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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257State of Incorporation:MinnesotaIRS Employer Identification No.41-1681094Executive Offices:1120 Wayzata Blvd E., Suite 201, Wayzata, MN 55391Telephone number:(952) 345-2244

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, par value $.01 per share

The NASDAQ Stock Market LLC


Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes o    No ý

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. ý

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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer o

Non-accelerated Filer o (Do not check if a
smaller reporting company)

Smaller Reporting Company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of $2.60 per share, was $3,164,283 on
June 30, 2009.

Shares
of common stock outstanding at March 12, 2010: 2,742,992.



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2009 Annual Shareholders' Meeting have been incorporated by
reference into Part III of this Form 10-K. The Proxy Statement is expected to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2009, the end of our fiscal year.

(The remainder of this page was intentionally left blank)

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NORTECH SYSTEMS INCORPORATED        ANNUAL REPORT ON FORM 10K        TABLE OF CONTENTS



PAGEPART IItem 1.

Business

4-7Item 1A.

Risk Factors

7-9Item 2.

Properties

9-10Item 3.

Legal Proceedings

10PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

10Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

11-15Item 8.

Consolidated Financial Statements and Supplementary Data

16-38Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

39Item 9A.

Controls and Procedures (Including Management's Annual Report on Internal Control Over Financial Reporting)

39Item 9B.

Other Information

39PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

40Item 11.

Executive Compensation

40Item 12.

Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters

40Item 13.

Certain Relationships and Related Transactions, and Director Independence

41Item 14.

Principal Accountant Fees and Services

41PART IVItem 15.

Exhibits, Consolidated Financial Statement Schedules

41Signatures

42Index to Exhibits

43


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NORTECH SYSTEMS INCORPORATED
FORM 10-K
For the Year Ended December 31, 2009

PART I

ITEM 1.        BUSINESS

DESCRIPTION OF BUSINESS

We are a Minnesota corporation organized in December 1990, filing annual reports, quarterly reports, proxy statements, and other documents with the Securities
Exchange Act of 1934 (Exchange Act). Prior to December 1990, we operated as DSC Nortech, Inc., who filed a petition for reorganization under Chapter 11 of the United States Bankruptcy
Code during 1990. The business and assets of DSC Nortech, Inc. were transferred to us during 1990.

The
public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 340 Fifth Street N.W., Washington, D.C. 20549. Also, the SEC maintains an
Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, who file electronically with the SEC. The public can obtain any
documents that we file with the SEC at http://www.sec.gov.

We
make available free of charge through our Internet website (http://www.nortechsys.com) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Press Releases, and Current Reports on Form 8-K.

GENERAL

We are an Electronic Manufacturing Service (EMS) contract manufacturing company with our headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota.
We maintain manufacturing facilities in Minnesota including Bemidji, Fairmont, Blue Earth, Baxter, and Merrifield as well as Augusta, Wisconsin; and Monterrey, Mexico. We manufacture wire harness and
cable assemblies, electronic sub-assemblies, and printed circuit board assemblies. We provide value added services and technical support including design, testing, prototyping and supply
chain management. The vast majority of our revenue is derived from products built to the customer's design specifications.

We
provide a high degree of manufacturing expertise using statistical process controls to ensure product quality, total supply chain solution techniques and the systems necessary to
effectively manage the business. This level of sophistication enables us to attract major original equipment manufacturers (OEMs) and to expand and diversify our customer base across several markets
to avoid the effects of fluctuations within a given industry. Our primary focus is in three major markets: Aerospace and Defense, Medical and Industrial Equipment.

We
believe growth and expansion trends for contract manufacturing and the EMS industry will continue once the macro economy improves. Outsourcing remains a strong focus for
OEMs as they apply more of their investment dollars on marketing and product development, and relying more on EMS providers for their production and supply chain requirements.

ACQUISITIONS

We continue to investigate potential acquisition opportunities as a normal course of business and a strategy for growth.

BUSINESS SEGMENT

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services (EMS) industry. We strategically direct
production between our various manufacturing facilities based on a number of considerations to best meet our customers' requirements. We share resources for sales, marketing, information services,
cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting. Consolidated financial information is
available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

BUSINESS STRATEGY

The Electronic Manufacturing Services industry has evolved into a dynamic, high tech global electronics contract services industry. We continue to expand our
capabilities to better meet these changing market requirements. Along with offering technical expertise in our quality processes, design applications and testing, we are also increasing our focus on
supplier-managed inventory services and the cost drivers throughout the supply chain. Our international operations and international partnerships allow us to take advantage of lower-cost
alternatives for our customers and remain competitive in the marketplace.

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We
continue to pursue acquisitions, mergers, and/or joint ventures of companies in the EMS industry to remain competitive, grow our customer base and increase revenues. Our strategic
objectives and our history have been based on both organic and acquired growth.

Our
quality systems and processes are based on ISO standards with all facilities certified to the latest version of the ISO 9001 and/or AS 9100 Aerospace standards. We also have
ISO 13485 certification which recognizes our quality management systems applicable to contract design, manufacture and repair of assemblies for the medical industry. We believe these
certifications benefit our customer base and increase our chances of attracting new business opportunities.

We
are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives we have invested in ROHS (lead free) processing, equipment, plant
capacity studies, people, ERP systems, and lean manufacturing and supply chain management techniques at our facilities. We are committed to continuous improvement in order to provide competitive and
comprehensive manufacturing service solutions to our customers. We will maintain a diversified customer base, and expand into other capabilities and services when they fit our core competencies and
strategic vision.

MARKETING

We concentrate our marketing efforts in the Aerospace and Defense, Medical and Industrial Equipment markets. Our marketing strategy emphasizes the breadth of our
manufacturing, supply chain and engineering services and reflects the complete turnkey solution for meeting our customers' current and future requirements.

Our
customer emphasis continues to be on mature companies, which require a contract manufacturer with a high degree of manufacturing and quality sophistication, including statistical
process control (SPC), statistical quality control (SQC), International Standards Organization (ISO), Military Specifications (Mill Spec) and Aerospace Systems 9100 (AS). We continue efforts to
penetrate our existing customer base and expand new market opportunities with participation in industry publications and selected trade shows. We target customers who value proven manufacturing
performance, design and application engineering expertise and who value the flexibility to manage the supply chain of a high mix of products and services. We market our services through our
in-house sales force and independent manufacturers' representatives.

SOURCES AND AVAILABILITY OF MATERIALS

We currently purchase the majority of our electronic components directly from electronic component manufacturers and large electronic distributors. On occasion
some of our components may be placed on a stringent allocation basis; however, we are not experiencing any major material purchasing or availability problems. We are experiencing longer
lead-times on some components due to the slow economy and reduced electronic manufacturing capacity.

PATENTS AND LICENSES

We are not presently dependent on a proprietary product requiring licensing, patent, copyright or trademark protection. There are no revenues derived from a
service-related business for which patents, licenses, copyrights and trademark protection are necessary for successful operations.

COMPETITION

The contract manufacturing EMS industry competitive makeup includes small closely held contract manufacturing companies, large global full-service
contract manufacturers, company-owned in-house manufacturing facilities and foreign contract manufacturers. We do not believe that the small closely held operations pose a significant
competitive threat in the markets and customers we serve, as they generally do not have the complete manufacturing services or capabilities required by our target customers. We do believe the larger
global full service and foreign manufacturers do provide a substantial competitive environment as their technical support has improved greatly along with their ability to be more responsive to
engineering and schedule changes. We continue to see opportunities with OEM companies that have their own in-house electronic manufacturing capabilities as they evaluate their internal
costs and investments against outsourcing to contract manufacturers. The willingness of foreign manufacturers to "stock" finished product at warehouse locations in the United States is another of
their competitive advantages, however, their inability to react to engineering, product or schedule changes is a disadvantage and plays into our strength. To mitigate foreign competition, we operate a
manufacturing operation in Mexico and have other sourcing solutions to

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support
our customers with a "Low Cost" supply chain solution.

MAJOR CUSTOMERS

Two divisions of General Electric, Co. (G.E.) accounted for 10% or more of our net sales during the past two years. G.E.'s Medical Divisions accounted for
13% and 12% of net sales for the years ended December 31, 2009 and 2008, respectively. G.E.'s Transportation Divisions accounted for 12% and 8% of net sales for the years ended
December 31, 2009 and 2008, respectively. Together, G.E.'s Medical and Transportation Divisions accounted for 25% and 20% of net
sales for the years ended December 31, 2009 and 2008, respectively. Accounts receivable from G.E.'s Medical and Transportation Divisions at December 31, 2009 and 2008 represented 16% and
19% of total accounts receivable, respectively. Additionally, Northrop Grumman Corp. accounted for 9% and 18% of net sales for the years ended December 31, 2009 and 2008, respectively. Accounts
receivable from Northrop Grumman at December 31, 2009 and 2008 represented 1% and 8% of total accounts receivable, respectively.

RESEARCH AND DEVELOPMENT

We perform research and development for customers on an as requested and program basis for development of conceptual engineering and design activities prior to
manufacturing the products. We did not expend significant dollars in 2009 and 2008 on company-sponsored product research and development.

