This Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, "Item 1: Business,"

Business Overview and Environment

TESSCO Technologies Incorporated (TESSCO, we, or the Company) is a leading provider of integrated product and supply chain solutions to the professionals that design, build, run, maintain and use wireless mobile, fixed and in-building systems. Although we sell products to customers in over 100 countries, approximately 96% of our sales are to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.

We offer a wide range of products that are classified into three business segments: network infrastructure; mobile devices and accessories; and installation, test and maintenance. Network infrastructure products, which are sold to our commercial customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products, such as cable, transmission lines and antennas are in part dependent on capital spending in the wireless communications industry. However, we have also been growing our offering of wireless broadband, network equipment, security and surveillance products, which are not as dependent on the overall capital spending of the industry. Mobile devices and accessory products include cellular phone and data device accessories, as well as two-way radios and related accessories. Mobile devices and accessory products are widely sold to commercial customers and consumers. Commercial customers include retail stores, value-added resellers and dealers. Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Approximately 45% of all of our mobile devices and accessory products sales for fiscal year 2009 were generated from the sales of accessory products to AT&T Mobility (formerly Cingular Wireless). Installation, test and maintenance products, which are sold to our commercial customers, are used to install, tune, maintain and repair wireless communications equipment. Approximately 50% of all of our installation, test and maintenance sales for fiscal year 2009 were generated from the sales of replacement parts and materials for original equipment manufacturers, primarily Nokia, Inc. (Nokia). The remainder of this segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware and supplies required by service technicians.

We view our customer base in four major categories:

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

º •
º Commercial Resellers. Resellers include dealers and resellers that sell, install and/or service cellular telephone, wireless networking, broadband and two-way radio communications equipment primarily for the enterprise market, and to a lesser extent, the consumer market. These resellers include local and national value-added resellers and retailers, as well as sales and installation centers operated by cellular and paging carriers.

º •
º Commercial Self-Maintained Users (SMUs) and Governments. SMUs and government customers include commercial entities, major utilities, transportation companies, federal agencies and state and local governments.

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

The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base. In addition, the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice. Our ability to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and our purchasing relationships with approximately 360 manufacturers provide us with a significant competitive advantage over new entrants to the market.

Results of Operations

    The following tables summarize the results of our operations for fiscal
years 2009, 2008 and 2007:

                                                             2008 to 2009                          2007 to 2008
(Dollars in thousands, except
per share data)                   2009        2008      $ Change     % Change       2007      $ Change     % Change
Commercial Revenues
    Network Infrastructure:
       Public Carriers and
       Network Operators        $  46,591   $  46,977   $    (386 )       (0.8 )% $  49,701   $  (2,724 )       (5.5 )%
       Resellers                   72,952      69,839       3,113          4.5 %     66,685       3,154          4.7 %
       SMUs and Governments        53,445      49,400       4,045          8.2 %     48,816         584          1.2 %

    Total Network
    Infrastructure                172,988     166,216       6,772          4.1 %    165,202       1,014          0.6 %
    Mobile Devices and
    Accessories:
       Public Carriers and
       Network Operators            2,094       2,193         (99 )       (4.5 )%     2,641        (448 )      (17.0 )%
       Resellers                  205,867     243,549     (37,682 )      (15.5 )%   205,581      37,968         18.5 %
       SMUs and Governments        14,334      13,746         588          4.3 %     14,356        (610 )       (4.2 )%

    Total Mobile Devices and
    Accessories                   222,295     259,488     (37,193 )      (14.3 )%   222,578      36,910         16.6 %
    Installation, Test and
    Maintenance:
       Public Carriers and
       Network Operators           12,874      13,199        (325 )       (2.5 )%    14,293      (1,094 )       (7.7 )%
       Resellers                    9,476       9,548         (72 )       (0.8 )%    10,580      (1,032 )       (9.8 )%
       SMUs and Governments        54,173      62,534      (8,361 )      (13.4 )%    72,162      (9,628 )      (13.3 )%

