumer revenue in the first half of fiscal 2006 and, to a lesser extent, growth in commercial sales during the first nine months of fiscal 2006.  During the fourth quarter of fiscal 2005, fulfillment costs and labor costs increased due to start-up issues associated with our new Configuration, Fulfillment and Delivery technology system that was initiated during that quarter.  We continued to see increases in fulfillment costs and labor costs in the first quarter of fiscal 2006 related to this system, but to a lesser extent.  Labor costs have also increased over the prior-year period, related to investments in business generation personnel.

Marketing expenses also increased in the first nine months of fiscal 2006 as compared with the same period of fiscal 2005.  In June of fiscal 2006, we retained RTC Relationship Marketing, a direct- and database- marketing firm to increase market awareness of TESSCO’s value proposition and product and solutions offering among potential and existing customers.  In the third quarter of fiscal 2006, we launched programs designed to increase our base of customers and our customers’ monthly purchases.  There can be no assurance as to the extent that these programs will increase revenues or gross profits.

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation.  We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation.  Accordingly, we recorded a provision for bad debts of $825,800 and $970,700 for the first nine months of fiscal 2006 and fiscal 2005, respectively.

Interest, net.  Net interest expense for the first nine months of fiscal year 2006 increased 69% over the prior-year period, primarily due to increased interest expense on our revolving credit facility and our existing term bank loan, partially offset by increased interest income.  As noted below, beginning October 1, 2005, we entered into a receive variable/pay fixed interest rate swap on our existing bank loan, thus fixing the interest rate on this loan at 6.38%.  Interest expense on our other debt instruments had only minor variances from year to year in total.

Income Taxes, Net Income and Diluted Earnings Per Share.  The effective tax rates for fiscal year 2006 and 2005 were 39.0%.  As a result of the factors discussed above net income and diluted earnings

19

per share for the first nine months of fiscal 2006 decreased 15% and 12%, respectively, over the prior-year period.

Liquidity and Capital Resources

We had a net cash outflow for operating activities of $2.7 million in the first nine months of fiscal 2006 compared with a net cash inflow of $2.9 million in the first nine months of fiscal 2005.  In the first nine months of fiscal 2006, our cash outflow for operating activities was driven by a significant decrease in trade accounts payable, partially offset by net income and depreciation and amortization, and decreases in trade accounts receivable and product inventory.  The decreases in inventory, trade accounts receivable and trade accounts payable are related to the termination of our T-Mobile affinity relationship in the second quarter of fiscal 2006.  The decrease in inventory and accounts payable related to T-Mobile products was largely offset by an increase in repair and replacement parts to support our relationship with Nokia, thus contributing to the cash outflow for the quarter.

Capital expenditures of $2.5 million in the first nine months of fiscal 2006 were down approximately 26% from expenditures of $3.4 million in the first nine months of fiscal 2005.  In both periods, capital expenditures primarily consisted of investment in information technology.

Net cash provided by financing activities was $1.4 million in the first nine months of fiscal 2006 compared with net cash used for financing activities of $2.7 million for the first nine months of fiscal 2005.  During the first nine months of fiscal 2006, we purchased 101,700 shares of our outstanding common stock pursuant to our stock buyback program, compared with 254,003 shares purchased in the first nine months of fiscal 2005.  From the beginning of our stock buyback program (the first quarter of fiscal 2004), through the end of the third quarter of fiscal 2006, a total of 500,703 shares have been purchased under this program for approximately $5.7 million, or an average price of $11.44 per share.  The Board of Directors had authorized the purchase of up to 900,000 shares in the aggregate, and therefore, 399,297 shares remained available to be purchased as of the end of the third quarter of fiscal 2006.  We expect to fund future purchases, if any, from working capital and/or our revolving credit facility.  No timetable has been set for the completion of this program.

To minimize interest expense, our policy is to use excess available cash to pay down any balance on our $30 million revolving credit facility.  The balance on our revolving credit facility at December 25, 2005 was $3.6 million, and therefore, we had no cash balance at the end of the quarter.  This facility has a term expiring in September 2007.  Included in accrued expenses at the end of the third quarter is approximately $1.1 million of outstanding checks in excess of on-hand cash balances. We expect to meet short-term and long-term liquidity needs through operating cash flow, supplemented by our existing revolving credit facility.  In doing so, the balance on our revolving credit facility could increase depending on our working capital and other cash needs.  If we were to undertake an acquisition or other major capital purchases that require funds in excess of its existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances.  There can be no assurances that such additional future sources of funding would be available.

