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 March 31, 2011
|                                               |                                                                                          
|                                               | 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, a
non-accelerated filer, or a smaller reporting company (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 May 1, 2011
|Common
 Stock, par value
 $.05 per share                                                                                        |  | NASDAQ                                |  | 8,432,658                 







|                                             
|---------------------------------------------
|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 (Loss)                   |  | 4        | 
|               |                                                                                                |  |          | 
|               | Condensed
 Consolidated Statement 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                             |  | 20       | 
|               |                                                                                                |  |          | 
|               | Item 4. Controls and Procedures                                                                |  | 20       | 
|               |                                                                                                |  |          | 
|Part II.       | Other Information                                                                              |  | 20       | 
|               |                                                                                                |  |          | 
|               |                                                                                                |  |          | 
|SIGNATURES     |                                                                                                |  |         
|               |                                                                                                |  |          | 
|CERTIFICATIONS |                                                                                                | 

2

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Table of Contents

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

|                                                                                                                                           |  |                 |             |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | ----------- | ------------------ | - | ----------- | -
|                                                                                                                                           |  | March
 31
 2011 |             | December
 31
 2010 |  
|ASSETS                                                                                                                                    
|CURRENT ASSETS:                                                                                                                            |  |                 |             |                    |   |             |  
|Cash and cash equivalents                                                                                                                  |  | $               | 15,625,165  |                    | $ | 16,787,558  |  
|Investments                                                                                                                                |  |                 | 19,938,475  |                    |   | 21,698,905  |  
|Trade accounts receivable, less allowance for doubtful accounts of
 $577,000 and $500,000, respectively                                    |  |                 | 19,425,433  |                    |   | 17,544,136  |  
|Inventories                                                                                                                                |  |                 | 25,009,349  |                    |   | 24,498,935  |  
|Prepaid income taxes                                                                                                                       |  |                 |             |                    |   | 296,586     |  
|Other current assets                                                                                                                       |  |                 | 1,595,313   |                    |   | 908,102     |  
|Deferred income taxes                                                                                                                      |  |                 | 4,398,934   |                    |   | 4,469,941   |  
|TOTAL CURRENT ASSETS                                                                                                                       |  |                 | 85,992,669  |                    |   | 86,204,163  |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                         |  |                 | 13,153,360  |                    |   | 13,214,067  |  
|OTHER ASSETS:                                                                                                                              |  |                 |             |                    |   |             |  
|Investments                                                                                                                                |  |                 | 6,109,116   |                    |   | 4,588,267   |  
|Goodwill                                                                                                                                   |  |                 | 4,560,217   |                    |   | 4,560,217   |  
|Prepaid pensions                                                                                                                           |  |                 | 353,094     |                    |   | 349,575     |  
|Other assets                                                                                                                               |  |                 | 149,517     |                    |   | 153,938     |  
|TOTAL OTHER ASSETS                                                                                                                         |  |                 | 11,171,944  |                    |   | 9,651,997   |  
|TOTAL ASSETS                                                                                                                               |  | $               | 110,317,973 |                    | $ | 109,070,227 |  
|                                                                                                                                           |  |                 |             |                    |   |             |  
|                                                                                                                                           |  |                 |             |                    |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      
|CURRENT LIABILITIES:                                                                                                                       |  |                 |             |                    |   |             |  
|Current portion of long-term debt                                                                                                          |  | $               | 406,065     |                    | $ | 399,209     |  
|Accounts payable                                                                                                                           |  |                 | 5,141,953   |                    |   | 5,385,558   |  
|Accrued compensation and benefits                                                                                                          |  |                 | 4,710,713   |                    |   | 3,951,401   |  
|Other accrued liabilities                                                                                                                  |  |                 | 1,558,909   |                    |   | 1,669,776   |  
|Income taxes payable                                                                                                                       |  |                 | 854,511     |                    |   | 0           |  
|Dividends payable                                                                                                                          |  |                 | 1,264,122   |                    |   | 1,263,434   |  
|TOTAL CURRENT LIABILITIES                                                                                                                  |  |                 | 13,936,273  |                    |   | 12,669,378  |  
|                                                                                                                                           |  |                 |             |                    |   |             |  
|LONG TERM LIABILITIES:                                                                                                                     |  |                 |             |                    |   |             |  
|Long-term compensation plans                                                                                                               |  |                 | 163,057     |                    |   | 1,738,105   |  
|Income taxes payable                                                                                                                       |  |                 | 704,213     |                    |   | 678,395     |  
|Deferred income taxes                                                                                                                      |  |                 | 657,191     |                    |   | 585,317     |  
|Long term debt - mortgage payable                                                                                                          |  |                 | 1,898,215   |                    |   | 2,002,339   |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                |  |                 | 3,422,676   |                    |   | 5,004,156   |  
|                                                                                                                                           |  |                 |             |                    |   |             |  
|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;
 8,427,480 and 8,422,890 shares issued and outstanding, respectively |  |                 | 421,374     |                    |   | 421,144     |  
|Additional paid-in capital                                                                                                                 |  |                 | 34,716,244  |                    |   | 34,491,370  |  
|Retained earnings                                                                                                                          |  |                 | 58,063,532  |                    |   | 56,769,816  |  
|Accumulated other comprehensive loss, net of tax                                                                                           |  |                 | (242,126    | )                  |   | (285,637    | )
|TOTAL STOCKHOLDERS EQUITY                                                                                                                 |  |                 | 92,959,024  |                    |   | 91,396,693  |  
|                                                                                                                                           |  |                 |             |                    |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                 |  | $               | 110,317,973 |                    | $ | 109,070,227 |  

