Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

|         
|---------
|         
|         
|FORM 10-Q
|         
|         

(Mark One)


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

For the quarterly period
ended June 30, 2009

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
 incorporation or organization) | (Federal
 Employer
 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 check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.YES o NO x

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

Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated
Filer o   Smaller Reporting Company x

APPLICABLE ONLY TO CORPORATE ISSUERS:


Indicate the number of
shares outstanding of each of the issuer’s classes of common stock, as of the
latest practicable date.


|                                         |  |                                        |  |                              
|---------------------------------------- |  | -------------------------------------- |  | -----------------------------
|Class                                    |  | Name of Exchange 
 On Which Registered |  | Outstanding at August 1, 2009
|                                         |  |                                        |  |                              
|Common
 Stock, par value
 $.05 per share |  | NASDAQ                                 |  | 8,343,262                    





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COMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIES

|     
|-----
|INDEX
|     

|                               |                                                                                                |    |         
|------------------------------ | ---------------------------------------------------------------------------------------------- | -- | --------
|                               |                                                                                                |    | Page No.
|                               |                                                                                                |    |         
|Part I.
 Financial Information |                                                                                                |   
|                               |                                                                                                |    |         
|                               | Item 1. Financial Statements (Unaudited)                                                       |    |         
|                               |                                                                                                |    |         
|                               | Condensed Consolidated Balance
Sheets                                                          |    | 3       
|                               |                                                                                                |    |         
|                               | Condensed Consolidated Statements of
Income
 and Comprehensive Income                          |    | 4       
|                               |                                                                                                |    |         
|                               | Condensed Consolidated Statements of
 Changes in Stockholders’ Equity                          |    | 5       
|                               |                                                                                                |    |         
|                               | Condensed Consolidated Statements of
Cash
 Flows                                               |    | 6       
|                               |                                                                                                |    |         
|                               | Notes to Condensed Consolidated
Financial
 Statements                                          |    | 7       
|                               |                                                                                                |    |         
|                               | Item 2. Management’s Discussion and Analysis of Financial Condition
 and Results of Operations |    | 16      
|                               |                                                                                                |    |         
|                               | Item 3. Quantitative and Qualitative Disclosures about Market Risk                             |    | 24      
|                               |                                                                                                |    |         
|                               | Item 4. Controls and Procedures                                                                |    | 24      
|                               |                                                                                                |    |         
|Part II. Other Information     |                                                                                                | 25
|                               |                                                                                                |    |         
|SIGNATURES                     |                                                                                                |   
|                               |                                                                                                |    |         
|CERTIFICATIONS                 |                                                                                                |   

2

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Table of Contents

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

|                                                                                                                                            |  |               |             |                    |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ------------------ | - | ---------- | -
|                                                                                                                                            |  | June 30
 2009 |             | December
 31
 2008 |  
|ASSETS                                                                                                                                     
|CURRENT ASSETS:                                                                                                                             |  |               |             |                    |   |            |  
|Cash and cash equivalents                                                                                                                   |  | $             | 20,004,972  |                    | $ | 29,951,561 |  
|Investments                                                                                                                                 |  |               | 9,601,766   |                    |   |            |  
|Trade accounts receivable, less allowance
 for doubtful accounts of $295,000 and $219,000, respectively                                     |  |               | 16,940,582  |                    |   | 17,243,788 |  
|Inventories                                                                                                                                 |  |               | 27,837,274  |                    |   | 29,398,443 |  
|Other current assets                                                                                                                        |  |               | 520,549     |                    |   | 861,039    |  
|Deferred income taxes                                                                                                                       |  |               | 3,844,034   |                    |   | 3,364,297  |  
|TOTAL CURRENT ASSETS                                                                                                                        |  |               | 78,749,177  |                    |   | 80,819,128 |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                          |  |               | 13,563,488  |                    |   | 12,014,541 |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|OTHER ASSETS:                                                                                                                               |  |               |             |                    |   |            |  
|Investments                                                                                                                                 |  |               | 4,994,074   |                    |   |            |  
|Goodwill                                                                                                                                    |  |               | 4,560,217   |                    |   | 4,560,217  |  
|Deferred income taxes                                                                                                                       |  |               | 678,009     |                    |   | 643,667    |  
|Prepaid pensions                                                                                                                            |  |               | 340,308     |                    |   | 566,137    |  
|Other assets                                                                                                                                |  |               | 128,552     |                    |   | 134,101    |  
|TOTAL OTHER ASSETS                                                                                                                          |  |               | 10,701,160  |                    |   | 5,904,122  |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|TOTAL ASSETS                                                                                                                                |  | $             | 103,013,825 |                    | $ | 98,737,791 |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                                       
|                                                                                                                                            |  |               |             |                    |   |            |  
|CURRENT LIABILITIES:                                                                                                                        |  |               |             |                    |   |            |  
|Current portion of long-term debt                                                                                                           |  | $             | 360,440     |                    | $ | 348,373    |  
|Accounts payable                                                                                                                            |  |               | 6,062,218   |                    | $ | 4,126,756  |  
|Accrued compensation and benefits                                                                                                           |  |               | 3,752,511   |                    |   | 2,985,233  |  
|Other accrued liabilities                                                                                                                   |  |               | 1,637,634   |                    |   | 1,624,971  |  
|Income taxes payable                                                                                                                        |  |               | 733,955     |                    |   | 11,430     |  
|Dividends payable                                                                                                                           |  |               | 1,168,154   |                    |   | 994,169    |  
|TOTAL CURRENT LIABILITIES                                                                                                                   |  |               | 13,714,912  |                    |   | 10,090,932 |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|LONG TERM LIABILITIES:                                                                                                                      |  |               |             |                    |   |            |  
|Long-term compensation plans                                                                                                                |  |               | 708,782     |                    |   | 1,410,559  |  
|Income taxes payable                                                                                                                        |  |               | 643,855     |                    |   | 733,683    |  
|Long term debt - mortgage payable                                                                                                           |  |               | 2,591,186   |                    |   | 2,774,474  |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                 |  |               | 3,943,823   |                    |   | 4,918,716  |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|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; 8,343,262 and 8,282,348 shares issued and
 outstanding, respectively |  |               | 417,163     |                    |   | 414,117    |  
|Additional paid-in capital                                                                                                                  |  |               | 33,533,263  |                    |   | 33,019,154 |  
|Retained earnings                                                                                                                           |  |               | 51,290,625  |                    |   | 50,503,410 |  
|Accumulated other comprehensive income, net
 of tax                                                                                         |  |               | 114,039     |                    |   | (208,538   | )
|TOTAL STOCKHOLDERS EQUITY                                                                                                                  |  |               | 85,355,090  |                    |   | 83,728,143 |  
|                                                                                                                                            |  |               |             |                    |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  | $             | 103,013,825 |                    | $ | 98,737,791 |  