    Total Installation, Test
    and Maintenance                76,523      85,281      (8,758 )      (10.3 )%    97,035     (11,754 )      (12.1 )%

Total Commercial Revenues         471,806     510,985     (39,179 )       (7.7 )%   484,815      26,710          5.4 %
Consumer Revenues-Mobile
Devices and Accessories            11,201       9,983       1,218         12.2 %      7,513       2,470         32.9 %

Total Revenues                  $ 483,007   $ 520,968   $ (37,961 )       (7.3 )% $ 492,328   $  28,640          5.8 %

                                                                 2008 to 2009                          2007 to 2008
(Dollars in thousands, except per
share data)                           2009        2008      $ Change     % Change       2007      $ Change     % Change
Commercial Gross Profit
    Network Infrastructure:
            Public Carriers and
            Network Operators       $  11,912   $  11,387    $    525          4.6 %  $  11,869    $   (482 )       (4.1 )%
            Resellers                  20,583      18,121       2,462         13.6 %     16,584       1,537          9.3 %
            SMUs and Governments       14,861      12,778       2,083         16.3 %     11,629       1,149          9.9 %

    Total Network Infrastructure       47,356      42,286       5,070         12.0 %     40,082       2,204          5.5 %
    Mobile Devices and
    Accessories:
            Public Carriers and
            Network Operators             596         633         (37 )       (5.8 )%       785        (152 )      (19.4 )%
            Resellers                  47,573      46,979         594          1.3 %     44,794       2,185          4.9 %
            SMUs and Governments        4,564       4,319         245          5.7 %      4,557        (238 )       (5.2 )%

    Total Mobile Devices and
    Accessories                        52,733      51,931         802          1.5 %     50,136       1,795          3.6 %
    Installation, Test and
    Maintenance:
            Public Carriers and
            Network Operators           2,973       3,248        (275 )       (8.5 )%     3,478        (230 )       (6.6 )%
            Resellers                   2,466       3,030        (564 )      (18.6 )%     2,601         429         16.5 %
            SMUs and Governments       12,445      12,798        (353 )       (2.8 )%    21,969      (9,171 )      (41.7 )%

    Total Installation, Test and
    Maintenance                        17,884      19,076      (1,192 )       (6.2 )%    28,048      (8,972 )      (32.0 )%

Total Commercial Gross Profit         117,973     113,293       4,680          4.1 %    118,266      (4,973 )       (4.2 )%
Consumer Gross Profit-Mobile
Devices and Accessories                 3,879       3,696         183          5.0 %      3,145         551         17.5 %

Total Gross Profit                  $ 121,852   $ 116,989    $  4,863          4.2 %  $ 121,411    $ (4,422 )       (3.6 )%
Selling, general and
administrative expenses             $ 110,656   $ 108,875    $  1,781          1.6 %  $ 109,209    $   (334 )       (0.3 )%

        Income from operations         11,196       8,114       3,082         38.0 %     12,202      (4,088 )      (33.5 )%
Interest, net                             664         574          90         15.7 %        879        (305 )      (34.7 )%

        Income before provision
        for income taxes               10,532       7,540       2,992         39.7 %     11,323      (3,783 )      (33.4 )%
Provision for income taxes              4,204       2,721       1,483         54.5 %      4,281      (1,560 )      (36.4 )%

        Net income                  $   6,328   $   4,819    $  1,509         31.3 %  $   7,042    $ (2,223 )      (31.6 )%

Diluted earnings per share          $    1.26   $    0.88    $   0.38         43.2 %  $    1.17    $  (0.29 )      (24.8 )%

Fiscal Year 2009 Compared to Fiscal Year 2008

Revenues. Revenues for fiscal year 2009 decreased 7.3% as compared to fiscal year 2008, primarily due to a 7.7% decrease in commercial revenues, partially offset by a 12.2% increase in consumer revenues. The decrease in commercial revenues was driven primarily by a decline in our mobile devices and accessories, and in our installation, test, and maintenance commercial lines of business, partially offset by an increase in our network infrastructure commercial line of business.