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

3

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Table of Contents

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

|                                                           |  |                              |            |      |   |            |  
|---------------------------------------------------------- |  | ---------------------------- | ---------- | ---- | - | ---------- | -
|                                                           |  | Three
 Months Ended March 31 |           
|                                                           |  | 2011                         |            | 2010 |  
|                                                           |  |                              |            |      |   |            |  
|Sales from operations                                      |  | $                            | 31,022,802 |      | $ | 25,882,011 |  
|                                                           |  |                              |            |      |   |            |  
|Costs and expenses:                                        |  |                              |            |      |   |            |  
|Cost of sales                                              |  |                              | 17,694,313 |      |   | 15,366,950 |  
|Selling, general and administrative expenses               |  |                              | 9,187,210  |      |   | 8,394,796  |  
|Total costs and expenses                                   |  |                              | 26,881,523 |      |   | 23,761,746 |  
|                                                           |  |                              |            |      |   |            |  
|Operating income                                           |  |                              | 4,141,279  |      |   | 2,120,265  |  
|                                                           |  |                              |            |      |   |            |  
|Other income and
 (expenses):                              |  |                              |            |      |   |            |  
|Investment and other income                                |  |                              | 79,422     |      |   | 38,622     |  
|Gain on sale of assets                                     |  |                              | (12,220    | )    |   | 6,420      |  
|Interest and other expense                                 |  |                              | (48,043    | )    |   | (52,489    | )
|                                                           |  |                              |            |      |   |            |  
|Other income (loss), net                                   |  |                              | 19,159     |      |   | (7,447     | )
|                                                           |  |                              |            |      |   |            |  
|Income before income taxes                                 |  |                              | 4,160,438  |      |   | 2,112,818  |  
|                                                           |  |                              |            |      |   |            |  
|Income tax expense                                         |  |                              | 1,602,600  |      |   | 781,894    |  
|                                                           |  |                              |            |      |   |            |  
|Net income                                                 |  |                              | 2,557,838  |      |   | 1,330,924  |  
|                                                           |  |                              |            |      |   |            |  
|Other comprehensive income
 (loss), net of tax:            |  |                              |            |      |   |            |  
|Additional minimum pension liability adjustments           |  |                              | (9,218     | )    |   | (102,462   | )
|Unrealized gains (losses) on available-for-sale securities |  |                              | (15,328    | )    |   | 18,000     |  
|Foreign currency translation adjustment                    |  |                              | 68,057     |      |   | (208,232   | )
|Total other comprehensive
 income (loss), net of tax       |  |                              | 43,511     |      |   | (292,694   | )
|Comprehensive net income                                   |  | $                            | 2,601,349  |      | $ | 1,038,230  |  
|                                                           |  |                              |            |      |   |            |  
|Basic net income per share:                                |  | $                            | 0.30       |      | $ | 0.16       |  
|                                                           |  |                              |            |      |   |            |  
|Diluted net income per
 share:                             |  | $                            | 0.30       |      | $ | 0.16       |  
|                                                           |  |                              |            |      |   |            |  
|Average Basic Shares
 Outstanding                          |  |                              | 8,425,003  |      |   | 8,356,873  |  
|Average Dilutive Shares
 Outstanding                       |  |                              | 8,469,845  |      |   | 8,388,478  |  
|Dividends per share                                        |  | $                            | 0.15       |      | $ | 0.14       |  

