Technology Research (TRCI) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

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

For the quarterly period ended December 31, 2010

¨ 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  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

The aggregate number of shares of the Registrant’s Common Stock, $.51 par value, outstanding on December 31, 2010, was 6,640,484.

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Cash Flows	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results  of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4. Controls and Procedures	18
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 6. Exhibits	19
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
SIGNATURES	19

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	December 31, 2010			March 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	8,662			8,216
Trade and other accounts receivable, net of allowance for doubtful accounts of $30 at December 31, 2010 and $38 at March 31, 2010		3,649			4,400
Income taxes receivable (note 8)		72			29
Inventories (notes 3 and 4)		7,915			7,315
Deferred income taxes (note 8)		378			729
Prepaid expenses and other current assets		304			299
Total current assets		20,980			20,988
Property, plant and equipment, net of accumulated depreciation of $11,176 at December 31, 2010 and $10,532 at March 31, 2010		3,211			3,123
Intangible assets, net of accumulated amortization of $1,660 at December 31, 2010 and $238 at March 31, 2010 (note 5)		3,230			3,929
Goodwill (note 5)		4,453			4,402
Other assets		33			33
Total assets	$	31,907			32,475
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	1,618			1,423
Accrued expenses		920			1,720
Accrued dividends		135			134
Total current liabilities		2,673			3,277
Income taxes payable (note 8)		512			303
Deferred income taxes (note 8)		662			1,397
Patco earn-out (note 3)		738			738
Total liabilities		4,585			5,715
Stockholders’ equity (note 9):
Common stock $0.51 par value; 10,000,000 shares authorized, 6,671,834 shares issued and 6,640,484 shares outstanding at December 31, 2010 and 6,629,405 shares issued and 6,603,620 shares outstanding at March 31, 2010		3,403			3,379
Additional paid-in capital		12,967			12,570
Retained earnings		11,029			10,867
Common stock held in treasury at cost, 31,350 shares at December 31, 2010 and 25,785 shares at March 31, 2010		(77	)		(56	)
Total stockholders’ equity		27,322			26,760
Total liabilities and stockholders’ equity	$	31,907			32,475

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

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TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended December 31,					Nine Months Ended December 31,
	2010			2009		2010		2009
Revenue:
Commercial	$	3,608			3,525	$	12,100		10,569
Military		3,152			3,978		14,042		16,087
Royalty		184			85		411		258
Total revenue		6,944			7,588		26,553		26,914
Cost of sales		4,843			4,832		16,891		16,202
Gross profit		2,101			2,756		9,662		10,712
Operating expenses:
Selling and marketing		442			582		1,693		1,862
General and administrative		1,289			919		4,645		2,917
Research and development		738			565		2,484		1,896
Acquisition related transaction costs		90			—		90		—
Total operating expenses		2,559			2,066		8,912		6,675
(Loss) income from operations		(458	)		690		750		4,037
Other income, net		—			—		1		5
(Loss) income before income taxes		(458	)		690		751		4,042
Income tax (benefit) expense		(116	)		208		186		1,128
Net (loss) income	$	(342	)		482	$	565		2,914
(Loss) earnings per share - basic	$	(0.05	)		0.08	$	0.09		0.49
(Loss) earnings per share - diluted	$	(0.05	)		0.08	$	0.08		0.48
Shares outstanding - basic		6,625,913			5,896,728		6,610,528		5,892,903
Shares outstanding - diluted		6,625,913			6,022,855		6,833,035		5,975,212

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

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TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	565			2,914
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of interest on short-term investments		—			(8	)
Bad debt recovery		(6	)		—
Depreciation		776			732
Loss on disposal of property and equipment		6			143
Amortization of intangible assets		1,421			44
Stock compensation expense		349			368
Deferred income taxes		(384	)		(201	)
Changes in operating assets and liabilities:
Trade and other accounts receivable, net		757			647
Inventories, net		(330	)		1,770
Prepaid expenses and other current assets		(5	)		(30	)
Trade accounts payable		195			74
Accrued expenses		(799	)		81
Income taxes		166			341
Net cash provided by operating activities		2,711			6,875
Cash flows from investing activities:
Maturities of short-term investments		—			6,000
Purchase of short-term investments		—			(3,994	)
Cash paid for acquisition of Shoreline Reels product line		(1,068	)		—
Purchases of property and equipment		(845	)		(381	)
Net cash (used in) provided by investing activities		(1,913	)		1,625
Cash flows from financing activities:
Proceeds from the exercise of stock options		38			2
Tax benefit of restricted stock vesting		34			38
Purchase of treasury stock		(21	)		(16	)
Cash dividends paid		(403	)		(361	)
Net cash used in financing activities		(352	)		(337	)
Net increase in cash and cash equivalents		446			8,163
Cash and cash equivalents at beginning of period		8,216			2,954
Cash and cash equivalents at end of period	$	8,662			11,117

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

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TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARIES

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, 2010. Operating results for the nine-month period ended December 31, 2010 are not necessarily an indication of the results that may be expected for the fiscal year ending March 31, 2011.

