Table of Contents





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

|          
|----------
|(Mark One)

|                                                                                                                        |                                                                                          
|----------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|x                                                                                                                       | QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                                                        |                                                                                          
|For the quarterly period
ended March 31, 2010                                                                          
|                                                                                                                       
|OR                                                                                                                     
|o                                                                                                                       | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
|                                                                                                                        |                                                                                          
|For the transition period from
      ________________________________ to
      ________________________________________

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

| |  | 
| |  | 
| |  | 

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

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

|                                                   
|---------------------------------------------------
|(952)
 996-1674                                    
|Registrants
 telephone number, including area code

| |  | 
| |  | 
| |  | 

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES  x    NO o

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). YES  o    NO o

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

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

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act. YES  o    NO x

|                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------
|APPLICABLE
 ONLY TO CORPORATE ISSUERS:                                                                                         
|Indicate the number of
 shares outstanding of each of the issuers classes of common stock, as of the
 latest practicable date.

|                                         |  |                                       |  |                           
|---------------------------------------- |  | ------------------------------------- |  | --------------------------
|Class                                    |  | Name of Exchange
 On Which Registered |  | Outstanding at May 1, 2010
|Common
 Stock, par value
 $.05 per share |  | NASDAQ                                |  | 8,359,270                 







|                                             
|---------------------------------------------
|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 | 14                                                                   |  
|                               |                                                                                                |                                                                      |   | 
|                               | Item 3. Quantitative and Qualitative Disclosures about Market Risk                             | 18                                                                   |  
|                               |                                                                                                |                                                                      |   | 
|                               | Item 4. Controls and Procedures                                                                | 19                                                                   |  
|                               |                                                                                                |                                                                      |   | 
|Part II. Other Information     | 19                                                                                             |                                                                     
|                               |                                                                                                |                                                                      |   | 
|SIGNATURES                     |                                                                                                |                                                                     
|                               |                                                                                                |                                                                      |   | 
|CERTIFICATIONS                 |                                                                                                |                                                                     

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Table of Contents

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                           |  |                |             |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | ----------------- | - | ----------- | -
|                                                                                                                                           |  | March 31
 2010 |             | December 31
 2009 |  
|ASSETS                                                                                                                                    
|CURRENT ASSETS:                                                                                                                            |  |                |             |                   |   |             |  
|Cash and cash equivalents                                                                                                                  |  | $              | 11,884,714  |                   | $ | 21,293,448  |  
|Investments                                                                                                                                |  |                | 15,795,728  |                   |   | 11,236,940  |  
|Trade accounts receivable, less allowance for doubtful accounts of
 $465,000 and $505,000, respectively                                    |  |                | 17,083,922  |                   |   | 15,042,411  |  
|Inventories                                                                                                                                |  |                | 24,752,077  |                   |   | 24,598,317  |  
|Prepaid income taxes                                                                                                                       |  |                | 0           |                   |   | 337,274     |  
|Other current assets                                                                                                                       |  |                | 806,473     |                   |   | 884,555     |  
|Deferred income taxes                                                                                                                      |  |                | 3,751,368   |                   |   | 3,574,501   |  
|TOTAL CURRENT ASSETS                                                                                                                       |  |                | 74,074,282  |                   |   | 76,967,446  |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                         |  |                | 13,377,814  |                   |   | 13,321,825  |  
|OTHER ASSETS:                                                                                                                              |  |                |             |                   |   |             |  
|Investments                                                                                                                                |  |                | 9,428,692   |                   |   | 7,538,903   |  
|Goodwill                                                                                                                                   |  |                | 4,560,217   |                   |   | 4,560,217   |  
|Prepaid pensions                                                                                                                           |  |                | 275,744     |                   |   | 399,743     |  
|Other assets                                                                                                                               |  |                | 122,672     |                   |   | 125,560     |  
|TOTAL OTHER ASSETS                                                                                                                         |  |                | 14,387,325  |                   |   | 12,624,423  |  
|TOTAL ASSETS                                                                                                                               |  | $              | 101,839,421 |                   | $ | 102,913,694 |  
|                                                                                                                                           |  |                |             |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      
|CURRENT LIABILITIES:                                                                                                                       |  |                |             |                   |   |             |  
|Current portion of long-term debt                                                                                                          |  | $              | 379,330     |                   | $ | 372,926     |  
|Accounts payable                                                                                                                           |  |                | 5,222,538   |                   |   | 4,986,028   |  
|Accrued compensation and benefits                                                                                                          |  |                | 2,817,623   |                   |   | 4,855,899   |  
|Other accrued liabilities                                                                                                                  |  |                | 1,329,826   |                   |   | 1,370,105   |  
|Income taxes payable                                                                                                                       |  |                | 302,826     |                   |   | 0           |  
|Dividends payable                                                                                                                          |  |                | 1,170,058   |                   |   | 1,169,040   |  
|TOTAL CURRENT LIABILITIES                                                                                                                  |  |                | 11,222,201  |                   |   | 12,753,998  |  
|                                                                                                                                          
|LONG TERM LIABILITIES:                                                                                                                     |  |                |             |                   |   |             |  
|Long-term compensation plans                                                                                                               |  |                | 1,461,895   |                   |   | 887,210     |  
|Income taxes payable                                                                                                                       |  |                | 734,481     |                   |   | 723,534     |  
|Deferred income taxes                                                                                                                      |  |                | 253,887     |                   |   | 208,111     |  
|Long term debt - mortgage payable                                                                                                          |  |                | 2,304,280   |                   |   | 2,401,548   |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                |  |                | 4,754,543   |                   |   | 4,220,403   |  
|                                                                                                                                           |  |                |             |                   |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                              |  |                |             |                   |   |             |  
|                                                                                                                                           |  |                |             |                   |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                       |  |                |             |                   |   |             |  
|Preferred stock, par value $1.00 per share; 3,000,000 shares
 authorized; none issued                                                      |  |                |             |                   |   |             |  
|Common stock, par value $.05 per share; 30,000,000 shares authorized;
 8,357,558 and 8,352,883 shares issued and outstanding, respectively |  |                | 417,878     |                   |   | 417,644     |  
|Additional paid-in capital                                                                                                                 |  |                | 33,696,488  |                   |   | 33,641,510  |  
|Retained earnings                                                                                                                          |  |                | 52,168,127  |                   |   | 52,007,261  |  
|Accumulated other comprehensive income, net of tax                                                                                         |  |                | (419,816    | )                 |   | (127,122    | )
|TOTAL STOCKHOLDERS EQUITY                                                                                                                 |  |                | 85,862,677  |                   |   | 85,939,293  |  
|                                                                                                                                           |  |                |             |                   |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                 |  | $              | 101,839,421 |                   | $ | 102,913,694 |  

