Table of Contents





|                                    |           | 
|----------------------------------- | --------- | 
|UNITED
 STATES                     
|SECURITIES
 AND EXCHANGE COMMISSION
|Washington, D.C. 20549             
|                                    |           | 
|                                    |           | 
|                                    | FORM 10-Q | 
|                                    |           | 

|                                                                                                   |                                                                                         
|-------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|(Mark One)                                                                                        
|x                                                                                                  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                                   |                                                                                         
|For the
 quarterly period ended June 30, 2010                                                     
|                                                                                                   |                                                                                         
|OR                                                                                                
|o                                                                                                  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                                   |                                                                                         
|For the
 transition period from _______________________________ to _______________________________

|                         |           | 
|------------------------ | --------- | 
|Commission
 File Number: | 001-31588 | 
|                         |           | 

|                                                       |  | 
|------------------------------------------------------ |  | 
|                                                       |  | 
|                                                       |  | 
|COMMUNICATIONS
 SYSTEMS, INC.                         
|(Exact name of registrant as specified in its charter)

| |                                          |                     | 
| | ---------------------------------------- | ------------------- | 
| | MINNESOTA                                | 41-0957999          | 
| | (State or other jurisdiction of          | (Federal Employer   | 
| | incorporation or organization)           | Identification No.) | 
| |                                          |                     | 
| | 10900 Red Circle Drive, Minnetonka, MN   | 55343               | 
| | (Address of principal executive offices) | (Zip Code)          | 

|                                                   |  | 
|-------------------------------------------------- |  | 
|(952) 996-1674                                    
|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  x  NO  o

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 during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES  o  NO  o

Indicate by a
check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer (as defined by Rule 12b-2 of the Exchange
Act).

Large
Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer o
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  o  NO  x

|                                                                                                                                |  |                                       |  |                              
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- |  | -----------------------------
|APPLICABLE ONLY TO CORPORATE ISSUERS:                                                                                          
|Indicate the
 number of shares outstanding of each of the issuers classes of common stock,
 as of the latest practicable date.
|                                                                                                                               
|                                                                                                                                |  |                                       |  |                              
|Class                                                                                                                           |  | Name of Exchange
 On Which Registered |  | Outstanding at August 1, 2010
|                                                                                                                                |  |                                       |  |                              
|Common Stock, par value                                                                                                         |  | NASDAQ                                |  | 8,398,692                    
|$.05 per share                                                                                                                  |  |                                       |  |                              







|                                              |                                                                                                |    |          | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------- | -- | -------- | 
|COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
|                                             
|INDEX                                        
|                                             
|                                             
|                                              |                                                                                                |    | Page No.
|                                              |                                                                                                |    |         
|                                              |                                                                                                |    |         
|Part I.
 Financial Information                |                                                                                                |    |         
|                                              |                                                                                                |    |          | 
|                                              | Item 1.
 Financial Statements (Unaudited)                                                      |    |          | 
|                                              |                                                                                                |    |          | 
|                                              | Condensed Consolidated Balance Sheets                                                          |    | 3        | 
|                                              |                                                                                                |    |          | 
|                                              | Condensed Consolidated Statements of Income and Comprehensive Income                           |    | 4        | 
|                                              |                                                                                                |    |          | 
|                                              | Condensed Consolidated Statements of Changes in Stockholders Equity                           |    | 5        | 
|                                              |                                                                                                |    |          | 
|                                              | Condensed Consolidated Statements of Cash Flows                                                |    | 6        | 
|                                              |                                                                                                |    |          | 
|                                              | Notes to Condensed Consolidated Financial Statements                                           |    | 7        | 
|                                              |                                                                                                |    |          | 
|                                              | Item 2. Managements Discussion and Analysis of Financial Condition
 and Results of Operations |    | 15       | 
|                                              |                                                                                                |    |          | 
|                                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                             |    | 23       | 
|                                              |                                                                                                |    |          | 
|                                              | Item 4. Controls and Procedures                                                                |    | 23       | 
|                                              |                                                                                                |    |          | 
|Part II. Other Information                    |                                                                                                | 23 |         
|                                              |                                                                                                |    |          | 
|SIGNATURES                                    |                                                                                                |    |         
|                                              |                                                                                                |    |          | 
|CERTIFICATIONS                                |                                                                                                |    |         

2

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Table of Contents

COMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                            |  |               |             |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ----------------- | - | ----------- | -
|                                                                                                                                            |  | June 30
 2010 |             | December 31
 2009 |  
|ASSETS                                                                                                                                     
|CURRENT ASSETS:                                                                                                                             |  |               |             |                   |   |             |  
|Cash and cash equivalents                                                                                                                   |  | $             | 12,073,784  |                   | $ | 21,293,448  |  
|Investments                                                                                                                                 |  |               | 17,284,937  |                   |   | 11,236,940  |  
|Trade accounts receivable, less allowance
 for doubtful accounts of $411,000 and $505,000, respectively                                     |  |               | 17,257,528  |                   |   | 15,042,411  |  
|Inventories                                                                                                                                 |  |               | 25,736,043  |                   |   | 24,598,317  |  
|Prepaid income taxes                                                                                                                        |  |               | 0           |                   |   | 337,274     |  
|Other current assets                                                                                                                        |  |               | 602,140     |                   |   | 884,555     |  
|Deferred income taxes                                                                                                                       |  |               | 4,051,981   |                   |   | 3,574,501   |  
|TOTAL CURRENT ASSETS                                                                                                                        |  |               | 77,006,413  |                   |   | 76,967,446  |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                          |  |               | 13,207,104  |                   |   | 13,321,825  |  
|OTHER ASSETS:                                                                                                                               |  |               |             |                   |   |             |  
|Investments                                                                                                                                 |  |               | 8,652,236   |                   |   | 7,538,903   |  
|Goodwill                                                                                                                                    |  |               | 4,560,217   |                   |   | 4,560,217   |  
|Prepaid pensions                                                                                                                            |  |               | 364,617     |                   |   | 399,743     |  
|Other assets                                                                                                                                |  |               | 119,906     |                   |   | 125,560     |  
|TOTAL OTHER ASSETS                                                                                                                          |  |               | 13,696,976  |                   |   | 12,624,423  |  
|TOTAL ASSETS                                                                                                                                |  | $             | 103,910,493 |                   | $ | 102,913,694 |  
|                                                                                                                                            |  |               |             |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       
|CURRENT LIABILITIES:                                                                                                                        |  |               |             |                   |   |             |  
|Current portion of long-term debt                                                                                                           |  | $             | 385,844     |                   | $ | 372,926     |  
|Accounts payable                                                                                                                            |  |               | 4,539,353   |                   |   | 4,986,028   |  
|Accrued compensation and benefits                                                                                                           |  |               | 2,928,151   |                   |   | 4,855,899   |  
|Other accrued liabilities                                                                                                                   |  |               | 1,455,836   |                   |   | 1,370,105   |  
|Income taxes payable                                                                                                                        |  |               | 943,749     |                   |   | 0           |  
|Dividends payable                                                                                                                           |  |               | 1,259,447   |                   |   | 1,169,040   |  
|TOTAL CURRENT LIABILITIES                                                                                                                   |  |               | 11,512,380  |                   |   | 12,753,998  |  
|                                                                                                                                           
|LONG TERM LIABILITIES:                                                                                                                      |  |               |             |                   |   |             |  
|Long-term compensation plans                                                                                                                |  |               | 1,541,187   |                   |   | 887,210     |  
|Income taxes payable                                                                                                                        |  |               | 756,045     |                   |   | 723,534     |  
|Deferred income taxes                                                                                                                       |  |               | 285,343     |                   |   | 208,111     |  
|Long term debt - mortgage payable                                                                                                           |  |               | 2,205,342   |                   |   | 2,401,548   |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                 |  |               | 4,787,917   |                   |   | 4,220,403   |  
|                                                                                                                                            |  |               |             |                   |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                               |  |               |             |                   |   |             |  
|                                                                                                                                            |  |               |             |                   |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                        |  |               |             |                   |   |             |  
|Preferred stock, par value $1.00 per share;
 3,000,000 shares authorized; none issued                                                       |  |               |             |                   |   |             |  
|Common stock, par value $.05 per share;
 30,000,000 shares authorized; 8,396,310 and 8,352,883 shares issued and
 outstanding, respectively |  |               | 419,815     |                   |   | 417,644     |  
|Additional paid-in capital                                                                                                                  |  |               | 34,215,438  |                   |   | 33,641,510  |  
|Retained earnings                                                                                                                           |  |               | 53,324,009  |                   |   | 52,007,261  |  
|Accumulated other comprehensive income, net
 of tax                                                                                         |  |               | (349,066    | )                 |   | (127,122    | )
|TOTAL STOCKHOLDERS EQUITY                                                                                                                  |  |               | 87,610,196  |                   |   | 85,939,293  |  
|                                                                                                                                           
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  | $             | 103,910,493 |                   | $ | 102,913,694 |  