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.

2. Earnings Per Share:

In accordance with the relevant accounting guidance for computing earnings per share, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. As of April 1, 2009, we implemented the accounting guidance which required us to treat unvested shares of restricted stock as participating securities in accordance with the two-class method in the calculation of both basic and diluted earnings per share. In calculating basic income (loss) per share, net income (loss) is divided by the weighted average number of shares outstanding for the period. Diluted income (loss) per share reflects the assumed exercise or conversion of all dilutive securities, such as options, warrants, and convertible debt instruments. No such exercise or conversion is assumed where the effect is antidilutive, such as when there is a loss for the period.

The following tables summarize the components of basic and diluted earnings per share computations.

	Three months ended December 31,					Nine months ended December 31,
	2010			2009		2010		2009
Reconciliation of undistributed earnings:
Net (loss) income available to common shareholders	$	(342	)		482	$	565		2,914
Less: dividends on common stock		133			119		399		357
Less: dividends on unvested participating securities		1			1		4		4
Undistributed (loss) earnings (1)	$	(476	)		362	$	162		2,553
	Three months ended December 31,					Nine months ended December 31,
	2010			2009		2010		2009
Basic earnings per share computation:
Net (loss) income available to common shareholders	$	(342	)		482	$	565		2,914
Less: dividend equivalents on unvested participating securities		1			1		4		4
Less: undistributed (loss) earnings allocated to unvested participating securities (1)		(6	)		5		2		34
Undistributed (loss) earnings allocated to common shareholders	$	(337	)		476	$	559		2,876
EPS Denominator:
Weighted average shares outstanding for basic earnings per share		6,625,913			5,896,728		6,610,528		5,892,903
Basic (loss) earnings per common share	$	(0.05	)		0.08	$	0.09		0.49

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	Three months ended December 31,					Nine months ended December 31,
	2010			2009		2010		2009
Diluted earnings per common share computation:(1)
Net (loss) income available to common shareholders	$	(342	)		482	$	565		2,914
Less: dividend equivalents on unvested participating securities		1			1		4		4
Less: undistributed (loss) earnings allocated to unvested participating securities		(6	)		5		2		34
Undistributed (loss) earnings allocated to common shareholders	$	(337	)		476	$	559		2,876
EPS Denominator:
Weighted average shares outstanding for basic earnings per share		6,625,913			5,896,728		6,610,528		5,892,903
Dilutive common shares issuable upon exercise of stock options (2)		—			77,644		189,900		41,254
Dilutive unvested common shares associated with restricted stock awards		—			48,483		32,607		41,055
Weighted average shares outstanding—diluted		6,625,913			6,022,855		6,833,035		5,975,212
Diluted (loss) earnings per common share	$	(0.05	)		0.08	$	0.08		0.48

(1) For the three and nine months ended December 31, 2010, 80,128 shares of restricted unvested stock are considered participating securities. For the three and nine months ended December 31, 2009, 78,825 shares of unvested outstanding shares restricted stock were considered participating securities. The undistributed earnings are allocated to both common shares and unvested participating securities in computing the earnings per share under the two-class method.

(2) For both the three-month and nine-month periods ended December 31, 2010, options to purchase 474,177 and 332,200 shares of common stock and 73,561 and 43,350 shares of unvested restricted stock, respectively, were considered anti-dilutive for the purposes of calculating earnings per share. For the three-month and nine-month periods ended December 31, 2009, options to purchase 654,643 and 605,200 shares of common stock, respectively, were considered anti-dilutive for the purposes of calculating earnings per share.

3. Acquisition:

On November 19, 2010, we acquired the assets associated with theShoreline Reels^® product line owned by TDI Products, Inc. (“TDI”) in exchange for approximately $1.1 million in cash. TDI develops, produces, assembles, promotes, and sells manual and motorized cord and hose reels, marked under theShoreline Reels trademark, for recreational vehicles, boats, and other industrial applications. We incurred approximately $0.1 million of transaction costs recorded in the three months ended December 31, 2010, consisting primarily of broker’s commissions and professional fees associated with the acquisition.

The allocation of the purchase price is based upon estimates of the assets and liabilities acquired in accordance with the relevant accounting guidance. The acquisition of theShoreline Reels^® product line will help expand our product portfolio in support of our specialty vehicle strategy. The expected long-term growth, market position and expected synergies to be generated by theShoreline Reels^® product line are the primary factors which gave rise to an acquisition price which resulted in the recognition of goodwill.