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

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Table of Contents

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

|                                                  |  |                             |            |      |   |            |  
|------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- | -
|                                                  |  | Three Months Ended March 31 |           
|                                                  |  | 2010                        |            | 2009 |  
|                                                  |  |                             |            |      |   |            |  
|Sales from operations                             |  | $                           | 25,882,011 |      | $ | 26,764,958 |  
|                                                  |  |                             |            |      |   |            |  
|Costs and expenses:                               |  |                             |            |      |   |            |  
|Cost of sales                                     |  |                             | 15,366,950 |      |   | 16,985,514 |  
|Selling, general and administrative expenses      |  |                             | 8,394,796  |      |   | 8,002,809  |  
|Total costs and expenses                          |  |                             | 23,761,746 |      |   | 24,988,323 |  
|Operating income                                  |  |                             | 2,120,265  |      |   | 1,776,635  |  
|                                                  |  |                             |            |      |   |            |  
|Other income and
 (expenses):                     |  |                             |            |      |   |            |  
|Investment and other income                       |  |                             | 38,622     |      |   | 210,537    |  
|Gain on sale of assets                            |  |                             | 6,420      |      |   | 8,630      |  
|Interest and other expense                        |  |                             | (52,489    | )    |   | (59,091    | )
|Other (loss) income, net                          |  |                             | (7,447     | )    |   | 160,076    |  
|                                                  |  |                             |            |      |   |            |  
|Income before income taxes                        |  |                             | 2,112,818  |      |   | 1,936,711  |  
|                                                  |  |                             |            |      |   |            |  
|Income tax expense                                |  |                             | 781,894    |      |   | 713,780    |  
|                                                  |  |                             |            |      |   |            |  
|Net income                                        |  |                             | 1,330,924  |      |   | 1,222,931  |  
|                                                  |  |                             |            |      |   |            |  
|Other comprehensive (loss)
 income, net of tax:   |  |                             |            |      |   |            |  
|Additional minimum pension liability adjustments  |  |                             | (102,462   | )    |   | 11,961     |  
|Unrealized gains on available-for-sale securities |  |                             | 18,000     |      |   |            |  
|Foreign currency translation adjustment           |  |                             | (208,232   | )    |   | (74,629    | )
|Total other comprehensive
 loss, net of tax       |  |                             | (292,694   | )    |   | (62,668    | )
|                                                 
|Comprehensive net income                          |  | $                           | 1,038,230  |      | $ | 1,160,263  |  
|                                                  |  |                             |            |      |   |            |  
|Basic net income per share:                       |  | $                           | .16        |      | $ | .15        |  
|                                                  |  |                             |            |      |   |            |  
|Diluted net income per
 share:                    |  | $                           | .16        |      | $ | .15        |  
|                                                  |  |                             |            |      |   |            |  
|Average Basic Shares
 Outstanding                 |  |                             | 8,356,873  |      |   | 8,316,753  |  
|Average Dilutive Shares
 Outstanding              |  |                             | 8,388,478  |      |   | 8,319,373  |  
|Dividends per share                               |  | $                           | .14        |      | $ | .12        |  