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

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Table of Contents

COMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF 
INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)

|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|---------------------------------------------------------- |  | -------------------------- | ---------- | ------------------------ | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                           |  | Three Months Ended June 30 |            | Six Months Ended June 30 |  
|                                                           |  | 2010                       |            | 2009                     |   | 2010       |   | 2009 |           
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Sales from operations                                      |  | $                          | 30,658,824 |                          | $ | 28,584,399 |   | $    | 56,540,835 |   | $ | 55,349,357 |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Costs and expenses:                                        |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Cost of sales                                              |  |                            | 17,374,816 |                          |   | 17,934,303 |   |      | 32,741,766 |   |   | 34,919,816 |  
|Selling, general and administrative
 expenses              |  |                            | 9,092,085  |                          |   | 7,882,388  |   |      | 17,486,881 |   |   | 15,885,197 |  
|Total costs and expenses                                   |  |                            | 26,466,901 |                          |   | 25,816,691 |   |      | 50,228,647 |   |   | 50,805,013 |  
|Operating income                                           |  |                            | 4,191,923  |                          |   | 2,767,708  |   |      | 6,312,188  |   |   | 4,544,344  |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Other income and (expenses):                               |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Investment and other income                                |  |                            | 46,802     |                          |   | 280,245    |   |      | 85,425     |   |   | 490,782    |  
|(Loss) gain on sale of assets                              |  |                            | (15,040    | )                        |   | 24,041     |   |      | (8,620     | ) |   | 32,672     |  
|Interest and other expense                                 |  |                            | (55,961    | )                        |   | (57,703    | ) |      | (108,451   | ) |   | (116,795   | )
|Other (loss) income, net                                   |  |                            | (24,199    | )                        |   | 246,583    |   |      | (31,646    | ) |   | 406,659    |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Income before income taxes                                 |  |                            | 4,167,724  |                          |   | 3,014,291  |   |      | 6,280,542  |   |   | 4,951,003  |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Income tax expense                                         |  |                            | 1,752,395  |                          |   | 1,265,910  |   |      | 2,534,289  |   |   | 1,979,690  |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Net income                                                 |  |                            | 2,415,329  |                          |   | 1,748,381  |   |      | 3,746,253  |   |   | 2,971,313  |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Other comprehensive (loss) income, net of
 tax:            |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Additional minimum pension liability
 adjustments          |  |                            | 88,882     |                          |   | (240,238   | ) |      | (13,580    | ) |   | (228,278   | )
|Unrealized (losses) gains on
 available-for-sale securitie |  |                            | (16,520    | )                        |   | 66,775     |   |      | 1,481      |   |   | 66,775     |  
|Foreign currency translation adjustment                    |  |                            | (1,613     | )                        |   | 557,799    |   |      | (209,845   | ) |   | 484,080    |  
|Total other comprehensive (loss) income,
 net of tax       |  |                            | 70,749     |                          |   | 384,336    |   |      | (221,944   | ) |   | 322,577    |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Comprehensive net income                                   |  | $                          | 2,486,078  |                          | $ | 2,132,717  |   | $    | 3,524,309  |   | $ | 3,293,890  |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Basic net income per share:                                |  | $                          | .29        |                          | $ | .21        |   | $    | .45        |   | $ | .36        |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Diluted net income per share:                              |  | $                          | .29        |                          | $ | .21        |   | $    | .45        |   | $ | .36        |  
|                                                           |  |                            |            |                          |   |            |   |      |            |   |   |            |  
|Average Basic Shares Outstanding                           |  |                            | 8,373,799  |                          |   | 8,343,262  |   |      | 8,365,382  |   |   | 8,330,093  |  
|Average Dilutive Shares Outstanding                        |  |                            | 8,399,720  |                          |   | 8,350,628  |   |      | 8,394,504  |   |   | 8,335,162  |  
|Dividends per share                                        |  | $                          | .15        |                          | $ | .12        |   | $    | .29        |   | $ | .24        |  

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

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Table of Contents

COMMUNICATIONS SYSTEMS,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)

|                                                            |  |              |           |        |   |         |  |                              |            |                    |   |                                                 |   |       |          |   |   |            |  
|----------------------------------------------------------- |  | ------------ | --------- | ------ | - | ------- |  | ---------------------------- | ---------- | ------------------ | - | ----------------------------------------------- | - | ----- | -------- | - | - | ---------- | -
|                                                            |  |              |           |        |   |         |  | Additional
 Paid-in
 Capital |            | Retained
 Earnings |   | Cumulative
 Other
 Comprehensive
 Income (Loss) |   | Total |         
|                                                            |  |              |           |        |   |         |  |                              |            |                    |  
|                                                            |  | Common Stock |           |        |   |         | 
|                                                            |  | Shares       |           | Amount |   |         |  |                              |           
|BALANCE AT DECEMBER 31, 2009                                |  |              | 8,352,883 |        | $ | 417,644 |  | $                            | 33,641,510 |                    | $ | 52,007,261                                      |   | $     | (127,122 | ) | $ | 85,939,293 |  
|Net income                                                  |  |              |           |        |   |         |  |                              |            |                    |   | 3,746,253                                       |   |       |          |   | $ | 3,746,253  |  
|Issuance of common stock under Employee Stock Purchase Plan |  |              | 6,432     |        |   | 321     |  |                              | 76,467     |                    |   |                                                 |   |       |          |   | $ | 76,788     |  
|Issuance of common stock to Employee Stock Ownership Plan   |  |              | 36,995    |        |   | 1,850   |  |                              | 458,368    |                    |   |                                                 |   |       |          |   | $ | 460,218    |  
|Share based compensation                                    |  |              |           |        |   |         |  |                              | 39,093     |                    |   |                                                 |   |       |          |   | $ | 39,093     |  
|Shareholder dividends                                       |  |              |           |        |   |         |  |                              |            |                    |   | (2,429,505                                      | ) |       |          |   | $ | (2,429,505 | )
|Other comprehensive income                                  |  |              |           |        |   |         |  |                              |            |                    |   |                                                 |   |       | (221,944 | ) | $ | (221,944   | )
|BALANCE AT JUNE 30, 2010                                    |  |              | 8,396,310 |        | $ | 419,815 |  | $                            | 34,215,438 |                    | $ | 53,324,009                                      |   | $     | (349,066 | ) | $ | 87,610,196 |  