ENVIRONMENTAL LAW COMPLIANCE

We believe that our manufacturing facilities are currently operating under compliance with local, state, and federal environmental laws. We have incurred, and
plan to continue incurring, the necessary expenditures for compliance with applicable laws. Any environmental-oriented equipment is capitalized and depreciated over a seven-year period.
The annualized depreciation expense for this type of environmental equipment is insignificant.

EMPLOYEES

We have 515 full-time and 23 part-time/temporary employees as of December 31, 2009. Manufacturing personnel, including direct,
indirect support and sales functions, comprise 505 employees, while general administrative employees total 33. At December 31, 2008 we had 976 full-time and 20
part-time/temporary employees. The reduction in employees was the result of our facility consolidation and cost reduction activities throughout 2009.

FOREIGN OPERATIONS AND EXPORT SALES

We have a leased manufacturing facility in Monterrey, Mexico with approximately $201,000 in long-term assets at December 31, 2009. Export sales
represent 4% of net sales for both of the years ended December 31, 2009 and 2008.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with
the SEC, in materials delivered to stockholders and in press releases. Such statements generally will be accompanied by words such as "anticipate," "believe," "estimate," "expect," "forecast,"
"intend," "possible," "potential," "predict," "project," or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are
reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks
and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:



The
factors identified above are believed to be important factors (but not necessarily all of the important

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factors)
that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I,
Item 1A, "Risk Factors", and should be considered an integral part of Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this
Form 10-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its
associated cautionary language) whether as a result of new information or future events.

ITEM 1A.        RISK FACTORS

In evaluating us as a company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual
Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of an
investment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidated financial statements and the
related notes.

The economic conditions in the United States and around the world could adversely affect our financial results.

Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth
rates, construction, consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, defense spending levels, and the profits, capital spending, and
liquidity of industrial companies. A continued downturn in the economy and in the markets that we serve could further cause our OEM consumers to reduce spending levels resulting in reschedules,
program delays or cancelled orders of our products and services having an adverse effect on our business and our financial results.

We operate in the highly competitive EMS (Electronic Manufacturing Services) industry.

We compete against many EMS companies. The larger global competitors have more resources and greater economies of scale. We also
compete with OEM in-house operations that are continually evaluating manufacturing products internally against the advantages of outsourcing. We may also be at a competitive disadvantage
with respect to price when compared to manufacturers with excess capacity, lower cost structures and availability of lower cost labor.

The
availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. We must continue to provide a quality product,
be responsive and flexible to customers' requirements, and deliver to customers' expectations. Our lack of execution could have an adverse effect on our operations.

A large percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us.

G.E.'s Medical and Transportation Divisions accounted for 25% and 20% of net sales for the years ended December 31, 2009 and
2008, respectively, and Northrop Grumman Corp. accounted for 9% and 18% of net sales for the years ended December 31, 2009 and 2008, respectively.

We are dependent on suppliers for electronic components and may experience shortages, extended lead times, cost premiums and shipment delays that would adversely affect our
customers and us.

We purchase raw materials, commodities and components for use in our production. Increased costs of these materials could have an
adverse effect on our production costs if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives. Fuel and energy cost increases
could also adversely affect our freight and operating costs. Due to customer specifications and requirements,
we are dependent on suppliers to provide critical electronic components and materials for our operations that could result in shortages of some of the electronic components needed for their
production. Component shortages may result in expedited freight, overtime premiums and increased component costs. In addition to the financial impact on operations from lost revenue and increased
cost, there could potentially be harm to our customer relationships.

Our customers cancel orders, change order quantity, timing and specifications that if not managed would have an adverse affect on inventory carrying costs.

We do face, through the normal course of business, customer cancellations and rescheduled orders and are

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not
always successful in recovering the costs of such cancellations or rescheduling. In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, product
changes and contract termination could have an adverse effect on our operations. We estimate and reserve for any known or potential impact from these possibilities.

The manufacture and sale of our products carries potential risk for product liability claims.

We represent and warrant the goods and services we deliver are free from defects in material and workmanship for one year from ship
date. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including without limitation, warranties to merchantability, fit for a particular
purpose, non-infringement of patent or the like unless agreed upon in writing. If a product liability claim results in our being liable and the amount is in excess of our insurance
coverage or there is no insurance coverage for the claim then it could have an adverse effect on our business and financial position.

We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees.

Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product
development engineers, sales people and operational personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial and
technical resources within the highly competitive EMS industry. Not being able to attract or retain these employees could have a material adverse effect on revenues and earnings.

Operating in foreign countries exposes our operations to risks that could adversely affect our operating results.

We've operated a manufacturing facility in Mexico since 2002. The benefits projected for our Mexico operation have taken more time than
expected to integrate into our marketing strategies. Our operation there is subject to risks that could adversely impact our financial results, such as economic or political volatility, crime, severe
weather, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations.

Non-compliance with environmental laws may result in restrictions and could adversely affect operations.

Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern
the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act; the Clean Water
Act; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as analogous state and foreign laws. Compliance with these
environmental laws is a major consideration for us due to our manufacturing processes and materials. It is possible we may be subject to potential financial liability for costs associated with the
investigation and remediation at our sites; this may have an adverse effect on operations. We have not incurred significant costs related to compliance with environmental laws and regulations and we
believe that our operations comply with all applicable environmental laws.

Environmental
laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. We operate in
environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes or restrictions on discharge
limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation. It is possible that environmental compliance costs and
penalties from new or existing regulations may harm our business, financial condition, and results of operations.

We may be subject to risks associated with our acquisitions, and the risks could adversely affect our operating results.

Our strategy is to grow our business organically and through acquisitions, alliances and joint venture arrangements. We will continue
to pursue and acquire additional businesses in the EMS industry that fit our long-term objectives for growth and profitability. The success of our acquisitions will depend on our ability
to integrate the new operations with the existing operations.

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If we fail to comply with the covenants contained in our revolving credit facility we may be unable to secure additional financing and repayment obligations on our
outstanding indebtedness may be accelerated.

Our revolving credit facility and debt agreements contain financial and operating covenants with which we must comply. As of
December 31, 2009, we were in compliance with these covenants. However, our continued compliance with these covenants is dependent on our financial results, which are subject to fluctuation as
described elsewhere in these risk factors. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to
borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our business.

We are dependent on our management information systems for order, inventory and production management, financial reporting, communications and other functions. If our
information systems fail or experience major interruptions, our business and our financial results could be adversely affected.

We rely on our management information systems to effectively manage our operational and financial functions. Our computer systems,
Internet web sites, telecommunications, and data networks are also vulnerable to damage or interruption from power loss, natural disasters and attacks from viruses or hackers. These types of system
failures or interruption could adversely affect our business and operating results.

Our business may be impacted by natural disasters.

Tornadoes, blizzards and other natural disasters could negatively impact our business and supply chain. In countries that we rely on
for operations and materials, such as Mexico, China and Thailand, potential natural disasters could disrupt our manufacturing operations, reduce demand for our customers' products and increase supply
chain costs.

ITEM 2.        PROPERTIES

ADMINISTRATION

Our Corporate Headquarters consists of approximately 5,000 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Corporate
Headquarters has a lease with a five-year term that expires on July 31, 2010. A portion of the Bemidji facility is used for corporate financial and information systems shared
services.

MANUFACTURING FACILITIES

Our manufacturing facilities as described below are in good operating condition and are suitable for our needs. We believe our overall productive capacity is
sufficient to handle our foreseeable manufacturing needs and customer requirements.

We
own our Bemidji, Minnesota facility consisting of eight acres of land and a building of approximately 69,000 square feet consisting of 56,000 square feet designated for manufacturing
space, and the remaining space is used for offices.

In
November 2009, we sold a 14,000 square foot building in Fairmont, Minnesota. We still own two buildings in Fairmont which together contain approximately 37,000 square feet. One
building is held for sale and the other contains a CNC machining center and office space.

We
own a building in Blue Earth, Minnesota, of approximately 140,000 square feet consisting of 92,000 square feet designated for manufacturing space. The remaining space is being used
for offices and warehouse.

We
own a building in Merrifield, Minnesota, of approximately 46,000 square feet consisting of 34,000 square feet designated for manufacturing; the remaining space is used for offices and
warehouse.

In
Baxter, Minnesota we lease 9,000 square feet in one building and 8,000 square feet in another building. Together the buildings contain 13,000 square feet designated for electronic
board repair of medical equipment with the remaining space being used for offices and warehouse. We are leasing these buildings on a month-to-month basis.

We
own our Augusta, Wisconsin facility consisting of five acres of land and a building of approximately 20,000 square feet. 15,000 square feet are designated for manufacturing space, and
the remaining space is used for offices.

We
lease a 30,000 square foot building in Monterrey, Mexico consisting of 29,000 square feet designated for manufacturing space with the remaining space being used for offices. The lease
expires on June 30, 2011.

In
Garner, Iowa we lease a 38,000 square foot building. The lease expires on June 30, 2011. In

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connection
with the restructuring activities during 2009, this facility was sub-leased on August 26, 2009 through the remaining term of the lease.

ITEM 3.        LEGAL PROCEEDINGS

From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably
estimable an amount is recorded in our financial statements. We currently are not a party to any material legal proceeding.

PART II

ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of March 4, 2010, there were 762 shareholders of record. Our stock is listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") Small Cap Market under the symbol "NSYS". We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the
foreseeable future. We did not declare or pay a cash dividend in 2009 or 2008. Future dividend policy and payments, if any, will depend upon earnings and our financial condition, our need for funds,
any limitations on payments of dividends present in our current or future debt agreements, and other factors.