Cash		$	1,068
Total purchase price		$	1,068
The allocation of the aggregate purchase price of this acquisition is as follows:
Goodwill		$	51
Identifiable intangible assets			722
Net assets acquired:
Inventory	270
Fixed assets	25
Net assets acquired			295
		$	1,068

Identifiable intangible assets principally include employment agreements, customer relationships, and developed technologies (see Note 5).

On March 31, 2010, we completed an acquisition of all of the common stock of Patco Electronics, Inc. (“Patco”), in exchange for $5.0 million in cash, 674,950 shares of our common stock and contingent cash payments if certain revenue targets are met for either or both of the two years after the closing of the transaction. Included in the purchase price of the Patco acquisition is $0.7 million, the present value of the contingent cash payments that could be paid as additional earn-out payments based upon our best estimate of Patco’s future sales of its battery products. Patco designs and manufactures battery management tools for secondary or re-chargeable batteries in several battery chemistries, including lead acid and lithium ion. Patco’s product solutions support customers in military, commercial and industrial sectors. Additionally, we incurred approximately $0.5 million of transaction costs, recorded in the year ended March 31, 2010, consisting primarily of broker’s commissions and professional service fees associated with the Patco acquisition.

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The allocation of the purchase price is based upon estimates of the assets and liabilities acquired in accordance with the relevant accounting guidance. The acquisition of Patco is based on management’s consideration of past and expected future performance as well as the potential strategic fit with our long-term goals. The expected long-term growth, market position and expected synergies to be generated by Patco are the primary factors which gave rise to an acquisition price which resulted in the recognition of goodwill. As a result of adjustments to the purchase price allocation, both goodwill and deferred tax liabilities have been reduced $1.1 million effective March 31, 2010.

Cash			$	5,000
Common stock – 674,950 shares valued at the $4.82 closing price on March 31, 2010 (discounted)				2,426
Present value of contingent consideration				738
Total purchase price			$	8,164
The allocation of the aggregate purchase price of this acquisition is as follows:
Goodwill			$	4,402
Identifiable intangible assets				3,584
Net assets acquired:
Cash	207
Accounts receivable	275
Inventory	1,048
Fixed assets	506
Other assets	27
Liabilities assumed	(396	)
Deferred tax liabilities on Patco basis differences	(1,489	)
Net assets acquired				178
			$	8,164

Identifiable intangible assets principally include employment agreements, trade secrets and purchased backlog (see Note 5).

Unaudited pro forma results of operations assuming the acquisition was consummated at the beginning of 2010 and 2009 are presented below. The proforma financial information presented below represents our historical results combined with those of Patco for the periods presented, adjusted for specific factually supportable items such as amortization of intangible assets. The pro forma results of operations do not include the costs of integration and are not necessarily indicative of either future results of operations or results that would have been achieved if the acquisition had been consummated at the beginning of the periods presented below.

	Three months ended December 31,					Nine months ended December 31,
(unaudited)	2010			2009		2010		2009
Total revenue	$	6,944		$	8,944	$	26,553	$	31,370
Net income		(342	)		425		565		3,232
Earnings per share
Basic	$	(0.05	)		0.06	$	0.09		0.49
Diluted		(0.05	)		0.06		0.08		0.49
Weighted average common shares outstanding
Basic		6,625,913			6,571,678		6,610,528		6,567,853
Diluted		6,625,913			6,697,805		6,833,035		6,650,162

4. Inventories:

Inventories consist of the following:

	December 31, 2010		March 31, 2010
Raw materials	$	6,119		4,871
Work-in-process		230		336
Finished goods		1,566		2,108
Total	$	7,915		7,315

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5. Intangible Assets

Intangible assets as of December 31, 2010 are as follows:

	Asset		Accumulated Amortization		Net		Useful Life
Employment / non-compete agreements	$	1,911	$	473	$	1,438		1 -5 years
Trade name, trade secrets, trademarks		1,120		154		966		1 -10 years
Backlog orders		759		759		—		1 year
Patents and developed technology		842		237		605		10 years
Customer relationships		258		37		221		9 years
Total intangible assets	$	4,890	$	1,660	$	3,230
Goodwill (a)	$	4,453			$	4,453

Intangible assets as of March 31, 2010 were as follows:

	Asset		Accumulated Amortization		Net		Useful Life
Employment / non-compete agreements	$	1,780	$	7	$	1,773		3 -5 years
Trade name, trade secrets, trademarks		1,060		6		1,054		1 -10 years
Backlog orders		759		0		759		1 year
Patents and developed technology		501		196		305		10 years
Customer relationships		67		29		38		9 years
Total intangible assets	$	4,167	$	238	$	3,929
Goodwill (a)	$	4,402			$	4,402

(a) See footnote 3 – Acquisition.

