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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, 2010ORo

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 $3.75 per share, was $4,571,370 on
June 30, 2010.

Shares
of common stock outstanding at March 9, 2011: 2,742,992.

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remainder of this page was intentionally left blank.)



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2010 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, 2010, 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

16-39Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40Item 9A.

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

40Item 9B.

Other Information

40PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

41Item 11.

Executive Compensation

41Item 12.

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

41Item 13.

Certain Relationships and Related Transactions, and Director Independence

42Item 14.

Principal Accountant Fees and Services

42PART IVItem 15.

Exhibits, Consolidated Financial Statement Schedules

42Signatures

43Index to Exhibits

44


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NORTECH SYSTEMS INCORPORATED
FORM 10-K
For the Year Ended December 31, 2010

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). 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, Blue Earth, Milaca, Baxter, and Merrifield as well as Augusta, Wisconsin; Monterrey, Mexico; and as of January 1, 2011,
Mankato, Minnesota. We manufacture wire harness cable and printed circuit board assemblies, electronic sub-assemblies, higher level assemblies and complete devices. 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 management, lean manufacturing practices,
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 the EMS industry will provide growth for contract manufacturing as the macro economy improves along with further industry consolidations. Outsourcing remains a strong option
for OEMs as they prefer to invest and focus on marketing and product development, and rely on EMS providers for their production and supply chain requirements.

ACQUISITIONS

On May 4, 2010, we acquired all of the intellectual property and assets, excluding cash and receivables, of Trivirix Corporation, Milaca, MN for $403,000
which consisted of $303,000 in inventory and $100,000 in property and equipment. This operation specializes in design, manufacturing and post-production services of complex electronic and
electromechanical medical devices for diagnostic, analytical and other life-science applications. This acquisition expands our capabilities and expertise serving medical electronics
manufacturers. The acquisition has been accounted for as a business combination and results of operations for Milaca since the date of acquisition are included in the consolidated financial
statements.

On
January 1, 2011, we completed the acquisition of the EMS business unit of Winland Electronics, Inc., (Winland) a Minnesota corporation. We paid $1,042,389 in cash at
closing and will make deferred payments of $250,000 each on July 1, 2011 and October 1, 2011 for substantially all of the assets and assumed certain liabilities of their EMS operations.
We have also agreed to a six year agreement with Winland to lease office and manufacturing space in Mankato, Minnesota and sublease a portion of it back to them through December 31, 2011.

In
connection with the acquisition, we agreed to purchase a minimum of $2,200,000 of inventory as consumed over the next 24 months. We also entered into an agreement to
manufacture certain products related to the production of Winland's proprietary monitoring devices business unit. See note 13 to the consolidated financial statements for further information on
this acquisition.

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

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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. Our financial information is consolidated
and evaluated regularly by the chief decision maker in assessing performance and allocating resources.

BUSINESS STRATEGY

The EMS 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 operation and international partnerships allow us to take advantage of lower-cost alternatives for our customers and
remain competitive in the marketplace.

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. Our Milaca operation is an
FDA registered facility. We believe these certifications and registrations 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), Aerospace Systems 9100 (AS) and FDA facility registration. 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.

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,

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copyrights
and trademark protection are necessary for successful operations.

COMPETITION

The contract manufacturing EMS industry's 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 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 Division accounted for
19% and 13% of net sales for the years ended December 31, 2010 and 2009, respectively. G.E.'s Transportation Division accounted for 8% and 12% of net sales for the years ended
December 31, 2010 and 2009, respectively. Together, G.E.'s Medical and Transportation Divisions accounted for 27% and 25% of net sales for the years ended December 31, 2010 and 2009,
respectively. Accounts receivable from G.E.'s Medical and Transportation Divisions at December 31, 2010 and 2009 represented 14% and 16% 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 2010 or 2009 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 667 full-time and 42 part-time/temporary employees as of December 31, 2010. Manufacturing personnel, including direct,
indirect support and sales functions, comprise 681 employees, while general administrative employees total 28. At December 31, 2009 we had 515 full-time and 23
part-time/temporary employees.