Our mobile devices and accessories revenues, including both commercial and consumer sales, decreased 13.4% for fiscal year 2009 compared to fiscal year 2008. We experienced a significant decline in commercial sales of mobile devices and accessory products, partially offset by an increase in consumer sales. Commercial revenues for mobile devices and accessories, which are sold primarily to resellers, but are also sold to SMUs, governments and public carriers and network operators, decreased 14.3% over the prior year, due in part to decreased sales to AT&T Mobility, our largest customer, as well as other smaller resellers and public carriers and network operators. Compared to fiscal year 2008, our sales mix in fiscal year 2009 changed from a significant amount of high-revenue low-margin cordless headsets to more low-revenue, higher-margin aftermarket accessory products. Sales to retailers declined due in part to deteriorating economic conditions in the United States and carrier consolidation resulting in the closing of many retail stores.

The 4.1% increase in our network infrastructure sales from fiscal year 2008 to fiscal year 2009 is primarily attributable to an increase in sales of radio frequency (RF) propagation and site support products, partially offset by lower sales of broadband products. Our growth in sales of network infrastructure product was in sales to resellers as well as SMUs and governments, as we have continued to focus on diversification beyond the traditional infrastructure carrier customer.

Revenues from our installation, test and maintenance line of business decreased 10.3% in fiscal year 2009 as compared to the prior fiscal year, primarily due to a decline in sales of repair parts related to our major repair components relationship with Nokia, as well as decreased sales of test and bench equipment partially offset by an increase in sales of safety products. In January 2009, we extended our repair components relationship with Nokia through December 2010. As part of this extension, Nokia now plays a larger role in servicing a group of larger customers. We continue to earn fees from Nokia to fulfill product to these larger customers, but as a result of our reduced role in these transactions, we receive a smaller fee and we account for these sales on a net basis. We continue to manage the complete supply chain as primary obligor for smaller customers so we continue to record sales to these smaller customers on a gross basis. Because of the evolution of our relationship with Nokia, it has become less material to our consolidated financial statements, and we expect that trend to continue. During the first nine months of fiscal year 2009, Nokia represented approximately 7% of total consolidated revenues, and in our fourth quarter of fiscal year 2009 (the first quarter under our new, extended relationship), it represented 4% of total consolidated revenues.

Gross Profit. Gross profit increased 4.2% in fiscal year 2009 compared to fiscal year 2008, driven by an increase in our network infrastructure and mobile devices and accessories commercial business segments, partially offset by a decline in our installation, test and maintenance commercial line of business. Total commercial gross profit increased 4.1%, while consumer gross profits increased 5.0%. Gross profit margin increased to 25.2% in fiscal year 2009, from 22.5% in fiscal year 2008. Except as noted below, our gross margins by product within each segment have been sustained and variations are related to sales mix within the segment product offerings. Gross profit margin increased to 27.4% in fiscal year 2009 in our network infrastructure segment, from 25.4% in fiscal year 2008. This increase in gross profit margin is the result of the change in product mix described above, as radio frequency and site support products typically have a higher gross margin than broadband products, which declined in sales. In our installation, test and maintenance segment, gross profit margin increased to 23.4% in fiscal year 2009, from 22.4% in fiscal year 2008, partially due to the change in the structure of our Nokia arrangement as discussed above. Gross profit margin in our mobile devices and accessories segment increased to 24.2% in fiscal year 2009, from 20.6% in fiscal year 2008. This increase is primarily attributable to the commercial gross profit margin for our mobile devices and accessories segment, which increased from 20.0% for fiscal year 2008 to 23.7% for fiscal year 2009, principally due to product mix in sales as discussed above. The gross profit margin for our consumer sales decreased from 37.0% to 34.6% in fiscal year 2009. We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.