On October 1, 2005, we entered into a receive variable/pay fixed interest rate swap on a total notional amount of $4.2 million with Wachovia Bank, N.A. to avoid the risks associated with fluctuating interest rates on our existing term bank loan, which bears interest at a floating rate of LIBOR plus 1.75%, and to eliminate the variability in the cash outflow for interest payments.  The interest rate swap agreement locks the interest rate for the outstanding principal balance of the loan at 6.38% through July 1, 2011.  There was no payment due or received at inception of the swap.  No hedge ineffectiveness will be recognized as the interest rate swaps’ provisions match the applicable provisions of the term bank loan.  This cash flow hedge qualified for hedge accounting using the short-cut method since the swap terms match the critical terms of the hedged debt.

20

Critical Accounting Policies and Estimates

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

We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended March 27, 2005.

Revenue Recognition.  We record revenue when 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) our price to the buyer is fixed and determinable, and 4) collectibility is reasonably assured. Our revenue recognition policy includes evidence of arrangements for significant revenue transactions through either receipt of a customer purchase order or a web-based order.  We record revenue when product is shipped to the customer and all shipments are made using FOB shipping terms.  Our prices are always fixed at the time of sale.  Historically, there have not been any material concessions provided to or by customers, future discounts, or other incentives subsequent to a sale.We sell under normal commercial terms and, therefore, we only record sales on transactions where collectibilty is reasonably assured.

Because our sales transactions meet the conditions set forth in Statement of Financial Accounting Standard (SFAS) No. 48, “Revenue Recognition When Right of Return Exists,” we recognize revenues from sales transactions containing sales returns provisions at the time of the sale.  These conditions require that 1) our price be substantially fixed and determinable at the date of sale, 2) the buyer is obligated to pay us, and such obligation is not contingent on their resale of the product, 3) the buyer’s obligation to us does not change in the event of theft or physical destruction or damage of the product, 4) the buyer has economic substance apart from us, 5) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and 6) the amount of future returns can be reasonably estimated.  Because our normal terms and conditions of sale are consistent with conditions 1-5 above, and we are able to perform condition 6, we make a reasonable estimate of product returns in sales transactions and accrue a sales return reserve based on this estimate.

Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service.  Some of these companies have turned to us to implement supply chain solutions, including purchasing inventory, assisting in demand forecasting, configuring, packaging, kitting and delivering products and managing customer relations, from order taking through cash collections.  In performing these solutions, we assume varying levels of involvement in the transactions and varying levels of credit and inventory risk.  As our solutions offerings continually evolve to meet the needs of our customers, we constantly evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States.  When applying this guidance in accordance with Emerging Issues Task Force (EITF) No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” we look at the following indicators: whether we are the primary obligor in the transaction; whether we have general inventory risk; whether we have latitude in establishing price; the extent to which we change the product or perform part of the service; whether we have responsibility for supplier selection; whether we are involved in the determination of product and service specifications; whether we

21

have physical inventory risk; whether we have credit risk; and whether the amount we earn is fixed.  Each of our customer relationships is independently evaluated based on the above guidance and revenue is recorded on the appropriate basis.   Based on a review of the factors above, in the majority of our sales relationships, we have concluded that we are the principal in the transaction and we record revenue based upon the gross amounts earned and booked. However, we do have several relationships where we are not the principal and we record revenue on a net fee basis, regardless of amounts billed (less than 2% of our total revenue). If applying this revenue recognition guidance resulted in recording revenue on a different basis from which we have previously concluded, or if the factors above change significantly, revenues could increase or decrease; however, our gross profit and net income would remain constant.