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

3

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Table of Contents

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

|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                             |  | Three
 Months Ended June 30 |            | Six Months
 Ended June 30 |  
|                                                             |  | 2009                        |            | 2008                      |   | 2009       |   | 2008 |           
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Sales from operations                                        |  | $                           | 28,584,399 |                           | $ | 31,291,042 |   | $    | 55,349,357 |   | $ | 61,612,277 |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Costs and expenses:                                          |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Cost of sales                                                |  |                             | 17,934,303 |                           |   | 20,029,342 |   |      | 34,919,816 |   |   | 38,900,023 |  
|Selling, general and administrative
expenses                 |  |                             | 7,882,388  |                           |   | 8,553,281  |   |      | 15,885,197 |   |   | 16,584,438 |  
|Impairment and other charges related to JDL
(Notes 4 and 11) |  |                             |            |                           |   | (221,213   | ) |      |            |   |   | 2,999,441  |  
|Total costs and expenses                                     |  |                             | 25,816,691 |                           |   | 28,361,410 |   |      | 50,805,013 |   |   | 58,483,902 |  
|Operating income                                             |  |                             | 2,767,708  |                           |   | 2,929,632  |   |      | 4,544,344  |   |   | 3,128,375  |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Other income and (expenses):                                 |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Investment and other income                                  |  |                             | 280,245    |                           |   | 130,504    |   |      | 490,782    |   |   | 319,260    |  
|Gain on sale of assets                                       |  |                             | 24,041     |                           |   | 80,987     |   |      | 32,672     |   |   | 86,204     |  
|Interest and other expense                                   |  |                             | (57,703    | )                         |   | (51,638    | ) |      | (116,795   | ) |   | (87,762    | )
|Other income, net                                            |  |                             | 246,583    |                           |   | 159,853    |   |      | 406,659    |   |   | 317,702    |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Income before income taxes                                   |  |                             | 3,014,291  |                           |   | 3,089,485  |   |      | 4,951,003  |   |   | 3,446,077  |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Income tax expense                                           |  |                             | 1,265,910  |                           |   | 829,000    |   |      | 1,979,690  |   |   | 999,000    |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net income                                                   |  |                             | 1,748,381  |                           |   | 2,260,485  |   |      | 2,971,313  |   |   | 2,447,077  |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Other comprehensive income (loss), net of tax:               |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Additional minimum pension liability adjustments             |  |                             | (240,238   | )                         |   | (44,367    | ) |      | (228,278   | ) |   | 43         |  
|Unrealized gains on available-for-sale
securities            |  |                             | 66,775     |                           |   |            |   |      | 66,775     |   |   |            |  
|Foreign currency translation adjustment                      |  |                             | 557,799    |                           |   | 33,822     |   |      | 484,080    |   |   | (209,153   | )
|Total other comprehensive income (loss), net of tax          |  |                             | 384,336    |                           |   | (10,545    | ) |      | 322,577    |   |   | (209,110   | )
|Comprehensive net income (loss)                              |  | $                           | 2,132,717  |                           | $ | 2,249,940  |   | $    | 3,293,890  |   | $ | 2,237,967  |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Basic net income per share:                                  |  | $                           | .21        |                           | $ | .26        |   | $    | .36        |   | $ | .28        |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Diluted net income per share:                                |  | $                           | .21        |                           | $ | .26        |   | $    | .36        |   | $ | .28        |  
|                                                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Average Basic Shares Outstanding                             |  |                             | 8,343,262  |                           |   | 8,609,628  |   |      | 8,330,093  |   |   | 8,593,851  |  
|Average Dilutive Shares Outstanding                          |  |                             | 8,350,628  |                           |   | 8,652,053  |   |      | 8,335,162  |   |   | 8,635,834  |  
|Dividends per share                                          |  | $                           | .12        |                           | $ | .12        |   | $    | .24        |   | $ | .24        |  

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

4

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Table of Contents

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

|                                                             |  |              |           |        |   |         |   |                              |            |                    |   |                                                 |   |   |          |   |   |            |  
|------------------------------------------------------------ |  | ------------ | --------- | ------ | - | ------- | - | ---------------------------- | ---------- | ------------------ | - | ----------------------------------------------- | - | - | -------- | - | - | ---------- | -
|                                                             |  |              |           |        |   |         |   | Additional
 Paid-in
 Capital |            | Retained
 Earnings |   | Cumulative
 Other
 Comprehensive
 Income (Loss) |   |   |          |  
|                                                             |  | Common Stock |           |        |   |         |   |                              |           
|                                                             |  | Shares       |           | Amount |   |         |   |                              | Total      |                   
|BALANCE AT DECEMBER 31, 2008                                 |  |              | 8,282,349 |        | $ | 414,117 |   | $                            | 33,019,154 |                    | $ | 50,503,410                                      |   | $ | (208,538 | ) | $ | 83,728,143 |  
|Net income                                                   |  |              |           |        |   |         |   |                              |            |                    |   | 2,971,313                                       |   |   |          |   | $ | 2,971,313  |  
|Issuance of common stock under Employee
 Stock Purchase Plan |  |              | 6,683     |        |   | 334     |   |                              | 49,187     |                    |   |                                                 |   |   |          |   | $ | 49,521     |  
|Issuance of common stock to Employee Stock
 Ownership Plan   |  |              | 55,100    |        |   | 2,755   |   |                              | 427,025    |                    |   |                                                 |   |   |          |   | $ | 429,780    |  
|Issuance of common stock under Employee
 Stock Option Plan   |  |              | 2,000     |        |   | 100     |   |                              | 17,200     |                    |   |                                                 |   |   |          |   | $ | 17,300     |  
|Tax benefit from non-qualified employee
 stock options       |  |              |           |        |   |         |   |                              | 650        |                    |   |                                                 |   |   |          |   | $ | 650        |  
|Share based compensation                                     |  |              |           |        |   |         |   |                              | 31,571     |                    |   |                                                 |   |   |          |   | $ | 31,571     |  
|Purchase of common stock                                     |  |              | (2,869    | )      |   | (143    | ) |                              | (11,524    | )                  |   | (14,458                                         | ) |   |          |   | $ | (26,125    | )
|Shareholder dividends                                        |  |              |           |        |   |         |   |                              |            |                    |   | (2,169,640                                      | ) |   |          |   | $ | (2,169,640 | )
|Other comprehensive income                                   |  |              |           |        |   |         |   |                              |            |                    |   |                                                 |   |   | 322,577  |   | $ | 322,577    |  
|BALANCE AT JUNE 30, 2009                                     |  |              | 8,343,263 |        |   | 417,163 |   |                              | 33,533,263 |                    |   | 51,290,625                                      |   |   | 114,039  |   |   | 85,355,090 |  

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

5

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Table of Contents

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

|                                                                                   |  |                          |             |      |   |            |  
|---------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- | - | ---------- | -
|                                                                                   |  | Six Months Ended June 30 |            
|                                                                                   |  | 2009                     |             | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                          |             |      |   |            |  
|Net income                                                                         |  | $                        | 2,971,313   |      | $ | 2,447,077  |  
|Adjustments to reconcile net income to net cash
provided by operating
 activities: |  |                          |             |      |   |            |  
|Depreciation and amortization                                                      |  |                          | 814,454     |      |   | 1,107,339  |  
|Share based compensation                                                           |  |                          | 31,571      |      |   | 41,824     |  
|Deferred income taxes                                                              |  |                          | (514,079    | )    |   | (1,024,482 | )
|Impairment and other charges related to JDL (Notes 4
and 11)                       |  |                          | 0           |      |   | 2,999,441  |  
|(Gain) loss on sale of assets                                                      |  |                          | (32,672     | )    |   | (86,204    | )
|Excess tax benefit from stock based
payments                                       |  |                          | (650        | )    |   | (34,216    | )
|Changes in assets and liabilities:                                                 |  |                          |             |      |   |            |  
|Trade receivables                                                                  |  |                          | 416,903     |      |   | (4,346,423 | )
|Inventories                                                                        |  |                          | 1,736,690   |      |   | 933,428    |  
|Prepaid income taxes                                                               |  |                          | 0           |      |   | 689,624    |  
|Other current assets                                                               |  |                          | 355,195     |      |   | (946,866   | )
|Accounts payable                                                                   |  |                          | 1,865,747   |      |   | 546,307    |  
|Accrued compensation and benefits                                                  |  |                          | 495,280     |      |   | (1,105,164 | )
|Other accrued expenses                                                             |  |                          | (5,919      | )    |   | 794,308    |  
|Income taxes payable                                                               |  |                          | 633,348     |      |   | 395,836    |  
|Net
 cash provided by operating activities                                         |  |                          | 8,767,181   |      |   | 2,411,829  |  
|                                                                                   |  |                          |             |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                          |             |      |   |            |  
|Capital expenditures                                                               |  |                          | (2,318,124  | )    |   | (2,408,985 | )
|Purchases of investments                                                           |  |                          | (21,758,065 | )    |   |            |  
|Proceeds from sale of fixed assets                                                 |  |                          | 41,536      |      |   | 127,906    |  
|Proceeds from the sale of investments                                              |  |                          | 7,229,000   |      |   |            |  
|Net
 cash used in investing activities                                             |  |                          | (16,805,653 | )    |   | (2,281,079 | )
|                                                                                   |  |                          |             |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                          |             |      |   |            |  
|Cash dividends paid                                                                |  |                          | (1,995,656  | )    |   | (2,062,999 | )
|Mortgage principal payments                                                        |  |                          | (171,221    | )    |   | (156,820   | )
|Proceeds from issuance of common stock                                             |  |                          | 66,821      |      |   | 306,559    |  
|Excess tax benefit from stock based
payments                                       |  |                          | 650         |      |   | 34,216     |  
|Purchase of common stock                                                           |  |                          | (26,125     | )    |   | (103,932   | )
|Net
 cash used in financing activities                                             |  |                          | (2,125,531  | )    |   | (1,982,976 | )
|                                                                                   |  |                          |             |      |   |            |  
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                                    |  |                          | (217,414    | )    |   | (11,623    | )
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |  |                          | (9,946,589  | )    |   | (1,863,849 | )
|                                                                                   |  |                          |             |      |   |            |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |  |                          | 29,951,561  |      |   | 29,427,879 |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |  | $                        | 20,004,972  |      | $ | 27,564,030 |  
|                                                                                   |  |                          |             |      |   |            |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |  |                          |             |      |   |            |  
|Income taxes paid                                                                  |  | $                        | 1,860,422   |      | $ | 449,260    |  
|Interest paid                                                                      |  |                          | 115,889     |      |   | 89,079     |  
|Dividends declared not paid                                                        |  |                          | 1,168,154   |      |   | 1,034,632  |  