FOREIGN OPERATIONS AND EXPORT SALES

We have a leased manufacturing facility in Monterrey, Mexico with approximately $192,000 in long-term assets at December 31, 2010. Export sales
represent 6% and 4% of net sales for the years ended December 31, 2010 and 2009, respectively.

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

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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 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.

We operate in the highly competitive EMS 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 27% and 25% of net sales for the years ended December 31, 2010 and
2009, 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

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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 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. 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.

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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.

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, 2010, 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, 2015. 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. Both
buildings are held for sale.

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.

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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 at which point we expect to renew.

In
Garner, Iowa we lease a 38,000 square foot building. The lease expires on June 30, 2011. In connection with the restructuring activities during 2009, this facility was
sub-leased on August 26, 2009 through the remaining term of the lease.

We
lease a 20,000 square foot building in Milaca, Minnesota consisting of 15,000 square feet designated for manufacturing space with the remaining space being used for offices. The lease
expires on July 31, 2011 at which point we intend to renew.

As
part of the acquisition of the EMS business unit of Winland in January 2011, we agreed to lease a 58,000 square foot building consisting of 43,000 square feet designated for
manufacturing and the remaining space used for offices. The lease expires on January 1, 2017 at which point we have the right of first refusal and an option to purchase the building. A portion
of this facility will be subleased back to Winland through December 31, 2011.

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 3, 2011, there were 752 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 2010 or 2009. 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, 2010

$
3.07

$
3.77June 30, 2010

$
3.32

$
3.99September 30, 2010

$
3.10

$
3.75December 31, 2010

$
3.32

$
4.62March 31, 2009

$
2.80

$
4.69June 30, 2009

$
2.50

$
3.53September 30, 2009

$
2.40

$
3.00December 31, 2009

$
2.74

$
3.29


Sales
of Unregistered Securities:

We
did not have any unregistered sales of equity securities in 2010.

Purchases
of Equity Securities by the Issuer and Affiliated Purchasers:

We
did not make any purchases of our equity securities in 2010.

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, Milaca and Wayzata. We also have facilities in
Augusta, Wisconsin; Monterrey, Mexico; and as of January 1, 2011, Mankato, Minnesota.

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 2010, 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.

In
the first half of 2010 we saw our revenues stabilize and customer confidence improve. Our 90 day backlog increased steadily leading to a double digit revenue growth for the
year.

Our
net sales for the year ended December 31, 2010 were $99.8 million, an increase of 25% compared to 2009. Gross profit as a percentage of net sales was 11.5% and 7.2% for
the years ended December 31, 2010 and 2009, respectively. The cost reduction and capacity consolidation efforts which were completed in third quarter 2009, account for the significant
improvements in gross profit performance in 2010. Our net income in 2010 was $506,766 or $0.18 per diluted common share compared to net loss of $3,835,041 or $1.40 per diluted common share in 2009.

We
continued to focus on cash management and cash conservation throughout 2010. Cash from Operating Activities was $2,890,000 for the year. On January 6, 2011 we entered into the
first amendment to the third amended and restated credit and security agreement with Wells Fargo Bank (WFB) which provides a $13.5 million line of credit through May 31, 2013. We believe
our financing arrangements and cash flows provided by operations will be sufficient to satisfy our working capital needs through the foreseeable future.

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:

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 is recognized upon completion of the
engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. 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.

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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, 2010 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, 2010 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 2010, we recorded an impairment charge of $56,000 on a building held for sale. 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 were no longer being 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, 2010 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.

No
matters have come to our attention since December 31, 2010 that would cause the estimates included in the consolidated financial statements to change materially.

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OPERATING RESULTS

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

2010

2009Net Sales


100.00
%

100.00
%Cost of Goods Sold


88.50


92.80Gross Profit


11.50


7.20Selling Expenses


3.10


5.60General and Administrative Expenses


7.00


7.30Restructuring Charges


0.10


1.20Income (Loss) from Operations


1.30


(6.90
)Other Expenses, Net


0.40


0.90Income Tax Expense (Benefit)


0.40


(3.00
)Net Income (Loss)


0.50
%

(4.80
)%


Net sales:

For the years ended December 31, 2010 and 2009, we had net sales of $99.8 million and $79.9 million, respectively, an increase of 25%. The
Milaca medical device operation acquired in May 2010 accounted for $3.6 million of net sales for the year ended December 31, 2010. Net sales by our major EMS industry markets for the
year ended December 31, 2010 and 2009 are as follows:

Year Ended
December 31(in thousands)

2010
$

2009
$

%
ChangeAerospace and Defense


16,152


26,515


(39
)Medical


29,329


17,493


68Industrial


54,339


35,932


51Total Net Sales


99,820


79,940


25


We
saw sales to our Aerospace and Defense customers decline 39% due to the end of major contracts and the timing of new replacement business. Sales to our Medical and Industrial
customers increased 68% and 51%, respectively as the overall economy stabilized and we began to see more new business opportunities and improved buying confidence from our existing customer base.

Backlog:

Our 90 day backlog as of December 31, 2010 was approximately $18.5 million compared to approximately $17.7 million on
December 31, 2009. 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 Year Ended(in thousands)

December 31
2010

December 31
2009

%
ChangeAerospace and Defense

$
4,453

$
4,494


(1
)Medical


4,216


3,638


16Industrial


9,813


9,614


2Total Backlog

$
18,482

$
17,746


4


Gross Profit:

For the years ended December 31, 2010 and 2009, we had gross profit of $11.4 million and $5.8 million, respectively. Gross profit as a
percentage of net sales was 11.5% and 7.2% for the years ended December 31, 2010 and 2009, respectively. The year over year increase in gross profit as a percentage of net sales was a direct
result of the increase in sales volume in 2010 and the restructuring which occurred in the third quarter of 2009 resulting in better utilization of our fixed cost structure.

Selling:

Selling expenses were $3.1 million or 3.1% of net sales for the year ended December 31, 2010 and $4.4 million or 5.6% of net sales for the
year ended December 31, 2009. The majority of the $1.3 million decrease was due to approximately $0.7 million less commissions and $0.6 million in cost reductions.

General and Administrative:

General and administrative expenses were $7.0 million or 7.0% of net sales for the year ended December 31, 2010 and $5.9 million or 7.3% of
net sales for the year ended December 31, 2009. The 2010 increase of $1.1 million is mainly attributed to the reversal of wage decreases and the re-instatement of merit increases, 401K
matching and incentive programs on July 1, 2010.

Restructuring and Impairment Charges:

We recognized $0.1 million and $1.0 million of restructuring and impairment charges in Income (Loss) from Operations during the years ended
December 31, 2010 and 2009, respectively. The 2010 costs relate to the impairment of a Fairmont building that is held for

13

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Table of Contents

sale.
The 2009 restructuring and impairment costs included $0.5 million in non-cash impairment charges for property and equipment that are no longer being used in operations and
$0.5 million related to employee benefits, contract termination costs, and other expenses incurred to relocate production. The 2009 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.

Other Income (Expense):

Other expense for the years ended December 31, 2010 and 2009 was approximately $0.3 million and $0.7 million, respectively. Interest expense
and foreign exchange transaction losses make up the majority of the other expense in 2010.

Income Taxes:

Income tax expense for the year ended December 31, 2010 was $375,000. Due to the loss incurred in 2009, we recorded an income tax benefit of
$2.4 million for the year ended December 31, 2009. The effective tax rate for fiscal 2010 was 42.5% compared to 38.4% in fiscal 2009. The increase in effective tax rate from 2009 to 2010
relates primarily to the true-up of our net operating loss (NOL) carryback which resulted in additional tax expense of approximately $103,000 partially offset by state and federal research
credits.

Net Income (Loss):

Our net income in 2010 was $506,766 or $0.18 per diluted common share compared to net loss of $3,835,041 or $1.40 per diluted common share in 2009. We returned to
profitability in 2010 primarily due to increased sales and the cost reductions experienced from the prior year restructuring activities.