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

4

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Table of Contents

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

|                                                              |  |              |           |        |                  |         |  |                          |            |  |   |            |   |                                           |          |   |   |            |  
|------------------------------------------------------------- |  | ------------ | --------- | ------ | ---------------- | ------- |  | ------------------------ | ---------- |  | - | ---------- | - | ----------------------------------------- | -------- | - | - | ---------- | -
|                                                              |  |              |           |        |                  |         |  |                          |            |  |   |            |   | CumulativeOtherComprehensiveIncome (Loss) |          |   |   |           
|                                                              |  |              |           |        |                  |         |  | AdditionalPaid-inCapital |            |  |   |            |   |                                           |          |  
|                                                              |  | Common Stock |           |        | RetainedEarnings |         |  |                          |            | 
|                                                              |  | Shares       |           | Amount |                  |         |  |                          | Total      | 
|                                                              |  |              |           |        |                  |         |  |                          |            |  |   |            |  
|BALANCE AT DECEMBER 31, 2010                                  |  |              | 8,422,890 |        | $                | 421,144 |  | $                        | 34,491,370 |  | $ | 56,769,816 |   | $                                         | (285,637 | ) | $ | 91,396,693 |  
|Net income                                                    |  |              |           |        |                  |         |  |                          |            |  |   | 2,557,838  |   |                                           |          |   |   | 2,557,838  |  
|Issuance of common stock under Employee Stock Purchase Plan   |  |              | 1,590     |        |                  | 80      |  |                          | 21,131     |  |   |            |   |                                           |          |   |   | 21,211     |  
|Issuance of common stock under Non-Employee Stock Option Plan |  |              | 3,000     |        |                  | 150     |  |                          | 24,150     |  |   |            |   |                                           |          |   |   | 24,300     |  
|Tax benefit from non-qualified stock options                  |  |              |           |        |                  |         |  |                          | 7,280      |  |   |            |   |                                           |          |   |   | 7,280      |  
|Share based compensation                                      |  |              |           |        |                  |         |  |                          | 172,313    |  |   |            |   |                                           |          |   |   | 172,313    |  
|Shareholder dividends                                         |  |              |           |        |                  |         |  |                          |            |  |   | (1,264,122 | ) |                                           |          |   |   | (1,264,122 | )
|Other comprehensive income                                    |  |              |           |        |                  |         |  |                          |            |  |   |            |   |                                           | 43,511   |   |   | 43,511     |  
|BALANCE AT MARCH 31, 2011                                     |  |              | 8,427,480 |        | $                | 421,374 |  | $                        | 34,716,244 |  | $ | 58,063,532 |   | $                                         | (242,126 | ) | $ | 92,959,024 |  

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

5

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Table of Contents

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

|                                                                                   |  |                             |            |      |   |            |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                   |  | Three Months Ended March 31 |           
|                                                                                   |  | 2011                        |            | 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                             |            |      |   |            |  
|Net income                                                                         |  | $                           | 2,557,838  |      | $ | 1,330,924  |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                             |            |      |   |            |  
|Depreciation and amortization                                                      |  |                             | 499,221    |      |   | 486,692    |  
|Share based compensation                                                           |  |                             | 80,173     |      |   |           |  
|Deferred income taxes                                                              |  |                             | 142,881    |      |   | (131,091   | )
|Loss (gain) on sale of assets                                                      |  |                             | 12,220     |      |   | (6,420     | )
|Excess tax benefit from stock based payments                                       |  |                             | (7,280     | )    |   |           |  
|Changes in assets and liabilities:                                                 |  |                             |            |      |   |            |  
|Trade receivables                                                                  |  |                             | (1,853,282 | )    |   | (2,085,915 | )
|Inventories                                                                        |  |                             | (482,030   | )    |   | (204,684   | )
|Prepaid income taxes                                                               |  |                             | 296,586    |      |   | 337,274    |  
|Other  assets                                                                      |  |                             | (681,740   | )    |   | 76,721     |  
|Accounts payable                                                                   |  |                             | (254,581   | )    |   | 255,857    |  
|Accrued compensation and benefits                                                  |  |                             | (723,597   | )    |   | (1,463,591 | )
|Other accrued expenses                                                             |  |                             | (115,352   | )    |   | (36,744    | )
|Income taxes payable                                                               |  |                             | 887,609    |      |   | 313,773    |  
|Net
 cash provided by (used in) operating activities                               |  |                             | 358,666    |      |   | (1,127,204 | )
|                                                                                   |  |                             |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                             |            |      |   |            |  
|Capital expenditures                                                               |  |                             | (443,602   | )    |   | (555,608   | )
|Purchases of investments                                                           |  |                             | (7,125,746 | )    |   | (9,698,600 | )
|Proceeds from the sale of fixed assets                                             |  |                             |           |      |   | 7,524      |  
|Proceeds from the sale of investments                                              |  |                             | 7,350,000  |      |   | 3,268,023  |  
|Net
 cash used in investing activities                                             |  |                             | (219,348   | )    |   | (6,978,661 | )
|                                                                                   |  |                             |            |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                             |            |      |   |            |  
|Cash dividends paid                                                                |  |                             | (1,263,434 | )    |   | (1,169,040 | )
|Mortgage principal payments                                                        |  |                             | (97,268    | )    |   | (90,864    | )
|Proceeds from issuance of common stock                                             |  |                             | 45,511     |      |   | 55,212     |  
|Excess tax benefit from stock based payments                                       |  |                             | 7,280      |      |   |           |  
|Purchase of common stock                                                           |  |                             |           |      |   |           |  
|                                                                                   |  |                             |            |      |   |            |  
|Net
 cash used in financing activities                                             |  |                             | (1,307,911 | )    |   | (1,204,692 | )
|                                                                                   |  |                             |            |      |   |            |  
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                                    |  |                             | 6,200      |      |   | (98,177    | )
|                                                                                   |  |                             |            |      |   |            |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |  |                             | (1,162,393 | )    |   | (9,408,734 | )
|                                                                                   |  |                             |            |      |   |            |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |  |                             | 16,787,558 |      |   | 21,293,448 |  
|                                                                                   |  |                             |            |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |  | $                           | 15,625,165 |      | $ | 11,884,714 |  
|                                                                                   |  |                             |            |      |   |            |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |  |                             |            |      |   |            |  
|Income taxes paid                                                                  |  | $                           | 275,522    |      | $ | 260,893    |  
|Interest paid                                                                      |  |                             | 46,290     |      |   | 52,731     |  
|Dividends declared not paid                                                        |  |                             | 1,264,122  |      |   | 1,170,058  |  