During fiscal year 2006, we began sourcing a significant portion of our private branded product line directly from factories in China. All of such purchases are denominated in U.S. dollars. We have been increasing the amount of products and services sold under TESSCO's private labels. While sales of these directly sourced products and services represented only 11% of our total sales, we believe that this direct sourcing initiative has allowed us to realize lower costs of goods sold on sales of these products, after accounting for additional supply chain costs and lead times. We also believe that these cost savings have allowed us to be more competitive in the market.

Our ongoing ability to earn revenues and gross profits from customers and vendors looking to us for product and supply chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship often differ. Among these factors are the

strength of the customer's or vendor's business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our customer and vendor relationships are based are typically of limited duration, and are terminable by either party upon several months or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or the global financial crisis.

As total revenues and gross profits from larger customer and vendor relationships, including AT&T Mobility, increase, we occasionally experience and expect to continue to experience, pricing pressures that may adversely affect future results. In an effort to mitigate the overall effect of these pressures and to meet these consistent challenges, we are focused on our continuing efforts to grow revenues and gross profits from other customer and vendor relationships.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by 1.6% during fiscal year 2009 as compared to fiscal year 2008. Total selling, general and administrative expenses as a percentage of revenues increased from 20.9% in fiscal year 2008 to 22.9% in fiscal year 2009, due to the decline of revenues as discussed above, particularly the decline in sales of mobile devices and accessory products as well as the increases in expenses discussed below.

The largest factors contributing to the increase in total selling, general and administrative expenses during fiscal year 2009 were increased compensation expense and bonus accruals, partially offset by decreased marketing, sales promotion, freight expense, corporate support and information technology expenses.

Compensation expenses primarily related to business generation activities increased from fiscal year 2008 to fiscal year 2009. Compensation costs have also increased over the last fiscal year due to increased accruals related to our cash and equity bonus programs. Our bonus programs are performance based, and therefore, the increase in bonus accruals is due to improved results during fiscal year 2009, as applied to pre-defined performance targets. Total compensation costs, including benefits and bonus expense, increased by approximately $8.3 million from fiscal year 2008 to fiscal year 2009.

Marketing and sales promotion expenses decreased in fiscal year 2009 as compared with fiscal year 2008. During the second quarter of fiscal year 2008, we incurred marketing expenses related to a corporate branding initiative which was completed by the beginning of fiscal year 2009. In fiscal year 2009, we also reduced marketing expenses related to market research, publications, and print and online advertising. Also in fiscal year 2009, we had decreased sales promotion expense due to the lower merchandising racks and graphics expenditures associated with our retail business. Total marketing and sales promotion expenses decreased by approximately $2.4 million from fiscal year 2008 to fiscal year 2009.

Freight costs in fiscal year 2009 decreased approximately $2.4 million over the prior year, primarily due to increased productivity in our distribution operations and lower sales revenues, partially offset by higher fuel surcharges.

Corporate support expenses decreased approximately $1.4 million over the prior year, primarily due to lower sales tax expense/reserves. The decrease was driven by changes in estimates related to sales and use tax reserves during fiscal year 2009. Recruiting expenses also declined, but were primarily offset by higher bad debt expense as discussed below.

Information technology expenses decreased by approximately $1.0 million in fiscal year 2009 as compared with fiscal year 2008, primarily due to a decrease in depreciation expense resulting from changes in property and equipment purchases and the corresponding estimated useful lives.

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of

prospective and current customers and make decisions regarding extension of credit terms to such based on this evaluation. Accordingly, we recorded a provision for bad debts of $1,593,600 and $937,900 for fiscal year 2009 and fiscal year 2008, respectively. This increase in bad debt expense is related to customer write-offs during fiscal year 2009 and the anticipation for further increases in write-offs related to outstanding receivables as of March 29, 2009, due to the downturn in the global economy.