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 May 27, 2010 we entered into a third amended and restated credit and security agreement with Wells Fargo Bank which provides a $12 million line
of credit through May 31, 2013 and a real estate note maturing on May 31, 2012. On January 6, 2011, we entered into the first amendment to this agreement which provides a
$13.5 million line of credit through May 31, 2013, a new $475,000 equipment term loan tied to equipment purchased in the recent acquisition announced January 3, 2011 and a new
term loan of up to $1.0 million for capital expenditures to be made in 2011. Under the new agreement, both the line of credit and real estate term note are subject to variations in the LIBOR
rate. Advances on our line of credit will bear interest at three-month LIBOR + 4.00% (4.30% at December 31, 2010). The weighted-average interest rate on our line of credit and
other long-term debt was 4.63% and 5.04%, respectively for the year ended December 31, 2010.

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, 2010

Date of
ExpirationLine of credit

$
13,500,000

$
5,615,121


May 31, 2013


As
of December 31, 2010 we have net unused availability under our line of credit agreement of approximately $5.2 million as supported by our borrowing base. Under the terms
of our new agreement, our unused availability increased to $6.5 million on January 6, 2011.

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Table of Contents

Cash Flow:

December 312010

2009Cash flows provided by (used in):Operating activities

$
2,890,254

$
(853,495
)Investing activities


(1,029,599
)

(76,609
)Financing activities


(1,876,092
)

371,860Effect of exchange rate changes on cash


638


584Net decrease in cash and cash equivalents

$
(14,799
)
$
(557,660
)


On
December 31, 2010, we had working capital of approximately $13.1 million as compared to $13.2 million at the end of 2009. During 2010, we generated approximately
$2.9 million of cash flow from operating activities. The cash flow from operations is primarily due to net income of $0.5 million plus $2.1 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 from operating assets
and liabilities was $0.3 million. This was driven by a decrease in income taxes receivable of $2.1 million and an increase in accounts payable and accruals of $1.8 million offset
in part by a $3.5 million increase in accounts receivable.

Our
net cash used in investing activities of $1.0 million is due to $0.6 million of capital equipment purchases and $0.4 million for the acquisition in May 2010. Net
cash used in financing activities of $1.9 million consisted of $2.0 million reduction of long-term debt offset by $0.1 million line of credit increase.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        TABLE OF CONTENTS        DECEMBER 31, 2010 AND 2009

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



PAGEReport of Independent Registered Public Accounting Firm

17Consolidated Financial Statements:Consolidated Balance Sheets as of December 31, 2010 and 2009

18-19Consolidated Statements of Operations for the years ended December 31,
2010 and 2009

20Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2010 and 2009

21Consolidated Statements of Cash Flows for the years ended December 31,
2010 and 2009

22Notes to Consolidated Financial Statements

23-37Report of Independent Registered Public Accounting Firm on Supplementary Data

38Schedule II Valuation and Qualifying Accounts

39


(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, 2010 and 2009, 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. The Company is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/
McGladrey & Pullen, LLP

Minneapolis,
Minnesota
March 11, 2011

See
accompanying Notes to Consolidated Financial Statements.

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Table of Contents



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2010 AND 2009

ASSETS

2010

2009CURRENT ASSETSCash and Cash Equivalents

$
230,582

$
245,381Accounts Receivable, Less Allowance for Uncollectible Accounts


15,562,277


12,021,378Inventories


16,108,773


15,806,669Prepaid Expenses


596,363


542,643Income Taxes Receivable


376,001


2,515,906Deferred Income Taxes


594,000


753,000Total Current Assets


33,467,996


31,884,977Property and Equipment, Net


7,157,543


8,239,161Finite Life Intangible Assets, Net of Accumulated Amortization


202,150


343,549Deferred Income Taxes


219,000


348,000Other Assets


514,235


313,518Total Assets

$
41,560,924

$
41,129,205


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, 2010 AND 2009



LIABILITIES AND SHAREHNOLDERS' EQUITY

2010

2009CURRENT LIABILITIESLine of Credit

$
5,615,121

$
5,490,607Current Maturities of Long-Term Debt


841,760


1,013,920Accounts Payable


10,727,907


9,050,684Accrued Payroll and Commissions


2,584,108


1,449,528Accrued Health and Dental Claims


35,000


310,000Other Accrued Liabilities


599,655


1,354,438Total Current Liabilities


20,403,551


18,669,177LONG-TERM LIABILITIESLong-Term Debt (Net of Current Maturities)