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

6

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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 business

Communications Systems, Inc. (herein
collectively called CSI 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 presentation

The condensed
consolidated balance sheets and consolidated statement of changes in
stockholders equity as of March 31, 2011 and 2010 and the related consolidated
statements of income and comprehensive income (loss), and the condensed
consolidated statements of cash flows for the periods ended March 31, 2011 and
2010 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 March 31, 2011 and 2010 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, 2010 Annual Report to Shareholders on Form 10-K. The
results of operations for the periods ended March 31 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, 2010, appropriately
represent, in all material respects, the current status of accounting policies,
and are incorporated herein by reference.

7

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Table of Contents

Cash equivalents and investments

For purposes
of the condensed consolidated balance sheet and 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
March 31, 2011, the Company had $15.6 million in cash and cash
equivalents. Of this amount, $8.9 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 equivalents are held at large, well-established financial institutions and
the Company believes any risk associated with uninsured balances is remote.

The Company
had $26.0 million in investments, which consist of certificates of deposit that
were purchased in the public markets and are classified as available-for-sale
at March 31, 2011. Of the $26.0 million in investments, $19.9 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 sales
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
the 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.

Accumulated other comprehensive income (loss)

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

|                                                          |  |                |            |                   |   |            |  
|--------------------------------------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | -
|                                                          |  | March 31
 2011 |            | December 31
 2010 |  
|Foreign
 currency translation                             |  | $              | (1,204,473 | )                 | $ | (1,272,530 | )
|Unrealized
 gain (loss) on available-for-sale investments |  |                | (1,270     | )                 |   | 14,058     |  
|Minimum pension
 liability                                |  |                | 963,617    |                   |   | 972,835    |  
|                                                          |  | $              | (242,126   | )                 | $ | (285,637   | )

8

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NOTE 2 -
STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

Under the
Companys Employee Stock Purchase Plan (ESPP) employees are able to acquire
shares of common stock at 95% of the price at the end of the current quarterly
plan term, which is March 31, 2011. The ESPP is non-compensatory under current
rules and does not give rise to compensation cost. At March 31, 2011, 75,131
shares remain available for purchase under the ESPP.

Stock Option Plan for Directors

Shares of
common stock are also reserved for issuance in connection with a nonqualified
stock option plan under which 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 March 31, 2011, 37,000 shares are available to be issued under the
Director Plan.

Stock Plan

Under the
Companys 1992 Stock Plan (the Stock Plan) shares of common stock may be
issued pursuant to stock options, restricted stock or deferred stock grants 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, restricted stock and deferred
stock are determined by the Compensation Committee of the Board of Directors,
subject to certain limitations in the Stock Plan.

During the
quarter ending March 31, 2011 stock options were awarded covering 89,610 shares
to key executive employees, which options expire seven years from the date of
award and vest 25% each year beginning one year after the date of award.

During the
quarter ended March 31, 2011, key employees were granted 16,092 shares of
deferred stock based on achievement against performance goals in 2010 under the
Companys performance unit plan. The deferred stock will be paid out in the
first quarter of 2014 to key employees still with the Company at that time. The
Company also granted deferred stock awards of 73,972 shares to key employees
under the Companys performance unit plan for performance over the 2011 to 2013
period. The actual number of shares of deferred stock earned by the respective
employees, if any, will be determined based on achievement against cumulative
performance goals for the three years ending December 31, 2013 and the number
of shares earned will be paid in the first quarter of 2014 to those key
employees still with the Company at that time. During the first quarter, the
Company also granted deferred stock awards of up to 11,618 shares to executive
employees that will be earned under the Companys short-term incentive plan if
actual revenue growth equals or exceeds 150% of the revenue growth target for
2011. The number of shares earned by the respective executive employees, if
any, will be paid out in the first quarter of 2012.

At March 31,
2011, 933,981 shares remained available to be issued under the Stock Plan.