The accompanying notes are an integral part of the 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, our or the Company) is a
Minnesota corporation organized in 1969 which operates directly and through its
subsidiaries located in the United States, Costa Rica, the United Kingdom and
China. CSI is principally engaged through its Suttle and Austin Taylor business
units in the manufacture and sale of modular connecting and wiring devices for
voice and data communications, digital subscriber line filters, and structured
wiring systems and through its Transition Networks business unit in the
manufacture of media and rate conversion products for telecommunications
networks. CSI also provides through its JDL Technologies 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 condensed consolidated statement of changes in
stockholders equity as of June 30, 2009 and 2008 and the related condensed
consolidated statements of income and comprehensive income, and the condensed
consolidated statements of cash flows for the periods ended June 30, 2009 and
2008 have been prepared by Company management. In the opinion of management,
all adjustments (which include only normal recurring adjustments except where
noted) necessary to present fairly the financial position, results of
operations, and cash flows at June 30, 2009 and 2008 and for the periods then
ended have been made.


Certain
information and footnote disclosures normally included in condensed
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, 2008 Annual Report to
Shareholders on Form 10-K. The results of operations for the periods ended June
30 are not necessarily indicative of operating results for the entire year.

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

Except to the
extent updated or described below, the significant accounting policies set
forth in Note 1 to the condensed consolidated financial statements in the
Companys Annual Report on Form 10-K for the year ended December 31, 2008,
appropriately represent, in all material respects, the current status of
accounting policies, and are incorporated herein by reference.

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Table of Contents

Cash equivalents and investments

For purposes
of the condensed consolidated statements of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less at the
time of purchase to be cash equivalents. As of June 30, 2009, the Company had
$20.0 million in cash and cash equivalents. Of this amount, $6.6 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
company (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 is operating
cash and certificates of deposit which are fully insured through the FDIC.

The Company
had $14.6 million in investments which consist of certificates of deposit that
are traded on the open market and are classified as available-for-sale at June
30, 2009. Of the $14.6 million in investments, $9.6 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. Sales are
made directly to customers and through distributors. Payment terms for
distributors are consistent with the terms of the Companys direct customers.
The Company records a provision for sale returns, sales incentives and warranty
costs at the time of the sale based on historical experience and current
trends.

JDL
Technologies generally records revenue on hardware, software and related
equipment sales and installation contracts when the revenue recognition
criteria are met and products are installed and accepted by customer.

JDL records
revenue on service contracts on a straight-line basis over the contract period,
unless evidence suggests the revenue is earned in a different pattern. Each
contract is individually reviewed to determine when the earnings process is
complete. Contracts in effect through June 30, 2008 with the United States
Virgin Islands Department of Education (VIDE) required funding under the
federal governments E-RATE program and approval by the Schools and Libraries
Division (SLD) of the Universal Service Administration Company (USAC) before
payment was made. Our policy is not to recognize E-RATE revenue on our VIDE
contracts until approval is received from the SLD.

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Table of Contents

Comprehensive income

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

|                                                   |  |               |          |                   |   |          |  
|-------------------------------------------------- |  | ------------- | -------- | ----------------- | - | -------- | -
|                                                   |  | June 30
 2009 |          | December 31
 2008 |  
|Foreign
 currency translation                      |  | $             | (368,294 | )                 | $ | (852,374 | )
|Unrealized
 gain on available-for-sale investments |  |               | 66,775   |                   |   |          |  
|Minimum
 pension liability                         |  |               | 415,558  |                   |   | 643,836  |  
|                                                   |  | $             | 114,039  |                   | $ | (208,538 | )

NOTE 2 -
STOCK-BASED COMPENSATION

Common shares
are reserved in connection with the Companys 1992 Stock Plan under which
2,500,000 shares of common stock may be issued pursuant to stock options, stock
appreciation rights, restricted stock or deferred stock granted to officers and
key employees. Exercise prices of stock options under the Stock Plan cannot be
less than fair market value of the stock on the date of grant. Rules and
conditions governing awards of stock options, stock appreciation rights and
restricted stock are determined by the Compensation Committee of the Board of
Directors, subject to certain limitations incorporated into the Stock Plan. At
June 30, 2009, 1,074,239 shares remained available to be issued under the Stock
Plan. All currently outstanding awards under the Stock Plan are vested. The
options expire five years from date of grant.

Shares of
common stock are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors (the Director Plan). The Director Plan provides for the automatic
grant of nonqualified options for 3,000 shares of common stock annually to each
nonemployee director concurrent with the annual stockholders meeting. Exercise
price is the fair market value of the stock at the date of grant. Options
granted under the Director Plan vest when issued and expire 10 years from date
of grant. At June 30, 2009, 31,000 shares are available to be issued under the
Director Plan.

The Company
also has an Employee Stock Purchase Plan (ESPP) for which 500,000 common shares
have been reserved. Employees are able to acquire shares under the ESPP Plan at
95% of the price at the end of the current semi-annual plan term, which is June
30, 2009. The ESPP Plan is non-compensatory under current rules and does not give
rise to compensation cost under SFAS No. 123(R).

Stock
compensation expense recognized for the six month period ended June 30, 2009
was $32,000 before income taxes and $20,000 after income taxes. Stock
compensation expense recognized for the six month period ended June 30, 2008
was $42,000 before income taxes and $27,000 after income taxes. Excess tax
benefits from the exercise of stock options included in financing cash flows
for the six month periods ended June 30, 2009 and 2008, were $1,000 and $34,000,
respectively.

The following
table summarizes the stock option transactions for the three months ended June
30, 2009. All outstanding stock options are currently exercisable.

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|                                 |  |         |          |                                             |   |                                               |  |  |            | 
|-------------------------------- |  | ------- | -------- | ------------------------------------------- | - | --------------------------------------------- |  |  | ---------- | 
|                                 |  | Options |          | Weighted average
 exercise price
 per share |   | Weighted average
 remaining
 contractual term | 
|Outstanding
  December 31, 2008 |  |         | 351,350  |                                             | $ | 9.99                                          |  |  | 2.78 years | 
|Issued                           |  |         | 18,000   |                                             | $ | 9.73                                          |  |  |            | 
|Exercised                        |  |         | (2,000   | )                                           | $ | 8.65                                          |  |  |            | 
|Canceled                         |  |         | (124,450 | )                                           | $ | 9.51                                          |  |  |            | 
|Outstanding
  June 30, 2009     |  |         | 242,900  |                                             | $ | 10.23                                         |  |  | 4.19 years | 

18,000
director stock options were granted during the six month period ended June 30,
2009. The aggregate intrinsic value of all options (the amount by which the
market price of the stock on the last day of the period exceeded the market
price of the stock on the date of grant) outstanding at June 30, 2009 was
$155,000. The intrinsic value of all options exercised during the six months
ended June 30, 2009 was $2,000. Net cash proceeds from the exercise of all
stock options were $0 and $239,000 for the six months ended June 30, 2009 and
2008, respectively.

