Technology Research 10Q 2009 Q4 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 December 31, 2008

 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 .

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  No þ

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

	Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	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 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

Item 1. Financial Statements.

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

	December 31,			March 31,
ASSETS	2008			2008
Current assets:
Cash and cash equivalents	$	1,131			2,132
Short-term investments		4,001			1,495
Trade and other accounts receivable, net of allowance for doubtful accounts
of $178 and $123 at December 31, 2008 and March 31, 2008, respectively		4,740			6,573
Other receivable		903			869
Income taxes receivable		791			197
Inventories		8,129			7,788
Deferred income taxes		604			1,446
Prepaid expenses and other current assets		451			258
Total current assets		20,750			20,758

Property, plant and equipment, net of accumulated depreciation of
$11,918 and $11,604 at December 31, 2008 and March 31, 2008, respectively		3,389			3,684
Intangible asset, net of accumulated amortization of $164 and $119, respectively		419			463
Deferred income taxes		55			-
Other assets		37			45
Total assets	$	24,650			24,950

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	1,825			3,111
Accrued expenses		1,460			1,781
Accrued dividends		132			132
Total current liabilities		3,417			5,024

Income taxes payable		137			-
Deferred income taxes		-			37
Total liabilities		3,554			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		9,879			9,568
Retained earnings		8,242			7,346
Common stock held in treasury, 21,500 shares at cost		(40	)		(40	)
Total stockholders' equity		21,096			19,889
Total liabilities and stockholders' equity	$	24,650			24,950

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

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share data)

Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007		2008			2007
Revenue:
Commercial	$	4,047			5,735		15,290			16,947
Military		3,774			3,504		10,459			11,209
Total revenue		7,821			9,239		25,749			28,156
Cost of sales		5,270			6,606		17,140			19,831
Gross profit		2,551			2,633		8,609			8,325

Operating expenses:
Selling and marketing		701			600		2,212			2,067
General and administrative		1,103			1,130		3,673			3,247
Research and development		586			527		1,716			1,430
Total operating expenses		2,390			2,257		7,601			6,744
Income from operations		161			376		1,008			1,581

Other income (expense):
Other income, net		165			36		545			148
Interest expense		(6	)		-		(10	)		(75	)
Other income, net		159			36		535			73
Income before income taxes		320			412		1,543			1,654
Income tax expense		65			56		292			414
Net income	$	255			356		1,251			1,240

Earnings per share - basic	$	0.04			0.06		0.21			0.21

Earnings per share - diluted	$	0.04			0.06		0.21			0.21

Shares outstanding - basic		5,890,828			5,888,828		5,890,828			5,888,828

Shares outstanding - diluted		5,897,310			5,910,053		5,902,647			5,938,708

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)

Nine Months Ended December 31,

		2008		2007
Cash flows from operating activities:
Net income	$	1,251		1,240
Adjustments to reconcile net income
to net cash provided by operating activities:
Accretion of interest on short-term investments and other receivable		(46	)	(8	)
Bad debt expense		125		30
Depreciation		850		875
Amortization of intangible assets		44		45
Stock compensation expense		311		182
Deferred income taxes		750		(155	)
Loss on disposal of property and equipment		42		-
Changes in operating assets and liabilities:
Trade and other accounts receivable		1,708		730
Other receivable – current		(34	)	(107	)
Inventories		(341	)	(636	)
Prepaid expenses and other current assets		(193	)	(111	)
Other assets		8		-
Trade accounts payable		(1,286	)	205
Accrued expenses		(321	)	(84	)
Accrued dividends		-		(1	)
Income taxes receivable/payable		(457	)	(908	)
Net cash provided by operating activities		2,411		1,297
Cash flows from investing activities:
Maturities of short-term investments		3,500		1,000
Purchase of short-term investments		(5,960	)	(989	)
Purchases of property and equipment		(597	)	(254	)
Net cash used in investing activities		(3,057	)	(243	)
Cash flows from financing activities:
Repayments of short-term and long-term debt		-		(3,000	)
Cash dividends paid		(355	)	(355	)
Net cash used in financing activities		(355	)	(3,355	)
Net decrease in cash and cash equivalents		(1,001	)	(2,301	)
Cash and cash equivalents at beginning of period		2,132		3,471
Cash and cash equivalents at end of period	$	1,131		1,170

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 and per 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 interim 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 Annual Report on Form 10-K for the year ended March 31, 2008. Operating results for the nine-month period ended December 31, 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 our management, all adjustments necessary for a fair presentation of the financial results for the interim periods presented. 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.