6. 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 management’s best estimate of probable liabilities, calculated as a function of sales volume and historical repair experience for each product under warranty. In September 2009, we increased the warranty reserve by $0.1 million to cover potential claims arising from production problems at one of our foreign contract manufacturers. As of December 31, 2010, no claims have been filed against this additional reserve. A roll-forward of the activity in our warranty liability, included in accrued expenses, for the three months and nine months ended December 31, 2010 and 2009 is as follows:

	Three months ended December 31,						Nine months ended December 31,
	2010			2009			2010			2009
Beginning balance	$	236			240		$	237			164
Warranty expense		38			37			120			232
Warranty claims		(29	)		(38	)		(112	)		(157	)
Ending balance	$	245			239		$	245			239

7. Debt:

Effective October 25, 2010, we entered into the Second Amendment to Amended and Restated Loan Agreement (the “Loan Agreement”) and Promissory Note dated that same date (the “Replacement Note”) with Wells Fargo Bank, N.A. (“Wells Fargo”), our current institutional lender. The Replacement Note provides for an interest rate on our line of credit equal to the 30-day London Interbank Offering Rate (“LIBOR”) Market Index Rate plus a spread to be reset quarterly as follows:

If Funded Debt/EBITDA Ratio is:	The LIBOR Spread (basis points) will be:
< 1.50:1.00	210
³ 1.50:1.00 < 2.00:1.00	240
³ 2.00:1.00	270

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The Loan Agreement extends the maturity date of our Wells Fargo credit facility until September 30, 2012.

The Loan Agreement is for a credit facility of $3.0 million. As of December 31 and March 31, 2010, we had no borrowings on this credit facility. The revolving line of credit can be used for acquisitions, working capital and general corporate purposes. Revolving loans may be borrowed, repaid and re-borrowed until September 30, 2012, at which time all amounts borrowed must be repaid. Our Loan Agreement with Wells Fargo obligates us to pay a customary unused facility fee for a credit facility of this size. The revolving loans under the Loan Agreement are secured by a continuing security interest in most of our key assets, including accounts and notes receivable, inventory, investments, demand deposit accounts maintained with our lender and 65% of the voting stock of Technology Research Corporation/Honduras, S.A. DE C.V, our wholly-owned subsidiary.

We have no off-balance sheet arrangements and no debt relationships other than noted above.

8. Income taxes:

Our effective income tax rate was 25.3% and 30.1% for the three months ended December 31, 2010 and 2009, respectively. For the nine months ended December 31, 2010 and 2009, our effective income tax rate was 24.8% and 27.9%, 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 subsidiary in Honduras. The income tax rate on income earned from Honduras is zero due to a tax holiday and, therefore, the 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. The lower current period rate reflects a higher percentage of income earned in Honduras this year.

Pursuant to the accounting for uncertainty in income taxes accounting guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of accruals, our effective tax rate in a given financial statement period could be affected.

As of December 31, 2010, we have unrecognized tax benefits of $531, of which $19 is included in current income taxes payable and $512 is included in noncurrent income taxes payable. As of March 31, 2010, we had unrecognized tax benefits of $321, of which $18 was included in income taxes receivable and $303 was included in noncurrent income taxes payable. During the three months ended December 31, 2010 and 2009, we recorded $70 and $87, respectively, of unrecognized tax benefits primarily related to transfer pricing. Interest expense related to uncertain tax positions amounted to $0 and $1 for the three months ended both December 31, 2010 and 2009. During the nine month periods ended December 31, 2010 and 2009, we recorded $209 and $307, respectively, of unrecognized tax benefits primarily related to transfer pricing. Interest expense related to uncertain tax positions amount to $1 and $2 for the nine months ended both December 31, 2010 and 2009, respectively. Total accrued interest at December 31, 2010 and March 31, 2010 was $22 and $10, respectively, and was included in income taxes receivable. There are no accrued penalties. It is our policy to recognize interest and penalties in the provision for income taxes.

A reconciliation of unrecognized tax benefits is as follows:

	Three months ended December 31,				Nine months ended December 31,
	2010		2009		2010		2009
Beginning balance	$	461		346	$	321		127
Additions based on tax positions related to the current year		—		—		1		—
Additions for tax positions of prior years		70		88		209		307
Ending balance	$	531		434	$	531		434

We file U.S. Federal and Florida income tax returns. We have concluded an audit on all U.S. federal income tax matters through fiscal year 2008. Federal income tax returns for fiscal years 2009 and 2010 and state income tax returns for fiscal years 2006 through 2010 have not been audited.

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9. Stock-Based Compensation:

For purposes of determining the variables used in the calculation of stock compensation expense under current accounting guidance, we perform an analysis of current market data and historical company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. We use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our Condensed Consolidated Statements of Income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.