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

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Table of Contents

COMMUNICATIONS SYSTEMS,
INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                                   |  |                          |             |      |   |             |  
|---------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- | - | ----------- | -
|                                                                                   |  | Six Months Ended June 30 |            
|                                                                                   |  |                          |             |      |   |             |  
|                                                                                   |  | 2010                     |             | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                          |             |      |   |             |  
|Net income                                                                         |  | $                        | 3,746,253   |      | $ | 2,971,313   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                          |             |      |   |             |  
|Depreciation and amortization                                                      |  |                          | 978,026     |      |   | 814,454     |  
|Share based compensation                                                           |  |                          | 39,093      |      |   | 31,571      |  
|Deferred income taxes                                                              |  |                          | (400,248    | )    |   | (514,079    | )
|Loss (gain) on sale of assets                                                      |  |                          | 8,620       |      |   | (32,672     | )
|Excess tax benefit from stock based payments                                       |  |                          |            |      |   | (650        | )
|Changes in assets and liabilities:                                                 |  |                          |             |      |   |             |  
|Trade receivables                                                                  |  |                          | (2,253,333  | )    |   | 416,903     |  
|Inventories                                                                        |  |                          | (1,192,560  | )    |   | 1,736,690   |  
|Prepaid income taxes                                                               |  |                          | 337,274     |      |   |            |  
|Other current assets                                                               |  |                          | 285,577     |      |   | 355,195     |  
|Accounts payable                                                                   |  |                          | (430,378    | )    |   | 1,865,747   |  
|Accrued compensation and benefits                                                  |  |                          | (813,553    | )    |   | 495,280     |  
|Other accrued expenses                                                             |  |                          | 88,977      |      |   | (5,919      | )
|Income taxes payable                                                               |  |                          | 976,260     |      |   | 633,348     |  
|Other                                                                              |  |                          |            |      |   |            |  
|Net
 cash provided by operating activities                                         |  |                          | 1,370,008   |      |   | 8,767,181   |  
|                                                                                   |  |                          |             |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                          |             |      |   |             |  
|Capital expenditures                                                               |  |                          | (895,485    | )    |   | (2,318,124  | )
|Purchases of investments                                                           |  |                          | (14,390,147 | )    |   | (21,758,065 | )
|Proceeds from the sale of fixed assets                                             |  |                          | 11,883      |      |   | 41,536      |  
|Proceeds from the sale of investments                                              |  |                          | 7,230,299   |      |   | 7,229,000   |  
|Net
 cash used in investing activities                                             |  |                          | (8,043,450  | )    |   | (16,805,653 | )
|                                                                                   |  |                          |             |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                          |             |      |   |             |  
|Cash dividends paid                                                                |  |                          | (2,339,098  | )    |   | (1,995,656  | )
|Mortgage principal payments                                                        |  |                          | (183,288    | )    |   | (171,221    | )
|Proceeds from issuance of common stock                                             |  |                          | 76,788      |      |   | 66,821      |  
|Excess tax benefit from stock based payments                                       |  |                          |            |      |   | 650         |  
|Purchase of common stock                                                           |  |                          |            |      |   | (26,125     | )
|Net
 cash used in financing activities                                             |  |                          | (2,445,598  | )    |   | (2,125,531  | )
|                                                                                   |  |                          |             |      |   |             |  
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                                    |  |                          | (100,624    | )    |   | 217,414     |  
|                                                                                   |  |                          |             |      |   |             |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |  |                          | (9,219,664  | )    |   | (9,946,589  | )
|                                                                                   |  |                          |             |      |   |             |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |  |                          | 21,293,448  |      |   | 29,951,561  |  
|                                                                                   |  |                          |             |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |  | $                        | 12,073,784  |      | $ | 20,004,972  |  
|                                                                                   |  |                          |             |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |  |                          |             |      |   |             |  
|Income taxes paid                                                                  |  | $                        | 1,619,958   |      | $ | 1,860,422   |  
|Interest paid                                                                      |  |                          | 103,753     |      |   | 115,889     |  
|Dividends declared not paid                                                        |  |                          | 1,259,447   |      |   | 1,168,154   |  

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

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Table of Contents

COMMUNICATIONS
SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of businessCommunications
Systems, Inc. (herein collectively called CSI, our or the Company) is a
Minnesota corporation organized in 1969 which operates directly and through its
subsidiaries located in the United States, Costa Rica, the United Kingdom and
China. CSI is principally engaged through its Suttle and Austin Taylor business
units in the manufacture and sale of modular connecting and wiring devices for
voice and data communications, digital subscriber line filters, and structured
wiring systems and through its Transition Networks business unit in the
manufacture of media and rate conversion products for telecommunications
networks. CSI also provides through its JDL Technologies (JDL) business unit
IT solutions including network design, computer infrastructure installations,
IT service management, change management, network security and network
operations services.

Financial statement presentationThe condensed consolidated balance sheets and
consolidated statement of changes in stockholders equity as of June 30, 2010
and 2009 and the related consolidated statements of income and comprehensive
income, and the condensed consolidated statements of cash flows for the periods
ended June 30, 2010 and 2009 have been prepared by Company management. In the
opinion of management, all adjustments (which include only normal recurring
adjustments except where noted) necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 2010 and 2009 and
for the periods then ended have been made.

Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted. We
recommend these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Companys December 31, 2009 Annual Report to Shareholders on Form 10-K. The
results of operations for the periods ended June 30 are not necessarily
indicative of operating results for the entire year.

The
presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, and disclosure of
contingent assets and liabilities at the balance sheet date, and the reported
amounts of revenues and expenses during the reporting period. The estimates and
assumptions used in the accompanying condensed consolidated financial
statements are based upon managements evaluation of the relevant facts and
circumstances as of the time of the financial statements. Actual results could
differ from those estimates.

Except to the
extent updated or described below, the significant accounting policies set
forth in Note 1 to the consolidated financial statements in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009, appropriately
represent, in all material respects, the current status of accounting policies,
and are incorporated herein by reference.

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Cash equivalents and investments

For purposes
of the condensed consolidated statements of cash flows, the Company considers
all highly liquid investments with an original maturity of three months or less
at the time of purchase to be cash equivalents. As of June 30, 2010, the
Company had $12.1 million in cash and cash equivalents. Of this amount,
$1.9 million was invested in short-term money market funds that are not
considered to be bank deposits and are not insured or guaranteed by the Federal
Deposit Insurance Corporation (FDIC) or other government agency. These money
market funds seek to preserve the value of the investment at $1.00 per share;
however, it is possible to lose money investing in these funds.

The remainder
of the Companys cash and cash equivalents is deposited at banks. The FDIC
insures deposits at banks up to $250,000 per account. The Companys cash and
cash equivalent are held at large, well-established financial institutions and
the Company believes any risk associated with uninsured balances is remote.

The Company
had $25.9 million in investments which consist of certificates of deposit that
were purchased in the public markets and are classified as available-for-sale
at June 30, 2010. Of the $25.9 million in investments, $17.3 million mature in
12 months or less and are classified as current assets. Available-for-sale
investments are reported at fair value with unrealized gains and losses net of
tax excluded from operations and reported as a separate component of
stockholders equity (See Comprehensive income below).

Revenue Recognition

The Companys manufacturing operations
(Suttle, Transition Networks and Austin Taylor) recognize revenue when the
earnings process is complete, evidenced by persuasive evidence of an agreement,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and collectability is reasonably assured. Revenue is recognized
for domestic and international sales at the shipping point or delivery to
customers, based on the related shipping terms. Risk of loss transfers at the
point of shipment or delivery to customers, and the Company has no further
obligation after this time. Sales are made directly to customers and through
distributors. Payment terms for distributors are consistent with the terms of the
Companys direct customers. The Company records a provision for sale returns,
sales incentives and warranty costs at the time of the sale based on historical
experience and current trends.

JDL generally records revenue on hardware,
software and related equipment sales and installation contracts when the
revenue recognition criteria are met and products are installed and accepted by
customer. JDL records revenue on service contracts on a straight-line basis
over the contract period, unless evidence suggests the revenue is earned in a
different pattern. Each contract is individually reviewed to determine when the
earnings process is complete.

Comprehensive income

The components
of accumulated other comprehensive income, net of tax, are as follows:

|                                                   |  |               |            |                   |   |            |  
|-------------------------------------------------- |  | ------------- | ---------- | ----------------- | - | ---------- | -
|                                                   |  | June 30
 2010 |            | December 31
 2009 |  
|Foreign
 currency translation                      |  | $             | (1,299,605 | )                 | $ | (1,089,760 | )
|Unrealized
 gain on available-for-sale investments |  |               | 35,283     |                   |   | 33,802     |  
|Minimum
 pension liability                         |  |               | 915,256    |                   |   | 928,836    |  
|                                                   |  | $             | (349,066   | )                 | $ | (127,122   | )

NOTE 2 -
STOCK-BASED COMPENSATION

Common shares
are reserved in connection with the Companys 1992 Stock Plan under which
2,500,000 shares of common stock may be issued pursuant to stock options, stock
appreciation rights, restricted stock or deferred stock granted to officers and
key employees. Exercise prices of stock options under the Stock Plan cannot be
less than fair market value of the stock on the date of grant. Rules and
conditions governing awards of stock options, stock appreciation rights and
restricted stock are determined by the Compensation Committee of the Board of
Directors, subject to certain limitations incorporated into the Stock Plan. At
June 30, 2010, 1,123,739 shares remained available to be issued under the Stock
Plan. All currently outstanding awards under the Stock Plan are vested. The
options expire five years from date of grant.

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Shares of
common stock are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors (the Director Plan). The Director Plan provides for the automatic
grant of nonqualified options for 3,000 shares of common stock annually to each
nonemployee director concurrent with the annual shareholders meeting. Exercise
price is the fair market value of the stock at the date of grant. Options
granted under the Director Plan vest when issued and expire 10 years from date
of grant. At June 30, 2010, 37,000 shares are available to be issued under the
Director Plan.

The Company
also has an Employee Stock Purchase Plan (ESPP) for which 500,000 common
shares have been reserved. Employees are able to acquire shares under the ESPP
Plan at 95% of the price at the end of the current quarterly plan term, which is
June 30, 2010. The ESPP Plan is non-compensatory under current rules and does
not give rise to compensation cost. At June 30, 2010, 81,396 shares remain
available under the Plan for purchase.