Stock
price comparisons (NASDAQ):

During the Three Months Ended

Low

HighMarch 31, 2009

$
2.80

$
4.69June 30, 2009

$
2.50

$
3.53September 30, 2009

$
2.40

$
3.00December 31, 2009

$
2.74

$
3.29March 31, 2008

$
5.25

$
6.80June 30, 2008

$
6.05

$
9.40September 30, 2008

$
5.05

$
14.50December 31, 2008

$
3.80

$
6.17


Sales
of Unregistered Securities:

We
did not have any unregistered sales of equity securities in 2009.

Purchases
of Equity Securities by the Issuer and Affiliated Purchasers:

We
did not make any purchases of our equity securities in 2009.

EQUITY COMPENSATION PLAN INFORMATION

Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on
Form 10-K.

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ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a Wayzata, Minnesota based full-service EMS contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level
assemblies and box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market which includes industrial
equipment, transportation, vision, agriculture, oil and gas. In Minnesota, we have facilities in Baxter, Bemidji, Blue Earth, Fairmont, Merrifield and Wayzata. We also have facilities in Augusta,
Wisconsin, and Monterrey, Mexico.

The
vast majority of our revenue is derived from products that are built to the customer's design specifications and consist of a wide range of simple to highly complex manufacturing
processes. During 2009, we continued our supply chain and lean manufacturing initiatives designed to reduce costs, improve asset utilization and increase responsiveness to customers. Our initiatives
focused on improving our ability to promise based on our capabilities and scheduling as well as improving our manufacturing processes and yields by doing it right the first time. Our goal is to expand
and diversify
our customer base by focusing on sales and marketing efforts that fit our value-added service strategy. Our Mexico operation allows for medium volume and mix with lower cost production alternatives
when the opportunities are presented. We also benefit from our relationships with Asian manufacturers and suppliers that allow us to meet higher volume, lower mix and lower cost customer requirements
when lead times and product stability are not as critical.

The
global economic downturn started to impact us in the fourth quarter of 2008 requiring us to take a number of cost reduction and cash management measures in the first quarter of 2009.
When we began to experience even deeper cuts in our customer demand levels during the first half of 2009, further actions were required. During 2009 we closed our Garner, Iowa
EMS Printed Circuit Board assembly operations and consolidated it into our Merrifield, MN facility due to lower customer demand and order cancellations caused by the slow economy.

In
addition, we had several large contracts expire during 2009, resulting in a consolidation of our Aerospace and Defense cable assembly production into our 140,000 square foot facility
in Blue Earth, MN. Prior to the consolidations, the majority of Aerospace and Defense cable assembly was in three Fairmont, MN facilities that represented approximately 51,000
square feet of assembly production. In November 2009, we sold a 14,000 square foot building in Fairmont, Minnesota. We still own two buildings in Fairmont which together contain
approximately 37,000 square feet. One building is held for sale and the other contains a CNC machining center and office space. The consolidation efforts reduced facility costs and improved
manufacturing processes and material flow.

Our
net sales for the year ended December 31, 2009 were $79.9 million, a decrease of 34% compared to 2008. In late 2009, we began to see improvement in our revenues, with
the fourth quarter of 2009 up 6% over the previous quarter, and the 90 day backlog at December 31, 2009 was up 25% compared to September 30, 2009. Gross profit as a percentage of
net sales was 7.2% and 13.8% for the years ended December 31, 2009 and 2008, respectively. The volume decline, excess capacity and high levels of fixed overhead costs for most of the year
caused the lower gross profit percentage in 2009. As a result of the cost reduction and capacity consolidation efforts which were completed in the latter part of the third quarter, we began to see
significant improvements in gross profit performance in the fourth quarter. Our fourth quarter Operating Income returned to profitability for the first time in 2009. Our net loss in 2009 was
$3,835,041 or $1.40 per diluted common share compared to net income of $1,753,849 or $0.64 per diluted common share in 2008. The vast majority of the loss was experienced in the first three quarters
of 2009, with the fourth quarter of 2009 gaining the full benefit from the cost reduction efforts taken in the previous quarters, reducing the net loss to $145,347 or $0.05 per diluted common share
for the quarter.

A
large focus throughout 2009 was on cash management and cash conservation. Cash used from Operating Activities was $853,000 for the year, however cash provided from Operating Activities
for the last 9 months of 2009 was $2.2 million. We worked closely with our bank (Wells Fargo Bank, N.A. or WFB) throughout the first half of 2009 and on August 6, 2009 we entered
into a second amended and restated credit agreement for both our line of credit and our real estate

11

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Table of Contents

term
notes. Terms, conditions and covenants of the agreement were adjusted to better fit the business environment and provided us the time required to adjust to the new sales and capacity levels.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies and estimates are summarized in the footnotes to our annual consolidated financial statements. Some of the accounting policies
require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, known trends in the industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results may differ from these
estimates under different assumptions and conditions. Certain of the most critical estimates that require significant judgment are as follows.

Allowance for Uncollectible Accounts:

When evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts receivable, historical write-offs of bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to
provide adequate protection against losses resulting from collecting less than full payment on outstanding accounts receivable. A considerable amount of judgment is required when assessing the
realizability of accounts receivable, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers was to
deteriorate, resulting in an impairment of their ability to make payments, an additional provision for uncollectible accounts may be required. We have historically not experienced significant bad
debts expense and believe the reserve is adequate for any exposure to loss in the December 31, 2009 accounts receivable.

Inventory Reserves:

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production
needs. We have an evaluation process that is used to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis. We evaluate our inventory based on current usage
and the latest forecasts of product demand and production requirements from our customers. We believe the total reserve at December 31, 2009 is adequate.

Long-Lived and Intangible Asset Impairment:

We evaluate long-lived assets and intangible assets with finite lives for impairment, as well as the related amortization periods, to determine
whether adjustments to these amounts or useful lives are required based on current events and circumstances. The evaluation is based on our projection of the undiscounted future operating cash flows
of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required
to reduce the carrying amount to equal estimated fair value. In connection with the closing of two facilities in 2009, we recorded an impairment charge of approximately $502,000 on certain property
and equipment that will no longer be used in operations.

Valuation Allowance:

We record valuation allowances against our deferred tax assets when necessary. Realization of deferred tax assets (such as net operating loss carry forwards) is
dependent on future taxable earnings and therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we
believe that recovery is not likely, we establish a valuation allowance against these assets, thereby increasing income tax expense or decreasing the income tax benefit in the period the determination
is made. As of December 31, 2009 we expect to recover our deferred tax assets in their entirety, and thus no valuation allowance was deemed necessary.

Based
on a critical assessment of our accounting estimates and the underlying judgments and uncertainties of those estimates, we believe that our consolidated financial statements
provide a meaningful and fair presentation of our financial position and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide economic
conditions, fluctuations in foreign currency exchange rates, changes in materials costs, performance of acquired businesses and others, could not adversely impact our consolidated financial position,
results of operations and cash flows in future periods.

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Table of Contents

No
matters have come to our attention since December 31, 2009 that would cause the estimates included in the consolidated financial statements to change materially.

OPERATING RESULTS

The following table presents statement of operations data as percentages of net sales for the indicated year:

2009

2008Net Sales


100.00
%

100.00
%Cost of Goods Sold


92.80


86.20Gross Profit


7.20


13.80Selling Expenses


5.60


4.70General and Administrative Expenses


7.30


6.30Restructuring Charges


1.20


0.00Income (Loss) from Operations


(6.90
)

2.80Other Expenses, Net


0.90


0.50Income Tax Expense (Benefit)


(3.00
)

0.90Net Income (Loss)


(4.80
)%

1.40
%


Net sales:

For the years ended December 31, 2009 and 2008, we had net sales of $79.9 million and $121.9 million, respectively, a decrease of
$42.0 million or 34.4%. We saw sales to our Aerospace and Defense customers decline 42% mainly due to the end of major contracts and the timing of new replacement business. The slow economy has
also resulted in lower Medical and Industrial sales, with a larger impact on our Industrial customers. Net sales by our major EMS industry markets for the year ended December 31, 2009 and 2008
are as follows:

Year Ended
December 31(in thousands)

2009
$

2008
$

%
ChangeAerospace and Defense


26,515


46,078


(42
)Medical


17,493


21,411


(18
)Industrial


35,932


54,363


(34
)Total Net Sales


79,940


121,852


(34
)


Backlog:

Our 90 day backlog as of December 31, 2009 was approximately $17.7 million compared to approximately $14.2 million on
September 30, 2009 and approximately $18.2 million on December 31, 2008. Our backlog consists of firm purchase orders and we expect a major portion of the current 90 day
backlog to be realized as revenue during the following quarter.

Backlog as of the Quarter Ended(in thousands)

December 31
2009

December 31
2008Aerospace and Defense

$
4,494

$
9,116Medical


3,638


2,648Industrial


9,614


6,415Total Backlog

$
17,746

$
18,179


Gross Profit:

For the years ended December 31, 2009 and 2008, we had gross profit of $5.8 million and $16.9 million, respectively. Gross profit as a
percentage of net sales was 7.2% and 13.8% for the years ended December 31, 2009 and 2008, respectively. The year over year decline in gross profit as a percentage of net sales was a direct
result of the decline in sales volume which caused under utilization of our manufacturing facilities and associated excess fixed costs. Measures were taken in 2009 to adjust our capacity and cost
structure which resulted in a continuous improvement quarter over quarter throughout the year. Gross profit for each of the four quarters of 2009 was 3.9%, 5.5%, 8.7% and 11.3%, sequentially.