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

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Table of Contents

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

|                                                             |  |              |           |            |   |          |  |               |            |               |   |            |   |   |          |   |   |            |  
|------------------------------------------------------------ |  | ------------ | --------- | ---------- | - | -------- |  | ------------- | ---------- | ------------- | - | ---------- | - | - | -------- | - | - | ---------- | -
|                                                             |  |              |           |            |   |          |  | Cumulative    |            |               |  
|                                                             |  |              |           | Additional |   |          |  | Other         |            |               |  
|                                                             |  | Common Stock |           | Paid-in    |   | Retained |  | Comprehensive |            |               |  
|                                                             |  | Shares       |           | Amount     |   | Capital  |  | Earnings      |            | Income (Loss) |   | Total      |  
|BALANCE AT DECEMBER 31, 2009                                 |  |              | 8,352,883 |            | $ | 417,644  |  | $             | 33,641,510 |               | $ | 52,007,261 |   | $ | (127,122 | ) | $ | 85,939,293 |  
|Net income                                                   |  |              |           |            |   |          |  |               |            |               |   | 1,330,924  |   |   |          |   | $ | 1,330,924  |  
|Issuance of common stock under Employee
 Stock Purchase Plan |  |              | 4,675     |            |   | 234      |  |               | 54,978     |               |   |            |   |   |          |   | $ | 55,212     |  
|Shareholder dividends                                        |  |              |           |            |   |          |  |               |            |               |   | (1,170,058 | ) |   |          |   | $ | (1,170,058 | )
|Other comprehensive income                                   |  |              |           |            |   |          |  |               |            |               |   |            |   |   | (292,694 | ) | $ | (292,694   | )
|BALANCE AT MARCH 31, 2010                                    |  |              | 8,357,558 |            | $ | 417,878  |  | $             | 33,696,488 |               | $ | 52,168,127 |   | $ | (419,816 | ) | $ | 85,862,677 |  

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

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Table of Contents

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

|                                                                                   |  |                             |            |      |   |             |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ----------- | -
|                                                                                   |  | Three Months Ended March 31 |           
|                                                                                   |  |                             |           
|                                                                                   |  | 2010                        |            | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                             |            |      |   |             |  
|Net income                                                                         |  | $                           | 1,330,924  |      | $ | 1,222,931   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                             |            |      |   |             |  
|Depreciation and amortization                                                      |  |                             | 486,692    |      |   | 445,449     |  
|Deferred income taxes                                                              |  |                             | (131,091   | )    |   | (72,995     | )
|(Gain) loss on sale of assets                                                      |  |                             | (6,420     | )    |   | (8,630      | )
|Changes in assets and liabilities:                                                 |  |                             |            |      |   |             |  
|Trade receivables                                                                  |  |                             | (2,085,915 | )    |   | 388,618     |  
|Inventories                                                                        |  |                             | (204,684   | )    |   | 1,488,099   |  
|Prepaid income taxes                                                               |  |                             | 337,274    |      |   |             |  
|Other current assets                                                               |  |                             | 76,721     |      |   | 210,269     |  
|Accounts payable                                                                   |  |                             | 255,857    |      |   | (1,250,199  | )
|Accrued compensation and benefits                                                  |  |                             | (1,463,591 | )    |   | 79,223      |  
|Other accrued expenses                                                             |  |                             | (36,744    | )    |   | 165,099     |  
|Income taxes payable                                                               |  |                             | 313,773    |      |   | (39,605     | )
|Other                                                                              |  |                             |            |      |   | (22,104     | )
|Net
 cash (used in) provided by operating activities                               |  |                             | (1,127,204 | )    |   | 2,606,155   |  
|                                                                                   |  |                             |            |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                             |            |      |   |             |  
|Capital expenditures                                                               |  |                             | (555,608   | )    |   | (370,942    | )
|Purchases of investments                                                           |  |                             | (9,698,600 | )    |   | (18,109,595 | )
|Proceeds from the sale of fixed assets                                             |  |                             | 7,524      |      |   | 10,545      |  
|Proceeds from the sale of investments                                              |  |                             | 3,268,023  |      |   | 3,472,000   |  
|Net cash used in investing activities                                              |  |                             | (6,978,661 | )    |   | (14,997,992 | )
|                                                                                   |  |                             |            |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                             |            |      |   |             |  
|Cash dividends paid                                                                |  |                             | (1,169,040 | )    |   | (994,168    | )
|Mortgage principal payments                                                        |  |                             | (90,864    | )    |   | (84,882     | )
|Proceeds from issuance of common stock                                             |  |                             | 55,212     |      |   | 66,629      |  
|Purchase of common stock                                                           |  |                             |            |      |   | (26,125     | )
|Net cash used in financing activities                                              |  |                             | (1,204,692 | )    |   | (1,038,546  | )
|                                                                                   |  |                             |            |      |   |             |  
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                                    |  |                             | (98,177    | )    |   | (14,711     | )
|                                                                                   |  |                             |            |      |   |             |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |  |                             | (9,408,734 | )    |   | (13,445,094 | )
|                                                                                   |  |                             |            |      |   |             |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |  |                             | 21,293,448 |      |   | 29,951,561  |  
|                                                                                   |  |                             |            |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |  | $                           | 11,884,714 |      | $ | 16,506,467  |  
|                                                                                  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |  |                             |            |      |   |             |  
|Income taxes paid                                                                  |  | $                           | 260,893    |      | $ | 826,381     |  
|Interest paid                                                                      |  |                             | 52,731     |      |   | 58,747      |  
|Dividends declared not paid                                                        |  |                             | 1,170,058  |      |   | 1,001,486   |  

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

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Table of Contents

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

NOTE 1 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Financial statement presentationThe condensed consolidated balance sheets and
consolidated statement of changes in stockholders equity as of March 31, 2010
and 2009 and the related consolidated statements of income and comprehensive
income, and the condensed consolidated statements of cash flows for the periods
ended March 31, 2010 and 2009 have been prepared by Company management. In the
opinion of management, all adjustments (which include only normal recurring
adjustments except where noted) necessary to present fairly the financial
position, results of operations, and cash flows at March 31, 2010 and 2009 and
for the periods then ended have been made.