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 has been adjusted to include the number of shares that would have been outstanding if the stock options had been exercised and nonvested shares had been vested, at the average market price of the period, with the proceeds being used to buy shares from the market, if dilutive.

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

	Three months ended December 31,				Nine months ended December 31,

	2008		2007		2008		2007
Net income	$	255		356		1,251		1,240

Weighted average shares outstanding - basic		5,890,828		5,888,828		5,890,828		5,888,828
Dilutive effect of stock options and nonvested shares		6,482		21,225		11,819		49,880

Weighted average shares outstanding - diluted		5,897,310		5,910,053		5,902,647		5,938,708

Earnings per share:
Basic	$	0.04		0.06		0.21		0.21
Diluted	$	0.04		0.06		0.21		0.21

For both the three-month and nine-month periods ended December 31, 2008, options to purchase 698,000 shares of common stock were considered anti-dilutive for the purposes of calculating earnings per share. For the three-month and nine-month periods ended December 31, 2007, options to purchase 409,500 and 287,800 shares of common stock, respectively, were considered anti-dilutive for purposes of calculating earnings per share.

3. Short-term Investments:

The value of short-term investments totaled $4,001 as of December 31, 2008, consisting of corporate securities in the amount of $1 and original cost plus accrued interest on U.S. Treasury Bills in the amount of $4,000. 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. We consider all of our short-term investments to be held-to-maturity, and therefore, are recorded at amortized cost.

4. Inventories:

Inventories consist of the following:

December 31, 2008			March 31, 2008

Raw materials	$	5,388	4,976
Work-in-process		309	663
Finished goods		2,432	2,149
Total	$	8,129	7,788

5. Warranty:

We generally provide a one year warranty period for all of our products. We also provide limited coverage on certain of its surge products for “downstream” damage of products not manufactured by us. Our 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 our warranty liability, included in accrued expenses, for the three and nine months ended December 31, 2008 and 2007 is as follows:

	Three months ended December 31,						Nine months ended December 31,

	2008			2007			2008			2007
Beginning balance	$	137			121			137			90
Warranty expense		53			27			112			135
Warranty claims		(26	)		(23	)		(85	)		(100	)
Ending balance	$	164			125			164			125

6. Debt:

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 our key assets including receivables, inventories, short-term investments, demand deposit accounts maintained with our lender, and 65% of the voting stock of our Honduran subsidiary and requires us to maintain certain financial ratios. As of December 31, 2008 and March 31, 2008, we had no borrowings on this credit agreement and the full $6.0 million is available.

7. Income taxes:

Our effective income tax rate was 20.3% and 13.6% for the three months ended December 31, 2008 and 2007, respectively. For the nine months ended December 31, 2008 and 2007, our effective income tax rate was 18.9% and 25.0%, 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, we 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 ultimate settlement. As a result of implementing FIN 48, we did not recognize any cumulative effect adjustment impacting retained earnings as of the beginning of fiscal 2008.

As of April 1, 2008, we had unrecognized tax benefits of $12, accrued interest of $4, and there are no accrued penalties. For the three-months ended December 31, 2008, we recorded an additional $137 of unrecognized tax benefits related to transfer pricing. As of December 31, 2008, we have unrecognized tax benefits of $152, accrued interest of $6, and there are no accrued penalties. After adoption of FIN 48, our policy is to recognize interest and penalties in the provision for income taxes.

We file U.S. Federal and Florida income tax returns. We have concluded on all U.S. federal income tax matters through the fiscal 2004 year. Federal income tax returns for fiscal years 2005 through 2008 and state income tax returns for fiscal years 2004 through 2008 remain subject to audit.

8. Stock-Based Compensation:

As of April 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, (“SFAS 123R”) for our share-based compensation plans. Previously, we 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.

Since stock compensation expense of $311 and $182, respectively, resulting from SFAS 123R was included in earnings for the nine months ended December 31, 2008 and 2007, the consolidated statements of cash flows for the nine months ended December 31, 2008 and 2007, include adjustments to reconcile net income to net cash provided by operating activities of $311 and $182, 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 nine months ended December 31, 2008 and 2007 was zero. We expect to utilize available registered shares when share-based awards are issued.