Selling:

Selling expenses were $4.4 million or 5.6% of net sales for the year ended December 31, 2009 and $5.8 million or 4.7% of net sales for the
year ended December 31, 2008. The 2009 decrease of $1.4 million was a result of cost management and decreased spending. Our intent is to maintain our sales infrastructure and marketing
initiatives during the economic downturn, providing high levels of customer service and taking advantage of the opportunities to expand our customer base.

General and Administrative:

General and administrative expenses were $5.9 million or 7.3% of net sales for the year ended December 31, 2009 and $7.6 million or 6.3% of
net sales for the year ended December 31, 2008. The 2009 decrease of $1.7 million is mainly attributed to adjusting our cost structure by reducing personnel and discretionary spending
levels to be in line with current business levels.

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Restructuring and Impairment Charges:

We recognized $1.0 million of restructuring and impairment charges during the year ended December 31, 2009 included in our Loss from Operations. The
restructuring and impairment costs included $0.5 million in non-cash impairment charges for property and equipment that will no longer be used in operations and $0.5 million
related to employee benefits, contract termination costs, and other expenses incurred to relocate production. The restructuring and impairment charges were the result of the facility closings and
consolidation efforts taken throughout the year to better align our capacity to current customer demand levels.

The
cash charges consisted of employee benefit costs of approximately $46,000, lease termination fees of $65,000, and other expenses incurred to relocate production of $331,000. Total
cash paid in 2009 was $442,000 with the remaining accrued liabilities of approximately $24,000 expected to be paid over the first six months of 2010.

Other Income (Expense):

Other expense for the years ended December 31, 2009 and 2008 was approximately $0.7 million and $0.6 million, respectively. Interest expense,
foreign exchange transaction losses, and finance and legal charges incurred in securing the second amended and restated credit agreement make up the majority of the other expense in 2009.

Income Taxes:

Dues to the loss incurred in 2009, we recorded an income tax benefit of $2.4 million for the year ended December 31, 2009. Income tax expense for
the year ended December 31, 2008 was $1.1 million. The effective tax rate for fiscal 2009 was 38.4% compared to 38.6% in fiscal 2008.

Net Income (Loss):

Our net loss in 2009 was $3,835,041 or $1.40 per diluted common share compared to net income of $1,753,849 or $0.64 per diluted common share in 2008. As
previously stated, the vast majority of the loss was experienced in the first three quarters of 2009, with the fourth quarter gaining the full benefit from the cost reduction efforts taken in the
previous quarters. As a result, the fourth quarter net loss was down to $145,347 or $0.05 per diluted common share.

FINANCIAL CONDITION AND LIQUIDITY

We believe that our existing financing arrangements and anticipated cash flows from operations will be sufficient to satisfy our working capital needs, capital
expenditures, investments, and debt repayments for the foreseeable future.

Credit Facility:

On August 6, 2009, we entered into a second amended and restated credit agreement with WFB which expires, if not renewed, on June 30, 2010. Under
the new agreement, both the line of credit and real estate term note are subject to variations in the LIBOR rate. Our line of credit bears interest at three-month LIBOR + 5.00% (5.375%
at December 31, 2009). The weighted-average interest rate on our line of credit was 4.66% for the year ended December 31, 2009.

The
line of credit and other installment debt with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual
shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under the line is subject to borrowing base
requirements, and advances are at the discretion of the lender. The line is secured by substantially all of our assets. This commitment is summarized as described below:

Other Commercial Commitment

Total
Amount
Committed

Outstanding at
December 31, 2009

Date of
ExpirationLine of credit

$
12,000,000

$
5,490,607


June 30, 2010


As
of December 31, 2009 we have net unused availability under our line of credit agreement of approximately $5.4 million as supported by our borrowing base.

14

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Table of Contents

Cash Flow:

December 312009

2008Cash flows provided by (used in):Operating activities

$
(853,495
)
$
4,027,231Investing activities


(76,609
)

(2,303,151
)Financing activities


371,860


(1,809,730
)Effect of exchange rate changes on cash


584


655Net decrease in cash and cash equivalents

$
(557,660
)
$
(84,995
)


On
December 31, 2009, we had working capital of approximately $13.2 million as compared to $15.8 million at the end of 2008. During 2009, we used approximately
$0.9 million of cash flow from operating activities. The cash flow used in operations is primarily due to net loss of $3.8 million offset by $3.4 million of noncash charges,
including depreciation, amortization, property and equipment impairment charges, restructuring charges, the change in deferred taxes and other miscellaneous noncash expenses. The cash flow used for
operating assets and liabilities was $0.2 million. This was driven by an increase in income taxes receivable of $2.1 million and a decrease in accruals of $4.1 million offset in
part by a $1.1 million reduction in accounts receivable and a $4.9 million reduction in inventory.

Our
net cash used in investing activities of $0.1 million is primarily due to $0.7 million of capital equipment purchases, offset by proceeds from the sale of assets of
$0.2 million and the change in restricted cash of $0.4 million. Net cash provided by financing activities of $0.4 million consisted of an increase of $1.1 million on our
line of credit, and a net decrease in long-term debt of $0.7 million.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        TABLE OF CONTENTS        DECEMBER 31, 2009 AND 2008

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



PAGEReport of Independent Registered Public Accounting Firm

17Consolidated Financial Statements:Consolidated Balance Sheets as of December 31, 2009 and 2008

18-19Consolidated Statements of Operations for the years ended December 31,
2009 and 2008

20Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2009 and 2008

21Consolidated Statements of Cash Flows for the years ended December 31,
2009 and 2008

22Notes to Consolidated Financial Statements

23-36Report of Independent Registered Public Accounting Firm on Supplementary Data

37Schedule II Valuation and Qualifying Accounts

38


(The
remainder of this page was intentionally left blank.)

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Table of Contents

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders
Nortech Systems Incorporated and Subsidiary

We
have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortech Systems Incorporated and Subsidiary as
of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We
were not engaged to examine management's assessment of the effectiveness of Nortech Systems Incorporated and Subsidiary's internal control over financial reporting as of
December 31, 2009 included in the Company's Annual Report and titled Management's Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion
thereon.

/s/
McGladrey & Pullen, LLP

Minneapolis,
Minnesota
March 15, 2010

17

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Table of Contents



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2009 AND 2008

ASSETS

2009

2008CURRENT ASSETSCash and Cash Equivalents

$
245,381

$
803,041Accounts Receivable, Less Allowance for Uncollectible Accounts


12,021,378


13,161,578Inventories


15,806,669


20,703,144Prepaid Expenses


542,643


745,044Income Taxes Receivable


2,515,906


421,175Deferred Income Taxes


753,000


1,358,000Total Current Assets


31,884,977


37,191,982Property and Equipment, Net


8,239,161


10,245,208Restricted Cash





427,500Finite Life Intangible Assets, Net of Accumulated Amortization


343,549


493,670Deferred Income Taxes


348,000


Other Assets


313,518


82,732Total Assets

$
41,129,205

$
48,441,092


See
accompanying Notes to Consolidated Financial Statements.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Continued)

DECEMBER 31, 2009 AND 2008

LIABILITIES AND SHAREHOLDERS' EQUITY

2009

2008CURRENT LIABILITIESLine of Credit

$
5,490,607

$
4,367,562Current Maturities of Long-Term Debt


1,013,920


951,437Accounts Payable


9,050,684


10,746,206Accrued Payroll and Commissions


1,449,528


3,417,901Accrued Health and Dental Claims


310,000


446,102Other Accrued Liabilities


1,354,438


1,484,990Total Current Liabilities


18,669,177


21,414,198LONG-TERM LIABILITIESLong-Term Debt (Net of Current Maturities)


3,572,264


4,386,064Deferred Income Taxes





69,000Other Long-Term Liabilities


160,912


153,805Total Long-Term Liabilities


3,733,176


4,608,869Total Liabilities


22,402,353


26,023,067SHAREHOLDERS' EQUITYPreferred Stock, $1 par value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding


250,000


250,000Common Stock$0.01 par value; 9,000,000 Shares Authorized; 2,738,992 and 2,738,955 Shares Issued and Outstanding at December 31, 2009 and 2008,
respectively


27,390


27,390Additional Paid-In Capital


15,654,160


15,525,981Accumulated Other Comprehensive Loss


(73,909
)

(89,598
)Retained Earnings


2,869,211


6,704,252Total Shareholders' Equity


18,726,852


22,418,025Total Liabilities and Shareholders' Equity

$
41,129,205

$
48,441,092


See
accompanying Notes to Consolidated Financial Statements.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF OPERATIONS        FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

2009

2008Net Sales

$
79,939,839

$
121,852,088Cost of Goods Sold


74,141,269


104,997,077Gross Profit


5,798,570


16,855,011Operating Expenses:Selling Expenses


4,449,184


5,772,762General and Administrative Expenses


5,865,380


7,612,713Restructuring Charges


967,991


Total Operating Expenses


11,282,555


13,385,475Income (Loss) From Operations


(5,483,985
)

