Technology Research (TRCI) 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

0-13763

(Commission file No.)

TECHNOLOGY RESEARCH CORPORATION

(Exact name of registrant as specified in its charter)

FLORIDA	59-2095002
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

5250-140th Avenue North Clearwater, Florida 33760

(Address of principal executive offices)

(727) 535-0572

(Registrant’s telephone number, including area code)

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 such filing requirements for the past 90 days. Yes  þ   No o.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definitions of “accelerated filer, “large accelerated filer” and “smaller  reporting company” in Rule 12b-2 of the Exchange Act.  (Check one): 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o  No þ

FORM 10-Q

PART I — FINANCIAL INFORMATION
	Item 1.  Financial Statements  (Unaudited)
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statements of Cash Flows
	Notes to the Condensed Consolidated Financial Statements
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk
	Item 4.  Controls and Procedures
PART II — OTHER INFORMATION
	Item 1.  Legal Proceedings
	Item 1A.  Risk Factors
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.  Defaults Upon Senior Securities
	Item 4.  Submission of Matters to a Vote of Security Holders
	Item 5.  Other Information
	Item 6.  Exhibits
SIGNATURES
Exhibit 31.1 — Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 — Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 — Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 — Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

	June 30,			March 31,
ASSETS	2008			2008
Current assets:
Cash and cash equivalents	$	1,597			2,132
Short-term investments		2,489			1,495
Trade and other accounts receivable, net of allowance for doubtful
accounts of $131 at June 30, 2008 and $123 at March 31, 2008		5,435			6,573
Other receivable - current portion		881			869
Income taxes receivable		100			197
Inventories		7,935			7,788
Deferred income taxes		1,494			1,446
Prepaid expenses and other current assets		371			258
Total current assets		20,302			20,758
Property, plant and equipment, net of accumulated depreciation of
$11,900 at June 30, 2008 and $11,604  at March 31, 2008		3,532			3,684
Intangible asset, net of accumulated amortization of $134  at June 30, 2008 and $119 at March 31, 2008		449			463
Other assets		37			45
Total assets	$	24,320			24,950
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	2,809			3,111
Accrued expenses		1,426			1,781
Accrued dividends		132			132
Total current liabilities		4,367			5,024
Deferred income taxes		12			37
Total liabilities		4,379			5,061
Stockholders' equity:
Common stock $0.51 par value; 10,000,000 shares
authorized, 5,912,328 shares issued and
5,890,828 shares outstanding		3,015			3,015
Additional paid-in capital		9,680			9,568
Retained earnings		7,286			7,346
Common stock held in treasury, 21,500 shares at cost		(40	)		(40	)
Total stockholders' equity		19,941			19,889
Total liabilities and stockholders' equity	$	24,320			24,950

The accompanying notes are an integral part of the condensed consolidated financial statements.

  TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

Three Months Ended June 30,
	2008		2007
Revenues:
Commercial	$	5,643		5,905
Military		2,988		3,753
Total revenues		8,631		9,658
Cost of sales		6,097		6,818
Gross profit		2,534		2,840
Operating expenses:
Selling and marketing		687		736
General and administrative		1,247		986
Research and development		537		432
Total operating expenses		2,471		2,154
Income from operations		63		686
Other income (expense):
Other income, net		18		54
Interest expense		-		(55	)
Other income (expense), net		18		(1	)
Income before income taxes		81		685
Income tax expense		23		202
Net income	$	58		483
Earnings per share - basic	$	0.01		0.08
Earnings per share - diluted	$	0.01		0.08
Shares outstanding - basic		5,890,828		5,888,828
Shares outstanding – diluted		5,903,215		5,910,953

The accompanying notes are an integral part of the condensed consolidated financial statements.

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended June 30,
		2008		2007
Cash flows from operating activities:
Net income	$	58		483
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Accretion of interest on short-term investments		(7	)	(5	)
Change in allowance for doubtful accounts		8		5
Accretion of interest on note receivable		(12	)	(17	)
Depreciation		299		319
Amortization of intangible assets		15		16
Stock compensation expense		112		34
Deferred income taxes		(73	)	(54	)
Changes in operating assets and liabilities:
Trade and other accounts receivable		1,130		54
Inventories		(147	)	382
Prepaid expenses and other current assets		(113	)	(24	)
Other assets		8		-
Trade accounts payable		(302	)	(198	)
Accrued expenses		(355	)	(177	)
Income taxes receivable		97		(838	)
Net cash provided by  (used in)  operating activities		718		(20	)
Cash flows from investing activities:
Maturities of short-term investments		500		500
Purchase of short-term investments		(1,487	)	-
Purchases of property and equipment		(148	)	(83	)
Net cash ( used in)  provided by  investing activities		(1,135	)	417
Cash flows from financing activities:
Repayments of short-term debt		-		(1,000	)
Cash dividends paid		(118	)	(117	)
Net cash used in financing activities		(118	)	(1,117	)
Net decrease in cash and cash equivalents		(535	)	(720	)
Cash and cash equivalents at beginning of period		2,132		3,471
Cash and cash equivalents at end of period	$	1,597		2,751

The accompanying notes are an integral part of the condensed consolidated financial statements.

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY

Notes to the Condensed Consolidated Financial Statements

(In thousands, except share data)

1.  Basis of Presentation: 

The unaudited interim condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations.  The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Technology Research Corporation (the “Company”) Annual Report on Form 10-K for the year ended March 31, 2008.  Operating results for the three-month period ended June 30, 2008 are not necessarily an indication of the results that may be expected for the fiscal year ending March 31, 2009.

The information furnished reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim periods presented. 

2.  Earnings Per Share:

 Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding.

Diluted earnings per share have been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding.  The weighted average common and common equivalent shares outstanding have been adjusted to include the number of shares that would have been outstanding if the stock options had been exercised at the average market price of the period, with the proceeds being used to buy shares from the market (i.e. treasury stock method).  

The table below reconciles the calculation of basic and diluted earnings per share:

	Three months ended  June 30,
	2008		2007
Net income	$	58		483
Weighted average shares outstanding - basic		5,890,828		5,888,828
Dilutive common shares issuable upon exercise of stock options		12,387		21,225
Weighted average shares outstanding - diluted		5,903,215		5,910,053
Earnings per common share:
Basic	$	0.01		0.08
Diluted	$	0.01		0.08

For the three-month period ended June 30, 2008, options to purchase 734,500 shares of common stock were considered anti-dilutive for the purposes of calculating earnings per share.  For the three-month period ended June 30, 2007, options to purchase 311,900 shares of common stock were considered anti-dilutive for the purposes of calculating earnings per share.  