Stock compensation expense of $118 was included in the Condensed Consolidated Statements of Income for the three months ended December 31, 2010 and 2009. Stock compensation expense of $349 and $368, respectively, was included in the Condensed Consolidated Statements of Income for the nine month periods ended December 31, 2010 and 2009.

Cash received from the exercise of stock options under all share-based payment arrangements for the three months ended December 31, 2010 and 2009 was $3 and $0, respectively. Cash received from the exercise of stock options under all share-based payment arrangements for the nine months ended December 31, 2010 and 2009 was $38 and $0, respectively. Currently, 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 (non-vested shares) of our common stock (the “Plans”). Employee stock options generally vest 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, our 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 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.

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 of Stockholders. 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 our employees or directors. The 2000 Long Term Incentive Plan also allows for the grant of restricted stock awards (non-vested shares) to 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 (non-vested 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 293,500 shares remain available for awards as of December 31, 2010.

The table below summarizes stock option activity in the Plans from April 1 through December 31, 2010:

	Shares available for grant			Options outstanding			Aggregate intrinsic value (in thousands)			Weighted average exercise price		Weighted average remaining contractual life
Balance as of March 31, 2010		376,885			910,118		$	1,457		$	4.39		6.94
Options granted		(130,800	)		130,800			—			4.73		—
Options canceled		28,887			(28,887	)		(56	)		1.89		—
Options expired		54,101			(54,101	)		(17	)		6.40		—
Options exercised		—			(20,779	)		(58	)		1.82		—
Restricted stock grants		(43,350	)		—			—			—
Restricted stock canceled		7,777			—			—			—
Balance as of December 31, 2010		293,500			937,151		$	679		$	4.46		6.65
Exercisable as of December 31, 2010					680,797		$	471		$	4.83		5.94

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The weighted average grant date fair value of options granted during the nine months ended December 31, 2010 was $2.35 per share. The total intrinsic value of options exercised during the nine months ended December 31, 2010 was $58. There were no options granted or exercised during the nine months ended December 31, 2009.

As of December 31, 2010, there was $334 of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted average period of 2.06 years. The total fair value of stock options vested during the nine months ended December 31, 2010 and 2009 was $201 and $247, respectively.

We 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 our stock price as well as assumptions regarding several subjective variables including our 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 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 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 and nine months ended December 31, 2010 and 2009 are as follows:

	Three months ended December 31,				Nine months ended December 31,
	2010		2009		2010			2009
Weighted-average expected dividend yield		N/A		N/A		1.98	%		N/A
Weighted-average risk free interest rate		N/A		N/A		2.37	%		N/A
Weighted-average expected volatility		N/A		N/A		60.46	%		N/A
Weighted-average expected life		N/A		N/A		6.58 years			N/A

We granted 81,999 shares of restricted stock awards (non-vested shares) in December 2008 at a grant date fair value of $1.70 per share and 25,000 shares of restricted stock awards (non-vested shares) in February 2009 at a grant date fair value of $1.90 per share. In June 2010, we granted 19,600 shares of restricted stock awards (non-vested shares) at a grant date fair value of $5.10 per share. In August 2010, we granted 23,750 shares of restricted stock awards (non-vested shares) at a grant date fair value of $4.87 per share. The shares have a three-year vesting period. As of December 31, 2010, 80,128 shares of restricted stock are non-vested and remain outstanding.

As of December 31, 2010, there was $241 of total unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 2.16 years. During the nine month period ended December 31, 2010, 25,935 of the restricted shares that are issued and outstanding became vested.

The following table summarizes activity in our restricted shares during the period from April 1 through December 31, 2010:

	Shares			Weighted-average Grant-Date Fair Value
Non-vested balance at March 31, 2010		70,490		$	1.75
Restricted stock granted		43,350			4.99
Restricted stock vested		(25,935	)
Restricted stock forfeited		(7,777	)
Non-vested balance as of December 31, 2010		80,128		$	3.51

10. 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 its financial condition, result of operations or cash flows.

11. New Accounting Standards

In December 2010, the FASB issued updated accounting guidance for business combinations that specifies the disclosure method and supplemental pro forma disclosure required in business combinations. The amended guidance will be effective for business combinations for which the acquisition date is on or after April 1, 2011.

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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 subsidiaries 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 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 SEC, such as our last filed Annual Report onForm 10-K for the fiscal year ended March 31, 2010, 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, entitledRisk Factors.

OVERVIEW

Technology Research Corporation is a recognized leader in providing cost effective engineered solutions for applications involving power management and control, intelligent battery systems technology and electrical safety products based on our proven ground fault sensing andFire Shield^® technology. These products are designed, manufactured and distributed to the consumer, commercial and industrial markets worldwide. The Company also supplies power monitors and control equipment to the United States Military and its prime contractors.

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 atwww.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.