3,469,536Other Income (Expense)Miscellaneous Income (Expense)


(225,784
)

87,771Interest Expense


(512,272
)

(702,458
)Total Other Expense


(738,056
)

(614,687
)Income (Loss) Before Income Taxes


(6,222,041
)

2,854,849Income Tax Expense (Benefit)


(2,387,000
)

1,101,000Net Income (Loss)

$
(3,835,041
)
$
1,753,849Earnings (Loss) Per Common Share:Basic

$
(1.40
)
$
0.64Weighted Average Number of Common Shares Outstanding


2,738,982


2,719,250Diluted

$
(1.40
)
$
0.64Weighted Average Number of Common and Common Equivalent Shares Outstanding


2,738,982


2,746,157


See
accompanying Notes to Consolidated Financial Statements.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

Preferred
Stock

Common
Stock

Paid-In
Capital

Comprehensive
Income (Loss)

Retained Earnings

Shareholders'
EquityBALANCE DECEMBER 31, 2007

$
250,000

$
27,149

$
15,111,179

$
(27,882
)
$
4,950,403

$
20,310,849Net income














1,753,849


1,753,849Issuance of stock upon exercise of stock options





241


136,940








137,181Compensation on stock-based awards








277,862








277,862Translation loss, net of tax











(61,716
)




(61,716
)BALANCE DECEMBER 31, 2008


250,000


27,390


15,525,981


(89,598
)

6,704,252


22,418,025Net loss














(3,835,041
)

(3,835,041
)Issuance of stock upon exercise of stock options








132








132Compensation on stock-based awards








128,047








128,047Translation gain, net of tax











15,689





15,689BALANCE DECEMBER 31, 2009

$
250,000

$
27,390

$
15,654,160

$
(73,909
)
$
2,869,211

$
18,726,852


See
accompanying Notes to Consolidated Financial Statements.

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF CASH FLOWS        DECEMBER 31, 2009 AND 2008

2009

2008CASH FLOWS FROM OPERATING ACTIVITIESNet income (Loss)

$
(3,835,041
)
$
1,753,849Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities:Depreciation


1,773,917


1,728,848Amortization


150,121


150,121Compensation on Stock-Based Awards


128,047


277,862Interest on Swap Valuation


(18,893
)

21,886Restructuring Charges


466,455


Fixed Asset Impairment


501,536


Deferred Income Taxes


188,000


(11,600
)(Gain) Loss on Disposal of Property and Equipment


4,955


(4,555
)Foreign Currency Transaction (Gain) Loss


10,131


(30,656
)Changes in Current Operating ItemsAccounts Receivable


1,146,371


2,174,657Inventories


4,896,475


(1,826,680
)Prepaid Expenses and Other Assets


203,114


(235,279
)Income Taxes Receivable


(2,095,733
)

(552,522
)Accounts Payable


(1,696,872
)

(645,776
)Accrued Payroll and Commissions


(1,973,657
)

595,124Accrued Health and Dental Claims


(136,102
)

66,102Other Accrued Liabilities


(566,319
)

565,850Net Cash Provided by (Used in) Operating Activities


(853,495
)

4,027,231CASH FLOWS FROM INVESTING ACTIVITIESProceeds from Sale of Property and Equipment


176,350


12,431Restricted Cash


427,500


Purchases of Property and Equipment


(680,459
)

(2,315,582
)Net Cash Used in Investing Activities


(76,609
)

(2,303,151
)CASH FLOWS FROM FINANCING ACTIVITIESNet Borrowings (Repayments) on Line of Credit


1,123,045


(1,267,514
)Proceeds from Long-Term Debt


616,397


496,953Principal Payments on Long-Term Debt


(1,367,714
)

(1,176,350
)Proceeds from Issuance of Common Stock


132


137,181Net Cash Provided by (Used in) Financing Activities


371,860


(1,809,730
)Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents


584


655NET DECREASE IN CASH AND CASH EQUIVALENTS


(557,660
)

(84,995
)Cash and Cash EquivalentsBeginning of Year


803,041


888,036CASH AND CASH EQUIVALENTSEND OF YEAR

$
245,381

$
803,041


22

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

We manufacture wire harnesses, cables and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and
defense industries. We provide a full "turn-key" contract manufacturing service to our customers. All products are built to the customer's design specifications. Products are sold to
customers both domestically and internationally. We also provide repair service on circuit boards used in machines in the medical industry.

Our
manufacturing facilities are located in Bemidji, Fairmont, Blue Earth, Merrifield and Baxter, Minnesota as well as Augusta, Wisconsin, and Monterrey, Mexico.

A
summary of our significant accounting policies follows:

Basis of Presentation

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) 105,Generally Accepted
Accounting Principles, which establishes the FASB ASC as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of FASB ASC 105,
we have updated references to generally accepted accounting principles (GAAP) in our consolidated financial statements issued for the year ended December 31, 2009. The adoption of FASB ASC 105
did not impact our financial position or results of operation.

We
have evaluated the period after the balance sheet date up through the date we filed the annual report to which these audited consolidated financial statements are a part, and
determined that there were no subsequent events or transactions that required recognition or disclosure in the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also
affect the reported amounts of revenue and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, allowance for
doubtful accounts and realizability of deferred tax assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, we consider cash equivalents to be short-term, highly liquid interest-bearing accounts readily convertible to
cash and whose original maturity is three months or less.

Restricted Cash

As of December 31, 2008 we had restricted cash of $427,500 which was used for facility upgrades at the Blue Earth, Minnesota facility. This was required by
the Industrial Revenue Bond agreement into which we entered on June 28, 2006 to purchase the Blue Earth, Minnesota facility (See Note 5). At December 31, 2009 we had no restricted
cash.

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for uncollectible accounts.
The allowance for uncollectible accounts was $138,000 and $492,000 at December 31, 2009 and 2008, respectively. We determine our allowance by considering a number of factors, including the
length of time accounts receivable are past due, our previous loss history, the customers' current ability to pay their obligations to us, and the condition of the general economy and the industry as
a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of

23

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

replacement
cost or net realizable value). Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated
value of the inventory that may have a lower value than stated or quantities in excess of future production needs.

Inventories
are as follows:

2009

2008Raw materials

$
11,137,853

$
13,483,021Work in process


3,304,725


4,126,710Finished goods


2,459,521


4,433,648Reserves


(1,095,430
)

(1,340,235
)Total

$
15,806,669

$
20,703,144


Property, Equipment and Depreciation

Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance, repairs
and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is
reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated use lives or their remaining lease terms. All other property and equipment are depreciated by the
straight-line method over their estimated useful lives, as follows:

Buildings

39 YearsLeasehold improvements

3-7 YearsManufacturing equipment

5-7 YearsOffice and other equipment

3-7 Years


Property
and equipment at December 31, 2009 and 2008:

2009

2008Land

$
272,500

$
300,000Building and Leasehold Improvements


6,543,066


6,508,974Manufacturing Equipment


11,751,996


12,067,317Office and Other Equipment


3,827,542


4,572,953Accumulated Depreciation


(14,155,943
)

(13,204,036
)Net Property and Equipment

$
8,239,161

$
10,245,208


Assets Held for Sale

Assets held for sale consists of property related to closed facilities that are currently being marketed for disposal. Assets held for sale are reported at the
lower of their carrying value or estimated fair value less costs to sell. At December 31, 2009, land of $15,000 and a building, net of accumulated depreciation, of $216,000 are classified as
held for sale and shown in Other Assets on the balance sheet.

Finite Life Intangible Assets

Finite life intangible assets are primarily related to acquired customer base and bond issuance costs and are amortized on a straight-line basis over
their estimated useful lives. Finite life intangible assets at December 31, 2009 and 2008 are as follows:

December 31, 2009Estimated
Lives
(Years)

Gross
Carrying
Amount

Accumulated
Amortization
Amount

Net Book
Value
AmountBond Issue Costs


15

$
79,373

$
18,522

$
60,851Customer Base


5


676,557


394,655


281,902Other intangibles


3


28,560


27,764


796Totals




$
784,490

$
440,941

$
343,549


24

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

December 31, 2008Estimated
Lives
(Years)

Gross
Carrying
Amount

Accumulated
Amortization
Amount

Net Book
Value
AmountBond Issue Costs


15

$
79,373

$
13,230

$
66,143Customer Base


5


676,557


259,345


417,212Other intangibles


3


28,560


18,245


10,315Totals




$
784,490

$
290,820

$
493,670


Amortization
expense related to these assets was as follows:

Year ended December 31, 2009

$
150,121Year ended December 31, 2008


150,121


Estimated
future annual amortization expense related to these assets for the years ending December 31, is as follows:

2010

$
141,0002011


141,0002012


17,0002013


5,0002014


5,000Thereafter


35,000$
344,000


Impairment Analysis

We evaluate property and equipment and intangible assets with finite lives for impairment and for propriety of the related amortization periods, to determine
whether adjustments to these amounts or useful lives are required based on current events and circumstances. The evaluation is based on our projection of the undiscounted future operating cash flows
of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required
to reduce the carrying amount to the asset's estimated fair value. In connection with the 2009 restructuring plan, we recorded an impairment charge of approximately $502,000 on certain property and
equipment that will no longer be used in operations (see Note 12).