NOTE 3 -
INVENTORIES

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

|                             |  |               |            |                   |   |            | 
|---------------------------- |  | ------------- | ---------- | ----------------- | - | ---------- | 
|                             |  | June 30
 2009 |            | December 31
 2008 |  
|Finished
 goods              |  | $             | 17,365,433 |                   | $ | 17,924,907 | 
|Raw and
 processed materials |  |               | 10,471,841 |                   |   | 11,473,536 | 
|Total                        |  | $             | 27,837,274 |                   | $ | 29,398,443 | 

NOTE 4 
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is
required to be evaluated for impairment on an annual basis and between annual
tests upon the occurrence of certain events or circumstances, according to SFAS
No. 142, Goodwill and Other Intangible Assets. The standard requires a two-step
process be performed to analyze whether or not goodwill has been impaired. Step
one is to test for potential impairment, and requires that the fair value of
the reporting unit be compared to its book value including goodwill. If the
fair value is higher than the book value, no impairment is recognized. If the
fair value is lower than the book value, a second step must be performed. The
second step is to measure the amount of impairment loss, if any, and requires
that a hypothetical purchase price allocation be done to determine the implied
fair value of goodwill. This fair value is then compared to the carrying value
of goodwill. If the implied fair value is lower than the carrying value, an
impairment adjustment must be recorded.

On January 17,
2008, VIDE, at that time a major customer of the JDL Technologies segment under
successive one year contracts since 1998, notified the company that JDL was not
selected as a vendor to provide services to VIDE for the 2008-2009 school year.
The loss of the VIDE contract for 2008 - 2009 represented an event that
required goodwill to be tested for impairment in accordance with SFAS 142. The
Company completed the SFAS No. 142 evaluation at March 31, 2008 and recorded a
goodwill impairment for the JDL Technologies segment of $704,000.

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No events or
circumstances occurred during the quarter ended June 30, 2009 that required an
impairment test or adjustment to the financial statements.

NOTE 5 
WARRANTY

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

The following
table presents the changes in the Companys warranty liability for the six
months ended June 30, 2009 and 2008, the majority of which relates to a
five-year obligation to provide for potential future liabilities for network
equipment sales.

|                            |  |      |          |      |   |          |  
|--------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                            |  | 2009 |          | 2008 |  
|Beginning
 Balance          |  | $    | 593,000  |      | $ | 518,000  |  
|Actual
 warranty costs paid |  |      | (184,000 | )    |   | (159,000 | )
|Amounts
 charged to expense |  |      | 336,000  |      |   | 260,000  |  
|Ending
 balance             |  | $    | 745,000  |      | $ | 619,000  |  

NOTE 6 
CONTINGENCIES

In the
ordinary course of business, the Company is subject to legal actions and claims
and incurs costs to defend against such actions and claims. At June 30, 2009,
no legal actions or claims were outstanding or pending that would materially
affect the Companys financial position or results of operations.

NOTE 7 
INCOME TAXES

In the
preparation of the Companys condensed consolidated financial statements,
management calculates income taxes based upon the estimated effective rate
applicable to operating results for the full fiscal year. This includes
estimating the current tax liability as well as assessing differences resulting
from different treatment of items for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, 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 June 30,
2009 there was $522,000 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 2005-2007 remain open to examination by
the Internal Revenue Service and the years 2004-2007 remain open to examination
by various state tax departments. The tax years from 2006-2008 remain open in
Costa Rica.

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The Companys
effective income tax rate was 40% for the first six months of 2009. The
effective tax rate differs from the federal tax rate of 35% due to state income
taxes, foreign losses not currently deductible for U.S. income tax purposes,
and provisions for interest charges on uncertain tax positions. The foreign
operating losses may ultimately be deductible in the countries which they
occurred, however the Company has not recorded a deferred tax asset for these
losses due to uncertainty regarding eventual realization of the benefit. The
effect of the foreign operations is an overall rate increase of approximately
4.4% for the six months ended June 30, 2009.There were no additional uncertain
tax positions identified in the second quarter of 2009. The Companys effective
income tax rate was approximately 29% for the six months ended June 30, 2008,
and differed from the federal tax rate due to provisions for interest charges,
state income taxes and settlement of uncertain tax positions.

NOTE 8 
SEGMENT INFORMATION

The Company
classifies its businesses into four segments: Suttle, which manufactures U.S.
standard modular connecting and wiring devices for voice and data
communications and structured cabling products; Transition Networks, which
designs and markets data transmission, computer network and media conversion
products and print servers; JDL Technologies, (JDL), which provides IT
services; and Austin Taylor which manufactures British standard telephone
equipment and equipment enclosures for the U.K and international markets.
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 products and services.
There are no material intersegment revenues.

Information
concerning the Companys continuing operations in the various segments for the
six-month and three-month periods ended June 30, 2009 and 2008 is as follows:

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Table of Contents

SEGMENT INFORMATION - SIX
MONTHS

|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|-------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | ---------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |            | Other |   | Total     |  
|Six months ended June 30, 2009:              |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 22,610,556 |                      | $ | 25,807,976        |  | $              | 5,383,301  |       | $ | 1,547,524 |   | $ |           |   | $ | 55,349,357  | 
|Cost of sales                                |  |        | 17,568,938 |                      |   | 12,389,167        |  |                | 3,503,354  |       |   | 1,458,357 |   |   |           |   | $ | 34,919,816  | 
|Gross profit                                 |  |        | 5,041,618  |                      |   | 13,418,809        |  |                | 1,879,947  |       |   | 89,167    |   |   |           |   |   | 20,429,541  | 
|Selling, general and administrative expenses |  |        | 3,137,280  |                      |   | 9,794,984         |  |                | 660,565    |       |   | 589,474   |   |   | 1,702,894  |   | $ | 15,885,197  | 
|Operating income (loss)                      |  | $      | 1,904,338  |                      | $ | 3,623,825         |  | $              | 1,219,382  |       | $ | (500,307  | ) | $ | (1,702,894 | ) | $ | 4,544,344   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 312,877    |                      | $ | 294,861           |  | $              | 81,777     |       | $ | 31,406    |   | $ | 93,533     |   | $ | 814,454     | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 2,007,992  |                      | $ | 160,058           |  | $              | 8,542      |       | $ | 83,351    |   | $ | 58,181     |   | $ | 2,318,124   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Assets                                       |  | $      | 23,913,846 |                      | $ | 26,390,154        |  | $              | 5,218,364  |       | $ | 4,987,839 |   | $ | 42,503,622 |   | $ | 103,013,825 | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |            | Other |   | Total     |  
|Six months ended June 30, 2008:              |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 22,601,241 |                      | $ | 30,324,633        |  | $              | 5,574,530  |       | $ | 3,111,873 |   | $ |           |   | $ | 61,612,277  | 
|Cost of sales                                |  |        | 17,018,734 |                      |   | 15,921,759        |  |                | 3,392,070  |       |   | 2,567,460 |   |   |           |   | $ | 38,900,023  | 
|Gross profit                                 |  |        | 5,582,507  |                      |   | 14,402,874        |  |                | 2,182,460  |       |   | 544,413   |   |   |           |   |   | 22,712,254  | 
|Selling, general and administrative expenses |  |        | 3,491,766  |                      |   | 10,100,759        |  |                | 484,686    |       |   | 549,218   |   |   | 1,958,009  |   | $ | 16,584,438  | 
|Impairment and other charges related to JDL  |  |        |            |                      |   |                   |  |                | 2,999,441  |       |   |           |   |   |            |   | $ | 2,999,441   | 
|Operating income (loss)                      |  | $      | 2,090,741  |                      | $ | 4,302,115         |  | $              | (1,301,667 | )     | $ | (4,805    | ) | $ | (1,958,009 | ) | $ | 3,128,375   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 366,149    |                      | $ | 285,073           |  | $              | 286,200    |       | $ | 44,477    |   | $ | 125,440    |   | $ | 1,107,339   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 438,574    |                      | $ | 339,968           |  | $              |           |       | $ | 11,156    |   | $ | 1,619,287  |   | $ | 2,408,985   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |           |   |   |            |   |   |             | 
|Assets                                       |  | $      | 24,345,248 |                      | $ | 25,930,045        |  | $              | 6,385,685  |       | $ | 5,468,501 |   | $ | 39,514,303 |   | $ | 101,643,782 | 