In fiscal 2010, we undertook a strategic planning process that included a comprehensive review of our existing products, customers and the markets in which we compete over a strategic planning horizon of three years. During this process, it became evident that many of the current markets for electrical safety products in which we compete are mature, with limited opportunities for growth in the future. In order for us to achieve sustainable long-term growth, and increase shareholder value, management believes we must move into markets that allow for higher margins and less commoditization. We intend to continue to focus resources on our key market sectors: military, transportation/specialty vehicle, and industrial/commercial markets. These markets have many of the same needs and will allow us to converge much of our development talent to product platforms that will serve each of these markets. We will continue to take advantage of our positions in the mature military mobile generator set and ground fault sensing markets which should generate substantial cash flow over the next three years. This cash flow will help us transition the business to include higher-growth markets that will sustain revenue growth in future years as the markets for our electrical safety products mature. 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, (i) simplifying our product line, (ii) designing standard product platforms, (iii) expanding the utilization of our operations in Honduras, and (iv) developing new designs and operations software to improve quality, accelerate product development and reduce the cost of our redesigned products.

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Over our three-year strategic horizon, our plan is to be a profitable niche player in the power management and power storage markets with projected double-digit growth rates. Management believes this will require us to develop skills to migrate from an electromechanical ground fault company to a microprocessor-based developer of power products that serve our military, transportation/specialty vehicle, and industrial markets. We intend to develop or acquire skills that focus on four key technologies to drive growth. These include:

• Products that convert Alternating Current (AC) to Direct Current (DC) and convert DC to AC;

• Converting AC power into DC power while optimizing the life of the batteries being charged;

• Developing intelligence and communications products through the use of microprocessor based technology; and

• Power management and distribution technologies.

On March 31, 2010, we completed an acquisition of all of the common stock of Patco, a Titusville, Florida based company. Patco designs and manufactures battery management tools for secondary or re-chargeable batteries in several battery chemistries, including lead acid and lithium ion. Patco’s product solutions support customers in military, commercial and industrial sectors. The acquisition of Patco greatly enhances our ability to convert AC power into DC current that optimizes the life of the batteries being charged, thereby enabling us to take advantage of one of the four technologies identified in our strategic plan to drive business growth. For its calendar year ended December 31, 2009, Patco revenue was approximately $6 million and its net income was approximately $1.7 million.

On November 19, 2010, we acquired the assets associated with theShoreline Reels^®product line owned by TDI, an Atlantic Beach, Florida based company. TDI develops, produces, assembles, promotes, and sells manual and motorized cord and hose reels, marketed under the Shoreline Reels trademark, for recreational vehicles, boats, and other industrial applications. We added theShoreline Reels^®product line to our product portfolio in support of our specialty vehicle strategy.

We plan to pursue our operating strategy; however, actual results could 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. Some, but not all, of the factors impacting these risks and uncertainties are in the section entitled “Risk Factors”, set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Revenue for the three months and nine months ended December 31, 2010 decreased $0.6 million and decreased $0.4 million, respectively, compared with the comparable periods of the prior year. Commercial revenue changed minimally for the three months and increased $1.5 million for the nine months ended December 31, 2010 over the comparable periods of the prior year. Military revenue decreased by $0.8 million and $2.1 million for the three month and nine month periods ended December 31, 2010 from the comparable periods of the prior year. The increase in commercial revenue was principally a result of recovery from the impact of the recession on several of our major markets last year. The decrease in military revenue for the three month and nine month periods ended December 31, 2010 was primarily due to an accelerated delivery schedule from our largest customer in the prior year that has now returned to historical levels.

Gross profit decreased $0.7 million and $1.1 million for the three month and nine month periods from the prior year comparable periods, respectively due to the decline in the favorable shift in the mix of military and commercial business. Operating expenses were up for the three month and nine months periods ended December 31, 2010 compared with the comparable periods ended December 31, 2009 due to the inclusion of Patco’s expenses, amortization of expenses incurred for certain intangible assets acquired in the Patco andShoreline Reels^®product line acquisitions, and new product development expenses. Net income for the three month and nine month periods ended December 31, 2010 decreased $0.8 million and $2.4 million, respectively, when compared to the comparable periods last year. Diluted (loss) earnings per share is ($0.05) for the quarter and $0.08 for the nine months ended December 31, 2010 compared with diluted earnings per share of $0.08 and $0.48, respectively, for the three month and nine month periods ended December 31, 2009.

RESULTS OF OPERATIONS

Revenuefor the third quarter ended December 31, 2010 and 2009 was $6.9 million and $7.6 million, respectively. Commercial revenue remained relatively the same, while military revenue decreased by a net of $0.7 million, which consisted of a decrease of $0.9 million for existing customers, offset by $0.2 million of Patco revenue. The decrease in military revenue was primarily due to an accelerated delivery schedule from our largest customer in the prior year that has now returned to historical levels. Revenue for the nine-month period ended December 31, 2010 was $26.6 million compared to $26.9 million reported in the same period of the prior year, a decrease of 1.3%. For the nine month period ended December 31, 2010, commercial revenue increased $1.5 million while military revenue decreased $2.0 million.