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Changes in Stock Options Outstanding

The following
table summarizes changes in the number of outstanding stock options under the
Director Plan and Stock Plan over the period December 31, 2010 to March 31,
2011. All stock options outstanding at December 31, 2010 are exercisable and
none of the options awarded during the period ended March 31, 2011 are
exercisable.

|                                 |  |         |         |                                             |   |                                               |  |  |            | 
|-------------------------------- |  | ------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  |  | ---------- | 
|                                 |  | Options |         | Weighted average
 exercise price
 per share |   | Weighted average
 remaining
 contractual term | 
|Outstanding
  December 31, 2010 |  |         | 162,000 |                                             | $ | 9.49                                          |  |  | 5.33 years | 
|Awarded                          |  |         | 89,610  |                                             |   | 14.15                                         |  |  |            | 
|Exercised                        |  |         | (3,000  | )                                           |   | 8.10                                          |  |  |            | 
|Canceled                         |  |         |        |                                             |   |                                              |  |  |            | 
|Outstanding
  March 31, 2011    |  |         | 248,610 |                                             |   | 11.19                                         |  |  | 5.65 years | 

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 March 31, 2011 was $1,045,000. The intrinsic
value of all options exercised during the three months ended March 31, 2011 was
$19,000. Net cash proceeds from the exercise of all stock options were $24,000
and $0 for the three months ended March 31, 2011 and 2010, respectively.

Compensation Expense

Share based
compensation expense recognized for the three month period ended March 31, 2011
was $80,000 before income taxes and $52,000 after income taxes. No stock
compensation expense was recognized for the three month period ended March 31,
2010. Unrecognized compensation expense for the Companys plans was $857,000 at
March 31, 2011. Excess tax benefits from the exercise of stock options included
in financing cash flows for the three month periods ended March 31, 2011 and
2010 were $7,000 and $0, respectively.

NOTE 3 -
INVENTORIES

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

|                             |  |                |            |                   |   |            | 
|---------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | 
|                             |  | March 31
 2011 |            | December 31
 2010 |  
|Finished
 goods              |  | $              | 13,616,894 |                   | $ | 13,684,884 | 
|Raw and
 processed materials |  |                | 11,392,455 |                   |   | 10,814,051 | 
|Total                        |  | $              | 25,009,349 |                   | $ | 24,498,935 | 

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.

10

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The following
table presents the changes in the Companys warranty liability for the three
month periods ended March 31, 2011 and 2010, respectively, the majority of
which relates to a five-year obligation to provide for potential future
liabilities for network equipment sales.

|                            |  |      |         |      |   |         |  
|--------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                            |  | 2011 |         | 2010 |  
|Beginning
 Balance          |  | $    | 616,000 |      | $ | 648,000 |  
|Actual
 warranty costs paid |  |      | (89,000 | )    |   | (18,000 | )
|Amounts
 charged to expense |  |      | 105,000 |      |   | (50,000 | )
|Ending
 balance             |  | $    | 632,000 |      | $ | 580,000 |  

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 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, which 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 March 31,
2011 there was $546,000 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.

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

The Companys
effective income tax rate was 38.5% for the first three months of 2011. 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. The
foreign operating losses may ultimately be deductible in the countries in which
they have occurred; however 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 0.4% for the three months ended March 31, 2011. There were no
additional uncertain tax positions identified in the first quarter of 2011. The
Companys effective income tax rate for the three months ended March 31, 2010
was 37%, and differed from the federal tax rate due to state income taxes,
foreign losses not deductible for U.S. income tax purposes, provisions for
interest charges, and settlement of uncertain tax positions.

11

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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
three month periods ended March 31, 2011 and 2010 is as follows:

SEGMENT INFORMATION

|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|-------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total     |  
|Three months ended March 31, 2011:           |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 9,659,974  |                      | $ | 16,555,896        |  | $              | 3,779,724 |       | $ | 1,027,208 |   |   |            |   | $ | 31,022,802  | 
|Cost of sales                                |  |        | 7,126,170  |                      |   | 7,579,227         |  |                | 2,152,368 |       |   | 836,548   |   |   |            |   | $ | 17,694,313  | 
|Gross profit                                 |  |        | 2,533,804  |                      |   | 8,976,669         |  |                | 1,627,356 |       |   | 190,660   |   |   |           |   |   | 13,328,489  | 
|Selling, general and administrative expenses |  |        | 1,816,945  |                      |   | 5,332,393         |  |                | 512,820   |       |   | 303,246   |   |   | 1,221,806  |   | $ | 9,187,210   | 
|Operating income (loss)                      |  | $      | 716,859    |                      | $ | 3,644,276         |  | $              | 1,114,536 |       | $ | (112,586  | ) | $ | (1,221,806 | ) | $ | 4,141,279   | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 217,016    |                      | $ | 167,154           |  | $              | 28,488    |       | $ | 11,898    |   | $ | 74,665     |   | $ | 499,221     | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 232,625    |                      | $ | 191,550           |  | $              | 10,051    |       | $ | 9,376     |   | $ |           |   | $ | 443,602     | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Assets at March 31, 2011                     |  | $      | 20,424,181 |                      | $ | 32,125,732        |  | $              | 3,668,604 |       | $ | 2,732,972 |   | $ | 51,366,484 |   | $ | 110,317,973 | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total     |  
|Three months ended March 31, 2010:           |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 9,927,105  |                      | $ | 13,753,196        |  | $              | 1,295,719 |       | $ | 905,991   |   | $ |           |   | $ | 25,882,011  | 
|Cost of sales                                |  |        | 7,276,458  |                      |   | 6,330,882         |  |                | 934,898   |       |   | 824,712   |   |   |           |   | $ | 15,366,950  | 
|Gross profit                                 |  |        | 2,650,647  |                      |   | 7,422,314         |  |                | 360,821   |       |   | 81,279    |   |   |           |   |   | 10,515,061  | 
|Selling, general and administrative expenses |  |        | 1,787,899  |                      |   | 4,893,304         |  |                | 387,196   |       |   | 248,554   |   |   | 1,077,843  |   | $ | 8,394,796   | 
|Operating income (loss)                      |  | $      | 862,748    |                      | $ | 2,529,010         |  | $              | (26,375   | )     | $ | (167,275  | ) | $ | (1,077,843 | ) | $ | 2,120,265   | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 217,037    |                      | $ | 147,023           |  | $              | 37,919    |       | $ | 12,202    |   | $ | 72,510     |   | $ | 486,692     | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 463,796    |                      | $ | 26,590            |  | $              | 11,787    |       | $ | 14,648    |   | $ | 38,787     |   | $ | 555,608     | 
|                                             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Assets at March 31, 2010                     |  | $      | 20,160,161 |                      | $ | 30,071,446        |  | $              | 2,540,094 |       | $ | 3,890,113 |   | $ | 45,177,607 |   | $ | 101,839,421 | 

NOTE 8 
PENSIONS

The Companys
U.K. based subsidiary Austin Taylor maintains defined benefit pension plans
that cover approximately seven  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:

|                                |  |                             |         |      |   |         |  
|------------------------------- |  | --------------------------- | ------- | ---- | - | ------- | -
|                                |  | Three months Ended March 31 |        
|                                |  | 2011                        |         | 2010 |  
|Service cost                    |  | $                           | 12,000  |      |   | 9,000   |  
|Interest
 cost                  |  |                             | 67,000  |      |   | 62,000  |  
|Expected
 return on plan assets |  |                             | (63,000 | )    |   | (54,000 | )
|                                |  | $                           | 16,000  |      | $ | 17,000  |  

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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 and shares
associated with the long-term incentive compensation plans, which resulted in a
dilutive effect of 44,841 shares and 31,605 shares for the respective three
month periods ended March 31, 2011 and 2010. 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
was 0 and 24,000 at March 31, 2011 and 2010, respectively. Certain options were
not included because the exercise price was greater than the average market
price of common stock during the period and certain deferred stock awards were
not included because of unmet performance conditions.

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 March 31, 2011 and December 31, 2010, respectively,
include money market funds within cash and cash equivalents of $8,901,000 and
$9,624,000 classified as Level 1 within the hierarchy and certificate of
deposits within investments of $26,048,000 and $26,287,000 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 three
months ended March 31, 2011.

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.

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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:

| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our
 ability to manufacture and deliver our products to customers in the time
 frame these customers have specified;                                                                                                              
| |  | 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;                                                                                                                                                                                        
| |  | the
 continuing economic downturn and the fact that conditions outside the United
 States are recovering more slowly than within the United States;                                                                               
| |  | 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 March 31, 2011 Compared toThree Months Ended March 31, 2010

Consolidated
sales increased 20% in 2011 to $31,023,000 compared to $25,882,000 in 2010.
Consolidated operating income in 2011 increased to $4,141,000 compared to
$2,120,000 in the first quarter of 2010.

Net income in
2011 increased to $2,558,000 compared to $1,331,000 in the first quarter of
2010.

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Suttle

Suttle sales
decreased 3% in the first quarter of 2011 to $9,660,000 compared to $9,927,000
in the same period of 2010 due to a continued decline in the voice markets.
Sales by customer groups in the first quarter of 2011 and 2010 were:

|                           |  |                                |           |      |   |           | 
|-------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | 
|                           |  | Suttle Sales by Customer Group |          
|                           |  | 2011                           |           | 2010 |  
|Major
 telephone companies |  | $                              | 6,875,000 |      | $ | 6,751,000 | 
|Distributors               |  |                                | 1,149,000 |      |   | 1,458,000 | 
|International              |  |                                | 1,391,000 |      |   | 1,682,000 | 
|Other                      |  |                                | 245,000   |      |   | 36,000    | 
|                           |  | $                              | 9,660,000 |      | $ | 9,927,000 | 