Preferred Stock

Preferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend
of 12% when and as declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declared
or paid during the years ended December 31, 2009 and 2008.

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of
the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services, which are short term in nature, is
recognized upon completion of the engineering process, providing standalone fair value to our customers. In addition, we have another separate source of revenue that comes from short-term
repair services, which are recognized upon completion of the repairs, and the repaired products are shipped back to the customer. Shipping and handling costs charged to our customers are included in
net sales, while the corresponding shipping expenses are included in cost of goods sold.

Product Warranties

We provide limited warranty for the replacement or repair of defective product at no cost to our customers within a specified time period after the sale. We make
no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including without

25

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

limitation,
warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred
under our limited warranty and reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claims costs are not material
given the nature of our products and services which normally result in repair and return in the same accounting period.

Advertising

Advertising costs are charged to operations as incurred. The total amount charged to expense was $136,000 and $213,000 for the years ended December 31,
2009 and 2008, respectively

Income Taxes

We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the
financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Fair Value of Financial Instruments

The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities and the line of credit approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans
with similar terms and average maturities, the carrying value of our long-term debt approximates its fair value.

Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.

The
fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability.
Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1:    Unadjusted
quoted prices in active markets for identical assets or liabilities.

Level 2:    Observable
inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted
prices for identical assets or liabilities in inactive markets.

Level 3:    Unobservable
inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

Our
assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and
their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. As of December 31, 2009, our only asset or liability accounted for at fair value is our interest rate swap which is included in
Other Long-Term Liabilities. We have determined that the fair value of the swap, based on LIBOR and swap rates, falls within Level 2 in the fair value hierarchy.

Stock-Based Compensation

We account for stock-based compensation in accordance with FASB ASC Topic 718,CompensationStock
Compensation.Stock-based compensation expense was $128,000 ($.05 per diluted common share) for 2009 and $278,000 ($.10 per diluted common share) for 2008. See Note 9
for additional information.

26

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivative Financial Instruments

On June 28, 2006, we entered into an interest rate swap agreement to effectively convert our industrial revenue bond debt from a variable rate to a fixed
rate. The change in market value of an interest rate swap is recognized in the statements of operations by a charge or credit to interest expense. Further information related to our interest rate swap
is disclosed in Note 5.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding. Diluted net income per common share for the
year ended December 31, 2008 was computed using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of stock-based awards outstanding
during the period using the treasury stock method. For the year ended December 31, 2009, the effect of all stock-based awards were antidilutive due to the net loss incurred and, therefore, they
were not included in the computation of per share amounts.

Supplemental Cash Flow and Noncash Investing Information

We received income tax refunds, net of $519,397 for the year ended December 31, 2009. We paid $1,591,102 in income taxes for the year ended
December 31, 2008. We paid interest expense of $548,733 and $683,001 for the years ended December 31, 2009 and 2008, respectively.

At
December 31, 2009 we had a noncash transfer of certain property and equipment with a value of $231,000 from Property and Equipment to Other Assets due to their classification
as held for sale. For the year ended December 31, 2008, we had noncash investing activities of $780,000 related to capital expenditures.

Enterprise-Wide Disclosures

Our results of operations for the years ended December 31, 2009 and 2008 represent a single reportable segment referred to as Contract Manufacturing within
the Electronic Manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers'
requirements. We share resources for sales, marketing, information services, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC
reporting and corporate accounting. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.
Export sales represent approximately 4% of consolidated sales for each of the years ended December 31, 2009 and 2008.

Net
sales by our major EMS industry markets for the year ended December 31, 2009 and 2008 are as follows:

Year Ended
December 31(in thousands)

2009

2008Aerospace and Defense

$
26,515

$
46,078Medical


17,493


21,411Industrial


35,932


54,363Total Net Sales

$
79,940

$
121,852


27

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Noncurrent
assets, excluding deferred tax assets, by country are as follows:

United States

Mexico

Total2009Net property and equipment

$
8,038,406

$
200,755

$
8,239,161Other assets


649,341


7,726


657,0672008Net property and equipment

$
9,948,496

$
296,712

$
10,245,208Other assets


996,176


7,726


1,003,902


Foreign Currency Translation

Local currency is considered the functional currency for our operations outside the United States. Assets and liabilities are translated at year-end
exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are recorded as a component of accumulated other comprehensive
loss in shareholders' equity. Foreign exchange transaction gains and losses attributable to exchange rate movements on intercompany receivables and payables not deemed to be of a long-term
investment nature are recorded in other income (expense).

NOTE 2  PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of our wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc. All
significant intercompany accounts and transactions have been eliminated.

NOTE 3  MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we
maintain our excess cash balances in checking accounts at one high-credit quality financial institution. These accounts may at times exceed federally insured limits. We have not
experienced any losses in any of the short-term investment instruments we have used for excess cash balances. We do not require collateral on our receivables.

Two
divisions of General Electric, Co. (G.E.) accounted for 10% or more of our net sales during the past two years. G.E.'s Medical Divisions accounted for 13% and 12% of net sales
for the years ended December 31, 2009 and 2008, respectively. G.E.'s Transportation Divisions accounted for 12% and 8% of net sales for the years ended December 31, 2009 and 2008,
respectively. Together, G.E.'s Medical and Transportation Divisions accounted for 25% and 20% of net sales for the years ended December 31, 2009 and 2008, respectively. Accounts receivable from
G.E.'s Medical and Transportation Divisions at December 31, 2009 and 2008 represented 16% and 19% of total accounts receivable, respectively. Additionally, Northrop Grumman Corp. accounted for
9% and 18% of net sales for the years ended December 31, 2009 and 2008, respectively. Accounts receivable from Northrop Grumman Corp. at December 31, 2009 and 2008 represented 1% and 8%
of total accounts receivable, respectively.

NOTE 4  ACCRUED HEALTH AND DENTAL CLAIMS

We have partially self-insured our employee health and dental plans. We have contracted with two separate administrative service companies to
supervise and administer the programs and act as representatives. Our health plan insures for excessive or unexpected claims and we are not liable for claims exceeding $80,000 per individual per plan
year and an estimated aggregate amount of $4,363,503 for the plan year ending August 2010. Our dental plan pays claims based on actual amounts incurred. Estimated unpaid claims for incurred health and
dental services of $310,000 and $446,000 are reflected as accrued liabilities on the balance sheet at December 31, 2009 and 2008, respectively.

28

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 5  LONG-TERM DEBT

On August 6, 2009, we entered into a second amended and restated credit agreement with WFB, which provides for a line of credit arrangement of
$12 million, which expires if not renewed, on June 30, 2010. The credit arrangement also has a real estate term note with a maturity date of May 31, 2012. The line of credit and
other installment debt with WFB contain certain covenants, which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain
certain financial performance, and limit the amount of annual capital expenditures. Under the new agreement, our line of credit and real estate term notes bear interest at three month
LIBOR + 5.00% (5.375% at December 31, 2009). The weighted-average interest rate on our line of credit was 4.66% and 4.52% for the years ended December, 31 2009 and 2008,
respectively. We had borrowings of $5,490,607 and $4,367,562 outstanding as of December 31, 2009 and 2008, respectively.

The
availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At December 31, 2009, we have net unused availability
under our line of credit of approximately $5,400,000. The line is secured by substantially all of our assets.

A
summary of long-term debt balances at December 31, 2009 and 2008 is as follows:

Description

2009

2008Term notes payableWells Fargo Bank, N.A., one note bears interest at three month LIBOR + 5.00% (approx. 5.375%), three notes bear interest
at 6.67%, 4.95% and 4.95%, respectively; combined monthly principal payments of $80,000 plus interest, maturities range from Nov 2010 to May 2012; secured by substantially all assets

$
3,736,184

$
4,157,501Industrial revenue bond payable to the City of Blue Earth, Minnesota which bears interest at 4.07% and has a maturity date of June 1,
2021, with principal of $130,000 payable annually on June 1


850,000


1,180,000Total long-term debt


4,586,184


5,337,501Current maturities of long-term debt


(1,013,920
)

(951,437
)Long-term debtnet of current maturities

$
3,572,264

$
4,386,064


Future
maturity requirements for long-term debt are as follows:

Years Ending December 31,

Amount2010

$
1,013,9202011


840,9462012


2,211,3182013


80,0002014


80,000Future


360,000$
4,586,184


On
June 28, 2006, we entered into an interest rate swap agreement with a notional amount of $1,440,000 to effectively convert our industrial revenue bond debt from a variable rate
to a fixed rate of 4.07% for five years, maturing on June 28, 2011. We do not use this interest rate swap for speculative purposes. The fair value of the swap of $45,912 and $64,805 was
recorded in Other Long-Term Liabilities at December 31, 2009 and 2008, respectively. The change in the fair value of ($18,893) and $21,886 for the years ended December 31,
2009 and 2008, respectively have been recorded as a component of interest expense.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 6  INCOME TAXES

The income tax expense (benefit) for the years ended December 31, 2009 and 2008 consists of the following:

2009

2008Current taxesFederal

$
(2,500,000
)
$
853,400Current taxesState


(73,000
)

187,800Current taxesForeign


10,000


16,400Deferred taxesFederal


324,000


71,200Deferred taxesState


(148,000
)

(27,800
)Income tax expense (benefit)