Stock
compensation expense recognized for the six month period ended June 30, 2010
was $39,000 before income taxes and $25,000 after income taxes. Stock
compensation expense recognized for the six month period ended June 30, 2009
was $32,000 before income taxes and $20,000 after income taxes. Excess tax
benefits from the exercise of stock options included in financing cash flows
for the six month periods ended June 30, 2010 and 2009 were $0.

The following
table summarizes the stock option transactions for the six months ended June
30, 2010. All outstanding stock options are currently exercisable.

|                                 |  |         |         |                                             |   |                                               |  |  |            | 
|-------------------------------- |  | ------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  |  | ---------- | 
|                                 |  | Options |         | Weighted average
 exercise price
 per share |   | Weighted average
 remaining
 contractual term | 
|Outstanding
  December 31, 2009 |  |         | 189,000 |                                             | $ | 9.77                                          |  |  | 4.75 years | 
|Issued                           |  |         | 18,000  |                                             |   | 11.82                                         |  |  |            | 
|Exercised                        |  |         |        |                                             |   |                                              |  |  |            | 
|Canceled                         |  |         | (24,000 | )                                           |   | 14.13                                         |  |  |            | 
|Outstanding
  June 30, 2010     |  |         | 183,000 |                                             |   | 9.40                                          |  |  | 5.39 years | 

18,000
director stock options were granted during the six month period ended June 30,
2010. The aggregate intrinsic value of all options (the amount by which the
market price of the stock on the last day of the period exceeded the market
price of the stock on the date of grant) outstanding at June 30, 2010 was
$230,000. The intrinsic value of all options exercised during the three months
ended June 30, 2010 was $0. Net cash proceeds from the exercise of all stock
options were $0 in each of the three month periods ended June 30, 2010 and
2009.

NOTE 3 -
INVENTORIES

Inventories
summarized below are priced at the lower of first-in, first-out cost or market:

|                             |  |               |            |                   |   |            | 
|---------------------------- |  | ------------- | ---------- | ----------------- | - | ---------- | 
|                             |  | June 30
 2010 |            | December 31
 2009 |  
|Finished
 goods              |  | $             | 17,052,334 |                   | $ | 15,195,132 | 
|Raw and
 processed materials |  |               | 8,683,709  |                   |   | 9,403,185  | 
|Total                        |  | $             | 25,736,043 |                   | $ | 24,598,317 | 

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NOTE 4 
WARRANTY

We provide
reserves for the estimated cost of product warranties at the time revenue is
recognized. We estimate the costs of our warranty obligations based on our
warranty policy or applicable contractual warranty, historical experience of
known product failure rates, and use of materials and service delivery costs
incurred in correcting product failures. Management reviews the estimated
warranty liability on a quarterly basis to determine its adequacy. The actual
warranty expense could differ from the estimates made by the Company based on
product performance.

The following
table presents the changes in the Companys warranty liability for the six
month periods ended June 30, 2010 and 2009, respectively, the majority of which
relates to a five-year obligation to provide for potential future liabilities
for network equipment sales.

|                            |  |      |          |      |   |          |  
|--------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                            |  | 2010 |          | 2009 |  
|Beginning
 Balance          |  | $    | 648,000  |      | $ | 593,000  |  
|Actual
 warranty costs paid |  |      | (117,000 | )    |   | (184,000 | )
|Amounts
 charged to expense |  |      | 81,000   |      |   | 336,000  |  
|Ending
 balance             |  | $    | 612,000  |      | $ | 745,000  |  

NOTE 5 
CONTINGENCIES

In the ordinary course of business, the
Company is exposed to legal actions and claims and incurs costs to defend
against these actions and claims. Company management is not aware of any
outstanding or pending legal actions or claims that would materially affect the
Companys financial position or results of operations.

NOTE 6 
INCOME TAXES

In the
preparation of the Companys condensed consolidated financial statements,
management calculates income taxes based upon the estimated effective rate
applicable to operating results for the full fiscal year. This includes
estimating the current tax liability as well as assessing differences resulting
from different treatment of items for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities that are recorded on
the balance sheet. These assets and liabilities are analyzed regularly and
management assesses the likelihood that deferred tax assets will be recovered
from future taxable income.

At June 30,
2010 there was $608,000 of net uncertain tax benefit positions that would
reduce the effective income tax rate if recognized. The Company records
interest and penalties related to income taxes as income tax expense in the
Condensed Consolidated Statements of Income. We do not anticipate that total
unrecognized tax benefits will significantly change due to the settlement of
audits or the expiration of statutes of limitations within the next twelve months.

The Company is
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. The tax years 2006-2008 remain open to examination by
the Internal Revenue Service and the years 2005-2008 remain open to examination
by various state tax departments. The tax years from 2007-2009 remain open in
Costa Rica.

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The Companys
effective income tax rate was 40.4% for the first six months of 2010. The
effective tax rate differs from the federal tax rate of 35% due to state income
taxes, foreign losses not deductible for U.S. income tax purposes, provisions
for interest charges and settlement of uncertain income tax positions. Although
the foreign operating losses may ultimately be deductible in the countries in
which they have occurred, the Company has not recorded a deferred tax asset for
these losses due to uncertainty regarding the eventual realization of the
benefit. The effect of the foreign operations is an overall rate increase of
approximately 3.2% for the six months ended June 30, 2010. There were no
additional uncertain tax positions identified in the second quarter of 2010.
The Companys effective income tax rate for the six months ended June 30, 2009
was 40%, and differed from the federal tax rate due to state income taxes,
foreign losses not deductible for U.S. income tax purposes, and provisions for
interest charges.

NOTE 7 
SEGMENT INFORMATION

The Company
classifies its businesses into four segments as follows:

| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Suttle
 manufactures and sells U.S. standard modular connecting and wiring devices
 for voice and data communications, digital subscriber line filters, and
 structured wiring systems;                    
| |  | Transition
 Networks designs and markets data transmission, computer network and media
 conversion products;                                                                                               
| |  | JDL Technologies,
 Inc. provides IT services including network design, computer infrastructure
 installations, IT service management, change management, network security and
 network operations services;
| |  | Austin
 Taylor Communications LTD manufactures British-standard telephone equipment
 and equipment enclosures for the U.K and international markets.                                                       

Our
non-allocated corporate general and administrative expenses are categorized as
Other in the Companys segment reporting. Management has chosen to organize the
enterprise and disclose reportable segments based on our products and services.
There are no material inter-segment revenues.

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Information concerning the
Companys continuing operations in the various segments for the six month and
three month periods ended June 30, 2010 and 2009 is as follows:

|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|-------------------------------------------- |  | ------ | ---------- | -------------------- | - | ------------------ |  | -------------- | --------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | 
|SEGMENT INFORMATION - SIX
 MONTHS            |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |  
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |  
|                                             |  | Suttle |            | Transition
 Networks |   | JDL 
 Technologies |  | Austin
 Taylor |           | Other |   | Total     |  
|Six months ended June 30, 2010:              |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 19,052,260 |                      | $ | 30,872,395         |  | $              | 4,920,855 |       | $ | 1,695,325 |   | $ |           |   | $ | 56,540,835  | 
|Cost of sales                                |  |        | 13,978,168 |                      |   | 14,285,741         |  |                | 2,896,285 |       |   | 1,581,572 |   |   |           |   | $ | 32,741,766  | 
|Gross profit                                 |  |        | 5,074,092  |                      |   | 16,586,654         |  |                | 2,024,570 |       |   | 113,753   |   |   |           |   |   | 23,799,069  | 
|Selling, general and administrative expenses |  |        | 3,633,670  |                      |   | 10,319,377         |  |                | 708,348   |       |   | 528,763   |   |   | 2,296,723  |   | $ | 17,486,881  | 
|Operating income (loss)                      |  | $      | 1,440,422  |                      | $ | 6,267,277          |  | $              | 1,316,222 |       | $ | (415,010  | ) | $ | (2,296,723 | ) | $ | 6,312,188   | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 435,843    |                      | $ | 298,263            |  | $              | 76,808    |       | $ | 20,727    |   | $ | 146,385    |   | $ | 978,026     | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 504,812    |                      | $ | 279,251            |  | $              | 16,947    |       | $ | 14,393    |   | $ | 80,082     |   | $ | 895,485     | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Assets at June 30, 2010                      |  | $      | 20,814,871 |                      | $ | 28,183,814         |  | $              | 5,514,242 |       | $ | 3,690,063 |   | $ | 45,707,503 |   | $ | 103,910,493 | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies  |  | Austin
 Taylor |           | Other |   | Total     |  
|Six months ended June 30, 2009:              |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 22,610,556 |                      | $ | 25,807,976         |  | $              | 5,383,301 |       | $ | 1,547,524 |   | $ |           |   | $ | 55,349,357  | 
|Cost of sales                                |  |        | 17,568,938 |                      |   | 12,389,167         |  |                | 3,503,354 |       |   | 1,458,357 |   |   |           |   | $ | 34,919,816  | 
|Gross profit                                 |  |        | 5,041,618  |                      |   | 13,418,809         |  |                | 1,879,947 |       |   | 89,167    |   |   |           |   |   | 20,429,541  | 
|Selling, general and administrative expenses |  |        | 3,137,280  |                      |   | 9,794,984          |  |                | 660,565   |       |   | 589,474   |   |   | 1,702,894  |   | $ | 15,885,197  | 
|Operating income (loss)                      |  | $      | 1,904,338  |                      | $ | 3,623,825          |  | $              | 1,219,382 |       | $ | (500,307  | ) | $ | (1,702,894 | ) | $ | 4,544,344   | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 312,877    |                      | $ | 294,861            |  | $              | 81,777    |       | $ | 31,406    |   | $ | 93,533     |   | $ | 814,454     | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 2,007,992  |                      | $ | 160,058            |  | $              | 8,542     |       | $ | 83,351    |   | $ | 58,181     |   | $ | 2,318,124   | 
|                                             |  |        |            |                      |   |                    |  |                |           |       |   |           |   |   |            |   |   |             | 
|Assets at June 30, 2009                      |  | $      | 23,913,846 |                      | $ | 26,390,154         |  | $              | 5,218,364 |       | $ | 4,987,839 |   | $ | 42,503,622 |   | $ | 103,013,825 | 

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SEGMENT INFORMATION - THREE MONTHS

|                                              |  |        |           |                      |   |                   |  |                |           |       |   |          |   |   |            |   |   |            | 
|--------------------------------------------- |  | ------ | --------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | -------- | - | - | ---------- | - | - | ---------- | 
|                                              |  | Suttle |           | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total    |  
|Three months ended June 30, 2010:             |  |        |           |                      |   |                   |  |                |           |       |   |          |   |   |            |   |   |            | 
|Sales                                         |  | $      | 9,125,155 |                      | $ | 17,119,199        |  | $              | 3,625,136 |       | $ | 789,334  |   | $ |           |   | $ | 30,658,824 | 
|Cost of sales                                 |  |        | 6,701,710 |                      |   | 7,954,859         |  |                | 1,961,387 |       |   | 756,860  |   |   |           |   | $ | 17,374,816 | 
|Gross profit                                  |  |        | 2,423,445 |                      |   | 9,164,340         |  |                | 1,663,749 |       |   | 32,474   |   |   |           |   |   | 13,284,008 | 
|Selling, general and administrative
 expenses |  |        | 1,845,771 |                      |   | 5,426,073         |  |                | 321,152   |       |   | 280,209  |   |   | 1,218,880  |   | $ | 9,092,085  | 
|Operating income (loss)                       |  | $      | 577,674   |                      | $ | 3,738,267         |  | $              | 1,342,597 |       | $ | (247,735 | ) | $ | (1,218,880 | ) | $ | 4,191,923  | 
|                                              |  |        |           |                      |   |                   |  |                |           |       |   |          |   |   |            |   |   |            | 
|Depreciation and amortization                 |  | $      | 218,806   |                      | $ | 151,238           |  | $              | 38,889    |       | $ | 8,525    |   | $ | 73,875     |   | $ | 491,333    | 
|                                              |  |        |           |                      |   |                   |  |                |           |       |   |          |   |   |            |   |   |            | 
|Capital expenditures                          |  | $      | 41,016    |                      | $ | 252,660           |  | $              | 5,160     |       | $ |         |   | $ | 41,040     |   | $ | 339,876    | 

|                                              |  |        |            |                      |   |                   |  |                |           |       |   |          |   |   |          |   |   |            | 
|--------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | -------- | - | - | -------- | - | - | ---------- | 
|                                              |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total    |  
|Three months ended June 30, 2009:             |  |        |            |                      |   |                   |  |                |           |       |   |          |   |   |          |   |   |            | 
|Sales                                         |  | $      | 10,760,552 |                      | $ | 13,671,193        |  | $              | 3,302,233 |       | $ | 850,421  |   | $ |         |   | $ | 28,584,399 | 
|Cost of sales                                 |  |        | 8,499,083  |                      |   | 6,564,333         |  |                | 2,065,941 |       |   | 804,945  |   |   |         |   | $ | 17,934,302 | 
|Gross profit                                  |  |        | 2,261,469  |                      |   | 7,106,860         |  |                | 1,236,292 |       |   | 45,476   |   |   |         |   |   | 10,650,097 | 
|Selling, general and administrative
 expenses |  |        | 1,571,038  |                      |   | 4,871,654         |  |                | 340,013   |       |   | 308,538  |   |   | 791,146  |   | $ | 7,882,389  | 
|Operating income (loss)                       |  | $      | 690,431    |                      | $ | 2,235,206         |  | $              | 896,279   |       | $ | (263,062 | ) | $ | (791,146 | ) | $ | 2,767,708  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |          |   |   |          |   |   |            | 
|Depreciation and amortization                 |  | $      | 162,713    |                      | $ | 147,437           |  | $              | 40,293    |       | $ | 16,433   |   | $ | 2,129    |   | $ | 369,005    | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |          |   |   |          |   |   |            | 
|Capital expenditures                          |  | $      | 1,768,895  |                      | $ | 84,757            |  | $              | 34,542    |       | $ | 43,052   |   | $ | 15,936   |   | $ | 1,947,182  | 

NOTE 8  PENSIONS

The
Companys U.K. based subsidiary Austin Taylor maintains defined benefit pension
plans that cover approximately 8 active employees. The Company does not provide
any other post-retirement benefits to its employees. Components of net periodic
benefit cost of the pension plans were:

|                                |  |                          |          |      |   |          |  
|------------------------------- |  | ------------------------ | -------- | ---- | - | -------- | -
|                                |  | Six months Ended June 30 |         
|                                |  | 2010                     |          | 2009 |  
|Service cost                    |  | $                        | 17,000   |      |   | 19,000   |  
|Interest cost                   |  |                          | 124,000  |      |   | 139,000  |  
|Expected return on plan
 assets |  |                          | (107,000 | )    |   | (135,000 | )
|                                |  | $                        | 34,000   |      | $ | 23,000   |  

NOTE 9  NET INCOME PER
SHARE

Basic net income per common
share is based on the weighted average number of common shares outstanding
during each year. Diluted net income per common share takes into effect the
dilutive effect of potential common shares outstanding. The Companys only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 25,921 shares and 29,122 shares for the respective three and
six month periods ended June 30, 2010. The dilutive effect of stock options for
the three and six month periods ended June 30, 2009 was 7,366 shares and 5,069
shares, respectively. The Company calculates the dilutive effect of outstanding
options using the treasury stock method. The number of shares not included in
the computation of diluted earnings per share because the options exercise
price was greater than the average market price of common stock during the
period was 0 and 170,900 at June 30, 2010 and 2009, respectively.

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NOTE 10  FAIR VALUE
MEASUREMENTS

The accounting guidance
establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows:

Level 1  Observable inputs
that reflect unadjusted quoted prices for identical assets or liabilities in
active markets that the Company has the ability to access at the measurement
date.

Level 2  Observable inputs
such as quoted prices for similar instruments and quoted prices in markets that
are not active, and inputs that are directly observable or can be corroborated
by observable market data. The types of assets and liabilities included in
Level 2 are typically either comparable to actively traded securities or contracts,
such as treasury securities with pricing interpolated from recent trades of
similar securities, or priced with models using highly observable inputs, such
as commodity options priced using observable forward prices and volatilities.

Level 3  Significant inputs
to pricing have little or no observability as of the reporting date. The types
of assets and liabilities included in Level 3 are those with inputs requiring
significant management judgment or estimation, such as the complex and subjective
models and forecasts used to determine the fair value of financial instruments.

The Companys assets and
liabilities that are measured at fair value on a recurring basis as of June 30,
2010 and December 31, 2009, respectively, include money market funds within
cash and cash equivalents of $1,873,000 and $12,972,000 classified as Level 1
within the hierarchy and certificate of deposits within investments of
$25,937,000 and $18,776,000 classified as Level 2. The Company does not have
any assets or liabilities classified as Level 3 within the hierarchy. There
were no transfers between levels during the six months ended June 30, 2010.