1,731,318


3,572,264Other Long-Term Liabilities


137,236


160,912Total Long-Term Liabilities


1,868,554


3,733,176Total Liabilities


22,272,105


22,402,353SHAREHOLDERS' 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; 2,742,992 and 2,738,992 Shares Issued and Outstanding at December 31, 2010 and 2009,
respectively


27,430


27,390Additional Paid-In Capital


15,698,348


15,654,160Accumulated Other Comprehensive Loss


(62,936
)

(73,909
)Retained Earnings


3,375,977


2,869,211Total Shareholders' Equity


19,288,819


18,726,852Total Liabilities and Shareholders' Equity

$
41,560,924

$
41,129,205


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, 2010 AND 2009

2010

2009Net Sales

$
99,820,069

$
79,939,839Cost of Goods Sold


88,389,803


74,141,269Gross Profit


11,430,266


5,798,570Operating Expenses:Selling Expenses


3,120,202


4,449,184General and Administrative Expenses


7,024,087


5,865,380Restructuring Charges


55,786


967,991Total Operating Expenses


10,200,075


11,282,555Income (Loss) From Operations


1,230,191


(5,483,985
)Other Income (Expense)Miscellaneous Income (Expense)


80,698


(225,784
)Interest Expense


(429,123
)

(512,272
)Total Other Expense


(348,425
)

(738,056
)Income (Loss) Before Income Taxes


881,766


(6,222,041
)Income Tax Expense (Benefit)


375,000


(2,387,000
)Net Income (Loss)

$
506,766

$
(3,835,041
)Earnings (Loss) Per Common Share:Basic and Diluted

$
0.18

$
(1.40
)Weighted Average Number of Common Shares Outstanding


2,742,389


2,738,982


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, 2010 AND 2009

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained Earnings

Total
Shareholders'
EquityBALANCE 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


18,726,852Net income














506,766


506,766Issuance of stock upon exercise of stock options





40


12,460








12,500Compensation on stock-based awards








31,728








31,728Translation gain, net of tax











10,973





10,973BALANCE DECEMBER 31, 2010

$
250,000

$
27,430

$
15,698,348

$
(62,936
)
$
3,375,977

$
19,288,819


See
accompanying Notes to Consolidated Financial Statements.

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF CASH FLOWS        DECEMBER 31, 2010 AND 2009

2010

2009CASH FLOWS FROM OPERATING ACTIVITIESNet income (Loss)

$
506,766

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


1,554,577


1,773,917Amortization


141,399


150,121Compensation on Stock-Based Awards


31,728


128,047Interest on Swap Valuation


(27,772
)

(18,893
)Restructuring Charges





466,455Fixed Asset Impairment


55,786


501,536Deferred Income Taxes


288,000


188,000Loss on Disposal of Property and Equipment


901


4,955Foreign Currency Transaction Loss


8,333


10,131Changes in Current Operating Items, Net of Effects of Business AcquisitionAccounts Receivable


(3,532,471
)

1,146,371Inventories


865


4,896,475Prepaid Expenses and Other Assets


(53,207
)

203,114Income Taxes Receivable


2,139,543


(2,095,733
)Accounts Payable


1,674,954


(1,696,872
)Accrued Payroll and Commissions


1,127,119


(1,973,657
)Accrued Health and Dental Claims


(275,000
)

(136,102
)Other Accrued Liabilities


(751,267
)

(566,319
)Net Cash Provided by (Used in) Operating Activities


2,890,254


(853,495
)CASH FLOWS FROM INVESTING ACTIVITIESProceeds from Sale of Property and Equipment





176,350Restricted Cash





427,500Business Acquisition


(402,969
)

Purchases of Property and Equipment


(626,630
)

(680,459
)Net Cash Used in Investing Activities


(1,029,599
)

(76,609
)CASH FLOWS FROM FINANCING ACTIVITIESNet Borrowings on Line of Credit


124,514


1,123,045Proceeds from Long-Term Debt





616,397Principal Payments on Long-Term Debt


(2,013,106
)

(1,367,714
)Proceeds from Issuance of Common Stock


12,500


132Net Cash Provided by (Used in) Financing Activities


(1,876,092
)

371,860Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents


638


584NET DECREASE IN CASH AND CASH EQUIVALENTS


(14,799
)

(557,660
)Cash and Cash EquivalentsBeginning of Year


245,381


803,041CASH AND CASH EQUIVALENTSEND OF YEAR

$
230,582

$
245,381


22

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2010 AND 2009

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 engineering services separate from the manufacture of a product and repair service on circuit boards used in machines in the medical
industry.