$
(2,387,000
)
$
1,101,000


The
statutory rate reconciliation for the years ended December 31, 2009 and 2008 is as follows:

2009

2008Statutory federal tax provision (benefit)

$
(2,115,000
)
$
971,000State income taxes (benefit)


(147,000
)

113,000Effect of foreign operations





(6,000
)Income tax credits


(109,000
)

(51,000
)Other, including benefit of income taxed at lower rates


(16,000
)

74,000Income tax expense (benefit)

$
(2,387,000
)
$
1,101,000


Income
(loss) from operations before income taxes was derived from the following sources:

2009

2008Domestic

$
(6,251,000
)
$
2,790,000Foreign


29,000


65,000Total

$
(6,222,000
)
$
2,855,000


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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 6  INCOME TAXES (Continued)

Deferred
tax assets (liabilities) at December 31, 2009 and 2008, consist of the following:

2009

2008Allowance for uncollectable accounts

$
50,000

$
188,000Inventories reserve


400,000


513,000Accrued vacation


262,000


341,000Health insurance reserve


113,000


171,000Non-compete amortization


400,000


423,000Stock-based compensation


47,000


88,000Other


607,000


503,000Deferred tax assets


1,879,000


2,227,000Prepaid expenses


(188,000
)

(274,000
)Property and equipment


(590,000
)

(664,000
)Deferred tax liabilities


(778,000
)

(938,000
)Net deferred tax assets

$
1,101,000

$
1,289,000Net current deferred tax assets

$
753,000

$
1,358,000Net non-current deferred tax assets (liabilities)


348,000


(69,000
)Net deferred tax assets

$
1,101,000

$
1,289,000


We
have determined that it is more likely than not that our deferred tax assets will be realized, principally through anticipated taxable income in future tax years. As a result, we have
determined that establishing a valuation allowance on our deferred tax assets is not necessary.

The
tax effects from an uncertain tax position can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on
the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following table sets forth changes in our total gross unrecognized tax benefit liabilities,
excluding accrued interest, for the year ended December 31, 2009:

Balance as of December 31, 2008

$
89,000Tax positions related to current year:Additions


68,000Reductions


(42,000
)Balance as of December 31, 2009

$
115,000


The
$115,000 of unrecognized tax benefits as of December 31, 2009 includes amounts which, if ultimately recognized, will reduce our annual effective tax rate.

Our
policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31,
2009 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 6  INCOME TAXES (Continued)

Due
to statute expiration, an approximate $35,000 decrease could occur with respect to our reserve in the next twelve months. This reserve, including associated interest, relates to
federal research tax credits.

We
are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related
tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the
years before 2006. We are not currently under examination by any taxing jurisdiction.

NOTE 7  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes income or losses
resulting from foreign currency translations. The details of comprehensive income (loss) are as follows:

Year Ended
December 31
2009

Year Ended
December 31
2008Net income (loss), as reported

$
(3,835,041
)
$
1,753,849Other comprehensive income (loss)


15,689


(61,716
)Comprehensive income (loss)

$
(3,819,352
)
$
1,692,133


NOTE 8  401(K) RETIREMENT PLAN

We have a 401(k) profit sharing plan (the "Plan") for our employees. The Plan is a defined contribution plan covering all of our employees except for employees
covered by a collective bargaining agreement and non-resident aliens earning non-U.S. source income. Employees are eligible to participate in the Plan after completing six
months of service and attaining the age of 21. Employees are allowed to contribute up to 60% of their wages to the Plan. Historically we have matched 25% of the employees' contribution up to 6% of
covered compensation. We suspended this benefit in the second quarter of 2009. We made contributions of approximately $84,000 and $229,000 during the years ended December 31, 2009 and 2008,
respectively.

NOTE 9  PROFIT SHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS

Employee Profit Sharing

During 1993, we adopted an employee profit sharing plan (the "Plan"). The purpose of the Plan is to provide a bonus for increased output, improved quality and
productivity and reduced costs. We have authorized 50,000 common shares to be available under this Plan. In accordance with the terms of the Plan, employees can acquire newly issued shares of common
stock for 90% of the current market value. During 2009 and 2008, 37 and 67 common shares, respectively, were issued in connection with this plan. Through December 31, 2009, 22,118 common shares
have been issued under this Plan.

Stock Options and Restricted Stock

In 1992, we approved the adoption of a fixed stock based compensation plan. In February 2003, we reached the maximum options allowed to be granted under
that plan.

During
2003, our shareholders approved the adoption of the Nortech Systems Incorporated 2003 Stock Option Plan (the "2003 Plan"). On May 3, 2005, the shareholders approved the
2005 Incentive Compensation Plan (the "2005 Plan") and eliminated the remaining 172,500 option shares available for grant under the 2003 Plan effective February 23, 2005. The total number of
shares of common stock that may be granted

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 9  PROFIT SHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

under
the 2005 Plan is 200,000, of which 6,250 remain available for grant at December 31, 2009. The 2005 Plan provides that option shares granted come from our authorized but unissued common
stock. The price of the option shares granted under the plan will not be less than 100% of the fair market value of the common shares on the date of grant. Options are generally exercisable after one
or more years and expire no later than 10 years from the date of grant.

During
2007, the Board of Directors approved the adoption of the FOCUS Incentive Plan (the "2007 Plan"). The purpose of the 2007 Plan is to provide incentives to our employees to
increase our return on sales "ROS" performance measurement. The total number of shares of common stock that may be granted under the 2007 Plan is 490,000, of which 112,100 remain available for grant
at December 31, 2009. The 2007 Plan provides that option shares granted come from our authorized but unissued common stock. The price of the option shares granted under the plan will not be
less than 100% of the fair market value of the common shares on the date of grant. Options expire no later than 10 years from the date of grant. However, the FOCUS plan is unique from the
preceding Plans in that vesting of options is conditional upon our achievement of established performance measurements as follows:



As
these performance measures were not met, no options granted from the 2007 Plan were vested.

We
estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is
recognized as expense in the consolidated statement of operations over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest,
share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.

We
used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the
Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables as noted in the following table. These variables include, but are not limited to,
our expected stock price volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a
treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount
of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data.

2009

2008Expected volatility

49.0%

45.9 - 51.0%Expected dividends

None

NoneExpected term (in years)

7

5-7Risk-free rate

2.6 - 2.7%

1.7 - 3.5%


Stock Options with Time-Based Vesting

Total compensation expense related to stock options with time-based vesting for the years ended December 31, 2009 and 2008 was $128,047 and
$205,625, respectively. As of December 31, 2009 there was approximately $59,000 of unrecognized compensation expense related to unvested option awards that we expect to recognize over a
weighted-average period of 0.65 years.

Stock Options with Performance-Based Vesting

As mentioned previously, the vesting of options granted under the 2007 Plan is conditional upon our achievement of established performance measurements.

33

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 9  PROFIT SHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

At
December 31, 2009, the performance measures were not met and the measurement period expired. Therefore, no options granted to date from the 2007 Plan will vest, although the options will
remain outstanding until the earlier of the option expiration date or the termination of the employee. No compensation expense has been recorded for the years ended December 31, 2009 and 2008
and no expense is expected to be recorded in the future related to these option grants.

A
summary of option activity under all plans as of December 31, 2009, and changes during the year then ended is presented below.

Options

Weighted-
Average
Exercise
Price Per
Share

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
ValueOutstandingJanuary 1, 2009


799,850

$
7.27Granted


9,550


3.65Exercised





Forfeited


(72,650
)

7.51OutstandingDecember 31, 2009


736,750

$
7.20


6.38

$
2,750Exercisable on December 31, 2009


311,079

$
7.03


4.74

$
2,750


The
weighted-average grant-date fair values of options granted during 2009 and 2008 were $1.92 and $3.13, respectively. The weighted-average fair value of options vested
during the years ended December 31, 2009 and 2008 were $3.70 and $4.29, respectively. The total intrinsic value of options exercised during the year ended December 31, 2008 was $105,720.

Cash
received from option exercise under all share-based payment arrangements for the year ended December 31, 2009 and 2008 was $0 and $137,181, respectively. Any tax benefit
recognized from the exercise of options is reflected in the statement of cash flows as a cash inflow from financing activities. There were no tax deductions from option exercises for the years ended
December 31, 2009 and 2008.

Restricted Stock

In March 2006, 28,500 shares of restricted common stock were granted to our management and directors. This benefit was valued at the market price of the
stock on the date of grant. These awards vest over a three-year term and are expensed ratably over the same period. We recorded compensation expense of $72,233 for the year ended
December 31, 2008. All restricted shares were fully vested as of December 31, 2008 and as a result there was no compensation expense recorded for the year ended December 31, 2009.
There were no additional grants of restricted stock during 2009.

NOTE 10 COMMITMENTS AND CONTINGENCIES

Operating Leases

We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on
various dates through 2014.

In
connection with the restructuring activities during 2009, the Garner, Iowa facility was sub-leased through the remaining term of the lease which expires on June 30,
2011. At December 31, 2009 future minimum lease payments, net of sublease income, was $15,000.

Rent
expense for the years ended December 31, 2009 and 2008 amounted to approximately $875,000 and $1,017,000 respectively.