Suttles sales
by product groups in first quarter of 2011 and 2010 were:

|                             |  |                               |           |      |   |           | 
|---------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                             |  | Suttle Sales by Product Group |          
|                             |  | 2011                          |           | 2010 |  
|Modular
 connecting products |  | $                             | 3,551,000 |      | $ | 4,213,000 | 
|DSL products                 |  |                               | 2,959,000 |      |   | 3,070,000 | 
|Structured
 cabling products |  |                               | 2,918,000 |      |   | 2,490,000 | 
|Other
 products              |  |                               | 232,000   |      |   | 154,000   | 
|                             |  | $                             | 9,660,000 |      | $ | 9,927,000 | 

Sales to the
major telephone companies increased 2% in 2011 due to an increase in new
multi-dwelling unit construction within the US housing market, which is offset
by declines in sales of DSL products and a continued decline in voice markets.
Sales to these customers accounted for 71% of Suttles sales in the first
quarter of 2011 compared to 68% of sales in 2010. Sales to distributors
decreased 21% in 2011 due to continued declines in voice markets, and continued
challenges in the single family unit construction within the US housing market.
This customer segment accounted for 12% and 15% of sales in the first quarters
of 2011 and 2010, respectively. International sales decreased 17% and accounted
for 14% of Suttles first quarter 2011 sales. Suttles products do not have a
large international market due to different product specifications in non-U.S.
markets.

Modular
connecting products sales have decreased 16% due to continued decline in the
voice market. Sales of DSL products decreased 4% due to the maturation of the
U.S. DSL market and the order cycle of major customers. Sales of structured
cabling products increased 17% due to an increase in new multi-dwelling unit
construction market.

Suttles gross margin decreased
4% in the first quarter of 2011 to $2,534,000 compared to $2,651,000 in the
same period of 2010. Gross margin as a percentage of sales decreased to 26% in
2011 from 27% in 2010 due to product mix changes. Selling, general and administrative
expenses increased $29,000 or 2% in the first quarter of 2011 compared to the
same period in 2010, due to increased spending in the Companys technology
development initiative. Suttles operating income was $717,000 in the first
quarter of 2011 compared to operating income of $863,000 in 2010.

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Transition Networks

Transition
Networks sales increased 20% to $16,556,000 in the first quarter of 2011
compared to $13,753,000 in 2010.

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

|                                      |  |                                     |            |      |   |            | 
|------------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                                      |  | Transition Networks Sales by Region |           
|                                      |  | 2011                                |            | 2010 |  
|North
 America                        |  | $                                   | 13,218,000 |      | $ | 11,095,000 | 
|Europe,
 Middle East, Africa (EMEA) |  |                                     | 1,832,000  |      |   | 1,080,000  | 
|Rest of
 world                        |  |                                     | 1,506,000  |      |   | 1,578,000  | 
|                                      |  | $                                   | 16,556,000 |      | $ | 13,753,000 | 

The following
table summarizes Transition Networks 2011 and 2010 first quarter sales by its
major product groups:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  | 2011                                       |            | 2010 |  
|Media
 converters  |  | $                                          | 11,629,000 |      | $ | 10,426,000 | 
|Ethernet
 switches |  |                                            | 1,036,000  |      |   | 870,000    | 
|Ethernet
 adapters |  |                                            | 2,296,000  |      |   | 1,602,000  | 
|Other
 products    |  |                                            | 1,595,000  |      |   | 855,000    | 
|                   |  | $                                          | 16,556,000 |      | $ | 13,753,000 | 

Sales in North
America increased 19% or $2,123,000 due to an improving economic situation in
the United States and Canada and increased activity in target vertical market
segments. International sales increased $680,000, or 26%, primarily due to
improved economic activity in EMEA.

Gross margin
on first quarter Transition Networks sales increased 21% to $8,977,000 in 2011
from $7,422,000 in 2010. Gross margin as a percentage of sales remained stable
at 54% in 2011 and 2010. Selling, general and administrative expenses increased
9% to $5,332,000 in 2011 compared to $4,893,000 in 2010 due to the hiring of
new employees and an increase in marketing and research and development
expenses. Operating income increased to $3,644,000 in 2011 compared to
$2,529,000 in 2010.

JDL Technologies, Inc.

JDL
Technologies, Inc. sales increased 192% to $3,780,000 in the first quarter of
2011 compared to $1,296,000 in 2010.

JDLs revenues
by customer group were as follows:

|                           |  |                               |           |      |   |           | 
|-------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                           |  | JDL Revenue by Customer Group |          
|                           |  | 2011                          |           | 2010 |  
|Broward
 County FL schools |  | $                             | 3,737,000 |      | $ | 1,200,000 | 
|All other                  |  |                               | 43,000    |      |   | 96,000    | 
|                           |  | $                             | 3,780,000 |      | $ | 1,296,000 | 
|                           |  |                               |           |      |   |           | 

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Revenues
earned in Broward County, Florida increased $2,537,000 or 212% in the first
quarter 2011. The increase was the result of higher funding from the federal
government for LAN/WAN/Wire work in the first quarter of 2011 than in the same
period of 2010 from an order that the Company disclosed in the first quarter of
2010.