Stock Option Plans

We have 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 (nonvested shares) of our 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 our stock, the exercise price for an incentive stock option may not be less than 110% of the fair market value of the shares of our common stock on the date of grant. The term of a stock option may not exceed ten years. Non-qualified stock options will be granted at the fair market value on the date of grant.

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

On March 24, 2000, our Board of Directors adopted the 2000 Long Term Incentive Plan and it was approved by our stockholders in August 2000 at our 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. The 2000 Long Term Incentive Plan also allows for the grant of restricted stock awards (nonvested shares) to our officers and directors.

On June 24, 2008, our Board of Directors approved the Amended and Restated 2000 Long Term Incentive Plan and it was approved by our stockholders on August 27, 2008 at our annual meeting. 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 our employees or directors. The Amended and Restated 2000 Long Term Incentive Plan also allows for the grant of restricted stock awards (nonvested shares) to either our employees or directors. A total of 500,000 additional shares of our common stock have been reserved for issuance under the Amended and Restated 2000 Long Term Incentive Plan. A total of 1.6 million shares of our common stock have been reserved for issuance under the Amended and Restated 2000 Long Term Incentive Plan, of which 405,750 shares remain available for awards as of December 31, 2008.

We granted 81,999 shares of restricted stock awards (nonvested shares) in December 2008 at a grant date fair value of $1.70 per share. The shares have a three-year vesting period. As of December 31, 2008 all 81,999 shares of restricted stock are non-vested and remain outstanding.

The table below summarizes stock option activity for the Plans from April 1 through December 31, 2008:

				Aggregate(1)		Weighted		Weighted
				intrinsic		average		average
	Options			value		exercise		remaining
	outstanding			(in thousands)		price		contractual life
Balance as of March 31, 2008		761,952		$	34	$	5.63		8.35

Options expired		(3,117	)				-		-
Options granted		224,001				$	1.93		9.84
Options canceled		(75,250	)				-		-
Options exercised		-					-		-
Balance as of December 31, 2008		907,586		$	1	$	4.58		8.24
Exercisable as of December 31, 2008		346,253		$	1	$	7.50		6.54
Footnote: 1 The aggregate intrinsic value represents the total pretax intrinsic value, based on the closing stock price of our common stock of $2.85 as of March 31, 2008 and of $1.70 as of December 31, 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 table below summarizes shares available for grant under the Plans from April 1 through December 31, 2008:

	Stock Options			Restricted Stock (Nonvested shares)		Shares available for grant
Balance as of March 31, 2008							136,500
Shares authorized							500,000
Shares expired		(3,117	)		-		-
Shares granted		224,001			81,999		(306,000	)
Shares canceled		(75,250	)		-		75,250
Shares exercised
Balance as of December 31, 2008							405,750

The weighted average grant date fair value of stock options granted during the nine months ended December 31, 2008 and 2007 was $1.09 per share and $3.53 per share, respectively. The total intrinsic value of stock options exercised during the nine months ended December 31, 2008 and 2007 was zero.

As of December 31, 2008, there was $893 of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share options and nonvested share awards) granted under the Plans that is expected to be recognized over a weighted average period of 2.17 years. The total fair value of stock options vested during the nine months ended December 31, 2008 and 2007 was $29 and $35, respectively.

We estimated the fair value of share-based compensation awards on the date of grant using the Black-Scholes option pricing model, which is impacted by our stock price as well as assumptions regarding several subjective variables including the expected stock price volatility of our common stock 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 our experience with paying dividends over the past 12 months. We are 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 compensation expense only for those awards that are expected to vest.

The weighted average assumptions used to value option grants for the three and nine months ended December 31, 2008 and 2007 are as follows:

	Three months ended December 31,						Nine months ended December 31,

	2008			2007			2008			2007
Expected dividend yield		3.23	%		1.87	%		3.05	%		1.86	%
Risk free interest rate		1.92	%		4.45	%		2.14	%		4.51	%
Expected volatility		75.60	%		86.86	%		76.48	%		86.76	%
Expected life (in yrs.)	8.00			7.54			7.89			7.43

9. Litigation:

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, results of operations or cash flows.