3.  Short-term Investments:

The value of short-term investments totaled $2,489 as of June 30, 2008, consisting of corporate securities in the amount of $3 and original cost plus accrued interest on U.S. Treasury Bills in the amount of $2,486.  As of March 31, 2008, the value of short-term investments totaled $1,495, consisting of corporate securities in the amount of $3 and original cost plus accrued interest on U.S. Treasury Bills in the amount of $1,492.  The Company considers its short-term investments to be held-to-maturity, and therefore, are recorded at amortized cost.

4.  Inventories:

Inventories consist of the following:

June 30, 2008			March 31, 2008
Raw materials	$	5573	4,976
Work-in-process		533	663
Finished goods		1,829	2,149
Total	$	7,935	7,788

5.  Warranty:

The Company generally provides a one year warranty period for all of its products.   The Company also provides coverage on certain of its surge products for “downstream” damage of products not manufactured by the Company.  The Company's warranty provision represents management's best estimate of probable liabilities, calculated as a function of sales volume and historical repair experience for each product under warranty.  A roll-forward of the activity in the Company's warranty liability, included in accrued expenses, for the three months ended June 30, 2008 and 2007 is as follows:

	Three months ended June 30,
	2008			2007
Beginning balance	$	137			90
Warranty expense		27			84
Warranty claims		(27	)		(29	)
Ending balance	$	137			145

6.  Debt:

The maturity date of the revolving credit agreement with the Company’s institutional lender is September 30, 2009.  The agreement provides for borrowings up to $6.0 million.  The Company has the option of borrowing at the lender's prime rate of interest minus 100 basis points or the 30-day London Interbank Offering Rate (“LIBOR”) plus 160 basis points.   The loan is collateralized with a perfected first security interest which attaches to most of the Company’s key assets including receivables, inventory, investments, demand deposit accounts maintained with the Company’s lender, and 65% of the voting stock of the Company’s Honduran subsidiary and requires the Company to maintain certain financial ratios.   As of June 30, 2008 and March 31, 2008, the Company had no borrowings on this credit agreement and the full $6.0 million is available.

7.  Income taxes:

The Company's effective income tax rate was 28.4% and 29.5% for the three months ended June 30, 2008 and 2007, respectively.  The effective income tax rate is based on the estimated income for the year and the composition of this income from the U.S. and from our Honduran subsidiary.  The income tax rate on income earned from Honduras is zero due to a tax holiday and, therefore, the corporate effective rate is lower than the U.S. statutory rate due to the mix of income earned in the U.S. versus income earned in Honduras.

As of April 1, 2007, the Company adopted FASB Interpretation Number 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.  The interpretation contains a two step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon settlement.  As a result of implementing FIN 48, the Company did not recognize any cumulative effect adjustment impacting retained earnings as of the beginning of fiscal 2008. 

As of April 1, 2008, the Company has unrecognized tax benefits of $12, accrued interest of $4, and there are no accrued penalties. As of June 30, 2008, the Company has unrecognized tax benefits of $13, accrued interest of $5, and there are no accrued penalties.  After adoption of FIN 48, the Company’s policy is to recognize interest and penalties in the provision for income taxes.

The Company files U.S. Federal and Florida income tax returns.  The Company has concluded an audit on all U.S. federal income tax matters through the 2004 fiscal year.  Federal income tax returns for fiscal years 2005 through 2008 and state income tax returns for fiscal years 2005 through 2008 have not been audited.

 8.  Stock-Based Compensation: 

As of April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, (“SFAS 123R”) for its share-based compensation plans.  Previously, the Company accounted for these plans under the principles of Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees (“APB 25”) and related interpretations and disclosure requirements set by Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.

Prior to fiscal year ended March 31, 2007 following the principles of APB 25, no compensation expense was recognized in earnings for the Company’s stock options, except for the acceleration of vesting of stock options for a former officer of the Company in September 2005 and reflected in the financial results for the fiscal year ended March 31, 2006.  The pro forma effects on net income and earnings per share resulting from the stock options were disclosed in a footnote to the financial statements.  Under SFAS 123R, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense in earnings over the requisite service period.

The Company adopted SFAS 123R using the modified prospective transition method.  Under this method, prior periods are not restated to reflect the impact of SFAS 123R.  Under SFAS 123R, companies are required to estimate the fair value of share-based payment awards on the date of grant using an option pricing model.  The Company adopted the Black Scholes model to estimate the fair value of stock options.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Condensed Statements of Operations. 

The implementation of SFAS 123R had no impact on the Company’s cash position.  Stock compensation expense of $112 and $34, respectively, resulting from the implementation of SFAS 123R was included in the Condensed Consolidated Statements of Operations for the three months ended June 30, 2008 and 2007. The consolidated statements of cash flows for the three months ended June 30, 2008 and 2007, include adjustments to reconcile net income to net cash provided by operating activities of $112 and $34, respectively, due to this non-cash stock compensation expense.

Cash received from the exercise of stock options under all share-based payment arrangements for the three months ended June 30, 2008 and 2007 was zero.  Currently, the Company expects to utilize available registered shares when share-based awards are issued.

Stock Option Plans

The Company has adopted stock plans that provide for the grant of equity based awards to employees and directors, including incentive stock options, non-qualified stock options and restricted stock awards of Company common stock (the “Plans”).  Employee stock options generally vested over a three year period and, until March 2008, director stock options vested over a two year period.  Beginning in March 2008 when directors were granted stock options for the fiscal 2009 year, the director options also vest over a three- year period. The exercise price of incentive stock options granted under the Plans will not be less than 100% of the fair market value of shares of common stock on the date of grant.  For any participant owning stock representing more than 10% of the voting power of all classes of Company stock, the exercise price will not be less than 110% of the fair market value of the shares of common stock on the date of grant.  The term of stock options may not exceed ten years.  Non-qualified stock options will be granted at the fair market value on the date of grant.

The Company's 1993 Incentive Stock Option Plan and the Company's 1993 Amended and Restated Non-Qualified Stock Option Plan have expired, and no options will be granted from these plans in the future.  Certain stock options under these plans, however, are still outstanding and can be exercised in the future.

The Company’s 1996 Stock Option Performance Plan provided for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and non-qualified stock options to employees.  A total of 400,000 shares of common stock were reserved for issuance under this plan.  The 1996 Stock Option Performance Plan was terminated on July 1, 2006.  A total of 150,000 shares available for grant expired, and a total of 210,976 stock options outstanding expired unexercised.  No shares will be granted from this plan in the future, and no shares are available for exercise.

On March 24, 2000, the Company' Board of Directors adopted the 2000 Long Term Incentive Plan and it was approved by the Company's stockholders in August 2000 at its annual meeting.  The 2000 Long Term Incentive Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code to employees and non-qualified stock options to either employees or directors of the Company.  The 2000 Long Term Incentive Plan also allows for the grant of restricted stock awards to officers and directors.  A total of 1.1 million shares of common stock have been reserved for issuance under the 2000 Long Term Incentive Plan, of which 105,250 shares remain available for awards as of June 30, 2008.