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

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

Except to the
extent updated or described below, the significant accounting policies set
forth in Note 1 to the consolidated financial statements in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009, 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 investmentsFor purposes of the condensed consolidated statements
of cash flows, the Company considers all highly liquid investments with an
original maturity of three months or less at the time of purchase to be cash
equivalents. As of March 31, 2010, the Company had $11.9 million in cash and
cash equivalents. Of this amount, $3.0 million was invested
in short-term money market funds that are not considered to be bank deposits
and are not insured or guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or other government agency. These money market funds seek to preserve
the value of the investment at $1.00 per share; however, it is possible to lose
money investing in these funds. The remainder is operating cash and
certificates of deposit that are fully insured through the FDIC.

The Company
had $25.2 million in investments which consist of certificates of deposit that
are traded on the open market and are classified as available-for-sale at March
31, 2010. Of the $25.2 million in investments, $15.8 million mature in 12
months or less and are classified as current assets. Available-for-sale
investments are reported at fair value with unrealized gains and losses net of
tax excluded from operations and reported as a separate component of
stockholders equity (See Comprehensive income below).

Revenue Recognition

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

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

Comprehensive income

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

|                                                   |  |                |            |                   |   |            |  
|-------------------------------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | -
|                                                   |  | March 31
 2010 |            | December 31
 2009 |  
|Foreign
 currency translation                      |  | $              | (1,297,992 | )                 | $ | (1,089,760 | )
|Unrealized
 gain on available-for-sale investments |  |                | 51,802     |                   |   | 33,802     |  
|Minimum
 pension liability                         |  |                | 826,374    |                   |   | 928,836    |  
|                                                   |  | $              | (419,816   | )                 | $ | (127,122   | )

NOTE 2 -
STOCK-BASED COMPENSATION

Common shares
are reserved in connection with the Companys 1992 Stock Plan under which
2,500,000 shares of common stock may be issued pursuant to stock options, stock
appreciation rights, restricted stock or deferred stock granted to officers and
key employees. Exercise prices of stock options under the Stock Plan cannot be
less than fair market value of the stock on the date of grant. Rules and
conditions governing awards of stock options, stock appreciation rights and
restricted stock are determined by the Compensation Committee of the Board of
Directors, subject to certain limitations incorporated into the Stock Plan. At
March 31, 2010, 1,123,739 shares
remained available to be issued under the Stock Plan. All currently outstanding
awards under the Stock Plan are vested. The options expire five years from date
of grant.

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Shares of
common stock are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors (the Director Plan). The Director Plan provides for the automatic
grant of nonqualified options for 3,000 shares of common stock annually to each
nonemployee director concurrent with the annual shareholders meeting. Exercise
price is the fair market value of the stock at the date of grant. Options
granted under the Director Plan vest when issued and expire 10 years from date
of grant. At March 31, 2010, 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 quarterly plan term, which
is March 31, 2010. The ESPP Plan is non-compensatory under current rules and
does not give rise to compensation cost.

No stock
compensation expense was recognized for the three month periods ended March 31,
2010 and 2009. Excess tax benefits from the exercise of stock options included
in financing cash flows for the three month periods ended March 31, 2010 and
2009 were $0.

The following
table summarizes the stock option transactions for the three months ended March
31, 2010. All outstanding stock options are currently exercisable.

|                                 |  |         |         |                                             |   |                                               |  |            |  | 
|-------------------------------- |  | ------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  | ---------- |  | 
|                                 |  | Options |         | Weighted average
 exercise price
 per share |   | Weighted average
 remaining
 contractual term | 
|Outstanding
  December 31, 2009 |  |         | 189,000 |                                             | $ | 9.77                                          |  | 4.75 years | 
|Issued                           |  |         |        |                                             |   |                                              |  |            |  | 
|Exercised                        |  |         |        |                                             |   |                                              |  |            |  | 
|Canceled                         |  |         |        |                                             |   |                                              |  |            |  | 
|Outstanding
  March 31, 2010    |  |         | 189,000 |                                             |   | 9.77                                          |  | 4.50 years | 

The aggregate
intrinsic value of all options (the amount by which the market price of the
stock on the last day of the period exceeded the market price of the stock on
the date of grant) outstanding at March 31, 2010 was $626,000. The intrinsic
value of all options exercised during the three months ended March 31, 2010 was
$0. Net cash proceeds from the exercise of all stock options were $0 for the
three months ended March 31, 2010 and 2009, respectively.