NOTE 11  SUBSEQUENT EVENTS

The Company has evaluated
subsequent events through the date of this filing. We do not believe there are
any material subsequent events that would require further disclosure.

14

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Table of Contents

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

Forward looking statements

In this report
and, from time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, the Company may make forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 concerning
possible or anticipated future financial performance, business activities,
plans, pending claims, investigations or litigation which are typically
preceded by the words believes, expects, anticipates, intends or
similar expressions. For these forward-looking statements, the Company claims
the protection of the safe harbor for forward-looking statements contained in
federal securities laws. Shareholders and the investing public should
understand that these forward looking statements are subject to risks and
uncertainties that could cause actual performance, activities, anticipated
results, outcomes or plans to differ significantly from those indicated in the
forward-looking statements. These risks and uncertainties include, but are not
limited to:

| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lower sales
 to major telephone companies and other major customers;                                                                                                                                                              
| |  | the
 introduction of competitive products and technologies;                                                                                                                                                                       
| |  | our ability
 to successfully reduce operating expenses at certain business units;                                                                                                                                                 
| |  | the general
 health of the telecom sector;                                                                                                                                                                                        
| |  | successful
 integration and profitability of acquisitions;                                                                                                                                                                        
| |  | delays in
 new product introductions;                                                                                                                                                                                             
| |  | higher than
 expected expense related to new sales and marketing initiatives;                                                                                                                                                     
| |  | unfavorable
 resolution of claims and litigation;                                                                                                                                                                                 
| |  | availability
 of adequate supplies of raw materials and components;                                                                                                                                                               
| |  | fuel prices;                                                                                                                                                                                                                      
| |  | government
 funding of education technology spending; and                                                                                                                                                                         
| |  | other
 factors discussed from time to time in the Companys filings with the
 Securities and Exchange Commission, including risk factors presented under
 Item 1A of the Companys most recently filed annual report on Form 10-K.

Three Months Ended June 30, 2010 Compared toThree Months Ended June 30, 2009

Consolidated
sales increased 7% in 2010 to $30,659,000 compared to $28,584,000 in 2009.
Consolidated operating income in 2010 increased to $4,192,000 compared to
$2,768,000 in the second quarter of 2009.

Net income in
2010 increased to $2,415,000 compared to $1,748,000 in the second quarter of
2009.

Suttle

Suttle sales
decreased 15% in the second quarter of 2010 to $9,125,000 compared to
$10,761,000 in the same period of 2009 due to contraction of the housing and
building sectors of the economy. Sales by customer groups in the second quarter
of 2010 and 2009 were:

|                           |  |                                |           |      |   |            | 
|-------------------------- |  | ------------------------------ | --------- | ---- | - | ---------- | 
|                           |  | Suttle Sales by Customer Group |          
|                           |  | 2010                           |           | 2009 |  
|Major
 telephone companies |  | $                              | 4,225,000 |      | $ | 6,041,000  | 
|Distributors/OEM           |  |                                | 3,071,000 |      |   | 2,440,000  | 
|International              |  |                                | 1,208,000 |      |   | 1,254,000  | 
|Other                      |  |                                | 621,000   |      |   | 1,026,000  | 
|                           |  | $                              | 9,125,000 |      | $ | 10,761,000 | 

15

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Table of Contents

Suttles sales by product groups
in second quarter of 2010 and 2009 were:

|                             |  |                               |           |      |   |            | 
|---------------------------- |  | ----------------------------- | --------- | ---- | - | ---------- | 
|                             |  | Suttle Sales by Product Group |          
|                             |  | 2010                          |           | 2009 |  
|Modular
 connecting products |  | $                             | 3,595,000 |      | $ | 3,946,000  | 
|DSL products                 |  |                               | 2,977,000 |      |   | 3,083,000  | 
|Structured
 cabling products |  |                               | 2,352,000 |      |   | 3,588,000  | 
|Other
 products              |  |                               | 201,000   |      |   | 144,000    | 
|                             |  | $                             | 9,125,000 |      | $ | 10,761,000 | 

Sales to the
major telephone companies decreased 30% in 2010 due to a decrease in sales of
DSL products, an accelerating decline in voice markets and the continued impact
of the contraction of the U.S. housing market. Sales to these customers
accounted for 46% of Suttles sales in the 2010 second quarter compared to 56%
of sales in 2009. Sales to distributors, OEMs, and electrical contractors
increased 26% in 2010 due to increased sales of DSL products. This customer
segment accounted for 34% and 23% of sales in the second quarters of 2010 and
2009, respectively. International sales decreased 4% and accounted for 13% of
Suttles second quarter 2010 sales. Suttles products do not have a large
international market due to different product specifications in non-US markets.
Sales to other customers decreased 39% to $621,000.

Modular
connecting products sales have decreased 9% due to a slowing of the home
building business and accelerated decline in the voice market. Sales of DSL
products decreased 3% due to the maturation of the U.S. DSL market and the
order cycle of major customers. Sales of structured cabling products decreased
34% due to the contraction of the housing market, specifically the
multi-dwelling unit space.

Suttles gross
margin increased 7% in the second quarter of 2010 to $2,423,000 compared to
$2,261,000 in the same period of 2009. Gross margin percentage increased to 27%
in 2010 from 21% in 2009 due to product mix changes. Suttle realizes its
highest selling margins on modular connecting products. DSL products are the
least profitable. Suttle also earns better margins on sales to distributor and
OEM customers where pricing is usually based on Company list prices versus
major telephone customers where pricing is usually based on negotiated
contracts. Selling, general and administrative expenses increased $275,000 or
18% in the second quarter of 2010 compared to the same period in 2009, due to
increased spending in the Companys technology development initiative. Suttles
operating income was $578,000 in the second quarter of 2010 compared to
operating income of $690,000 in 2009.

Transition Networks

Transition
Networks sales increased 25% to $17,119,000 in the second quarter of 2010
compared to $13,671,000 in 2009.

Second quarter
sales by region are presented in the following table:

|                                    |  |                                     |            |      |   |            | 
|----------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                                    |  | Transition Networks Sales by Region |           
|                                    |  | 2010                                |            | 2009 |  
|North
 America                      |  | $                                   | 14,429,000 |      | $ | 11,407,000 | 
|Europe, Middle
 East, Asia (EMEA) |  |                                     | 995,000    |      |   | 879,000    | 
|Rest of
 world                      |  |                                     | 1,695,000  |      |   | 1,385,000  | 
|                                    |  | $                                   | 17,119,000 |      | $ | 13,671,000 | 

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Table of Contents

Sales in North
America increased 27% or $3,023,000 due to an improving economic situation in
the United States and Canada and increased activity in target vertical market
segments. International sales increased $426,000, or 19% primarily due to
improved economic activity in Asia and Latin America. The economy in the EMEA
region continues to be sluggish but sales still had a 13% increase over the
same period in the prior year.

The following
table summarizes Transition Networks 2010 and 2009 second quarter sales by its
major product groups:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  | 2010                                       |            | 2009 |  
|Media
 converters  |  | $                                          | 12,777,000 |      | $ | 9,806,000  | 
|Ethernet
 switches |  |                                            | 1,026,000  |      |   | 913,000    | 
|Ethernet
 adapters |  |                                            | 1,720,000  |      |   | 2,231,000  | 
|Other
 products    |  |                                            | 1,596,000  |      |   | 721,000    | 
|                   |  | $                                          | 17,119,000 |      | $ | 13,671,000 | 

Gross margin
on second quarter Transition Networks sales increased 29% to $9,164,000 in
2010 from $7,107,000 in 2009. Gross margin as a percentage of sales was 54% in
2010, compared to 52% in the 2009 period. The increase is due to the mix of
products with an increase in some higher margin conversion products and lower
operating expenses for the indirect costs related to gross margin. Selling,
general and administrative expenses increased 11% to $5,426,000 in 2010
compared to $4,872,000 in 2009 due to the hiring of new employees and an
increase in selling expenses. Operating income increased to $3,738,000 in 2010
compared to $2,235,000 in 2009.

JDL Technologies,
Inc.

JDL
Technologies, Inc. reported 2010 second quarter sales of $3,625,000 compared to
$3,302,000 in 2009.