 On June 24, 2008, subject to stockholder approval, the Company’s Board of Directors approved the Amended and Restated 2000 Long Term Incentive Plan.  At the 2008 annual stockholders meeting which will take place in August 2008, stockholders will be asked to approve an amended and restated plan reflecting amendments approved by the Board.  The Amended and Restated 2000 Long Term Incentive Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code to employees and non-qualified stock options to either employees or directors of the Company. The Amended and Restated 2000 Long Term Incentive Plan also allows for the grant of restricted stock awards to officers and directors. A total of 0.5 million additional shares of common stock will be reserved for issuance under the Amended and Restated 2000 Long Term Incentive Plan if such plan is approved by stockholders.

The table below summarizes stock option activity in the Plans from April 1 through June 30, 2008:

							Aggregate(1)		Weighted		Weighted
	Shares						intrinsic		average		average
	available			Options			value		exercise		remaining
	for grant			outstanding			(in thousands)		price		contractual life
Balance as of March 31, 2008		136,500			761,952		$	34	$	5.63		8.35
Options authorized		-			-					-		-
Options expired		-			-					-		-
Options granted		(40,000	)		40,000				$	2.99		9.81
Options canceled		8,750			(8,750	)				-		-
Options exercised		-			-					-		-
Balance as of June 30, 2008		105,250			793,202		$	26	$	5.44		8.22
Exercisable as of June 30, 2008					302,002		$	26	$	8.90		6.27
_________________
Footnote: 1  The aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s closing stock price of $2.85 as of March 31, 2008 and of $2.59 as of June 30, 2008 and on the dates options were granted or exercised, which would have been received by the option holders had all option holders exercised their options as of that date, including only those options that are in-the-money.

The weighted average grant date fair value of options granted during the three months ended June 30, 2008 and 2007 was $2.99 per share and zero per share, respectively.  The total intrinsic value of options exercised during the three months ended June 30, 2008 and 2007 was zero.

As of June 30, 2008, there was $829 of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted average period of 2.27 years.  The total fair value of stock options vested during the three months ended June 30, 2008 and 2007 was $36 and $35, respectively.

The Company estimated the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model, which is impacted by the Company’s stock price as well as assumptions regarding several subjective variables including the Company’s expected stock price volatility over the term of the awards, actual and projected employee option exercise experience, the risk free interest rate and expected dividends.  The estimated expected term of options that have been granted was based on historical option exercise trends.  Estimated volatility was based on historical volatility over the expected term and the risk free interest rate was based on U.S. Treasury Bills similar to the expected term.  The expected dividend yield was based on the Company’s experience with paying dividends over the past 12 months.  The Company is also required to estimate forfeitures at the time of the grant and to revise these estimates in later periods if actual forfeitures differ from those estimates.  Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

The assumptions used to value stock option grants for the three months ended June 30, 2008 and 2007 are as follows:

	Three months ended June 30,
	2008	2007
Expected dividend yield	2.25%	N/A
Risk free interest rate	3.15%	N/A
Expected volatility	80.51%	N/A
Expected life	7.38 years	N/A

 9.  Litigation

On February 16, 2007, Shanghai ELE Manufacturing Corporation (“ELE”) filed a declaratory judgment action against the Company in the Central District of California alleging that the Company’s United States Patent No. 6,292,337 (“the 337 patent”) is invalid and not infringed by ELE.  The Company had previously written a letter to ELE requesting that they cease all infringing activity relating to the '337 patent.  On April 11, 2007 the Company filed a counterclaim against ELE asserting that the patent is valid and that ELE's Leakage Current Detectors and Interrupters (LCDIs), among other things, infringe the '337 patent.  The Company is also seeking monetary damages against ELE for past infringement of the '337 patent.  The '337 patent underlies the Company’s Fire Shield® technology for cord fire prevention.  The Company filed a motion to transfer the ELE action to the United States District Court for the Middle District of Florida, where the Company is headquartered.  On May 18, 2007, Judge R. Gary Klausner granted the Company’s motion and transferred the action to the Middle District of Florida. 

On August 4, 2008, Technology Research Corporation (“TRC”) entered into a Settlement Agreement with Shanghai ELE  Manufacturing Corporation (“ELE”).  Under the Settlement Agreement, the civil actions filed by both TRC and ELE are to be dismissed.  The parties have agreed to make payments to each other for sales of products made prior to July 1, 2008, thereby resulting in TRC receiving a net payment from ELE as part of the terms of the confidential Settlement Agreement.  ELE and TRC also agreed to enter into a cross-licensing arrangement for TRC’s ‘337 patent and ELE’s Chinese patents Nos. ZL200420096315.2, ZL 200520118736.5 and ZL200520118737.X for the period such patents remain valid and enforceable. Under this licensing arrangement, TRC will be receiving royalty payments for periods beginning after June 30, 2008, based on the number of designated ELE Leakage Current Detector Interrupter Products sold.

The Company is involved in various claims and legal actions arising in the ordinary course of business.  In the Company's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition, result of operations or cash flows.

10.  New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“the FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 establishes a single definition of fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. In February 2008, FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2) was issued delaying the effective date of FASB Statement No. 157 until fiscal years beginning after November 15, 2008 with respect to nonfinancial assets and nonfinancial liabilities that are not remeasured at fair value on a recurring basis (at least annually). The partial adoption of SFAS No. 157 had no material effect on the Company’s financial condition, results of operations or cash flows.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on Issue No. 06-03, How Taxes Collected from Customers and Remitted to Government Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF No. 06-03”).  The Company adopted the provisions of EITF No. 06-03 for the fiscal year beginning April 1, 2007, electing the net basis of reporting.  The implementation of EITF No. 06-03 did not have a material impact on the Company’s fiscal 2008 consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS No. 159”).  SFAS 159 allows companies to make an election to carry certain eligible financial assets and liabilities at fair value, even if fair value measurement has not historically been required for such assets and liabilities under U.S. generally accepted accounting principles. SFAS 159 first became effective as of April 1, 2008. The implementation of SFAS 159 did not have a material impact on the Company’s consolidated financial statements as we have not adopted the fair value option.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R requires that business combinations will result in assets and liabilities of an acquired business being recorded at their fair values as of the acquisition date, with limited exceptions. Certain forms of contingent consideration and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141R also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed separately from the business combination in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently reviewing SFAS 141R’s requirements and is assessing the impact SFAS 141R may have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No.160).  SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity.  SFAS No. 160 is effective for the Company on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2010.  As of June 30, 2008 and March 31, 2008, the Company did not have any minority interests.  The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. The Company will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities (“SFAS 133”), and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the requirements of SFAS 161 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows.