10. Disposition of Inventory and Purchase Obligations:

On August 20, 2008, we received $310 from one of our contract manufacturers in full and final settlement for the disposition of 310,000 kilograms of TRC’s FireShield® cable inventory and settlement of other purchase obligations. During the nine-months ended December 31, 2008, we recognized a gain of $637 resulting from the settlement of this FireShield® cable inventory disposition, the satisfaction of contract purchase obligations, and other inventory held with our contract manufacturer. This gain is included in our cost of sales.

11. 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 157”). SFAS 157 establishes a single definition of fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. SFAS 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 SFAS 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 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 had no material effect 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 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. On April 1, 2008, SFAS 159 first became effective for us. The implementation of SFAS 159 had no impact on our consolidated financial statements because 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. SFAS 141R 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 that 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 160”). SFAS 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 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 December 31, 2008 and March 31, 2008, we did not have any minority interests. The adoption of SFAS 160 is not expected to impact our 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. 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. SFAS 161 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.

We anticipate that on January 1, 2009, we will adopt EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 requires companies to recognize a realized income tax benefit associated with dividends or dividend equivalents paid on non-vested equity-classified employee share-based payment awards that are charged to retained earnings as an increase to additional paid-in capital. The adoption of EITF 06-11 is not expected to have a material impact on our financial position, results of operations or cash flows.

In June 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” as defined in EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, and therefore such awards should be included in the earnings allocation in computing earnings per share using the two-class method as described in SFAS No. 128, Earnings per Share. According to FSP EITF 03-6-1, a share-based payment award is a participating security when the award includes nonforfeitable rights to dividends or dividend equivalents. The rights result in a noncontingent transfer of value each time an entity declares a dividend or dividend equivalent during the award’s vesting period. However, the award would not be considered a participating security if the holder forfeits the right to receive dividends or dividend equivalents in the event that the award does not vest. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. When adopted, the requirements are applied by recasting previously reported EPS. We are currently evaluating the requirements of FSP EITF 03-6-1 and have not yet determined the impact of adoption.

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

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 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 overall gross margin by increasing the margin in our 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.

Revenue was $1.4 million lower in the third quarter of fiscal 2009 compared with the third quarter of the prior year. Gross profit as a percentage of revenue increased to 32.6% for the quarter ended December 31, 2008 from 28.5% for the prior year quarter due to the relative mix in revenue between military and commercial business. Net income for the third fiscal quarter ended December 31, 2008 was $0.3 million compared with net income of $0.4 million for the third quarter of last year. Diluted earnings per share are $0.04 for the quarter ended December 31, 2008 compared with diluted earnings per share of $0.06 for last year’s third quarter.

Through the nine months ended December 31, 2008, net income of $1.3 million was substantially unchanged compared with the first nine months of fiscal 2008. Diluted earnings per share for the same period were unchanged at $0.21 per share.

RESULTS OF OPERATIONS

Revenue for the third quarter ended December 31, 2008 and 2007 was $7.8 million and $9.2 million, respectively. Commercial revenue, including royalties, decreased by $1.7 million and military revenue increased $0.3 million. Revenue for the nine-month period ended December 31, 2008 was $25.7 million compared to $28.2 million reported in the same period of the prior year, a decrease of 8.5%. The recent extreme volatility and disruption of financial markets in the United States, Europe and Asia and depressed conditions in the real estate market have all contributed to weakening worldwide economic conditions and have contributed to a reduction in revenue in our commercial business. Commercial revenue for the nine months ended December 31, 2008 decreased $1.7 million from the same period last year while military revenue decreased $0.8 million. The decrease in commercial revenue for the three and nine month periods ended December 31, 2008 compared with the same periods in the prior year is principally due to lower revenue in our RAC business. The decrease in military revenue for the nine months ended December 31, 2008 was largely due to the delay until June 30, 2008 in passage and signing of the Emergency Supplemental Spending bill.