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Table of Contents

SEGMENT
INFORMATION - THREE MONTHS

|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|--------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|                                              |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total     |  
|Three months ended June 30, 2009:             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Sales                                         |  | $      | 10,760,552 |                      | $ | 13,671,193        |  | $              | 3,302,233 |       | $ | 850,421   |   | $ |           |   | $ | 28,584,399  | 
|Cost of sales                                 |  |        | 8,499,083  |                      |   | 6,564,334         |  |                | 2,065,941 |       |   | 804,945   |   |   |           |   | $ | 17,934,303  | 
|Gross profit                                  |  |        | 2,261,469  |                      |   | 7,106,859         |  |                | 1,236,292 |       |   | 45,476    |   |   |           |   |   | 10,650,096  | 
|Selling, general and administrative
 expenses |  |        | 1,571,038  |                      |   | 4,871,653         |  |                | 340,013   |       |   | 308,538   |   |   | 791,146    |   | $ | 7,882,388   | 
|Operating income (loss)                       |  | $      | 690,431    |                      | $ | 2,235,206         |  | $              | 896,279   |       | $ | (263,062  | ) | $ | (791,146   | ) | $ | 2,767,708   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                 |  | $      | 162,713    |                      | $ | 147,436           |  | $              | 40,293    |       | $ | 16,433    |   | $ | 2,129      |   | $ | 369,004     | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                          |  | $      | 1,768,895  |                      | $ | 84,756            |  | $              | 8,542     |       | $ | 43,052    |   | $ | 41,936     |   | $ | 1,947,181   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             | 
|Assets                                        |  | $      | 23,913,846 |                      | $ | 26,390,154        |  | $              | 5,218,364 |       | $ | 4,987,839 |   | $ | 42,503,622 |   | $ | 103,013,825 | 

|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             |  
|--------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | -
|                                              |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total     |  
|Three months ended June 30, 2008:             |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             |  
|Sales                                         |  | $      | 10,153,658 |                      | $ | 17,276,055        |  | $              | 2,414,995 |       | $ | 1,446,334 |   | $ |           |   | $ | 31,291,042  |  
|Cost of sales                                 |  |        | 8,058,266  |                      |   | 9,077,894         |  |                | 1,667,929 |       |   | 1,225,253 |   |   |           |   | $ | 20,029,342  |  
|Gross profit                                  |  |        | 2,095,392  |                      |   | 8,198,161         |  |                | 747,066   |       |   | 221,081   |   |   |           |   |   | 11,261,700  |  
|Selling, general and administrative
 expenses |  |        | 1,818,586  |                      |   | 5,316,733         |  |                | 255,982   |       |   | 266,596   |   |   | 895,384    |   | $ | 8,553,281   |  
|Impairment and other charges related to JDL   |  |        |           |                      |   |                  |  |                | (221,313  | )     |   |          |   |   |           |   | $ | (221,313    | )
|Operating income (loss)                       |  | $      | 276,806    |                      | $ | 2,881,428         |  | $              | 712,397   |       | $ | (45,515   | ) | $ | (895,384   | ) | $ | 2,929,732   |  
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             |  
|Depreciation and amortization                 |  | $      | 186,069    |                      | $ | 166,683           |  | $              | 49,800    |       | $ | 23,101    |   | $ | 66,462     |   | $ | 492,115     |  
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             |  
|Capital expenditures                          |  | $      | 104,445    |                      | $ | 237,468           |  | $              |          |       | $ | 5,855     |   | $ | 823,871    |   | $ | 1,171,639   |  
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |           |   |   |            |   |   |             |  
|Assets                                        |  | $      | 24,345,248 |                      | $ | 25,930,045        |  | $              | 6,385,685 |       | $ | 5,468,501 |   | $ | 39,514,303 |   | $ | 101,643,782 |  

NOTE 9  PENSIONS

The Companys U.K. based
subsidiary Austin Taylor maintains defined benefit pension plans that cover
approximately 10 active employees. The Company does not provide any other
post-retirement benefits to its employees. Components of net periodic benefit
cost of the pension plans were:

|                                          |  |                          |          |      |   |          |  
|----------------------------------------- |  | ------------------------ | -------- | ---- | - | -------- | -
|                                          |  | Six months Ended June 30 |         
|                                          |  | 2009                     |          | 2008 |  
|Service cost                              |  | $                        | 19,000   |      |   | 26,000   |  
|Interest cost                             |  |                          | 139,000  |      |   | 157,000  |  
|Expected return on plan
 assets           |  |                          | (135,000 | )    |   | (156,000 | )
|Amortization of
 unrecognized (gain)/loss |  |                          |         |      |   |         |  
|                                          |  | $                        | 23,000   |      | $ | 27,000   |  

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NOTE 10  NET INCOME PER
SHARE

Basic net income per common
share is based on the weighted average number of common shares outstanding
during each year. Diluted net income per common share takes into effect the
dilutive effect of potential common shares outstanding. The Companys only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 7,366 shares and 5,069 shares for the respective three and
six month periods ended June 30, 2009. The dilutive effect of stock options for
the three and six month periods ended June 30, 2008 was 42,426 shares and
41,983 shares, respectively. The Company calculates the dilutive effect of
outstanding options using the treasury stock method. The number of shares not
included in the computation of diluted earnings per share because the options
exercise price was greater than the average market price of common stock during
the period was 170,900 and 116,900 at June 30, 2009 and 2008, respectively.

NOTE 11  ASSET IMPAIRMENT

We are required to test for
asset impairment relating to property and equipment whenever events or changes
in circumstances indicate that the carrying value of an asset might not be
recoverable. We apply SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, in order to determine whether or not an asset is
impaired. This standard requires an impairment analysis when indicators of
impairment are present. If such indicators are present, the standard requires
that if the sum of the future expected cash flows from a companys asset,
undiscounted and without interest charges, is less than the carrying value, an
asset impairment must be recognized in the financial statements. The amount of
the impairment is the difference between the fair value of the asset and the
carrying value of the asset. On January 17, 2008 the Company was notified by
VIDE, a customer of JDL Technologies under successive one year contracts since
1998, that the Company was not selected as VIDEs vendor for the next contract
year, July 1, 2008 to June 30, 2009. The decision of VIDE to select another
vendor for the next contract year represented an event that required the
related asset group to be tested for impairment. The Company completed this
evaluation in the first quarter of fiscal 2008 and identified an impairment of
the network infrastructure supporting services provided to VIDE to the extent
of its total net book value of $2,295,000.

NOTE 12  FAIR VALUE
MEASUREMENTS

Effective Jan. 1, 2008, the
Company adopted SFAS No. 157,Fair Value
Measurements, for recurring fair value measurements. SFAS No. 157
provides a single definition of fair value and requires enhanced disclosures
about assets and liabilities measured at fair value. SFAS No. 157 establishes a
hierarchal framework for disclosing the observability of the inputs utilized in
measuring assets and liabilities at fair value. The three levels defined by the
SFAS No. 157 hierarchy and examples of each level are 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. The Companys financial instruments categorized as Level 1
relate to cash equivalents.

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.

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

The Companys assets and
liabilities that are measured at fair value on a recurring basis as of June 30,
2009 include cash equivalents and investments of $24,978,000 classified as
level one within the SFAS No. 157 hierarchy. The Company does not have any
assets or liabilities classified as level two or three within the SFAS No. 157
hierarchy.

NOTE 13  SUBSEQUENT EVENTS

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

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
such 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 such forward looking statements
are subject to risks and uncertainties which could cause actual performance,
activities, anticipated results, outcomes or plans to differ significantly from
those indicated in the forward-looking statements. Such risks and uncertainties
include, but are not limited to: lower sales to major telephone companies and
other major customers; the introduction of competitive products and
technologies; our ability to successfully reduce operating expenses at certain
business units; the general health of the telecom sector, successful
integration and profitability of acquisitions; delays in new product
introductions; higher than expected expense related to new sales and marketing
initiatives; unfavorable resolution of claims and litigation, availability of
adequate supplies of raw materials and components; fuel prices; government
funding of education technology spending; and other factors discussed from time
to time in the Companys filings with the Securities and Exchange Commission,
including risk factors presented under Item 1A of the Companys most recently
filed report on Form 10-K.