Gross profitdecreased $0.7 million, or 24.0%, to $2.1 million for the quarter ended December 31, 2010 as compared to the same period in the prior year as a result of reduced revenue as well as a less favorable mix of higher margin military business as

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compared to lower margin commercial business. Gross profit decreased $1.1 million or 9.8% to $9.7 million for the nine months ended December 31, 2010 compared to the same period in the prior year, due primarily to a less favorable mix of higher margin military business as compared to lower margin commercial business.

Selling and marketingexpense decreased 24.1% to $0.4 million, or 6.4% of revenue, for the quarter ended December, 2010, as compared to the prior year quarter. For the nine month period ended December 31, 2010, selling and marketing expense decreased 9.1% to $1.7 million, compared to the same period in the prior year. As a percentage of revenue, selling and marketing expense decreased to 6.4% from the 6.9% of revenue from the prior year period. Patco’s selling and marketing expenses for the three-month and nine-month periods this year were insignificant.

General and administrativeexpense of $1.3 million, or 18.6% of revenue for the quarter ended December 31, 2010, increased from $0.9 million, or 12.1% of revenue as compared to the quarter ended December 31, 2009. The increase of $0.4 million in the quarter is primarily due to $0.2 million of amortization expense related to the Patco acquisition and $0.1 million of Patco administrative costs. The 6.5 percentage point increase in general and administrative expense as a percent of revenue for the three month period ended December 31, 2010, as compared to the three month period ended December 31, 2009, primarily results from the higher expenses compared to lower revenue for the current period. For the nine months ended December 31, 2010, general and administrative expense of $4.6 million, or 17.5% of revenue, was $1.7 million higher than the $2.9 million or 10.8% of revenue for the prior year. The increase is due primarily to $1.4 million of amortization expense related to the acquisitions.

Research and developmentexpense was $0.7 million, or 10.6% of revenue, for the quarter ended December 31, 2010, an increase of $0.1 million from $0.6 million or 7.4% of revenue for the third quarter of fiscal 2009. The increase is mainly attributable to Patco’s engineering expenses of $0.1 million for the quarter. For the nine months ended December 31, 2010, research and development expense was $2.5 million, or 9.4% of revenue, compared to 1.9 million, or 7.0% of revenue, for the same period last year. The increase is due to Patco’s engineering costs and to increased spending on product development this year.

Acquisition related transaction costs of $0.1 million, or 1.3% of revenue for the quarter ended December 31, 2010 relates to theShoreline Reels^®product line acquisition and includes investment banker’s fees, legal and accounting costs. For the nine months ended December 31, 2010, these costs represent 0.3% of revenue.

Income tax benefitwas $0.1 million for the quarter ended December 31, 2010, compared with an expense of $0.2 million for the three months ended December 31, 2009. For the nine months ended December 31, 2010, income tax expense was $0.2 million compared to $1.1 million for the same period last year. Income tax expense as a percentage of income before taxes was 25.3% and 24.8% for the quarter and nine months ended December 31, 2010, as compared to 30.1% and 27.9% for the quarter and nine months ended December 31, 2009. Our effective tax rate varies based primarily on the mix of income before income taxes derived from our subsidiary in Honduras, 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 current accounting guidance, 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 lossfor the quarter ended December 31, 2010 was $0.3 million, compared to net income of $0.5 million in the same quarter last year. The basic and diluted loss per share was ($0.05) for the quarter ended December 31, 2010, compared to a basic and diluted earnings per share of $0.08 for the same quarter last year. The net income for the nine-month period ended December 31, 2010 was $0.6 million, compared to net income of $2.9 million for the same period in the prior year. The basic and diluted earnings per share was $0.08 for the nine-month period ended December 31, 2010, compared to basic and diluted earnings per share of $0.49 and $0.48, respectively, for the same period of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased from $8.2 million as of March 31, 2010 to $8.7 million as of December 31, 2010. Cash provided by operating activities was $2.7 million, cash used in investing activities was $1.9 million, and cash used in financing activities was $0.4 million resulting in a total increase in cash of $0.4 million for the nine-month period ended December 31, 2010.

Cash provided by operating activities primarily resulted from net income of $0.6 million, amortization expense of $1.4 million related primarily to the Patco acquisition, depreciation expense of $0.8 million, a decrease in accounts receivable of $0.8 million, and stock compensation expense of $0.3 million, partially offset by a decrease in accrued expenses of $0.8 million, and an increase in inventories of $0.3 million. Cash used in investing activities was due to purchase of property and equipment and the purchase of assets related to theShoreline Reels^®acquisition. Cash used in financing activities was due to the payment of quarterly dividends.