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

As used in this interim report on Form 10-Q, “we”, “our”, “us”, the “Company” and “TRC” all refer to Technology Research Corporation and its subsidiary unless the context otherwise requires.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This interim report on Form 10-Q contains forward-looking statements, which are subject to the safe harbor provisions created by of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934.  Any forward looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance.  Such statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “scheduled,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “potential,” or “continue,” or the negative of such terms, or other comparable terminology.  These statements are only predictions, and actual events as well as results may differ materially.  

 The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking.  Forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, competitiveness, gross margins, levels of research and development (R & D), outsourcing plans and operating expenses, tax expenses, our management’s plans and objectives for our current and future operations, the levels of customer spending or R & D activities, general economic conditions and the sufficiency of financial resources to support future operations, and capital expenditures.  Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our last filed Annual Report on Form 10-K for the fiscal year ended March 31, 2008, our quarterly reports on Form 10-Q, and our current reports on Form 8-K.  Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us.  We undertake no obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances which occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events.

Actual results could, however, differ materially from those projected or assumed in any of our forward-looking statements within this report. Our future financial condition and results of operations, as well as our operational and financial expectations, are subject to inherent risks and uncertainties.  See Part II, Item 1A, entitled Risk Factors.

OVERVIEW

Technology Research Corporation is an internationally recognized leader in the design, manufacture and marketing of electrical safety products that save lives, protect people against serious injury from electrical shock and/or prevent electrical fires in the home and workplace.  Based on our core technology in ground fault sensing and leakage current detection, our products are designed to meet the needs of the consumer, commercial and industrial markets worldwide.  TRC also designs and supplies power monitoring and control equipment to the United States military and its prime contractors for its tactical vehicles, naval vessels and mobile electric generators.

TRC was incorporated in Florida in 1981.  Our principal offices are located at 5250-140th Avenue North, Clearwater, Florida 33760, our telephone number is (727) 535-0572 and our website can be accessed at www.trci.net.  Information contained or referenced on our website is not incorporated by reference into, and does not form a part of, this Quarterly Report on Form 10-Q.

Our operating strategy is to grow revenue and improve gross margin in our military, recreational vehicle, industrial and consumer markets as well as closely aligned markets if they share similar products or have other synergies.  We plan to achieve these growth goals through internal development of new products, acquisitions, strategic partnerships and licensing.  We have undertaken a number of initiatives to lower cost, improve asset turnover and reduce our risk.  These initiatives include, but are not limited to, product line simplification, establishing product platforms in design, greater utilization of our operations in Honduras, utilizing new designs and operations software to improve quality, accelerate product development and reduce the cost of redesigned products.

Revenues were $8.6 million in the first quarter of fiscal 2009, compared with $9.7 million reported in the same quarter last year, a decrease of 10.6%. Net income for the first fiscal quarter ended June 30, 2008 was $0.1 million compared with net income of $0.5 million for the first quarter of last year.  Diluted earnings  per share is $0.01 for the quarter ended June 30, 2008 compared with diluted earnings per share of $0.08 for last year’s first quarter.

Quarter-to-quarter comparisons show that our Military revenues decreased $0.8 million, primarily due to delays in obtaining Congressional approval of the Emergency Supplemental Spending Bill. Commercial revenues decreased $0.3 due primarily to the continuing decline in room air conditioner (“RAC”) revenue due to competition from off-shore, low-cost manufacturers.   The decline in revenues along with an increase in operating expenses partially offset by lower income taxes led to the decline in net income.

RESULTS OF OPERATIONS

Revenues for the first quarter ended June 30, 2008 were $8.6 million compared to $9.7 million reported in the same quarter last year, a decrease of 10.6%.  Military revenues decreased by $0.8 million while commercial revenues, which includes RAC revenues, decreased by $0.3 million.  The decrease in RAC revenues was mainly due to competition from off-shore, low-cost manufacturers.

Gross profit decreased $0.3 million, or 10.8%, to $2.5 million for the quarter ended June 30, 2008, due primarily to the overall decline in revenue.  

Selling and marketing expense of $0.7 million, or 8.0% of revenues, was unchanged for the quarter ended June 30, 2008. As a percentage of revenues, selling and marketing expense increased 0.4% from the 7.6% of revenues for the first quarter of last year.  This increase in selling and marketing expense as a percent of revenue was primarily due to the reduction in revenues in the first quarter of the current year compared with the first quarter of the prior year.

General and administrative expense of $1.2 million, or 14.4% of revenues for the quarter ended June 30, 2008, increased from $1.0 million, or 10.2% of revenues for the quarter ended June 30, 2007.  The increase of $0.3 million in the first quarter of fiscal 2009 is primarily due to higher professional fees related to the ELE patent litigation, recruiting costs for the new Vice President of Operations, and higher Board of Directors expenses, partially offset by lower bonuses.   The 4.2% increase in general and administrative expense as a percent of revenues in the first quarter ended June 30, 2008 compared to the quarter ended June 30, 2007 primarily results from the higher expenses detailed above and to the lower revenue for the current period.

Research and development expense was $0.5 million, or 6.2% of revenues, for the quarter ended June 30, 2008, an increase of $0.1 million from $0.4 million or 4.5% of revenue for the first quarter of fiscal 2008.  The increase is mainly attributable to higher compensation and consulting related expenses as we improve our engineering expertise.

Other income (expense) was $18 thousand of income for the quarter ended June 30, 2008, compared with $1 thousand of expense for the same quarter last year. 

Income tax expense was $0 million of expense for the quarter ended June 30, 2008, compared with an expense of $0.2 million for the three months ended June 30, 2007.   Our effective tax rate varies based primarily on the mix of income before income taxes derived from our Honduran subsidiary, which is not subject to income taxes, and the balance of income before income taxes, which is subject to U.S. income taxes.  At each reporting period, we make our best estimate of the effective tax rate expected for the full fiscal year and apply that rate to the current year-to-date income before income taxes.  Any difference between the current and preceding estimated effective tax rate expected for the full fiscal year is reflected as an adjustment in the current quarter's income tax expense.  In accordance with SFAS No.109, “Accounting for Income Taxes”, we do not record deferred income taxes on the foreign undistributed earnings of an investment in a foreign subsidiary that is essentially permanent in duration.  If circumstances change, and it becomes apparent that some or all of the undistributed earnings of our subsidiary will be remitted in the foreseeable future, but U.S. income taxes have not been recognized, we will record as an expense of the current period the U.S. income taxes attributed to that remittance.