Six Months Ended June 30, 2009 Compared toSix Months Ended June 30, 2008

Consolidated sales decreased
in 2009 to $55,349,000 compared to $61,612,000 in 2008. Consolidated operating
income in 2009 increased to $4,544,000 compared to $3,128,000 in the first six
months of 2008. 2008 first half operating income was impaired by charges
totaling $2,999,000 related to JDL Technologies not being selected as a vendor
to provide services to VIDE for the period from July 1, 2008 to June 30, 2009.

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Net income in
2009 increased to $2,971,000 compared to $2,447,000 in the first six months of
2008.

Suttle

Suttle sales
remained stable in the first six months of 2009 at $22,611,000 compared to
$22,601,000 in the same period of 2008. Sales by customer groups in the first
six months of 2009 and 2008 were:

|                           |  |                                |            |      |   |            | 
|-------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | 
|                           |  | Suttle Sales by Customer Group |           
|                           |  | 2009                           |            | 2008 |  
|Major
 telephone companies |  | $                              | 12,997,000 |      | $ | 10,318,000 | 
|Distributors/OEMs          |  |                                | 6,531,000  |      |   | 8,319,000  | 
|International              |  |                                | 1,009,000  |      |   | 1,258,000  | 
|Other                      |  |                                | 2,074,000  |      |   | 2,706,000  | 
|                           |  | $                              | 22,611,000 |      | $ | 22,601,000 | 

Suttles sales
by product groups in first six months of 2009 and 2008 were:

|                             |  |                               |            |      |   |            | 
|---------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | 
|                             |  | Suttle Sales by Product Group |           
|                             |  | 2009                          |            | 2008 |  
|Modular
 connecting products |  | $                             | 8,503,000  |      | $ | 10,130,000 | 
|DSL products                 |  |                               | 6,716,000  |      |   | 4,523,000  | 
|Structured
 cabling products |  |                               | 7,079,000  |      |   | 7,497,000  | 
|Other
 products              |  |                               | 313,000    |      |   | 451,000    | 
|                             |  | $                             | 22,611,000 |      | $ | 22,601,000 | 

Sales to the
major telephone companies increased 26% in 2009 due to increased sales of DSL
products. Sales to these customers accounted for 57% of Suttles sales in the
first six months of 2009 compared to 46% of sales in the same period in 2008.
Sales to distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased 21% in 2009 primarily due to the contraction of the
housing and building sectors of the economy. This customer segment accounted
for 29% and 37% of sales in the first six months of 2009 and 2008, respectively.
International sales decreased 20% and accounted for 4% of Suttles first six
months 2009 sales. Suttles products do not have a large international market
due to different product specifications in non-US markets. Sales to other
customers decreased 23% to $2,074,000.

Modular
connecting product sales have decreased 16% while structured cabling products
have declined by 6%, due to a slowing of the home building business and
accelerated decline in the voice market, whereas DSL products have increased
48% as a result of a new contract with a major telephone company.

Suttles gross
margin decreased 10% in the first six months of 2009 to $5,042,000 compared to
$5,582,000 in the same period of 2008. Gross margin percentage decreased to 22%
in 2009 from 25% in 2008 due to product mix changes. Suttle realizes its
highest selling margins on modular connecting products. DSL products are the
least profitable. Suttle also earns better margins on sales to distributor and
OEM customers where pricing is usually based on Company list prices than from
major telephone customers where pricing is usually based on negotiated
contracts. Selling, general and administrative expenses decreased $355,000 or
10% in the first six months of 2009 compared to the same period in 2008, but
remained consistent as a percentage of sales. Suttles operating income was
$1,904,000 in the first six months of 2009 compared to operating income of
$2,091,000 in 2008.

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Transition Networks

Transition
Networks sales decreased 15% to $25,808,000 in the first six months of 2009
compared to $30,325,000 in 2008.

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

|                             |  |                                     |            |      |   |            | 
|---------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                             |  | Transition Networks Sales by Region |           
|                             |  | 2009                                |            | 2008 |  
|North
 America               |  | $                                   | 21,194,000 |      | $ | 20,548,000 | 
|Europe,
 Middle East, Africa |  |                                     | 2,069,000  |      |   | 4,753,000  | 
|Rest of
 world               |  |                                     | 2,545,000  |      |   | 5,024,000  | 
|                             |  | $                                   | 25,808,000 |      | $ | 30,325,000 | 

Sales in North
America increased $646,000 or 3% due to projects with the US Federal
Government. Overall sales have either remained flat or declined in most markets
in the US, but declines have not been as significant as in international
markets. International sales decreased $5,163,000, or 53% primarily due to the
impact of the global economic crisis and currency fluctuations. Customers have
either delayed or canceled projects, but the Company is continuing to invest in
the region because long term projects are promising.

The following
table summarizes Transition Networks 2009 and 2008 first six months sales by
its major product groups:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  | 2009                                       |            | 2008 |  
|Media
 converters  |  | $                                          | 19,422,000 |      | $ | 23,186,000 | 
|Ethernet
 switches |  |                                            | 1,460,000  |      |   | 2,928,000  | 
|Ethernet
 adapters |  |                                            | 3,548,000  |      |   | 2,572,000  | 
|Other products     |  |                                            | 1,378,000  |      |   | 1,639,000  | 
|                   |  | $                                          | 25,808,000 |      | $ | 30,325,000 | 

Gross margin
on the first six months of Transition Networks sales decreased to $13,419,000
in 2009 from $14,403,000 in 2008. Gross margin as a percentage of sales was 52%
in 2009, compared to 47% in the 2008 period, due to decreased manufacturing
costs related to an inventory cost reduction plan started in 2008 and change in
product mix. The increase in sales of Ethernet adapters and decrease in media
converters is one of the contributors to the increased margins. Furthermore,
the decline in sales of media converters is attributed to the slowing economy
around the world. The increase in sales of Ethernet adapters is due to ongoing
projects in North America. Selling, general and administrative expenses
decreased 3% to $9,795,000 in 2009 compared to $10,101,000 in 2008 due to open
positions that have not been filled due to the uncertainty of the economy and
lower revenues offset by increases in research and development costs related to
the creation of new prototypes. Operating income decreased to $3,624,000 in
2009 compared to $4,302,000 in 2008.

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JDL Technologies, Inc.

JDL
Technologies, Inc. reported 2009 first six months sales of $5,383,000 compared
to $5,575,000 in 2008.

JDLs revenues
by customer group were as follows:

|                           |  |                               |           |      |   |           | 
|-------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                           |  | JDL Revenue by Customer Group |          
|                           |  | 2009                          |           | 2008 |  
|Broward
 County FL schools |  | $                             | 5,301,000 |      | $ | 2,573,000 | 
|VIDE                       |  |                               |          |      |   | 2,921,000 | 
|All other                  |  |                               | 82,000    |      |   | 81,000    | 
|                           |  | $                             | 5,383,000 |      | $ | 5,575,000 | 

Revenues
earned in Broward County FL increased $2,728,000 or 106% in 2009. The increase
was the result of network refresh work originally scheduled for 2008 that was
performed in the first quarter of 2009 due to customer budget limitations in
the fourth quarter of 2008. In addition, projects scheduled to run through
September of 2009 were accelerated into the first half by customer request.
Overall, in 2009 the Company booked installation business above 2008 levels.
The decrease in VIDE revenue in 2009 was due to losing VIDE as a customer for
the 2008-2009 school year.

JDL gross
margin was $1,880,000 in the first six months of 2009 compared to $2,182,000 in
the same period in 2008. Gross margin in 2008 was significantly impacted by the
timing of the recognition of revenues from JDLs VIDE contracts as expenses
related to the revenue recognized in the first quarter of 2008 were booked in
2007. More specifically, costs of $1.4 million were recorded in 2007, when the
services were provided, while the $1.3 million revenue received for such
services was recognized in the first six months of 2008 when the E-Rate funding
was approved. Selling, general and administrative expenses
increased in 2009 to $661,000 compared to $485,000 in 2008 due to an increase
in compensation expenses. JDL reported operating income of $1,219,000 in the
first six months of 2009 compared to an operating loss of $1,302,000 in the
same period of 2008.