NOTE 3 -
INVENTORIES

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

|                             |  |                |            |                   |   |            | 
|---------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | 
|                             |  | March 31
 2010 |            | December 31
 2009 |  
|Finished
 goods              |  | $              | 14,708,477 |                   | $ | 15,195,132 | 
|Raw and
 processed materials |  |                | 10,043,600 |                   |   | 9,403,185  | 
|Total                        |  | $              | 24,752,077 |                   | $ | 24,598,317 | 

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NOTE 4 
WARRANTY

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

The following
table presents the changes in the Companys warranty liability for the three
months ended March 31, 2010 and 2009, the majority of which relates to a
five-year obligation to provide for potential future liabilities for network
equipment sales.

|                            |  |      |         |      |   |         |  
|--------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                            |  | 2010 |         | 2009 |  
|Beginning
 Balance          |  | $    | 648,000 |      | $ | 593,000 |  
|Actual
 warranty costs paid |  |      | (18,000 | )    |   | (95,000 | )
|Amounts
 charged to expense |  |      | (50,000 | )    |   | 160,000 |  
|Ending
 balance             |  | $    | 580,000 |      | $ | 658,000 |  

NOTE 5 
CONTINGENCIES

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

NOTE 6 
INCOME TAXES

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

At March 31,
2010 there was $591,000 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 2006-2008 remain open to examination by
the Internal Revenue Service and the years 2005-2008 remain open to examination
by various state tax departments. The tax years from 2007-2009 remain open in
Costa Rica.

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The Companys
effective income tax rate was 37% for the first three months of 2010. The
effective tax rate differs from the federal tax rate of 35% due to state income
taxes, foreign losses not deductible for U.S. income tax purposes, provisions
for interest charges and settlement of uncertain income tax positions. Although
the foreign operating losses may ultimately be deductible in the countries in
which they have occurred, the Company has not recorded a deferred tax asset for
these losses due to uncertainty regarding the eventual realization of the
benefit. The effect of the foreign operations is an overall rate increase of
approximately 2.2% for the three
months ended March 31, 2010. There were no additional uncertain tax positions
identified in the first quarter of 2010. The Companys effective income tax
rate for the three months ended March 31, 2009 was 37%, and differed from the
federal tax rate due to state income taxes, foreign losses not deductible for
U.S. income tax purposes, provisions for interest charges, and settlement of
uncertain tax positions.

NOTE 7 
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; 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 three-month
periods ended March 31, 2010 and 2009 is as follows:

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SEGMENT INFORMATION - THREE MONTHS

|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|-------------------------------------------- |  | ------ | ---------- | --------------------- | - | ------------------ |  | --------------- | --------- | ----- | - | --------- | - | - | ---------- | - | - | ----------- | 
|                                             |  | Suttle |            | Transition 
 Networks |   | JDL 
 Technologies |  | Austin 
 Taylor |           | Other |   | Total     |  
|Three months ended March 31, 2010:           |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 9,927,105  |                       | $ | 13,753,196         |  | $               | 1,295,719 |       | $ | 905,991   |   | $ |           |   | $ | 25,882,011  | 
|Cost of sales                                |  |        | 7,276,458  |                       |   | 6,330,882          |  |                 | 934,898   |       |   | 824,712   |   |   |           |   | $ | 15,366,950  | 
|Gross profit                                 |  |        | 2,650,647  |                       |   | 7,422,314          |  |                 | 360,821   |       |   | 81,279    |   |   |           |   |   | 10,515,061  | 
|Selling, general and administrative expenses |  |        | 1,787,899  |                       |   | 4,893,304          |  |                 | 387,196   |       |   | 248,554   |   |   | 1,077,843  |   | $ | 8,394,796   | 
|Operating income (loss)                      |  | $      | 862,748    |                       | $ | 2,529,010          |  | $               | (26,375   | )     | $ | (167,275  | ) | $ | (1,077,843 | ) | $ | 2,120,265   | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 217,037    |                       | $ | 147,023            |  | $               | 37,919    |       | $ | 12,202    |   | $ | 72,510     |   | $ | 486,692     | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 463,796    |                       | $ | 26,590             |  | $               | 11,787    |       | $ | 14,648    |   | $ | 38,787     |   | $ | 555,608     | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Assets                                       |  | $      | 20,160,161 |                       | $ | 30,071,446         |  | $               | 2,540,094 |       | $ | 3,890,113 |   | $ | 45,177,607 |   | $ | 101,839,421 | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|                                             |  | Suttle |            | Transition 
 Networks |   | JDL 
 Technologies |  | Austin 
 Taylor |           | Other |   | Total     |  
|Three months ended March 31, 2009:           |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Sales                                        |  | $      | 11,850,004 |                       | $ | 12,136,783         |  | $               | 2,081,068 |       | $ | 697,103   |   | $ |           |   | $ | 26,764,958  | 
|Cost of sales                                |  |        | 9,069,855  |                       |   | 5,824,834          |  |                 | 1,437,413 |       |   | 653,412   |   |   |           |   | $ | 16,985,514  | 
|Gross profit                                 |  |        | 2,780,149  |                       |   | 6,311,949          |  |                 | 643,655   |       |   | 43,691    |   |   |           |   |   | 9,779,444   | 
|Selling, general and administrative expenses |  |        | 1,566,242  |                       |   | 4,923,330          |  |                 | 320,552   |       |   | 280,936   |   |   | 911,748    |   | $ | 8,002,808   | 
|Operating income (loss)                      |  | $      | 1,213,907  |                       | $ | 1,388,619          |  | $               | 323,103   |       | $ | (237,245  | ) | $ | (911,748   | ) | $ | 1,776,636   | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 150,164    |                       | $ | 147,424            |  | $               | 41,484    |       | $ | 14,973    |   | $ | 91,404     |   | $ | 445,449     | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 239,097    |                       | $ | 75,301             |  | $               |          |       | $ | 40,299    |   | $ | 16,245     |   | $ | 370,942     | 
|                                             |  |        |            |                       |   |                    |  |                 |           |       |   |           |   |   |            |   |   |             | 
|Assets                                       |  | $      | 22,368,797 |                       | $ | 27,188,008         |  | $               | 3,629,215 |       | $ | 4,278,670 |   | $ | 40,341,460 |   | $ | 97,806,150  | 