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 10  COMMITMENTS AND CONTINGENCIES (Continued)

Approximate
future minimum lease payments under non-cancelable leases are as follows:

Years Ending December 31,

Amount2010

$
393,0002011


115,0002012


22,0002013


22,000Thereafter


9,000Total

$
561,000


Litigation

We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with
respect to these actions will not materially affect our consolidated financial statements or results of operations.

Executive Life Insurance Plan

During 2002, we set up an Executive Bonus Life Insurance Plan (the "Plan") for our key employees ("participants"). Pursuant to the Plan, we will pay a bonus to
officer participants of 15% and a bonus to all other participants of 10% of the participants' base annual salary, as well as an additional bonus to cover federal and state taxes incurred by the
participants. The participants are required to purchase life insurance and retain ownership of the life insurance policy once it is purchased. The Plan provides a five-year graded vesting
schedule in which the participants vest at a rate of 20% each year. Should a participant terminate employment prior to the fifth year of vesting, that participant may be required to reimburse us for
any unvested amounts, under certain circumstances. Due to the economic downturn and cost reduction efforts in 2009 this benefit was reduced. Expenses under the Plan were $44,000 and $322,000 for the
years ended December 31, 2009 and 2008, respectively.

Change of Control Agreements

During 2002, we entered into Change of Control Agreements (the "Agreement(s)") with certain key executives ("the Executive(s)"). The Agreements provide an
inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition, and to provide
economic security for the Executive after a change in control has occurred.

In
the event of an involuntarily termination, each Executive would receive their base salary, annual bonus at time of termination, and continued participation in health, disability and
life insurance plans for a period of three years for officers and two years for all other participants. Participants would also receive professional outplacement services up to $10,000 if applicable.
Each Agreement remains in full force until the Executive terminates employment or we terminate the employment of the Executive.

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009 AND 2008

NOTE 11 NET INCOME (LOSS) PER COMMON SHARE

The following is a reconciliation of the numerators and the denominators of the diluted net income per common share computations.

2009

2008Diluted Net Income (Loss) Per Common ShareNet Income (Loss)

$
(3,835,041
)
$
1,753,849Weighted average common shares outstanding


2,738,982


2,719,250Stock options





21,331Restricted Stock





5,576Weighted average common shares for diluted net income (loss) per common share


2,738,982


2,746,157Diluted net income (loss) per common share *

$
(1.40
)
$
0.64


*For
2009, the effect of all stock options is antidilutive due to the net loss incurred and, therefore, they were not included in the computation of
per-share amounts. For 2008, there were 250,140 shares excluded from the computation of diluted earnings per share because to include them would be antidilutive. Performance based options
outstanding of 438,350 at December 31, 2008, which were not probable of vesting were also excluded from diluted earnings per share.


NOTE 12 RESTRUCTURING AND IMPAIRMENT CHARGES

To better align our cost structure with recent changes in customer demand, our Board of Directors approved a restructuring plan in the second quarter of fiscal
year 2009. This restructuring resulted in the closing of our Garner, Iowa facility at the end of August 2009 with production moving to Merrifield, Minnesota and closing our Fairmont Aerospace
assembly production facilities and moving these activities to Blue Earth, Minnesota. One building in Fairmont was sold and another is held for sale at December 31, 2009 and was reclassified to
Other Assets on the balance sheet. As a result of these moves, we recognized approximately $968,000 of restructuring and impairment charges for the year ended December 31, 2009, in Income
(Loss) from Operations.

The
restructuring and impairment costs included $502,000 of non-cash property and equipment charges and $466,000 in cash charges related to employee benefits, contract
termination costs, and other expenses incurred to relocate production. The property and equipment impairment charges are for certain assets identified that will no longer be used in our operations as
a result of the restructuring. Total cash paid in 2009 was $442,000 with the remaining accrued liabilities of approximately $24,000 expected to be paid over the first six months of 2010.

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Report of Independent Registered Public Accounting Firm on Supplementary Information

To
the Board of Directors and Shareholders
Nortech Systems Incorporated and Subsidiary

Our
audits of the consolidated financial statements referred to in our report dated March 15, 2010, (included elsewhere in this Annual Report on Form 10-K) also
included the consolidated financial statement schedule of Nortech Systems Incorporated and Subsidiary, listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of Nortech Systems Incorporated and Subsidiary's management. Our responsibility is to express an opinion based on our audits of the consolidated financial statements.

In
our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/MCGLADREY & PULLEN, LLP

Minneapolis,
Minnesota
March 15, 2010

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

SCHEDULE IIValuation and Qualifying Accounts

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

Classification

Balance at Beginning
of Year

Additions Charged
to Costs
and Expenses

Deductions

Balance at
End of
YearYear Ended December 31, 2009:Allowance for Uncollectible Accounts

$
492,000

$
226,000

$
(580,000
)
$
138,000Inventory Reserves


1,340,000


966,000


(1,211,000
)

1,095,000Self-insurance Accrual


446,000


4,663,000


(4,799,000
)

310,000Year Ended December 31, 2008:Allowance for Uncollectible Accounts

$
184,000

$
324,000

$
(16,000
)
$
492,000Inventory Reserves


1,303,000


993,000


(956,000
)

1,340,000Self-insurance Accrual


380,000


4,809,000


(4,743,000
)

446,000


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Table of Contents

ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.        CONTROLS AND PROCEDURES

(a)Evaluation of disclosure controls and procedures.In accordance with Rule 13a-15(b) of
the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Annual Report on Form 10-K, the Company's management evaluated, with the
participation of the Company's President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the
Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such
evaluation in ensuring that information required to be disclosed in the Company's Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and
(2) accumulated and communicated to management, including the Company's President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

(b)Changes in internal control.There was no change in the Company's internal control over financial reporting
that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Company's internal control
over financial reporting.

Management's Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of published
financial statements.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.

We
have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on our assessment, we believe that, as of December 31, 2009,
our internal control over financial reporting is effective based on those criteria.

This
annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's
report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide
only management's report in this annual report.

ITEM 9B.        OTHER INFORMATION

None.

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Table of Contents

PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

Information regarding the directors and executive officers of the Registrant will be included in the Registrant's 2009 proxy statement to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.

ITEM 11.        EXECUTIVE COMPENSATION

Information regarding executive compensation of the Registrant will be included in the Registrant's 2009 proxy statements to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant's 2009 proxy statements
to be filed with the Securities and Exchange Commission within 120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statements are incorporated
herein by reference.

Information
regarding executive compensation plans (including individual compensation arrangements) as of the end of the last fiscal year, on two categories of equity compensation plans
(that is, plans that have been approved by security holders and plans that have not been approved by security holders) will be included in the Registrant's 2009 proxy statements to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statements are incorporated herein by reference.

The
following table provides information about our equity compensation plans (including individual compensation arrangements) as of December 31, 2009.

Plan category

Number of
securities to be
issued upon
the exercise of
outstanding
options, warrants
and rights(1)

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in the first
column)(2)Equity compensation plans approved by security holders


736,750

$
7.20


118,350Equity compensation plans not approved by security holders


0


0


0Total


736,750

$
7.20


118,350


(1)Represents
common shares issuable upon the exercise of outstanding options granted under our 1992 Employee Stock Incentive Plan (the "1992 Plan"), the 2003
Stock Option Plan (the "2003 Plan"), the 2005 Incentive Compensation Plan (the "2005 Plan") and the 2007 FOCUS Incentive Compensation Plan (the "2007 Plan").(2)Represents
common shares remaining available for issuance under the 2005 and 2007 Plans.


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ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item will be included in the Registrant's 2009 proxy statements to be filed with the Securities and Exchange Commission within
120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statements are incorporated herin by reference.

ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item will be included in the Registrant's 2009 proxy statements to be filed with the Securities and Exchange Commission within
120 days after December 31, 2009, the end of our fiscal year, and said portions of the proxy statement are incorporated herin by reference.

PART IV

ITEM 15.        EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES

(a)1.

Consolidated Financial StatementsConsolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 23.(a)2.

Consolidated Financial Statement ScheduleThe following financial statement schedule and the Auditors' report thereon is included in this Annual Report on Form 10-K:




PageReport of Independent Registered Public Accounting Firm on Supplementary Information

37Consolidated Financial Statement Schedule for the years ended December 31, 2009 and 2008:Schedule II Valuation and Qualifying Accounts

38


All
other schedules are omitted because the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

(a)3.

The following exhibits are incorporated herein by reference:


23.1

Consent of McGladrey & Pullen, LLP.31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1

Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

NORTECH SYSTEMS INCORPORATEDMarch 15, 2010

/s/RICHARDG. WASIELEWSKI Richard G. Wasielewski Chief Financial Officer and
Principal Accounting OfficerMarch 15, 2010

/s/MICHAELJ. DEGEN Michael J. Degen President, Chief Executive
Officer and Director


Pursuant
to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this
report.

March 15, 2010

/s/MICHAELJ. DEGEN Michael J. Degen President, Chief Executive
Officer and DirectorMarch 15, 2010

/s/ MYRONKUNIN Myron Kunin Chairman and DirectorMarch 15, 2010

/s/RICHARDW. PERKINS Richard W. Perkins, DirectorMarch 15, 2010

/s/ C. TRENTRILEY C. Trent Riley, DirectorMarch 15, 2010

/s/KENLARSON Ken Larson, Director


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INDEX TO EXHIBITS

DESCRIPTIONS OF EXHIBITS

23.1

Consent of McGladrey & Pullen, LLP31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1

Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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