Net income for the quarter ended June 30, 2008 was $0.1 million, compared to $0.5 million in the same quarter last year.  The basic and diluted earnings per share was $0.01 for the quarter ended June 30, 2008, compared to a basic and diluted earnings per share of $0.08 for the same quarter last year.    Net income for the three month period ended June 30, 2008 decreased $0.4 million compared to the prior year principally due to lower gross profit on lower revenue, higher operating expenses primarily due to higher general and administrative expense and reduced income taxes on the lower income before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents decreased from $2.1 million as of March 31, 2008 to $1.6 million as of June 30, 2008.  Cash provided by operating activities was $0.7 million, cash used in investing activities was $1.1 million and cash used in financing activities was $0.1 million resulting in a total decrease in cash of $0.5 million for the three-month period ended June 30, 2008.

Cash provided by operating activities primarily resulted from a decrease in trade accounts receivable of $1.1 million and depreciation of $0.3 million, partially offset by a decrease in trade accounts payable of $0.3 million, and a decrease in accrued expenses of $0.4 million.  The decrease in accounts receivable was primarily due to improved collections from customers.   The decrease in trade accounts payable was principally due to bringing our balances with vendors to a more current position.  The decrease in accrued expenses was primarily due to payment of year-end bonuses.

Cash used in investing activities was principally due to purchase of short-term investments in excess of maturing investments.

Cash used in financing activities was due to the payment of quarterly dividends.

The maturity date of the revolving credit agreement with our institutional lender is September 30, 2009.  The agreement provides for borrowings up to $6.0 million.  We have the option of borrowing at the lender's prime rate of interest minus 100 basis points or the 30-day London Interbank Offering Rate (“LIBOR”) plus 160 basis points.   The loan is collateralized with a perfected first security interest which attaches to most of the Company’s key assets including receivables, inventory, investments, demand deposit accounts maintained with the Company’s lender, and 65% of the voting stock of our Honduran subsidiary, and requires us to maintain certain financial ratios.   As of June 30, 2008 and March 31, 2008, we had no borrowings on this credit agreement.

We believe cash flow from operations, the available bank borrowings, current short-term investments and cash and cash equivalents will be sufficient to meet our working capital requirements for the next 12 months.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or variable interest entities, which are often established for the purposes of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

NEW ACCOUNTING STANDARDS

 In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 establishes a single definition of fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.  SFAS No. 157 does not require any new fair value measurements. In February 2008, FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2) was issued delaying the effective date of FASB Statement No. 157 until fiscal years beginning after November 15, 2008 with respect to nonfinancial assets and nonfinancial liabilities that are not remeasured at fair value on a recurring basis (at least annually). The partial adoption of SFAS No. 157 had no material effect on our financial condition, results of operations or cash flows.

 In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on Issue No. 06-03, How Taxes Collected from Customers and Remitted to Government Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF No. 06-03”).  We adopted the provisions of EITF No. 06-03 for the fiscal year beginning April 1, 2007, electing the net basis of reporting.  The implementation of EITF No. 06-03 did not have a material impact on our fiscal 2008 consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS No. 159”).  SFAS 159 allows companies to make an election to carry certain eligible financial assets and liabilities at fair value, even if fair value measurement has not historically been required for such assets and liabilities under U.S. Generally Accepted Accounting Principles.  SFAS No. 159 became effective as of April 1, 2008.  The implementation of SFAS No. 159 did not have a material impact on our consolidated financial statements as we have not adopted the fair value option.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R requires that business combinations will result in assets and liabilities of an acquired business being recorded at their fair values as of the acquisition date, with limited exceptions. Certain forms of contingent consideration and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141R also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed separately from the business combination in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently reviewing SFAS 141R’s requirements and are assessing the impact SFAS 141R may have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No.160).  SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity.  SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2010.  As of June 30, 2008 and March 31, 2008, we did not have any minority interests.  The adoption of SFAS No. 160 is not expected to have a material impact on our consolidated financial statements.

 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. We will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities (“SFAS 133”), and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the requirements of SFAS 161 and have not yet determined the impact of adoption, if any, on our financial position, results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures, in conformity with United States generally accepted accounting principles, requires management to make judgments, assumptions and estimates that affect the amounts reported.  Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. 

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations.  Specifically, critical accounting estimates have the following attributes:  (i) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates that we could reasonably have used, or changes in the estimates actually used resulting from events that could be reasonably foreseen as likely to have a material effect on our financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty.  We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances.  These estimates may change as new events occur, as additional information is obtained and as our operating environment changes.  These changes have historically been minor and have been included in the consolidated financial statements once known.  In addition, we are periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time.  These uncertainties are discussed in the section above entitled Disclosure Regarding Forward-Looking Statements and in section Item 1A below, entitled Risk Factors.  Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements are fairly stated in accordance with United States generally accepted accounting principles and present a meaningful presentation of our financial condition and results of operations. 

We believe that the following are critical accounting policies:

Revenue Recognition/Allowance for Doubtful Accounts.  We recognize revenue from commercial customers when an order has been received and accepted, pricing is fixed, delivery has occurred and title to the product has passed and collectability is reasonably assured.  Title generally passes upon shipment to the customer; however, in a limited number of cases, title passes upon receipt of shipment by the customer.  We have no installation obligation subsequent to product shipment.  Similarly, revenue from sales to distributors is recognized as title passes to them without additional involvement or obligation.  Collection of receivables related to distributor sales is not contingent upon subsequent sales to third parties.  Royalty revenues are recognized as reported by licensees.

 We may enter into government contracts that fall within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1) (non-standard products)  or fall outside the scope of  SOP 81-1 (“standard” products).  For government contracts within the scope of SOP 81-1, we record revenue under a units-of-delivery model with revenues and costs equal to the average unit value times the number of units delivered.  Any estimated loss on an overall contract would be recognized in the period determined in accordance with SOP 81-1.  For government contracts outside the scope of SOP 81-1, we record revenue the same as for commercial customers discussed above and would record a loss in the event the costs to fulfill a government contract are in excess of the associated revenues.  We have not experienced past losses on government contracts, and currently, we do not have any transactions being accounted for within the scope of SOP 81-1.

 We record an allowance for estimated losses resulting from the inability of customers to make timely payments of amounts due on account of product purchases.  We assess the credit worthiness of our customers based on multiple sources of information, including publicly available credit data, subscription based credit reports, trade association data, and analyzes factors such as historical bad debt experience, changes in customer payment terms or payment patterns, credit risk related to industry and geographical location and economic trends.  This assessment requires significant judgment.  If the financial condition of our customers were to worsen, additional write-offs could be required, resulting in write-offs not included in our current allowance for doubtful accounts.

