The old couple told the police that they were watching T.V. at the time of the break in

I prefer were watching, because the break in happened at the same time as the couple were watching T.V. That's the past progressive.

"...[W]ere watching TV" means that the couple did so in the past and finished doing so, using "had" here would mean they probably only stopped watching TV to speak to the police officer, or some other connection to the present. Or so I take it; I'm still learning myself :-)

Here is further explanation by IMcRout on The Free Dictionary English Forum on a similar question:

As I have been directly addressed I shall not refrain from doing my duty.

has / have been sent ---> present perfect tense

used when the action has an immediate connection to the present. It is very often used with words like just, already, always, never, this week / month / year ...

The little word 'just' in the first sentence indicates just that connection.

was / were sent --> past tense

used for an action that began and ended in the past. It is often used with ago, in 1975, yesterday, last week / month / year ...

The tense is often decided on by the speaker's attitude towards his deed:

They were sent ten minutes ago. --> It's over and done with. Let's tackle the next problem.