Most of our sales arrangements do not contain multiple elements.  However, when we enter into arrangements that do contain multiple elements, we follow the guidance under EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.”  Therefore, at the inception of the arrangement, we determine if each deliverable under the arrangement represents a separate unit of accounting.  We do this by determining whether the undelivered items have value to the customer on a stand-alone basis (if it is sold separately by any other vendor or the customer could resell the delivered item on a stand-alone basis), if there is objective and reliable evidence of the fair value of the item, and whether the delivery or performance of the undelivered item is considered probable and substantially in our control (in cases where the arrangement includes a general right of return relative to the delivered item).  During the first six months of the fiscal year, we had one significant multiple element arrangement, which included product configuration and distribution, web development, and web hosting/maintenance activities.  All of the elements were delivered and billed based on output measures on a monthly basis.  Fees and the billings for these elements were structured in a manner that reflected performance on the contract in accordance with the output measures; therefore, we recognized revenues based on the billing provisions in the contract.  This relationship was substantially terminated at the end of the second quarter.

Impairment of Long-Lived and Indefinite-Lived Assets.Our Consolidated Balance Sheet includes goodwill of approximately $2.5 million.  We perform an annual impairment test for goodwill on the first day of our fourth quarter.  We also periodically evaluate our long-lived assets and intangible assets for potential impairment indicators.  Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance and legal factors.  Future events, such as significant changes in cash flow assumptions, could cause us to conclude that impairment indicators exist and that the net book value of goodwill, long-lived assets or intangible assets are impaired.  Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount up to $2.5 million, resulting in a charge to operations.

Income Taxes.  We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities.  We regularly review our deferred tax assets for recoverability.  This review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.  Based on this review, we have not established a valuation allowance.   If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets, resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

Stock-Based Compensation.  Effective March 29, 2004, we adopted the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” using the modified prospective method, as prescribed by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”  Accordingly, beginning in fiscal year 2005, we began recognizing stock compensation expense related to stock options and other equity instruments using fair-value methods.

22

Also under SFAS No. 123, we record compensation expense on our PSUs over the vesting period, based on the number of shares management estimates will ultimately be issued.  Accordingly, we determine the periodic financial statement compensation expense based upon the stock price at the PSU grant date; our projections of future EPS performance over the performance cycle; and the resulting amount of estimated share grants, net of actual forfeitures.  Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change significantly in future periods.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”  This statement requires companies to expense stock options and other equity compensation instruments using fair value methods.  Under the provisions of SFAS No. 123R, the amount of tax benefit relating to stock compensation included in operating cash flows for the period prior to the effective date will be reported in financing cash flows once the statement becomes effective.  We adopted the fair value expense recognition provisions of SFAS No. 123 on March 29, 2004.  Accordingly, the adoption of SFAS No. 123R is not expected to have a material impact on our consolidated financial position or results of operations.  Currently, we record stock compensation expense based on actual forfeitures as opposed to estimated; however, SFAS No. 123R will require us to use estimated forfeitures, and therefore, could have a material impact on the timing of stock compensation expense.  SFAS No. 123R is effective for us beginning in fiscal 2007.  SFAS No. 123R allows for either prospective or retrospective recognition of compensation expense.  We anticipate adopting the standard using the prospective method.

Additional Risks

We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results.  In addition to risks elsewhere discussed in this Quarterly Report on Form 10-Q, included among the risks that could lead to a materially adverse impact on our business or operating results are: the termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners which are typically terminable by either party upon several months notice; loss of significant customers or relationships, including affinity relationships; loss of customers either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; the strength of the customers’, vendors’ and affinity partners’ business; economic conditions that may impact customers ability to fund purchase of our products and services; our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; failure of our information technology system or distribution system; technology changes in the wireless communications industry, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; the possibility that, 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 be delayed in realizing or fail to realize anticipated revenues or anticipated savings; and inability to protect certain intellectual property, including systems and technologies on which we rely.