NOTE 8 
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:

|                                |  |                             |         |      |   |         |  
|------------------------------- |  | --------------------------- | ------- | ---- | - | ------- | -
|                                |  | Three months Ended March 31 |        
|                                |  | 2010                        |         | 2009 |  
|Service cost                    |  | $                           | 9,000   |      |   | 8,000   |  
|Interest
 cost                  |  |                             | 62,000  |      |   | 60,000  |  
|Expected return
 on plan assets |  |                             | (54,000 | )    |   | (58,000 | )
|                                |  | $                           | 17,000  |      | $ | 10,000  |  

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NOTE 9  NET
INCOME PER SHARE

Basic net
income per common share is based on the weighted average number of common
shares outstanding during each year. Diluted net income per common share takes
into effect the dilutive effect of potential common shares outstanding. The
Companys only potential common shares outstanding are stock options, which
resulted in a dilutive effect of 31,605 shares and 2,619 shares for the
respective three month periods ended March 31, 2010 and 2009. 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 24,000 and 191,900
at March 31, 2010 and 2009, respectively.

NOTE 10  FAIR
VALUE MEASUREMENTS

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

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

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

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

The Companys
assets and liabilities that are measured at fair value on a recurring basis as
of March 31, 2010 include money market funds within cash and cash equivalents
of $3,032,000 classified as level one within the hierarchy and certificate of
deposits within investments of $25,224,000 classified as level two. The Company
does not have any assets or liabilities classified as level three within the
hierarchy.

NOTE 11 
SUBSEQUENT EVENTS

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

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

Forward looking statements

In this report
and, from time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, the Company may make forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 concerning
possible or anticipated future financial performance, business activities,
plans, pending claims, investigations or litigation which are typically
preceded by the words believes, expects, anticipates, intends or
similar expressions. For 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.

Three Months Ended March 31, 2010 Compared toThree Months Ended March 31, 2009

Consolidated
sales decreased in 2010 to $25,882,000 compared to $26,765,000 in 2009. Consolidated
operating income in 2010 increased to $2,120,000 compared to $1,777,000 in the
first quarter of 2009.

Net income in
2010 increased to $1,331,000 compared to $1,223,000 in the first quarter of
2009.

Suttle

Suttle sales
decreased 16% in the first quarter of 2010 to $9,927,000 compared to
$11,850,000 in the same period of 2009 due to a general slow down in the
housing market. Sales by customer groups in the first quarter of 2010 and 2009
were:

|                           |  |                                |           |      |   |            | 
|-------------------------- |  | ------------------------------ | --------- | ---- | - | ---------- | 
|                           |  | Suttle Sales by Customer Group |          
|                           |  | 2010                           |           | 2009 |  
|Major
 telephone companies |  | $                              | 4,515,000 |      | $ | 6,956,000  | 
|Distributors/OEM           |  |                                | 3,255,000 |      |   | 2,587,000  | 
|International              |  |                                | 1,431,000 |      |   | 1,259,000  | 
|Other                      |  |                                | 726,000   |      |   | 1,048,000  | 
|                           |  | $                              | 9,927,000 |      | $ | 11,850,000 | 

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

|                             |  |                               |           |      |   |            | 
|---------------------------- |  | ----------------------------- | --------- | ---- | - | ---------- | 
|                             |  | Suttle Sales by Product Group |          
|                             |  | 2010                          |           | 2009 |  
|Modular
 connecting products |  | $                             | 4,213,000 |      | $ | 4,557,000  | 
|DSL products                 |  |                               | 3,070,000 |      |   | 3,632,000  | 
|Structured
 cabling products |  |                               | 2,490,000 |      |   | 3,491,000  | 
|Other
 products              |  |                               | 154,000   |      |   | 170,000    | 
|                             |  | $                             | 9,927,000 |      | $ | 11,850,000 | 

Sales to the
major telephone companies (RBOCs) decreased 35% in 2010 due to a decrease in
sales of DSL products, an accelerating decline in voice markets and the
continued impact of the contraction of the U.S. housing market. Sales to these
customers accounted for 45% of Suttles sales in the 2010 first quarter
compared to 59% of sales in 2009. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors increased 26% in 2010 due to
DSL products. This customer segment accounted for 33% and 22% of sales in the
first quarters of 2010 and 2009, respectively. International sales increased
14% and accounted for 14% of Suttles first quarter 2010 sales. Suttles
products do not have a large international market due to different product
specifications in non-US markets. Sales to other customers decreased 16% to
$726,000.

Modular
connecting products sales have decreased 8% due to a slowing of the home
building business and accelerated decline in the voice market. Sales of DSL
products decreased 15% due to the maturation of the U.S. DSL market and the
order cycle of major customers. Sales of structured cabling products decreased
29% due to the contraction of the housing market, specifically the
multi-dwelling unit space.