Our
manufacturing facilities are located in Bemidji, Blue Earth, Merrifield, Milaca and Baxter, Minnesota as well as Augusta, Wisconsin; Monterrey, Mexico; and as of January 1,
2011, Mankato, Minnesota.

A
summary of our significant accounting policies follows:

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.

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.

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 $86,000 and $138,000 at December 31, 2010 and 2009, 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 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:

2010

2009Raw materials

$
11,277,741

$
11,137,853Work in process


3,477,236


3,304,725Finished goods


2,395,843


2,459,521Reserves


(1,042,047
)

(1,095,430
)Total

$
16,108,773

$
15,806,669


23

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

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

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, 2010 and 2009:

2010

2009Land

$
260,000

$
272,500Building and Leasehold Improvements


6,316,133


6,543,066Manufacturing Equipment


11,816,653


11,751,996Office and Other Equipment


3,523,526


3,827,542Accumulated Depreciation


(14,758,769
)

(14,155,943
)Net Property and Equipment

$
7,157,543

$
8,239,161


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, 2010, land of $27,000 and two buildings, net of accumulated depreciation, of $405,000 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, 2010 and 2009 are as follows:

December 31, 2010Remaining
Lives
(Years)

Gross
Carrying
Amount

Accumulated
Amortization
Amount

Net Book
Value
AmountBond Issue Costs


11

$
79,373

$
23,814

$
55,559Customer Base


2


676,557


529,966


146,591Other intangibles


0


28,560


28,560


Totals




$
784,490

$
582,340

$
202,150




December 31, 2009Remaining
Lives
(Years)

Gross
Carrying
Amount

Accumulated
Amortization
Amount

Net Book
Value
AmountBond Issue Costs


12

$
79,373

$
18,522

$
60,851Customer Base


3


676,557


394,655


281,902Other intangibles


1


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, 2010 AND 2009

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

Amortization
expense related to these assets was as follows:

Year ended December 31, 2010

$
141,399Year ended December 31, 2009


150,121


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

2011

$
141,0002012


17,0002013


5,0002014


5,0002015


5,000Thereafter


29,000$
202,000


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 2010, we recorded an impairment charge of $56,000 on a building held for sale. 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 11).

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, 2010 and 2009.

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 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 $167,000 and $136,000 for the years ended December 31,
2010 and 2009, respectively.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

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

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, 2010, 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, CompensationStock Compensation. Stock-based compensation expense was $32,000 ($.01 per diluted common share) for 2010 and $128,000 ($.05
per diluted common share) for 2009. See Note 8 for additional information.

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 4.

26

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

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

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding. For the years ended December 31, 2010
and 2009, no outstanding options were included in the computation of per-share amounts as the effect of all stock-based awards were antidilutive.

Supplemental Cash Flow and Noncash Investing Information

We received income tax refunds, net of $2,027,951 and $519,397 for the years ended December 31, 2010 and 2009, respectively. We paid interest expense of
$450,180 and $548,733 for the years ended December 31, 2010 and 2009, respectively.

We
had noncash transfers of certain property and equipment with a value of $201,000 and $231,000 for the years ended December 31, 2010 and 2009, respectively from Property and
Equipment to Other Assets due to their classification as held for sale.

Enterprise-Wide Disclosures

Our results of operations for the years ended December 31, 2010 and 2009 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 6% and 4% of consolidated sales for each of the years ended December 31, 2010 and 2009, respectively.