Gross profit for the quarter ended December 31, 2008 and 2007 was unchanged at $2.6 million. Gross profit as a percentage of total revenue increased to 32.6% for the three months ended December 31, 2008 from 28.5% for the three months ended December 31, 2007 due to military revenue representing a larger portion of total revenue this year. Gross profit increased $0.3 million, or 3.4%, to $8.6 million for the nine months ended December 31, 2008 compared to the same periods in the prior year. Gross profit as a percent of revenue increased to 33.4% for the nine months ended December 31, 2008 from 29.6% for the nine months ended December 31, 2007. The increase in gross profit and gross profit as a percentage of revenue for the nine months ended December 31, 2008 was primarily due to the second quarter $0.6 million gain on disposition of inventory and settlement of purchase obligations with one of our contract manufacturers.

Selling and marketing expense of $0.7 million, or 9.0% of revenue, for the quarter ended December 31, 2008 increased from $0.6 million or 6.5% of revenue for the quarter ended December 31, 2007. For the nine months ended December 31, 2008, selling and marketing expense of $2.2 million or 8.6% of revenue was $0.1 million higher from $2.1 million or 7.3% of revenue compared with the prior year. The increase for the both the quarter and nine months ended December 31, 2008 compared with the prior year is due primarily to increased expenses related to additional personnel hired in 2008.

General and administrative expense of $1.1 million, or 14.1% of revenue, for the quarter ended December 31, 2008 was unchanged from $1.1 million, or 12.2% of revenue for the quarter ended December 31, 2007. For the nine months ended December 31, 2008, general and administrative expense of $3.7 million, or 14.3% of revenue, increased by $0.4 million compared to $3.2 million, or 11.5% of revenue, for the same period last year. The $0.4 million increase over the prior year is due to second quarter obligations incurred from the retirement of a Company officer and higher professional fees.

Research and development expense of $0.6 million, or 7.5% of revenue, for the quarter ended December 31, 2008 increased by $0.1 million from the $0.5 million, or 5.7% of revenue, for the same quarter last year. For the nine months ended December 31, 2008, research and development expense was $1.7 million, or 6.7% of revenue, compared to $1.4 million, or 5.1% of revenue, for the same period last year. The increase in research and development expense from the prior year periods is primarily due to an increased headcount in engineering development and consulting related expenses as we added resources to improve our engineering expertise.

Other income (expense), net was $0.1 million of income for the quarter ended December 31, 2008, compared to $0.0 million in the same quarter last year. The increase in other income for the quarter ended December 31, 2008 was primarily due to payments received from settlements with vendors. For the nine months ended December 31, 2008, other income (expense) was income of $0.5 million, compared to $0.0 million of income for the same period last year. The increase in other income for the nine months ended December 31, 2008 was due primarily to payments received as part of a legal settlement.

Income tax expense was $0.1 million for both the quarter ended December 31, 2008 and December 31, 2007. For the nine months ended December 31, 2008, income tax expense was $0.3 million compared to $0.4 million for the same period last year. Income taxes as a percent of income before income taxes was 20.3% and 18.9% for the quarter and nine months ended December 31, 2008, compared with 13.6% and 25.0% for the quarter and nine months ended December 31, 2007. The reduction in the effective tax rate in fiscal 2009 is due to higher earnings of our Honduran subsidiary. 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 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 December 31, 2008 was $0.3 million, compared to a $0.4 million in the same quarter last year. The basic and diluted earnings per share was $0.04 for the quarter ended December 31, 2008, compared to basic and diluted earnings per share of $0.06 for the same quarter last year. The net income for the nine-month period ended December 31, 2008 was $1.3 million, compared to net income of $1.2 million for the same period in the prior year. The basic and diluted earnings per share were $0.21 for the nine-month periods ended December 31, 2008 and 2007. The decrease in net income for the three-month period ended December 31, 2008 was due primarily to lower gross profit on lower revenue and slightly higher operating expenses partially offset by other income from settlements. The increase in net income for the nine-month periods ended December 31, 2008, compared to the comparable prior year period, was primarily the result of the favorable inventory and purchase obligations settlement with one of our contract manufacturers, the increase in other income from a legal settlement, and the reduction in income taxes substantially offset by higher operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our total of cash and cash equivalents and short-term investments at December 31, 2008 was $5.1 million, an increase of $1.5 million from March 31, 2008. Cash and cash equivalents decreased from $2.1 million as of March 31, 2008 to $1.1 million as of December 31, 2008, primarily reflecting an increase in short-term investments. Cash provided by operating activities was $2.4 million, cash used in investing activities was $3.0 million and cash used in financing activities was $0.4 million resulting in a total decrease in cash of $1.0 million for the nine-month period ended December 31, 2008.