 Inventories.  Because of the lead times required to obtain certain raw materials, we must maintain sufficient quantities on hand to meet expected product demand for each of our many products.  If actual demand is much lower than forecasted, we may not be able to dispose of our inventory at or above our cost.  We write down our inventory for estimated excess and obsolete amounts to the lower of cost or market.  We review the reasonableness of our estimates each quarter (or more frequently).  An allowance is established for inventory that has had no activity for long periods of time or for which management believes is no longer salable. The allowance is reviewed and approved by the senior management team.  In the future, based on our quarterly analysis, if we estimate that any remaining allowance for obsolescence is either inadequate or in excess of the inventory allowance required, we may need to adjust it.  At present, based on our analysis, we believe the allowance is properly valued for the inventory held by us.

 Income Taxes.  Significant management judgment is required in developing our provision for income taxes, including the determination of any accrual for tax contingencies, any foreign withholding taxes or any United States income taxes on undistributed earnings of the foreign subsidiary, deferred tax assets and liabilities and any valuation allowances that might be required to be applied against the deferred tax assets.  It is our intention to reinvest undistributed earnings of our foreign subsidiary and thereby indefinitely postpone their repatriation.  Accordingly, prior to fiscal year 2005, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of our foreign subsidiary are paid to us as dividends.  We apply the Comparable Profits Method for transfer pricing to determine the amounts our subsidiary charges to the parent.

 Warranty.  We generally provide a one year warranty period for all of our products.  We also provide coverage on certain of our surge products for “downstream” damage of products not manufactured by us.  Our warranty provision represents our estimate of probable liabilities, calculated as a function of sales volume and historical repair experience for each product under warranty.  Our warranty accrual represents our estimate of our liability for warranty repairs that we will incur over the warranty period.

Impairment of Long-Lived Assets.  We review long-lived assets for possible impairment of carrying value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.  In evaluating the fair value and future benefit of our assets, management performs an analysis of the anticipated undiscounted future net cash flows to be derived from the use of individual assets over their remaining amortization period.  If the carrying amount of an asset exceeds its anticipated undiscounted cash flows, we recognize an impairment loss equal to the difference between its carrying value and its fair value.

Stock-Based Compensation.  We account for stock-based compensation in accordance with the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”).  Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award.  Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility and expected option life.  If actual forfeitures differ significantly from our estimates, adjustments to compensation cost may be required in future periods.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

          We do not engage in investing in or trading market risk sensitive instruments.  We also do not purchase, for investing, hedging, or for purposes “other than trading,” instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk, except as noted in the following paragraph.  We have not entered into any forward or futures contracts, purchased any options or entered into any interest rate swaps.  Additionally, we do not currently engage in foreign currency hedging transactions to manage exposure for transactions denominated in currencies other than U.S. dollars.

           As of June 30, 2008, we had no debt.  If we borrow, our loans are subject to changes in interest rates.  The rate of interest is based on either the lender’s prime rate or on the 30-day LIBOR rate at our option.  We have exposure to changes in interest rates from investments in held-to-maturity securities.  With our current level and term of investments, a 1% change in the market rate of interest would result in a change in interest income of approximately $40 thousand on an annual basis. 

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As of the end of the period covered by this interim report on Form 10-Q, we carried out, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), an evaluation of the effectiveness of our “disclosure controls and procedures” (as the term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 as amended).  Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Further, there were no changes in our internal control over financial reporting during our first fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

On February 16, 2007, Shanghai ELE Manufacturing Corporation (“ELE”) filed a declaratory judgment action against us in the Central District of California alleging that our United States Patent No. 6,292,337 (“the 337 patent”) is invalid and not infringed by ELE. We had previously written a letter to ELE requesting that they cease all infringing activity relating to the '337 patent.   On April 11,2007 we filed a counterclaim against ELE asserting that the patent is valid, and that ELE's Leakage Current Detectors and Interrupters (LCDIs), among other things, infringe the '337 patent. We are also seeking monetary damages against ELE for past infringement of the '337 patent. The '337 patent underlies our Fire Shield® technology for cord fire prevention. We filed a motion to transfer the ELE action to the United States District Court for the Middle District of Florida, where we are headquartered. On May 18, 2007, Judge R. Gary Klausner granted our motion and transferred the action to the Middle District of Florida. 

 On August 4, 2008, we entered into a Settlement Agreement with Shanghai ELE Manufacturing Corporation (“ELE”).  Under the Settlement Agreement, the civil actions filed by both us and ELE are to be dismissed.  The parties have agreed to make payments to each other for sales of products made prior to July 1, 2008, thereby resulting in our receiving a net payment from ELE as part of the terms of the confidential Settlement Agreement.  The two parties also agreed to enter into a cross-licensing arrangement for our ‘337 patent and ELE’s Chinese patents Nos. ZL200420096315.2, ZL 200520118736.5 and ZL200520118737.X for the period such patents remain valid and enforceable. Under this licensing arrangement, we will be receiving royalty payments for periods beginning after June 30, 2008, based on the number of designated ELE Leakage Current Detector Interrupter Products sold.

We are involved in various claims and legal actions arising in the ordinary course of business.  In our opinion, the ultimate disposition of these matters will not have a material adverse effect on our financial condition, result of operations or cash flows.

Item 1A.  Risk Factors.

Stockholders and investors should carefully consider the risk factors described below, together with the other information contained in this Form 10-Q, before making any investment decision with respect to our securities.  The risks and uncertainties described below are not the only ones we face.  If any of the following risks occur, our business, financial condition, or results of operation could be significantly impacted and the trading price of our common stock could decline: 

 Failure to achieve our operating strategy.  Our operating strategy is to grow revenue and improve gross margin in our military, recreational vehicle, industrial and consumer markets as well as closely aligned markets if they share similar products or have other synergies.  We plan achieve these growth goals through internal development of new products, acquisitions, strategic partnerships and licensing.  We have undertaken a number of initiatives to lower costs, improve asset turnover and reduce our risk.  These initiatives include, but are not limited to, product line simplification, establishing product platforms in design, greater utilization of our operations in Honduras, utilizing new designs and operations software to improve quality, accelerate product development and reduce the cost of redesigned products.

Any or all of these objectives may not be realized or, if realized, may not result in increased revenue, profitability or market presence.  Executing our strategy may also place a strain on our production, information technology systems and other resources. 

 Inability to finance our growth and meet our capital requirements.  Our ability to continue the growth of our business requires a large amount of working capital.  If we are unable to fund this growth, we may not be able to compete effectively.  Our requirement for capital depends on the market’s acceptance of our products, the growth of our marketing effort, our ability to expand our customer base, our need for additional capital equipment to adopt new manufacturing methods and new products and for future acquisitions.  We cannot be sure that additional financing, if needed, will be available or if such financing will be on favorable terms.  Without access to these additional funds, we may not be able to remain competitive.