Net
sales by our major EMS industry markets for the year ended December 31, 2010 and 2009 are as follows:

Year Ended
December 31(in thousands)

2010

2009Aerospace and Defense

$
16,152

$
26,515Medical


29,329


17,493Industrial


54,339


35,932Total Net Sales

$
99,820

$
79,940


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

United States

Mexico

Total2010Net property and equipment

$
6,965,816

$
191,727

$
7,157,543Other assets


708,659


7,726


716,3852009Net property and equipment

$
8,038,406

$
200,755

$
8,239,161Other assets


649,341


7,726


657,067


Foreign Currency Translation

During the fourth quarter of 2010, we reevaluated the reporting currency and determined that the functional currency for our operations in Mexico is the U.S.
Dollar. As a result, the Company is no longer recording translation adjustments related to assets and liabilities or income and expense items that are transacted in the local currency as a component
of accumulated other comprehensive loss in shareholders' equity. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local
currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense).

27

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NOTE 2  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 Division accounted for 19% and 13% of net sales
for the years ended December 31, 2010 and 2009, respectively. G.E.'s Transportation Division accounted for 8% and 12% of net sales for the years ended December 31, 2010 and 2009,
respectively. Together, G.E.'s Medical and Transportation Divisions accounted for 27% and 25% of net sales for the years ended December 31, 2010 and 2009, respectively. Accounts receivable from
G.E.'s Medical and Transportation Divisions at December 31, 2010 and 2009 represented 14% and 16% of total accounts receivable, respectively.

NOTE 3  ACCRUED HEALTH AND DENTAL CLAIMS

In 2009 and through September 2010, we were self-insured for our employee health and dental plans. In September 2010, we entered into a
co-employment agreement with Administaff Services, who now provides premium based health and dental plans to our employees. At December 31, 2010 we have an accrual of $35,000 for
estimated unpaid health and dental claims related to the run-out of our self-insured plans. Estimated unpaid claims for incurred health and dental services at
December 31, 2009 were $310,000.

NOTE 4  FINANCING AGREEMENTS

On May 27, 2010 we entered into a third amended and restated credit and security agreement with Wells Fargo Bank which provides a $12 million line
of credit through May 31, 2013 and a real estate note maturing on May 31, 2012. On January 6, 2011, we entered into the first amendment to this agreement which provides a
$13.5 million line of credit through May 31, 2013, a new $475,000 equipment term loan tied to equipment purchased in the recent acquisition announced January 3, 2011 and a new
term loan of up to $1.0 million for capital expenditures to be made in 2011. 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 + 4.00% (4.30% at December 31, 2010). The weighted-average interest rate on our line of credit was 4.63% for the year
ended December 31, 2010. We had borrowings of $5,615,121 and $5,490,607 outstanding as of December 31, 2010 and 2009, respectively.

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. At December 31, 2010, we have net unused availability
under our line of credit of approximately $5.2 million. Under the terms of our new agreement, our unused availability increased to $6.5 million on January 6, 2011. The line is secured by
substantially all of our assets.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 4  FINANCING AGREEMENTS (Continued)

A
summary of long-term debt balances at December 31, 2010 and 2009 is as follows:

Description

2010

2009Term notes payableWells Fargo Bank, N.A., one note bears interest at three month LIBOR + 4.50% (approx. 4.8%) and three month
LIBOR + 5.00% (approx 5.375%) at December 31, 2010 and 2009, respectively. Two notes bear interest at 4.95%, combined monthly principal payments of approximately $31,000 plus interest, maturities range from June 2011 to May 2012;
secured by substantially all assets

$
1,848,078

$
3,736,184Industrial 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 $125,000 payable on June 1, 2011 and $80,000 payable annually on June 1 thereafter


725,000


850,000Total long-term debt


2,573,078


4,586,184Current maturities of long-term debt


(841,760
)

(1,013,920
)Long-term debtnet of current maturities

$
1,731,318

$
3,572,264


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

Years Ending December 31,

Amount2011

$
841,7602012


1,211,3182013


80,0002014


80,0002015


80,000Future


280,000$
2,573,078


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. The amortized notional amount outstanding at December 31, 2010 was approximately $873,000. We do not use this interest
rate swap for speculative purposes. The fair value of the swap of $18,140 and $45,912 was recorded in Other Long-Term Liabilities at December 31, 2010 and 2009, respectively. The
change in the fair value of ($27,772) and ($18,893) for the years ended December 31, 2010 and 2009, respectively have been recorded as a component of interest expense.