JDL gross
margin increased 351% to $1,627,000 in the first quarter of 2011 compared to
$361,000 in the same period in 2010. Gross margin as a percentage of sales
increased to 43% in 2011 from 28% in 2010 due to purchasing discounts and
rebates the Company was able to take advantage of during the quarter. Selling,
general and administrative expenses increased in 2011 to $513,000 compared to
$387,000 in 2010 due to headcount increases, specifically within the sales
function as JDL has expanded its market focus. JDL reported operating income of
$1,115,000 in the first quarter of 2011 compared to an operating loss of
$26,000 in the same period of 2010.

Austin Taylor

Austin
Taylors revenues increased 13% to $1,027,000 for the first quarter of 2011,
compared to $906,000 in 2010. This revenue increase is due to increased product
penetration into a major frame and cabinet original equipment manufacturer
(OEM). In addition, the Company received adjusted OEM pricing on a renewed
three year supplier contract. Gross margin increased to $191,000 in 2011 from
$81,000 in 2010. Gross margin as a percentage of sales was 19% in 2011 compared
to 9% in 2010. This margin increase is a result of increased volume of
customized OEM product sales and improved efficiencies of the internal
manufacturing processes. Austin Taylor reported an operating loss in 2011 of
$113,000 compared to $167,000 in 2010.

Other

Net investment
income increased to $19,000 in 2011 as compared to a loss of $7,000 in 2010
This increase is due to favorable unrealized gains due to the improvement of
the Euro, offset by continued decreases in interest expense. The Companys
income before income taxes increased to $4,160,000 in 2011 compared to
$2,113,000 in 2010. The Companys effective income tax rate was 39% in 2011 and
37% in 2010. 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, income tax return to provision adjustments, provisions for interest
charges and settlement of uncertain income tax positions.

Liquidity and Capital Resources

At March 31,
2011, the Company had approximately $41,673,000 of cash equivalents and
investments compared to $43,075,000 of cash equivalents and investments at
December 31, 2010. The Company had current assets of approximately $85,993,000
and current liabilities of $13,936,000 at March 31, 2011 compared to current
assets of $86,204,000 and current liabilities of $12,669,000 at December 31,
2010.

Net cash
provided by operating activities was $359,000 in the first three months of 2011
compared to $1,127,000 used in the same period in 2010. Significant working capital
changes from December 31, 2010 to March 31, 2011 included an increase in
accounts receivable of $1,853,000 due to an overall increase in sales in the
first quarter of 2011 as compared to the fourth quarter of 2010 and an increase
in income taxes payable due to higher taxable income and timing of tax
payments.

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Net cash used
in investing activities was $219,000 in the first three months in 2011 compared
to cash used of $6,979,000 in the same period in 2010. During the first three
months of 2011, the Company continued to purchase certificates of deposit with
maturities of greater than 90 days.

Net cash used
in financing activities was $1,308,000 and $1,205,000 in the first three months
of 2011 and 2010, respectively. Cash dividends paid in the first three months
of 2011 were $1,263,000 ($0.15 per common share) compared to $1,169,000 ($0.14
per common share) in the same period in 2010. Proceeds from common stock
issuances, principally issued under the Companys Employee Stock Purchase Plan,
totaled approximately $46,000 in the first three months of 2011 and $55,000 in
the same period in 2010. In the first three months of 2011, the Company did not
purchase any of its outstanding common shares. At March 31, 2011, 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% (1.8% at March 31,
2011). There were no borrowings on the line of credit during the first three
months of 2011 or 2010. The credit agreement expires September 30, 2011 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 $97,000 during the first
quarter of 2011. The outstanding balance on the mortgage was $2,304,000 at
March 31, 2011.

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 2010 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 March 31, 2011.

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.

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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 March 31, 2011 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

The Company
carried out an evaluation, under the supervision and with the participation of
its management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective.

There was no
change in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys 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.

Item 4.
[Removed and Reserved]

Item 5. Other InformationNot Applicable

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Item 6 Exhibits.

| |                                              |                                                                                                                                                    
| | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 following exhibits are included herein:
| |                                             
| | 31.1                                         | Certification
 of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
| | 31.2                                         | Certification
 of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
| | 32.                                          | Certifications
 pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                          

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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: May
 10, 2011 |  |    | President
 and Chief Executive Officer
|                    |  |    |                                        | 
|                    |  |    | /s/ David T.
 McGraw                   | 
|                    |  |    | David T.
 McGraw                       | 
|Date: May
 10, 2011 |  |    | Chief
 Financial Officer               | 

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