In addition to the risks related to our business, there are risks related to the ownership of our common stock.  Our stock price may be volatile as a result of a number of factors, including public announcements by us or by analysts with regard to our business, financial results or prospects, public announcements by

23

our customers, vendors or competitors, and general market volatility.  In addition, provisions in our organizational documents and Delaware law may have the effect of delaying or preventing an acquisition in which we are not the surviving company, or a change in our management.  We are governed by Section 203 of the Delaware General Corporation Law, which may prohibit a stockholder holding 15% or more of our outstanding common stock from consummating a merger or business combination with us.  These provisions might limit the price that investors are willing to pay in the future for our common stock.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Subsequent Information

Subsequent to the end of the third fiscal quarter, David M. Young, who had been serving as Vice President, Acting Chief Financial Officer and Corporate Secretary of the Company, was named Senior Vice President and Chief Financial Officer.  Mr. Young also continues to serve as Corporate Secretary.  To date, no changes have been made to Mr. Young’s salary or benefit package.

Forward-Looking Statements

This Report contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, all of which are based on current expectations. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “believes,” “should,” “expects,” “anticipates,” “estimates,” and similar expressions. Our future results of operations and other forward-looking statements contained in this report involve a number of risks and uncertainties, including those described throughout this Quarterly Report on Form 10-Q and under the heading “Additional Risks” above. For a variety of reasons, actual results may differ materially from those described in any such forward-looking statement.  Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.

Available Information

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

We have not used derivative financial instruments through September 25, 2005.  However, as noted above, in October 2005, we entered into an interest 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, is not material at the present time.

Item 4.  Controls and Procedures

We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner.  Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and have concluded that the system is effective.  There have been no changes in our internal control over financial reporting during the most

24

recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.  Other Information

Item 1.  Legal Proceedings

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

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to purchases of TESSCO common stock by the Company or any affiliated purchasers during the third quarter of fiscal 2006.

Issuer Purchases of Equity Securities

Period (1)	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (2)
September 26, 2005 through October 23, 2005	—	N/A		—	500,997
October 24, 2005 through November 27, 2005	70,300	$	15.70	70,300	430,697
November 28, 2005 through December 25, 2005	31,400	$	16.30	31,400	399,297
Total	101,700	$	15.88	101,700	399,297

(1)Periods indicated are fiscal accounting months for the third quarter of fiscal 2006.

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

On April 28, 2003, our Board of Directors announced a stock buyback program and authorized the purchase of up to 450,000 shares of our common stock pursuant to the program.  On October 20, 2005, our Board of Directors amended the program and authorized the purchase of an additional 450,000 shares of outstanding commons stock.   As of December 25, 2005, we had purchased an aggregate of 500,703 shares of our outstanding common stock pursuant to this program for approximately $5.7 million, or an average price of $11.44 per share.  All shares repurchased during the third quarter of fiscal 2006 were repurchased under this program.  Shares may be purchased from time to time in the open market, by block purchase, or through negotiated transactions, or possibly other transactions managed by broker-dealers.  No timetable has been set for completion of the program.

Item 3.  Defaults upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

None

25

Item 5.  Other Information

None

Item 6.  Exhibits

(a)EXHIBITS:

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

26

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TESSCO TECHNOLOGIES INCORPORATED
Date: February 8, 2006	By:	/s/ David M. Young
	David M. Young
	Chief Financial Officer
	(principal financial and accounting officer)

27

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert B. Barnhill, Jr., Chairman, President and Chief Executive Officer of TESSCO Technologies Incorporated, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the period ended December 25, 2005, of TESSCO Technologies Incorporated (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 8, 2006	By:	/s/ Robert B. Barnhill, Jr.
			Robert B. Barnhill, Jr.
			Chairman, President and
			Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David M. Young, Chief Financial Officer of TESSCO Technologies Incorporated, certify that:

1.I have reviewed this quarterly report on Form 10-Q, for the period ended December 25, 2005, of TESSCO Technologies Incorporated (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 8, 2006	By:	/s/ David M. Young
		David M. Young
		Senior Vice President, Corporate Secretary and
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

I, Robert B. Barnhill, Jr., Chief Executive Officer of TESSCO Technologies Incorporated, (the “Company”), certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Quarterly Report on Form 10-Q of the Company for the period ended December 25, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  February 8, 2006	/s/ Robert B. Barnhill, Jr.
	Robert B. Barnhill, Jr.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

I, David M. Young, Chief Financial Officer of TESSCO Technologies Incorporated, (the “Company”), certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Quarterly Report on Form 10-Q of the Company for the period ended December 25, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 8, 2006	/s/ David M. Young
	David M. Young

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.