JDLs revenues
by customer group were as follows:

|                           |  |                               |           |      |   |           | 
|-------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                           |  | JDL Revenue by Customer Group |          
|                           |  | 2010                          |           | 2009 |  
|Broward
 County FL schools |  | $                             | 3,587,000 |      | $ | 3,289,000 | 
|All other                  |  |                               | 38,000    |      |   | 13,000    | 
|                           |  | $                             | 3,625,000 |      | $ | 3,302,000 | 

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Table of Contents

Revenues
earned in Broward County FL increased $298,000 or 9% in the second quarter
2010. The increase was the result of higher funding for LAN/WAN/Wire work in
2010 than in 2009.

JDL gross
margin increased 35% to $1,664,000 in the second quarter of 2010 compared to
$1,236,000 in the same period in 2009. Gross margin as a percentage of sales
increased to 46% in 2010 from 37% in 2009 due to purchasing discounts and
rebates the Company was able to take advantage of during the quarter. Selling,
general and administrative expenses decreased in 2010 to $321,000 compared to
$340,000 in 2009 due to a reduction in compensation expenses. JDL reported
operating income of $1,343,000 in the second quarter of 2010 compared to
$896,000 in the same period of 2009.

Austin Taylor

Austin
Taylors revenues decreased 7% to $789,000 for the second quarter of 2010,
compared to $850,000 in 2009. This decrease is due to the impact of project
suspensions and an overall decrease in demand within the markets served by
Austin Taylor. Gross margin decreased 29% to $32,000 in 2010 from $45,000 in
2009. Gross margin as a percentage of sales was 4% in 2010 compared to 5% in
2009. This decrease is a result of the cost of transferring manufacturing
equipment and establishing continuity of supply from alternative suppliers.
Austin Taylor reported an operating loss in 2010 of $248,000 compared to
$263,000 in 2009.

Other

Net investment
income decreased to a loss of $24,000 in 2010 as compared to income of $247,000
in 2009. This decrease is due to unrealized foreign exchange losses due to the
decline in the Euro. Income before income taxes increased to $4,168,000 in 2010
compared to $3,014,000 in 2009. The Companys effective income tax rate was 42%
in both 2010 and 2009. This effective rate was higher than the standard rate of
35% due to state income taxes, foreign losses not deductible for U.S. income
tax purposes, provisions for interest charges and settlement of uncertain
income tax positions.

Six Months Ended June 30, 2010 Compared toSix Months Ended June 30, 2009

Consolidated
sales increased 2% in 2010 to $56,541,000 compared to $55,349,000 in 2009.
Consolidated operating income in 2010 increased to $6,312,000 compared to
$4,544,000 in the first six months of 2009.

Net income in
2010 increased to $3,746,000 compared to $2,971,000 in the first six months of
2009.

Suttle

Suttle sales
decreased 16% in the first six months of 2010 to $19,052,000 compared to
$22,611,000 in the same period of 2009. Sales by customer groups in the first
six months of 2010 and 2009 were:

|                           |  |                                |            |      |   |            | 
|-------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | 
|                           |  | Suttle Sales by Customer Group |           
|                           |  | 2010                           |            | 2009 |  
|Major
 telephone companies |  | $                              | 8,740,000  |      | $ | 12,997,000 | 
|Distributors/OEMs          |  |                                | 6,326,000  |      |   | 5,028,000  | 
|International              |  |                                | 2,639,000  |      |   | 2,512,000  | 
|Other                      |  |                                | 1,347,000  |      |   | 2,074,000  | 
|                           |  | $                              | 19,052,000 |      | $ | 22,611,000 | 

18

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Table of Contents

Suttles sales by product
groups in first six months of 2010 and 2009 were:

|                             |  |                               |            |      |   |            | 
|---------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | 
|                             |  | Suttle Sales by Product Group |           
|                             |  | 2010                          |            | 2009 |  
|Modular
 connecting products |  | $                             | 7,808,000  |      | $ | 8,503,000  | 
|DSL products                 |  |                               | 6,048,000  |      |   | 6,716,000  | 
|Structured
 cabling products |  |                               | 4,841,000  |      |   | 7,079,000  | 
|Other
 products              |  |                               | 355,000    |      |   | 313,000    | 
|                             |  | $                             | 19,052,000 |      | $ | 22,611,000 | 

Sales to the
major telephone companies decreased 33% in 2010 due to decreased DSL deployment
and continued contraction of the domestic housing market. Sales to these
customers accounted for 46% of Suttles sales in the first six months of 2010
compared to 57% of sales in the same period in 2009. Sales to distributors,
original equipment manufacturers (OEMs), and electrical contractors increased
26% in 2010 primarily due to the increase of DSL sales to these customers.
Overall, DSL sales are lower in 2010 but have increased in this customer
segment due to increased broadband deployment. This customer segment accounted
for 33% and 22% of sales in the first six months of 2010 and 2009,
respectively. International sales increased 5% and accounted for 14% of
Suttles first six months 2010 sales. Suttles products do not have a large
international market due to different product specifications in non-US markets.
Sales to other customers decreased 35% to $1,347,000.

Modular
connecting products sales have decreased 8% due to a slowing of the home
building business and continued decline in the voice market. Sales of DSL
products decreased 10% due to the maturation of the U.S. DSL market. Sales of
structured cabling products decreased 32% due to the contraction of the housing
market, specifically the multi-dwelling unit space.

Suttles gross
margin increased 1% in the first six months of 2010 to $5,074,000 compared to
$5,042,000 in the same period of 2009. Gross margin percentage increased to 27%
in 2010 from 22% in 2009 due to product mix changes. Suttle realizes its
highest selling margins on modular connecting products. DSL products are the
least profitable. Suttle also earns better margins on sales to distributor and
OEM customers, where pricing is usually based on Company list prices, than from
sales to major telephone customers where pricing is usually based on negotiated
contracts. Selling, general and administrative expenses increased $496,000 or
16% in the first six months of 2010 compared to the same period in 2009, due to
increases in technological development spending. Suttles operating income was
$1,440,000 in the first six months of 2010 compared to operating income of
$1,904,000 in 2009.

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Table of Contents

Transition Networks

Transition
Networks sales increased 20% to $30,872,000 in the first six months of 2010
compared to $25,808,000 in 2009.

First six
months sales by region are presented in the following table:

|                                      |  |                                     |            |      |   |            | 
|------------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                                      |  | Transition Networks Sales by Region |           
|                                      |  | 2010                                |            | 2009 |  
|North
 America                        |  | $                                   | 25,524,000 |      | $ | 21,194,000 | 
|Europe,
 Middle East, Africa (EMEA) |  |                                     | 2,075,000  |      |   | 2,069,000  | 
|Rest of
 world                        |  |                                     | 3,273,000  |      |   | 2,545,000  | 
|                                      |  | $                                   | 30,872,000 |      | $ | 25,808,000 | 

Sales in North
America increased $4,330,000 or 20% due to an improving economic situation in
the United States and Canada and increased activity in target vertical market
segments and product groups. International sales increased $734,000, or 16%
primarily due to improved economic activity in Asia and Latin America. The EMEA
region continues to be sluggish in its economic recovery and sales remain
essentially flat in that region.

The following
table summarizes Transition Networks 2010 and 2009 first six months sales by
its major product groups:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  | 2010                                       |            | 2009 |  
|Media
 converters  |  | $                                          | 23,203,000 |      | $ | 19,422,000 | 
|Ethernet
 switches |  |                                            | 1,896,000  |      |   | 1,460,000  | 
|Ethernet
 adapters |  |                                            | 3,322,000  |      |   | 3,548,000  | 
|Other
 products    |  |                                            | 2,451,000  |      |   | 1,378,000  | 
|                   |  | $                                          | 30,872,000 |      | $ | 25,808,000 | 
|                   |  |                                            |            |      |   |            | 

Gross margin
on the first six months of Transition Networks sales increased to $16,587,000
in 2010 from $13,419,000 in 2009. Gross margin as a percentage of sales was 54%
in 2010, compared to 52% in the 2009 period, due to the mix of products with an
increase in some higher margin conversion products and lower operating expenses
for the indirect costs related to gross margin. Selling, general and
administrative expenses increased 5% to $10,319,000 in 2010 compared to
$9,795,000 in 2009 due to the hiring of new employees and an increase in
selling expenses. Operating income increased to $6,267,000 in 2010 compared to
$3,624,000 in 2009.

JDL Technologies,
Inc.

JDL
Technologies, Inc. reported 2010 first six months sales of $4,921,000 compared
to $5,383,000 in 2009.