Austin Taylor

Austin
Taylors revenues decreased to $1,548,000 for the first six months of 2009,
compared to $3,112,000 in 2008. This decrease is primarily due to the general
market and economy slowdown, specifically with overseas customers. Gross margin
decreased 84% to $89,000 in 2009 from $544,000 in 2008. Gross margin as a
percentage of sales was 6% in 2009 compared to 17% in 2008. This decrease was
due to greatly increased material costs compounded by an unfavorable currency
exchange rate during the first six months of 2009. Additionally, Austin Taylor
was burdened with the impact of product quality issues from two of its major
vendors. Austin Taylor reported an operating loss in 2009 of $500,000 compared
to $5,000 in 2008.

Other

Net investment
income increased 28% to $407,000 in 2009 as compared to $318,000 in 2008.
Income before income taxes increased to $4,951,000 in 2009 compared to
$3,446,000 in 2008. The Companys effective income tax rate was 40% in 2009
compared to 29% in 2008. This effective rate was higher than the standard rate
of 35% due to state income taxes, foreign losses not deductible for U.S. income
tax purposes, and provisions for interest charges as explained in Note 7 above.

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Three Months Ended June 30, 2009 Compared toThree Months Ended June 30, 2008

Consolidated
sales decreased 9% in 2009 to $28,584,000 compared to $31,291,000 in 2008.
Consolidated operating income in 2009 decreased to $2,768,000 compared to
$2,930,000 in the second quarter of 2008.

Net income in
2009 decreased to $1,748,000 compared to $2,261,000 in the second quarter of
2008.

Suttle

Suttle sales
increased 6% in the second quarter of 2009 to $10,761,000 compared to
$10,154,000 in the same period of 2008 due to stronger DSL product sales. Sales
by customer groups in the second quarter of 2009 and 2008 were:

|                           |  |                                |            |      |   |            | 
|-------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | 
|                           |  | Suttle Sales by Customer Group |           
|                           |  | 2009                           |            | 2008 |  
|Major
 telephone companies |  | $                              | 6,041,000  |      | $ | 4,301,000  | 
|Distributors/OEM           |  |                                | 3,314,000  |      |   | 4,238,000  | 
|International              |  |                                | 380,000    |      |   | 552,000    | 
|Other                      |  |                                | 1,026,000  |      |   | 1,063,000  | 
|                           |  | $                              | 10,761,000 |      | $ | 10,154,000 | 

Suttles sales
by product groups in second quarter of 2009 and 2008 were:

|                             |  |                               |            |      |   |            | 
|---------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | 
|                             |  | Suttle Sales by Product Group |           
|                             |  | 2009                          |            | 2008 |  
|Modular
 connecting products |  | $                             | 3,946,000  |      | $ | 4,153,000  | 
|DSL products                 |  |                               | 3,083,000  |      |   | 2,185,000  | 
|Structured
 cabling products |  |                               | 3,588,000  |      |   | 3,727,000  | 
|Other
 products              |  |                               | 144,000    |      |   | 89,000     | 
|                             |  | $                             | 10,761,000 |      | $ | 10,154,000 | 

Sales to the
major telephone companies increased 40% in 2009 due to increased sales of DSL
products. Sales to these customers accounted for 56% of Suttles sales in the
2009 second quarter compared to 42% of sales in the same period of 2008. Sales
to distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased 22% in 2009 primarily due to the contraction of the
housing and building sectors of the economy. This customer segment accounted
for 31% and 42% of sales in the second quarters of 2009 and 2008, respectively.
International sales decreased 31% and accounted for 4% of Suttles second
quarter 2009 sales. Suttles products do not have a large international market
due to different product specifications in non-US markets. Sales to other
customers decreased 3% to $1,026,000.

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Modular
connecting products sales have decreased 5% due to a slowing of the home
building business and accelerated decline in the voice market, whereas DSL
products have increased 41% as a result of a new contract with a major
telephone company.

Suttles gross
margin increased 8% in the second quarter of 2009 to $2,261,000 compared to
$2,095,000 in the same period of 2008. Gross margin percentage remained stable
at 21% in both 2009 and 2008. Suttle realizes its highest selling margins on
modular connecting products. DSL products are the least profitable. Suttle also
earns better margins on sales to distributor and OEM customers where pricing is
usually based on Company list prices than from major telephone customers where
pricing is usually based on negotiated contracts. Selling, general and
administrative expenses decreased $248,000 or 14% in the second quarter of 2009
compared to the same period in 2008. Suttles operating income was $690,000 in
the second quarter of 2009 compared to operating income of $277,000 in 2008.

Transition Networks

Transition
Networks sales decreased 21% to $13,671,000 in the second quarter of 2009
compared to $17,276,000 in 2008.

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

|                             |  |                                     |            |      |   |            | 
|---------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                             |  | Transition Networks Sales by Region |           
|                             |  | 2009                                |            | 2008 |  
|North
 America               |  | $                                   | 11,407,000 |      | $ | 10,914,000 | 
|Europe,
 Middle East, Africa |  |                                     | 879,000    |      |   | 3,476,000  | 
|Rest of
 world               |  |                                     | 1,385,000  |      |   | 2,886,000  | 
|                             |  | $                                   | 13,671,000 |      | $ | 17,276,000 | 

Sales in North
America increased $493,000 or 5% due to projects with the US Federal
Government. International sales decreased $4,098,000, or 64% due to decreased
sales from one large customer because the customer elected to delay sales to
subsequent quarters. Additionally, business is lower in Japan, greater Asia and
South America due to downturns in these economies.

The following
table summarizes Transition Networks 2009 and 2008 second quarter sales by its
major product groups:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  | 2009                                       |            | 2008 |  
|Media
 converters  |  | $                                          | 9,806,000  |      | $ | 11,899,000 | 
|Ethernet
 switches |  |                                            | 913,000    |      |   | 2,326,000  | 
|Ethernet
 adapters |  |                                            | 2,231,000  |      |   | 2,019,000  | 
|Other
 products    |  |                                            | 721,000    |      |   | 1,032,000  | 
|                   |  | $                                          | 13,671,000 |      | $ | 17,276,000 | 

Gross margin
on second quarter Transition Networks sales decreased to $7,107,000 in 2009
from $8,198,000 in 2008. Gross margin as a percentage of sales was 52% in 2009,
compared to 47% in the 2008 period, due to decreased manufacturing costs related
to the inventory cost reduction plan started in 2008 and change in product mix.
Furthermore, the decline in sales of media converters and Ethernet switches is
attributed to the slowing economy around the world. The increase in sales of
Ethernet adapters is due to ongoing projects in North America. Selling, general
and administrative expenses decreased 8% to $4,872,000 in 2009 compared to
$5,317,000 in 2008 due to open positions that have not been filled due to the
uncertainty of the economy and lower revenues. Operating income decreased to
$2,235,000 in 2009 compared to $2,881,000 in 2008.

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JDL Technologies, Inc.

JDL
Technologies, Inc. reported 2009 second quarter sales of $3,302,000 compared to
$2,415,000 in 2008.

JDLs revenues
by customer group were as follows:

|                           |  |                               |           |      |   |           | 
|-------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                           |  | JDL Revenue by Customer Group |          
|                           |  | 2009                          |           | 2008 |  
|Broward
 County FL schools |  | $                             | 3,289,000 |      | $ | 1,581,000 | 
|VIDE                       |  |                               |          |      |   | 834,000   | 
|All other                  |  |                               | 13,000    |      |   |          | 
|                           |  | $                             | 3,302,000 |      | $ | 2,415,000 | 

Revenues
earned in Broward County FL increased $1,708,000 or 108% in 2009. The increase
was the result of projects scheduled to run through September of 2009 that were
accelerated into the first half by customer request. The decrease in VIDE
revenue in 2009 was due to losing VIDE as a customer for the 2008-2009 school
year.

JDL gross
margin was $1,236,000 in the second quarter of 2009 compared to $747,000 in the
same period in 2008. Gross margin as a percentage of sales was 37% in 2009,
compared to 31% in the 2008 period due to purchasing discounts the Company was
able to take advantage of during the quarter. Selling, general and
administrative expenses increased in 2009 to $340,000 compared to $256,000 in
2008 which has remained consistent as a percentage of sales at 10%. JDL
reported operating income of $896,000 in the second quarter of 2009 compared to
$712,000 in the same period of 2008.