Interest, Net. Net interest expense increased from $574,100 in fiscal year 2008 to $664,300 in fiscal year 2009, primarily due to increased average borrowings on our revolving credit facility partially offset by lower interest rates. As noted below, beginning October 1, 2005, we entered into a receive variable/pay fixed interest rate swap on our existing bank loan, thus fixing the interest rate on this loan at 6.38%. Interest expense on our other debt instruments had only minor variances from year-to-year in total.

Income Taxes, Net Income and Diluted Earnings Per Share. The effective tax rates in fiscal year 2009 and 2008 were 39.9% and 36.1%, respectively. The effective tax rate for fiscal year 2009 increased due to changes in our state tax effective rate as well as a reduction of $196,300 in unrecognized tax benefits due to the lapse of an applicable statute of limitations in fiscal year 2008. As a result of the factors discussed above, net income and diluted earnings per share for fiscal year 2009 increased 31.3% and 43.2%, respectively, compared with fiscal year 2008. Diluted earnings per share was positively impacted by the stock buyback program further discussed in the liquidity and capital resources section below.

Fiscal Year 2008 Compared to Fiscal Year 2007

Revenues. Revenues for fiscal year 2008 increased 5.8% as compared with fiscal year 2007, primarily due to a 5.4% increase in commercial revenues, and to a much lesser extent, a 32.9% increase in consumer revenues. The increase in commercial revenues was driven primarily by growth in our mobile devices and accessories commercial line of business, and to a much lesser extent, by growth in our network infrastructure line of business, and was partially offset by a decline in our installation, test, and maintenance commercial line of business.

Our mobile devices and accessories revenues, including both commercial and consumer sales, increased 17.1% for fiscal year 2008 compared with fiscal year 2007. We experienced significant growth in commercial sales of mobile devices and accessory products, and to a much lesser extent, an increase in consumer sales. Commercial revenues for mobile devices and accessories, which are sold primarily to resellers, but are also sold to SMUs, governments and public carriers and network operators, increased 16.6% over the prior year, due in part to new product introductions, enhanced merchandising and packaging programs and increased sales of accessory products to carrier and independent retail customers.

The 0.6% increase in our network infrastructure sales from fiscal year 2007 to fiscal year 2008 was primarily attributable to an increase in sales of radio frequency (RF) propagation and site support products, partially offset by lower sales of broadband products. Our growth in sales of network infrastructure product was in sales to resellers as well as SMUs and governments, as we have continued to focus on diversification beyond the traditional infrastructure carrier customer.

Revenues from our installation, test and maintenance line of business decreased 12.1% in fiscal year 2008 as compared to the prior fiscal year, primarily due to a decline in sales of repair parts related to our major repair components relationship with Nokia, as well as decreased sales of test and bench equipment partially offset by an increase in sales of shop supplies. While revenues and gross profits from this Nokia relationship were significantly higher in fiscal year 2007 compared to fiscal year 2008, revenues and gross profits decreased significantly in the last six months of fiscal year 2007 as compared to the first six months of the year. We had previously anticipated fiscal year 2008 revenues and profits from this business to approximate the levels we experienced in the last half of the fiscal year 2007.

Gross Profit. Gross profit decreased 3.6% in fiscal year 2008 compared with fiscal year 2007, driven by a decline in our installation, test and maintenance commercial line of business, partially offset by growth in our network infrastructure and mobile devices and accessories commercial business segments. Commercial gross profit declined 4.2% and was partially offset by a 17.5% increase in consumer gross profit. Gross profit margin decreased to 22.5% in fiscal year 2008, from 24.7% in fiscal year 2007. Except as noted below, our gross margins by product within each segment have been sustained and variations are related to sales mix within the segment product offerings. Gross profit margin increased to 25.4% in fiscal year 2008 in our network infrastructure segment, from 24.3% in fiscal year 2007. In our installation, test and maintenance segment, gross profit margin decreased to 22.4% in fiscal year 2008, from 28.9% in fiscal year 2007. This decline was due primarily to the return to historical levels of gross profit attributable to our Nokia repair and replacement parts relationship as a result of price changes. Gross profit margin . . .