 Unavailability and cost increases in raw materials and components.  Raw materials and components constitute a significant portion of our cost of goods.  Factors that are largely beyond our control, such as movements in commodity prices for the specific materials required, may affect the future cost of raw materials and components.  As an example, our products require a substantial amount of plastic. Because the primary resource used in manufactured plastics is petroleum, the cost and availability of plastic varies to a great extent with the price of petroleum.  We have experienced increases in prices of plastic, as well as steel, aluminum and especially copper, which could continue in fiscal 2009.

 In addition, the inability of our suppliers to timely deliver raw materials or components could be disruptive and costly.  If we are unable to obtain raw materials on a timely basis at an affordable cost or if we experience any significant delays or interruptions of supply, our financial results could be significantly impacted.

 Dependence upon a limited number of key suppliers.  We purchase a significant volume of products from contract manufacturers in China.  In fiscal 2008, for example, our purchases from Chinese vendors were more than $6 million.  The purchase price for these products is set in U.S. dollars.  If the exchange rate between the U.S. dollar and Chinese yuan changes so that the yuan appreciates significantly against the dollar, the cost of building our products could increase significantly.  We anticipate that outsource providers will play key roles in our manufacturing operations.  Although we aim at selecting reputable providers, it is possible that one or more of these providers could fail to perform as we expect and such failure could have an adverse impact on our business.  Because of this expanded role of our outsource providers, we will need to monitor the performance of these suppliers and adopt new procedures to deal with and manage the performance of these outsource providers.  Any delay or failure in the implementation of our operational changes and monitoring of these relationships could adversely affect our customer relationships and/or have a negative effect on our operating results.

 The loss of or significant decrease in sales to large customers.  We must receive a continuous flow of new orders from our large customers.  Failure to obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce prices from key customers could have a material adverse effect on us.  In addition, as a result of the desire to more closely manage inventory levels, there is a growing trend in business, especially in our commercial markets, to make purchases on a “just-in-time” basis.  This requires us to shorten our lead time for production in certain cases and more closely anticipate demand, which could in the future require the carrying of additional inventories or require additional expenses to expedite delivery.

 Long-term contracts may not be renewed.  We currently have contracts with the U.S. military to provide control equipment used in engine generator systems. These contracts currently run through 2012.  We also are a key supplier of control equipment to DRS, a prime contractor with the U.S. military.  As a result of the war in Iraq, demand for these military products has remained strong.  If the war ends or significantly winds down or if our contracts with the military expire and are not renewed, demand for these products could be greatly reduced.

 We may face cancellations, reductions or delays in our product orders that could adversely affect our operating results.  From time to time we receive commercial orders from customers that require us to manufacture products on short notice and have such products available for shipment, even though the order may be reduced, cancelled or delayed.  Some orders may be designed to meet the unique needs of a particular customer.  As a result, changes, delays or cancellations of orders could result in an inventory of unsaleable products and possible inventory write-downs that could adversely affect our operating results.

 Adverse changes in the operations of global manufacturing facilities.  We manufacture a significant number of products in Honduras and obtain a significant proportion of the raw materials and sub-assembly components used in the manufacturing of our products outside the United States.  International operations are subject to risks including, among others:

 labor unrest;

            political instability;

            lack of developed infrastructure;

 longer payment cycles and greater difficulty in collecting accounts;

 import and export duties and quotas;

 changes in domestic and international customs and tariffs;

 unexpected changes in regulatory environments;

 difficulty in complying with a variety of foreign laws;

 difficulty in obtaining distribution and support;

 potentially adverse tax consequences; and

            changes in exchange rates between the U.S. dollar and the foreign currency.

 Labor in Honduras has historically been readily available and at lower cost than available in many other nations; however, we cannot be assured that labor will continue to be available in Honduras at costs consistent with historical levels.  A substantial increase in labor costs could have a material adverse effect on our results of operation.

 Interruptions in manufacturing operations.  Approximately 60% of our revenues are derived from products manufactured or assembled at our manufacturing facility in Honduras and by contract manufacturers located in China.  These manufacturing operations, as well as our manufacturing plant in Clearwater, Florida, are subject to hazards that could result in material damage to any such facilities.  Such damage to or prolonged interruption in the operations of such facilities for repairs, labor disruption, hurricanes, typhoons or other reasons, could have a material adverse effect on us.  In addition, our contract manufacturing agreements can be terminated on short notice.  If our contract manufacturers located in China are unable or unwilling to manufacture and deliver products to enable us to meet the delivery schedules and quality that we require, we could be forced to seek additional suppliers, thereby resulting in further delays and additional expenses in shipping products to our customers.

 Infringement or loss of proprietary rights.  We believe that our rights in owned and licensed names are of increasing importance to our business success and that our ability to create demand for our products is dependent to a large extent on our ability to exploit these trademarks, such as our SurgeGuard and Fire Shield® brand name.  There can be no assurance as to the breadth or degree of protection that these trademarks may afford us, or that we will be able to successfully leverage our trademarks in the future.  The costs associated with protecting our intellectual property rights, including litigation costs, may be material.  We also cannot be sure that we will be able to successfully assert our intellectual property rights or that these rights will not be invalidated, circumvented or challenged.  Any inability to do so, particularly with respect to names in which we have made significant capital investments, or a successful intellectual property challenge or infringement proceeding against us, could have a material adverse effect on us.

 Our success also depends in part on our proprietary technology and patent rights.  If we fail to adequately protect this technology and our patent rights, we may lose our competitive position or face significant expense to protect or enforce our intellectual property rights.  We intend to continue to protect our proprietary technology through patents, copyrights and trade secrets.  Despite this intention, we may not be successful in achieving adequate protection.  Claims allowed on any of our patents may not be sufficiently broad to protect our technology and any patents issued to us also may be challenged, invalidated or circumvented.  With respect to our pending applications for patents, there can be no assurance that we will be successful in obtaining patents from these applications.

 Loss of patent protection could impact our operating results.We currently hold patents on several products, the main patent being the ‘337 patent underlying our Fire Shield ® technology for cord fire prevention.  This patent provides legal protection against competitors who could unlawfully copy our technology.  Once these patents expire, competitors will be able to legally utilize our technology and competition could increase, resulting in lower prices in the marketplace.  If we are unable to develop new patented technologies we may be unable to maintain our profit margins and we could lose our technological advantage in the marketplace.

 Inability to effectively compete due to competitors’ patents.Competitors may register new patents on products that make it very difficult for us to effectively compete in certain markets. As a result, our current products could become obsolete or uneconomical. For example, our products could become difficult to market as a result of a competitor’s patented products that provides equal or superior performance at a lower cost. If we are not able to meet these competitive challenges, we could lose revenue or be forced to write down the value of our inventory.