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Effective October 25, 2010, we amended the Loan Agreement and Replacement Note with Wells Fargo, our current institutional lender. The Replacement Note provides for an interest rate equal to the 30-day LIBOR Market Index Rate plus a spread to be reset quarterly as follows:

If Funded Debt/EBITDA Ratio is:	The LIBOR Spread (basis points) will be:
< 1.50:1.00	210
³ 1.50:1.00 < 2.00:1.00	240
³ 2.00:1.00	270

The revolving line of credit can be used for acquisitions, working capital and general corporate purposes. Revolving loans may be borrowed, repaid and re-borrowed until September 30, 2012, at which time all amounts borrowed must be repaid. The Loan Agreement obligates us to pay a customary unused facility fee for a credit facility of this size. The revolving loans under the Loan Agreement are secured by a continuing security interest in most of our key assets including accounts and notes receivable, inventory, investments, demand deposit accounts maintained with our lender and 65% of the voting stock of our Honduran subsidiary, which require us to maintain certain financial ratios. As of December 31, 2010 and March 31, 2010, we had no borrowings on our Wachovia credit facility.

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

See Note 11 – “New Accounting Standards” to the Condensed Consolidated Financial Statements for a discussion of recent accounting standards.

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 entitledDisclosure Regarding Forward-Looking Statements and in section Item 1A above, entitledRisk 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

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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 FASB ASC Topic 912-605, “Contractors-Federal Government Revenue Recognition”. Currently we do not have any transactions being accounted for within the scope of FASB ASC Topic 912-605. We may enter into government contracts that fall within the scope of FASB ASC Topic 605-35, “Revenue Recognition, Construction-Type and Production-Type Contracts”. For government contracts within the scope of FASB Topic 605-35, 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 FASB ASC Topic 605-35. We have not experienced past losses on government contracts.

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). A write-down is established for inventory that has had no activity for long periods of time or for which management believes is no longer salable. This write-down is reviewed and approved by the senior management team. In the future, based on our quarterly analysis, if we estimate that any remaining write-down for obsolescence is inadequate, we may need to adjust it. At present, based on our analysis, we believe the write-down amount 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 management’s intention to reinvest future undistributed earnings of our foreign subsidiary and thereby indefinitely postpone their repatriation.

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 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 the relevant accounting guidance. 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.

Goodwill, representing the excess of acquisition costs over the fair value of net assets of acquired businesses, is not amortized but is reviewed for impairment at least annually and written down only in the periods in which it is determined that the recorded value is greater than its fair value. For the purposes of performing this impairment test, our business segments are our reporting units. The fair values of those reporting units, to which goodwill has been assigned, is compared with their recorded values. If recorded values are less than the fair values, no impairment is indicated. Since adoption, no impairment losses have been recorded.

Share-Based Compensation. Share-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.

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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, 2010, we have no long-term debt. If we borrow under our Wells Fargo credit facility, our borrowing costs will be affected by changes in interest rates. As of December 31, 2010, we have no investments in held-to-maturity securities. We make such investments, we may have exposure to changes in interest rates from investments in held-to-maturity securities.

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 second 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.

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.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our annual Report on Form 10-K for the fiscal year ended March 31, 2010. Subject to the disclosures set forth below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

We adopted a rights plan that could make it more difficult for a third party to acquire us.

In January 2011, our Board of Directors adopted a shareholder rights plan to better assure that we have time to evaluate and respond to a disclosed expression of interest. The plan could discourage, delay, or prevent a hostile third party from acquiring a large portion of our securities, initiating a tender offer or proxy contest, or acquiring us, even if our shareholders might receive a premium for their shares over then-current market prices.

The recent unsolicited expression of interest might create costs and distractions.

We previously disclosed our receipt of an unsolicited expression of interest. We continue to disclaim any duty to update with respect to developments involving this expression of interest. Review and consideration of this expression of interest might create costs and distractions for our management team and employees. There is no assurance that a transaction will occur, and if so, at any particular price.

Our stock price has fluctuated and might continue to be volatile.

During the nine month period ended December 31, 2010, the closing sale price of our common stock on the NASDAQ Stock Market System ranged from $3.42 to $5.44. The closing price of our common stock on January 31, 2011 was $5.29. The future trading price of our common stock might continue to be volatile, in part because of the disclosed expression of interest and subsequent developments. If no transaction occurs, our stock price could be adversely affected.

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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 9, 2011	By:        /s/ Owen Farren
	Owen Farren
	President and Chief Executive Officer
	(Principal Executive Officer)
February 9, 2011	By:        /s/ Robert D. Woltil
	Robert D. Woltil
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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