Cash provided by operating activities primarily resulted from net income of $1.3 million, a decrease in trade accounts receivable of $1.7 million, depreciation expense of $0.9 million, and a decrease in deferred income taxes of $0.8 million, partially offset by a decrease in trade accounts payable of $1.2 million, an increase in income taxes receivable of $0.5 million, an increase in inventories of $0.4 million, and a decrease in accrued expenses of $0.3 million. The decrease in trade accounts receivable was primarily due to improved collections from customers and lower quarterly revenue in third quarter fiscal 2009 as compared to the same quarter last year. The decrease in trade accounts payable was principally due to bringing our balances with vendors to a more current position. The increase in income taxes receivable primarily reflects the tax benefit resulting from the disposition of inventory that had been written down for financial statement purposes in prior periods. The increase in inventories was primarily due to higher finished goods inventory which is due to an economical production of high volume parts in anticipation of forecasted customer demand in the fourth quarter. The decrease in accrued expenses was primarily due to the settlement of purchase obligations with one of our contract manufacturers.

Cash used in investing activities was due to purchase of short-term investments in excess of maturing investments and cash used for purchases of property and equipment.

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 our key assets including receivables, inventory, investments, demand deposit accounts maintained with our lender, and 65% of the voting stock of our Honduran subsidiary, and requires us to maintain certain financial ratios. As of December 31, 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 157”). SFAS 157 establishes a single definition of fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. SFAS 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 SFAS 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 157 had no material effect on our financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 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 became effective as of April 1, 2008. The implementation of SFAS 159 did not have an 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. SFAS 141R 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 160). SFAS 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 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 December 31, 2008 and March 31, 2008, we did not have any minority interests. The adoption of SFAS 160 is not expected to impact our 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. 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. SFAS 161 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.

In June 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” as defined in EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, and therefore such awards should be included in the earnings allocation computing earnings per share using the two-class method as described in SFAS No. 128, Earnings per Share. According to FSP EITF 03-6-1, a share-based payment award is a participating security when the award includes nonforfeitable rights to dividends or dividend equivalents. The rights result in a noncontingent transfer of value each time an entity declares a dividend or dividend equivalent during the award’s vesting period. However, the award would not be considered a participating security if the holder forfeits the right to receive dividends or dividend equivalents in the event that the award does not vest. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. When adopted, the requirements are applied by recasting previously reported EPS. We are currently evaluating the requirements of FSP EITF 03-6-1 and have not yet determined the impact of adoption.

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 revenue is 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 revenue 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 revenue. 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 limited 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 December 31, 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 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 three fiscal quarters that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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:

Our growth is subject to a number of economic risks. As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate values. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. These economic developments affect businesses such as ours in a number of ways. The current tightening of credit in financial markets adversely affects the ability of customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services. Our business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, purchase of electrical safety equipment by consumers and businesses and military procurement.

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 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 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 sales. 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 fluctuations 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 but we expect this amount to decrease in fiscal 2009 as our RAC business has decreased and we have transferred some production to our facility in Honduras. 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 unsalable 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 revenue 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. In October 2008 we received approval from the U.S. government for our manufacturing license agreement between the Company and our Honduran subsidiary and we have begun to transfer work to our facility in Honduras. 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.

Our business may be affected by government contracting risks. U.S. government contracts are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. If we or one of our business units were charged with wrongdoing as a result of any U.S. government investigation (including violation of certain environmental or export laws), the U.S. government could suspend us from bidding on or receiving awards of new U.S. government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. government could subject us to fines, penalties, repayments and treble and other damages. The U.S. government could void any contracts found to be tainted by fraud. The U.S. government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. Debarment generally does not exceed three years. Independently, failure to comply with U.S. laws and regulations related to the export of goods and technology outside the United States could result in civil or criminal penalties and suspension or termination of our export privileges.

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, and 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 third 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 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

February 6, 2009	By: /s/ Owen Farren
	Owen Farren
	President and Chief Executive Officer
	(Principal Executive Officer)


February 6, 2009	By: /s/ Thomas G. Archbold
	Thomas G. Archbold
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Technology Research (TRCI) Inactive 10-Q2009 Q4 Quarterly report

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