Austin Taylor

Austin
Taylors revenues decreased to $850,000 for the second quarter of 2009,
compared to $1,446,000 in 2008. This decrease is primarily due to the general
market and economy slowdown. Gross margin decreased 80% to $45,000 in 2009 from
$221,000 in 2008. Gross margin as a percentage of sales was 5% in 2009 compared
to 15% in 2008. This decrease was due to greatly increased material costs
compounded by an unfavorable currency exchange rate during the second quarter
of 2009. Additionally, Austin Taylor was burdened with the impact of product
quality issues from two of its major vendors. Austin Taylor reported an
operating loss in 2009 of $263,000 compared to $46,000 in 2008.

Other

Net investment income increased 54% to $247.000
in 2009 as compared to $160,000 in 2008. Income before income taxes decreased 2%
to $3,014,000 in 2009 compared to $3,090,000 in 2008. The Company's effective
income tax rate was 42% in 2009 compared to 27% in 2008. This effective rate was
higher than our expected tax rate of 36.5% in 2009 due primarily to
uncertainties regarding our ability to realize the benefits of foreign losses
not deductible for U.S. income tax purposes. The 2008 rate reflects settlement
of a Puerto Rico tollgate tax dispute in May 2008, which resulted in an income
tax benefit that decreased the effective tax rate to 27%.

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Liquidity and Capital Resources

At June 30,
2009, the Company had approximately $34,601,000 of cash, cash equivalents and
investments compared to $29,952,000 of cash, cash equivalents and investments
at December 31, 2008. The Company had current assets of approximately
$78,749,000 and current liabilities of $13,715,000 at June 30, 2009 compared to
current assets of $80,819,000 and current liabilities of $10,091,000 at
December 31, 2008.

Net cash
provided by operating activities was $8,767,000 in the first six months of 2009
compared to $2,412,000 provided in the same period in 2008. Significant working
capital changes from December 31, 2008 to June 30, 2009 included decreased
inventory of $1,737,000 due to sale of increased inventory purchases at the end
of 2008 and an increase in accounts payable of $1,866,000 related to the
increased inventory purchases at JDL.

Net cash used
in investing activities was $16,806,000 in the first six months in 2009
compared to cash used of $2,281,000 in the same period in 2008, due to the
purchase of certificates of deposit with maturities of greater than 90 days,
offset by the sale of such investments. Additionally, capital expenditures
during the first half of 2009 were comparable to the prior 2008 period. In
2008, there were additional purchases equipping the Companys new building in
Minnetonka, Minnesota. In 2009, the Company spent approximately $1,644,000 on
new machinery at the Suttle facility.

Net cash used
in financing activities was $2,126,000 and $1,983,000 in the first six months
of 2009 and 2008, respectively. Cash dividends paid in the first six months of
2009 were $1,996,000 ($.24 per common share) compared to $2,063,000 ($.24 per
common share) in the same period in 2008. Proceeds from common stock issuances,
principally exercises of employee stock options, totaled approximately $67,000
in the first six months of 2009 and $307,000 in the same period in 2008. The
Companys Board of Directors has authorized the purchase and retirement, from
time to time, of shares of the Companys stock on the open market, or in
private transactions consistent with overall market and financial conditions.
In the first six months of 2009, the Company purchased and retired 2,869 of its
common shares at a cost of $26,000. At June 30, 2009, 484,194 additional shares
could be repurchased under outstanding Board authorizations. The Company has a
$10,000,000 line of credit from U.S. Bank. Interest on borrowings on the credit
line is at the LIBOR rate plus 1.5% (2.1% at June 30, 2009). There were no
borrowings on the line of credit during the first three months of 2009 or 2008.
The credit agreement expires September 30, 2009 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 $86,000 during the second quarter of 2009. The outstanding balance on
the mortgage was $2,952,000 at June 30, 2009.

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.

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Critical Accounting Policies

Our critical
accounting policies, including the assumptions and judgments underlying them,
are discussed in our 2008 Form 10-K in Note 1 Summary of Significant Accounting
Policies included in our Condensed Consolidated Financial Statements. There
were no significant changes to our critical accounting policies during the six
months ended June 30, 2009.

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 are believed 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 on an
ongoing basis reviews these estimates and judgments.

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.

Item 3. Quantitative and Qualitative
Disclosures about Market Risk.

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

The vast
majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically not been
material to the Company. At June 30, 2009 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 federal deposit insurance company and as such do not have
material risk exposure.

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

Item 4. Controls and Procedures

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

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Operating
Effectiveness of Accounting and Control Procedures. We concluded that, in the
aggregate, no material weakness existed as of June 30, 2009 related to
documentation and review of significant accounting judgments and estimates,
balance sheet account reconciliations, financial closing processes and
financial reporting processes at period ends.

Changes in
Internal Control over Financial Reporting

The following
changes to our internal controls over financial reporting were substantially completed
during the fourth quarter of fiscal 2008 and have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have
 developed detailed methodologies for all items requiring managements
 estimate and judgment and these methodologies formally document managements
 thought processes used to determine the amounts in estimates and such
 analyses are shared with the audit committee;                                                                                                                                                                                                                         
| |  | We have
 developed formal processes to document completion and review and approval of
 balance sheet account reconciliations;                                                                                                                                                                                                                                                                                                                                                                              
| |  | We have
 implemented processes to provide for supporting documentation and evidence of
 independent review and approval of journal entries, processes to require
 execution of sub-certifications of appropriate officers, processes to ensure
 that monthly close checklists are implemented and followed, processes to
 ensure formal review and approval of final subsidiary trial balances to
 reconcile agreement to consolidating schedule and processes to ensure review
 of posted journal entries;
| |  | We have
 developed templates and checklists for disclosure items and preparation of
 periodic reports.                                                                                                                                                                                                                                                                                                                                                                                                     

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

PART
II. OTHER INFORMATION

Item 1. Not Applicable

Item 1A. Risk Factors

In addition to
the risk factors disclosed elsewhere in this report or in the Companys 2008
Annual Report on Form 10-K, the following risk factor should be considered when
reviewing other information set forth in this report and previously filed
reports.

Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that disclosure controls and procedures will prevent all
possible error or fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our Company have been
detected. These inherent limitations, include, the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of persons, by collusion of two or more persons, or by management override
of the control. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies and
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and may not be detected.

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Risk of goodwill impairment.

A sustained
decline in the Companys stock price below book value may result in goodwill
impairments that could adversely affect the Companys results of operations and
financial position.

Items 2  3. Not
Applicable

Item 4. Submission of
Matters to a Vote of Securities Holders

The Annual
Meeting of the Shareholders of the Registrant was held on May 21, 2009 at the
Companys offices in Minnetonka, Minnesota. The total number of shares
outstanding and entitled to vote at the meeting was 8,345,481 of which
7,682,216 were present either in person or by proxy. Shareholders reelected
board members Jeffrey K. Berg and Roger H.D. Lacey to three-year terms expiring
at the 2012 Annual Meeting of Shareholders. The vote for these board members
was as follows:

|                  |  |          |           |            |  |         | 
|----------------- |  | -------- | --------- | ---------- |  | ------- | 
|                  |  | In Favor |           | Abstaining | 
|Jeffrey K.
 Berg  |  |          | 7,432,958 |            |  | 209,177 | 
|Roger H.D.
 Lacey |  |          | 7,402,171 |            |  | 240,287 | 

Board members
continuing in office are Edwin C. Freeman, Luella Gross Goldberg, Gerald D.
Pint, Curtis A. Sampson and Randall D. Sampson (whose terms expire at Annual
Shareholder Meetings in 2010 and 2011.

In addition,
at the 2009 Annual Meeting of Shareholders, shareholders approved an amendment
of the Companys 1990 Employee Stock Purchase Plan to increase by 100,000
shares the number of shares authorized for issuance under such plan to a total
of 500,000 shares.

Item 5. Not Applicable

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: August
 12, 2009 |    | President
 and Chief Executive Officer
|                       |    |                                        | 
|                       |    | /s/ David T.
 McGraw                   | 
|                       |    | David T.
 McGraw                       | 
|Date: August
 12, 2009 |    | Chief
 Financial Officer               | 

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