Suttles gross
margin decreased 5% in the first quarter of 2010 to $2,651,000 compared to
$2,780,000 in the same period of 2009. Gross margin percentage increased to 27%
in 2010 from 23% in 2009 due to product mix changes. Suttle realizes its
highest selling margins on modular connecting products. DSL products are the
least profitable. Suttle also earns better margins on sales to distributor and
OEM customers where pricing is usually based on Company list prices versus
major telephone customers where pricing is usually based on negotiated
contracts. Selling, general and administrative expenses increased $222,000 or
14% in the first quarter of 2010 compared to the same period in 2009, due to
increased spending in the Companys technology development initiative. Suttles
operating income was $863,000 in the first quarter of 2010 compared to
operating income of $1,214,000 in 2009.

Transition Networks

Transition
Networks sales increased 13% to $13,753,000 in the first quarter of 2010
compared to $12,137,000 in 2009.

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

|                                    |  |                                      |            |      |   |            | 
|----------------------------------- |  | ------------------------------------ | ---------- | ---- | - | ---------- | 
|                                    |  | Transition
 Networks Sales by Region |           
|                                    |  | 2010                                 |            | 2009 |  
|North
 America                      |  | $                                    | 11,095,000 |      | $ | 9,787,000  | 
|Europe,
 Middle East, Asia (EMEA) |  |                                      | 1,080,000  |      |   | 1,190,000  | 
|Rest of
 world                      |  |                                      | 1,578,000  |      |   | 1,160,000  | 
|                                    |  | $                                    | 13,753,000 |      | $ | 12,137,000 | 

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Sales in North
America increased 13% or $1,309,000 due to an improving economic situation in
the United States and Canada and increased activity in all vertical market
segments and product groups. International sales increased $308,000, or 13%
primarily due to improved economic activity in Asia and Latin America. The EMEA
region continues to be sluggish in its economic recovery and sales remain
essentially flat in that region.

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

|                   |  |                                             |            |      |   |            | 
|------------------ |  | ------------------------------------------- | ---------- | ---- | - | ---------- | 
|                   |  | Transition
 Networks Sales by Product Group |           
|                   |  | 2010                                        |            | 2009 |  
|Media
 converters  |  | $                                           | 10,426,000 |      | $ | 9,616,000  | 
|Ethernet
 switches |  |                                             | 870,000    |      |   | 547,000    | 
|Ethernet
 adapters |  |                                             | 1,602,000  |      |   | 1,316,000  | 
|Other
 products    |  |                                             | 855,000    |      |   | 658,000    | 
|                   |  | $                                           | 13,753,000 |      | $ | 12,137,000 | 

Gross margin
on first quarter Transition Networks sales increased 18% to $7,422,000 in 2010
from $6,312,000 in 2009. Gross margin as a percentage of sales was 54% in 2010,
compared to 52% in the 2009 period. The increase is due to the mix of products
with an increase in some higher margin conversion products and Ethernet
adapters and lower operating expenses for the indirect costs related to gross
margin. Selling, general and administrative expenses were flat at $4,893,000 in
2010 compared to $4,923,000 in 2009. Operating income increased to $2,529,000
in 2010 compared to $1,389,000 in 2009.

JDL Technologies,
Inc.

JDL
Technologies, Inc. reported 2010 first quarter sales of $1,296,000 compared to
$2,081,000 in 2009.

JDLs revenues
by customer group were as follows:

|                           |  |                                |           |      |   |           | 
|-------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | 
|                           |  | JDL
 Revenue by Customer Group |          
|                           |  | 2010                           |           | 2009 |  
|Broward
 County FL schools |  | $                              | 1,200,000 |      | $ | 2,011,000 | 
|All other                  |  |                                | 96,000    |      |   | 70,000    | 
|                           |  | $                              | 1,296,000 |      | $ | 2,081,000 | 

Revenues
earned in Broward County FL decreased $812,000 or 40% in 2010. The decrease was
the result of Broward County receiving contract funding approval six months
later than the usual announcement timeframe, which will result in higher
revenue in the subsequent quarters of 2010.

JDL gross
margin was $361,000 in the first quarter of 2010 compared to $644,000 in the
same period in 2009. Gross margin as a percentage of sales decreased to 28% in
2010 from 31% in 2009 due to on-going overhead costs against lower than
projected revenues for the period. Selling, general and administrative expenses
increased in 2010 to $387,000 compared to $321,000 in 2009 due to increased
travel and relocation costs due to a change in management in the first quarter
2010. JDL reported an operating loss of $26,000 in the first quarter of 2010
compared to operating income of $323,000 in the same period of 2009.

16

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Table of Contents

Austin Taylor

Austin
Taylors revenues increased to $906,000 for the first quarter of 2010, compared
to $697,000 in 2009. This increase is due to broader product sales into the OEM
market and deeper sales penetration into the UK and Ireland distribution
network. Gross margin increased 84% to $81,000 in 2010 from $44,000 in 2009.
Gross margin as a percentage of sales was 9% in 2010 compared to 6% in 2009.
This increase was due to a gain in manufacturing efficiency resulting from a
recently implemented cost reduction and process improvement program. Austin
Taylor reported an operating loss in 2010 of $167,000 compared to $237,000 in
2009.