JDLs revenues
by customer group were as follows:

|                           |  |                               |           |      |   |           | 
|-------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                           |  | JDL Revenue by Customer Group |          
|                           |  | 2010                          |           | 2009 |  
|Broward
 County FL schools |  | $                             | 4,787,000 |      | $ | 5,301,000 | 
|All other                  |  |                               | 134,000   |      |   | 82,000    | 
|                           |  | $                             | 4,921,000 |      | $ | 5,383,000 | 

20

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Revenues
earned in Broward County FL decreased $514,000 or 10% in 2010. The decrease was
the result of Broward County receiving contract funding approval six months
later than the usual announcement timeframe, which resulted in lower revenue in
the first half of 2010  specifically the first quarter.

JDL gross
margin increased 8% to $2,025,000 in the first six months of 2010 compared to
$1,880,000 in the same period in 2009. Gross margin as a percentage of sales
increased to 41% in 2010 from 35% in 2009 due to purchasing discounts and
rebates the Company was able to take advantage of during the first half of the
year. Selling, general and administrative expenses increased 7% in 2010 to
$708,000 compared to $661,000 in 2009 due to increased travel and relocation
costs due to a change in management in the first quarter 2010. JDL reported
operating income of $1,316,000 in the first six months of 2010 compared to
$1,219,000 in the same period of 2009.

Austin Taylor

Austin
Taylors revenues increased 9% to $1,695,000 for the first six months of 2010,
compared to $1,548,000 in 2009. This increase is due to broader product sales
into the OEM market and deeper sales penetration into the UK and Ireland
distribution network. Gross margin increased 28% to $114,000 in 2010 from
$89,000 in 2009. Gross margin as a percentage of sales was 7% in 2010 compared
to 6% in 2009. This increase was due to a gain in manufacturing efficiency
resulting from a recently implemented cost reduction and process improvement
program. Austin Taylor reported an operating loss in 2010 of $415,000 compared
to $500,000 in 2009.

Other

Net investment
income decreased 108% to a loss of $32,000 in 2010 as compared to income of
$407,000 in 2009. This decrease is due to unrealized foreign exchange losses
due to the decline in the Euro. Income before income taxes increased to
$6,281,000 in 2010 compared to $4,951,000 in 2009. The Companys effective
income tax rate was 40% in both 2010 and 2009. This effective rate was higher
than the standard rate of 35% due to state income taxes, foreign losses not deductible
for U.S. income tax purposes, and provisions for interest charges as explained
in Note 6 above.

Liquidity and Capital Resources

At June 30,
2010, the Company had approximately $38,011,000 of cash equivalents and
investments compared to $40,069,000 of cash equivalents and investments at
December 31, 2009. The Company had current assets of approximately $77,006,000
and current liabilities of $11,512,000 at June 30, 2010 compared to current
assets of $76,967,000 and current liabilities of $12,754,000 at December 31,
2009.

Net cash
provided by operating activities was $1,370,000 in the first six months of 2010
compared to $8,767,000 in the same period in 2009. Significant working capital
changes from December 31, 2009 to June 30, 2010 included decreased accrued
compensation and benefits of $814,000 due to the payment of the Companys long
term bonuses in the first quarter of 2010, an increase in inventory balances
due to purchases at JDL for installations during the third quarter and an
increase in accounts receivable of $2,253,000 due to an overall increase in
sales in the second quarter of 2010 as compared to the fourth quarter of 2009.

Net cash used
in investing activities was $8,043,000 in the first six months in 2010 compared
to cash used of $16,806,000 in the same period in 2009. During the first six
months of 2010, the Company continued to purchase certificates of deposit with
maturities of greater than 90 days during the quarter and increased its
investments from $18.8 million at December 31, 2009 to $25.9 million at June
30, 2010.

21

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Table of Contents

Net cash used
in financing activities was $2,446,000 and $2,126,000 in the first six months
of 2010 and 2009, respectively. Cash dividends paid in the first six months of
2010 were $2,339,000 ($.28 per common share) compared to $1,996,000 ($.24 per
common share) in the same period in 2009. Proceeds from common stock issuances,
principally issued under the Companys Employee Stock Purchase Plan, totaled
approximately $77,000 in the first six months of 2010 and $67,000 in the same
period in 2009. In the first six months of 2010, the Company did not purchase
any of its outstanding common shares. At June 30, 2010, 481,938 additional
shares could be repurchased under outstanding Board authorizations. The Company
has a $10,000,000 line of credit from U.S. Bank. Interest on borrowings on the
credit line is at the LIBOR rate plus 1.5% (2.0% at June 30, 2010). There were
no borrowings on the line of credit during the first six months of 2010 or
2009. The credit agreement expires September 30, 2010 and is secured by assets
of the Company. As part of the acquisition of the new Minnetonka headquarters
building in July 2007, the Company assumed an outstanding mortgage of
$4,380,000. The mortgage is payable in monthly installments and carries an
interest rate of 6.83%. The mortgage matures on March 1, 2016. Mortgage
payments on principal totaled $92,000 during the second quarter of 2010. The
outstanding balance on the mortgage was $2,591,000 at June 30, 2010.

In the opinion
of management, based on the Companys current financial and operating position
and projected future expenditures, sufficient funds are available to meet the
Companys anticipated operating and capital expenditure needs.

Critical Accounting Policies

Our critical
accounting policies, including the assumptions and judgments underlying them,
are discussed in our 2009 Form 10-K in Note 1 Summary of Significant Accounting
Policies included in our Consolidated Financial Statements. There were no
significant changes to our critical accounting policies during the three months
ended June 30, 2010.

The Companys
accounting policies have been consistently applied in all material respects and
disclose such matters as allowance for doubtful accounts, sales returns,
inventory valuation, warranty expense, income taxes, revenue recognition, asset
and goodwill impairment recognition and foreign currency translation. On an
ongoing basis, we evaluate our estimates based on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances,
the result of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Results may differ from these estimates due to actual outcomes being
different from those on which we based our assumptions. Management reviews
these estimates and judgments on an ongoing basis.

Recently Issued Accounting Pronouncements

We do not believe there are any recently
issued accounting standards that have not yet been adopted that will have a
material impact on the Companys financial statements.

22

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Item 3. Quantitative
and Qualitative Disclosures about Market Risk.

The Company
has no freestanding or embedded derivatives. The Companys policy is to not use
freestanding derivatives and to not enter into contracts with terms that cannot
be designated as normal purchases or sales.

The vast
majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically not been
material to the Company. At June 30, 2010 our bank line of credit carried a
variable interest rate based on the London Interbank Offered Rate (Libor) plus
1.5%. The Companys investments are either money market type of investments
that earn interest at prevailing market rates or certificates of deposits
insured through the FDIC and as such do not have material risk exposure.

Based on the
Companys operations, in the opinion of management, no material future losses
or exposure exist relative to market risk.

Item 4. Controls
and Procedures

Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as that term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Operating Effectiveness of Accounting and Control Procedures.
We concluded that, in the aggregate, no material weakness existed as of June
30, 2010 related to documentation and review of significant accounting
judgments and estimates, balance sheet account reconciliations, financial
closing processes and financial reporting processes at period ends.

Changes in Internal Control over Financial Reporting.
During the period covered by this Report there was no additional change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II. OTHER
INFORMATION

Item 1. Legal ProceedingsNot
Applicable.

Item 1A. Risk FactorsNot
Applicable.

Item 2.
Unregistered Sales of Equity Securities and Use of ProceedsNot
applicable.

Item 3.
Defaults Upon Senior SecuritiesNot
Applicable.

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Item 4.
[Removed and Reserved]

Item 5. Other InformationNot Applicable

Item 6 Exhibits.

| |                                              |                                                                                          
| | -------------------------------------------- | -----------------------------------------------------------------------------------------
| | The
 following exhibits are included herein:
| |                                              |                                                                                          
| | 31.1                                         | Certification                                                                            
| | 31.2                                         | Certification                                                                            
| | 32.                                          | Certifications
 pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

24

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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 thereto
duly authorized.

|                       |    |                                        | 
|---------------------- | -- | -------------------------------------- | 
|                       |    | Communications
 Systems, Inc.         
|                       |    |                                        | 
|                       | By | /s/ Jeffrey
 K. Berg                   | 
|                       |    | Jeffrey K.
 Berg                       | 
|Date: August
 10, 2010 |    | President
 and Chief Executive Officer
|                       |    |                                        | 
|                       |    | /s/ David T.
 McGraw                   | 
|                       |    | David T.
 McGraw                       | 
|Date: August
 10, 2010 |    | Chief
 Financial Officer               | 

25

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