 Seasonality.  Our business can vary significantly from quarter to quarter.  This seasonality may also result in cash outlays or additional interest expense due to an increased need to borrow funds to maintain sufficient working capital to support such increased demand.

 Competition from companies that produce similar products.  The markets for our products are highly competitive.  We believe that competition is based upon several factors, including price, quality, access to retail shelf space, product features and enhancements, brand names, new product introductions, marketing support and distribution systems.  We compete with established companies, a number of which have substantially greater facilities, personnel, financial and other resources.  Some competitors may be willing to reduce prices and accept lower profit margins to compete with us.  As a result of this competition, we could lose market share and sales, or be forced to reduce our prices to meet competition.  In such cases, we could be required to write down our inventory to market value.

 Additionally, our current products could become obsolete as a result of new customer demands or competitors’ new products.  For example, our products could become unmarketable as a result of a new product that provides superior performance at a lower cost.  If we cannot adapt to these competitive challenges, we may not be able to effectively compete.

 Our design and manufacture of products for sale to the United States military, combined with our international supply chain,  subjects us to certain governmental regulations, such as the International Traffic in Arms Regulations ("ITAR").  Certain of our products that we sell to the United States military are subject to ITAR, which is administered by the U.S. Department of State. ITAR regulates the export of related technical data and defense services as well as foreign production.  Given the current global political climate, there is increased focus by regulators and companies such as ours on ITAR and the actions that it regulates.  We are currently enhancing our ITAR controls and implementing improvements in our internal compliance program.  As we implement these enhancements and improvements, we are addressing certain of our business practices, which could lead to an increase in our costs.  Also, if we discover issues that are sufficiently material, the U.S. Department of State could impose fines on us, investigate our business practices or impose other remedies upon us which could have a material adverse effect on our business.  Furthermore, the conduct and resolution of any such issues that are sufficiently material could be time consuming, expensive and distracting from the conduct of our business.  In addition, if our ITAR-related enhancements and improvements were to fail or be ineffective for a prolonged period of time, it could have a materially adverse effect on our operating results.

 Newly acquired businesses or product lines.  We may acquire partial or full ownership in businesses or may acquire rights to market and distribute particular products or lines of products.  The acquisition of a business or of the rights to market specific products or use specific product names may involve a financial commitment, either in the form of cash or stock consideration.  There is no guarantee that the acquired businesses or product lines will contribute positively to earnings.  The anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations, and acquired businesses may carry unexpected liabilities.  Because we have a small management team, we may not be able to effectively assimilate the operations, technologies, personnel and products from the acquired company or our management team may be diverted from our other business concerns.

 Dependence on new products that are technical in nature. Our products are technical in nature and require significant engineering in order to develop.Rapid technological changes in our industry subject us to increased pressure to develop technological advances in our products. We believe that our future success depends in part upon our ability to develop and offer new products with improved capabilities and add additional features and adaptations of our existing products for new uses. If we are unable to develop sufficient new products to remain competitive, or if our products experience reliability problems, our business could be impacted.  Although products are tested prior to being sold, unanticipated or latent performance issues could be experienced subsequent to release. If new products have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, additional service and warranty expenses.  Additionally, if we incur significant numbers of quality issues, we could initiate a formal product recall which could result in significant additional costs. Our failure to complete commercialization of these products in a timely manner could result in unanticipated costs and inventory obsolescence, which would adversely affect our financial results.

 Volatility of our stock price.  In recent years, the price of our common stock has fluctuated greatly.  The price of our common stock could continue to be volatile and fluctuate in response to a variety of factors including, but not limited to, the following:

 general and global economic fluctuation;

 quarter-to-quarter variations in our operating results;

 material differences in revenue or earnings from levels expected by investors;

 announcements of restructurings, technological innovations, reductions in force, departure of key

    employees, consolidations of operations or introduction of new products;

 development in, or claims relating to, patent or other proprietary rights;

 success or failure of our new and existing products;

 disruptions with key customers or suppliers; or

 political, economic or environmental events occurring globally.

 Government regulations could adversely impact our operations.  Throughout the world, most federal, state, provincial and local authorities require Underwriters Laboratory, Inc. or other safety regulation certification prior to marketing electrical products in those jurisdictions.  Most of our products have such certifications; however, there can be no assurance that our products will continue to meet such specifications.  Many foreign, federal, state and local governments also have enacted laws and regulations that govern the labeling and packaging of products and limit the sale of product containing certain materials deemed to be environmentally sensitive.  A determination that our products are not in compliance with such rules and regulations could result in the imposition of fines or an award of damages to private litigants.

 Our business and results of operations could be impacted by the implementation of Sarbanes Oxley.  Under current rules, we were required to complete our initial assessment of the adequacy of internal control over financial reporting under Section 404 of the Sarbanes Oxley Act of 2002 as of March 31, 2008. We also must include in our assessment, a report detailing management’s assessment of the design effectiveness of our internal control over financial reporting as well as the operating effectiveness of our internal control over financial reporting.  Although we will devote significant resources into developing and updating the required documentation and perform the required testing, there can be no assurance that we will be able to comply with all of Section 404’s requirements.

 Additionally, our independent registered public accounting firm must audit the operating effectiveness of our internal control over financial reporting as of March 31, 2010.  If our internal control over financial reporting is not designed or operating effectively, our independent registered public accounting firm may either disclaim an opinion or may issue a qualified opinion as to the effectiveness of our internal control over financial reporting.  If this should occur, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which in turn, could cause a decline in the market price of our common stock.

 The risks listed above are not the only risks that we face.  Additional risks that are not yet known or that we believe to be immaterial may also impair business operations.

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2008, which could materially affect our business, financial condition or future results.  As of the date of the filing of this first quarter Form 10-Q, there are no changes to these Risk Factors of which we are aware.  The risks described in our Annual Report on Form 10-K are not the only risks that we face.  Additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

 Not applicable.

Item 3.  Defaults Upon Senior Securities.

 Not applicable.

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

 Not applicable.

Item 5.  Other information.

 Not applicable.

Item 6.  Exhibits.

Exhibit 31.1 — Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).

Exhibit 31.2 — Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).

Exhibit 32.1 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the

                            Sarbanes-Oxley Act of 2002.

Exhibit 32.2 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the

                            Sarbanes-Oxley Act of 2002.

SIGNATURES

 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.

	TECHNOLOGY RESEARCH CORPORATION
August 13, 2008	By:       /s/  Owen Farren
	Owen Farren
	President and Chief Executive Officer
	(Principal Executive Officer)
August 13, 2008	By:        /s/  Barry H. Black
	Barry H. Black
	Chief Financial Officer
	(Principal Financial and Accounting Officer)