Other

Net investment
income decreased to a loss of $7,000 in 2010 as compared to income of $160,000
in 2009. Income before income taxes increased to $2,113,000 in 2010 compared to
$1,937,000 in 2009. The Companys effective income tax rate was 37% in both
2010 and 2009. This effective rate was higher than the standard rate of 35% due
to state income taxes, foreign losses not deductible for U.S. income tax
purposes, provisions for interest charges and settlement of uncertain income
tax positions.

Liquidity and Capital Resources

At March 31,
2010, the Company had approximately $37,109,000 of cash equivalents and
investments compared to $40,069,000 of cash equivalents and investments at
December 31, 2009. The Company had current assets of approximately $74,074,000 and
current liabilities of $11,222,000 at March 31, 2010 compared to current assets
of $76,967,000 and current liabilities of $12,754,000 at December 31, 2009.

Net cash used
in operating activities was $1,127,000 in the first three months of 2010
compared to $2,606,000 provided the same period in 2009. Significant working
capital changes from December 31, 2009 to March 31, 2010 included decreased
accrued compensation and benefits of $1,464,000 due to the payment of the
Companys long term bonuses in the first quarter of 2010 and an increase in
accounts receivable of $2,086,000 due to an overall increase in sales in the
first quarter of 2010 as compared to the fourth quarter of 2009.

Net cash used in investing activities was
$6,979,000 in the first three months in 2010 compared to cash used of
$14,998,000 in the same period in 2009, due to the purchase of certificates of
deposit with maturities of greater than 90 days during the quarter, offset by
the sale of such investments.

Net cash used
in financing activities was $1,205,000 and $1,039,000 in the first three months
of 2010 and 2009, respectively. Cash dividends paid in the first three months
of 2010 were $1,169,000 ($.14 per common share) compared to $994,000 ($.12 per
common share) in the same period in 2009. Proceeds from common stock issuances,
principally issued under the Companys Employee Stock Purchase Plan, totaled
approximately $55,000 in the first three months of 2010 and $67,000 in the same
period in 2009. In the first three months of 2010, the Company did not purchase
any of its outstanding common shares. At March 31, 2010, 481,938 additional
shares could be repurchased under outstanding Board authorizations. The Company
has a $10,000,000 line of credit from U.S. Bank. Interest on borrowings on the
credit line is at the LIBOR rate plus 1.5% (1.8% at March 31, 2010). There were
no borrowings on the line of credit during the first three months of 2010 or
2009. The credit agreement expires September 30, 2010 and is secured by assets
of the Company. As part of the acquisition of the new Minnetonka headquarters
building in July 2007, the Company assumed an outstanding mortgage of
$4,380,000. The mortgage is
payable in monthly installments and carries an interest rate of 6.83%. The
mortgage matures on March 1, 2016. Mortgage payments on principal totaled
$91,000 during the first quarter of 2010. The outstanding balance on the
mortgage was $2,684,000 at March 31, 2010.

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

Critical Accounting Policies

Our critical
accounting policies, including the assumptions and judgments underlying them,
are discussed in our 2009 Form 10-K in Note 1 Summary of Significant Accounting
Policies included in our Consolidated Financial Statements. There were no
significant changes to our critical accounting policies during the three months
ended March 31, 2010.

The Companys
accounting policies have been consistently applied in all material respects and
disclose such matters as allowance for doubtful accounts, sales returns,
inventory valuation, warranty expense, income taxes, revenue recognition, asset
and goodwill impairment recognition and foreign currency translation. On an
ongoing basis, we evaluate our estimates based on historical experience and on
various other assumptions that 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
reviews these estimates and judgments on an ongoing basis.

Recently Issued Accounting Pronouncements

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

Item
3. Quantitative
and Qualitative Disclosures about Market Risk.

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

The vast
majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically not been
material to the Company. At March 31, 2010 our bank line of credit carried a
variable interest rate based on the London Interbank Offered Rate (Libor) plus
1.5%. The Companys investments are either money market type of investments
that earn interest at prevailing market rates or certificates of deposits
insured through the FDIC and as such do not have material risk exposure.

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

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Item
4. Controls and
Procedures

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

Operating Effectiveness of Accounting and Control Procedures.
We concluded that, in the aggregate, no material weakness existed as of
March 31, 2010 related to documentation and review of significant accounting
judgments and estimates, balance sheet account reconciliations, financial
closing processes and financial reporting processes at period ends.

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

PART II. OTHER INFORMATION

Item 1. Not Applicable

Item 1A. Risk Factors

In addition to
the risk factors disclosed elsewhere in this report or in the Companys 2009
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.

Although we
have implemented internal controls and procedures, we cannot ensure that these
procedures will prevent all possible errors or fraud. 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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Items 2  5. Not
Applicable

Item 6 Exhibits.

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

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Signatures

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.

|                    |    |                                        | 
|------------------- | -- | -------------------------------------- | 
|                    |    | Communications
 Systems, Inc.         
|                    |    |                                       
|                    | By | /s/ Jeffrey
 K. Berg                   | 
|                    |    | Jeffrey K.
 Berg                      
|Date: May
 12, 2010 |    | President
 and Chief Executive Officer
|                    |    |                                        | 
|                    |    | /s/ David T.
 McGraw                   | 
|                    |    | David T.
 McGraw                      
|Date: May
 12, 2010 |    | Chief
 Financial Officer              

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