NOTE 5  INCOME TAXES

The income tax expense (benefit) for the years ended December 31, 2010 and 2009 consists of the following:

2010

2009Current taxesFederal

$
128,000

$
(2,500,000
)Current taxesState


(41,000
)

(73,000
)Current taxesForeign


19,000


10,000Deferred taxesFederal


253,000


324,000Deferred taxesState


16,000


(148,000
)Income tax expense (benefit)

$
375,000

$
(2,387,000
)


29

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 5  INCOME TAXES (Continued)

The
statutory rate reconciliation for the years ended December 31, 2010 and 2009 is as follows:

2010

2009Statutory federal tax provision (benefit)

$
298,000

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


34,000


(147,000
)Effect of foreign operations


(5,000
)

Income tax credits


(95,000
)

(109,000
)NOL carryback true up


106,000


Other, including benefit of income taxed at lower rates


37,000


(16,000
)Income tax expense (benefit)

$
375,000

$
(2,387,000
)


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

2010

2009Domestic

$
820,000

$
(6,251,000
)Foreign


62,000


29,000Total

$
882,000

$
(6,222,000
)


Deferred
tax assets (liabilities) at December 31, 2010 and 2009, consist of the following:

2010

2009Allowance for uncollectable accounts

$
31,000

$
50,000Inventories reserve


383,000


400,000Accrued vacation


308,000


262,000Health insurance reserve


13,000


113,000Non-compete amortization


397,000


400,000Stock-based compensation


59,000


47,000Other


425,000


607,000Deferred tax assets


1,616,000


1,879,000Prepaid expenses


(211,000
)

(188,000
)Property and equipment


(592,000
)

(590,000
)Deferred tax liabilities


(803,000
)

(778,000
)Net deferred tax assets

$
813,000

$
1,101,000Net current deferred tax assets

$
594,000

$
753,000Net non-current deferred tax assets


219,000


348,000Net deferred tax assets

$
813,000

$
1,101,000


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.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 5  INCOME TAXES (Continued)

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, 2010:

Balance as of December 31, 2009

$
115,000Tax positions related to current year:Additions


27,000Reductions


(28,000
)Balance as of December 31, 2010

$
114,000


The
$114,000 of unrecognized tax benefits as of December 31, 2010 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,
2010 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.

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 and section 199 deductions.

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 2007. We are currently under audit by the
IRS related primarily to the 2009 NOL carry back claim. We are not aware of any significant items as a result of the IRS audit that should either be incorporated into the FIN 48 analysis or tax
projections for the year ended December 31, 2010.

NOTE 6  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
2010

Year Ended
December 31
2009Net income (loss), as reported

$
506,766

$
(3,835,041
)Other comprehensive income


10,973


15,689Comprehensive income (loss)

$
517,739

$
(3,819,352
)


NOTE 7  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 three
months of service and attaining the age of 18. Employees are allowed to contribute up to 60% of

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 7  401(K) RETIREMENT PLAN (Continued)

their
wages to the Plan. Historically we have matched 25% of the employees' contribution up to 6% of covered compensation. We suspended this benefit from the second quarter of 2009 thru June 2010. We
made contributions of approximately $79,000 and $84,000 during the years ended December 31, 2010 and 2009, respectively.

NOTE 8  INCENTIVE 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 could acquire newly issued shares of common
stock for 90% of the current market value. During 2009, 37 common shares were issued in connection with this plan and zero were issued in 2010. Through December 31, 2010, 22,118 common shares
had been issued under this Plan.

Stock Options

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 under the 2005 Plan is 200,000, of which 23,750 remain available for grant at December 31, 2010. 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 was to provide incentives to our employees to
increase our return on sales "ROS" performance measurement. 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 through December 31, 2010 from the 2007 Plan will ever vest.

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

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 8  INCENTIVE PLANS (Continued)

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. The variables used for the grants for the year ended December 31, 2009 are
below. There were no grants during the year ended December 31, 2010.

2009Expected volatility

49.0%Expected dividends

NoneExpected term (in years)

7Risk-free rate

2.6 - 2.7%


Stock Options with Time-Based Vesting

Total compensation expense related to stock options with time-based vesting for the years ended December 31, 2010 and 2009 was $31,728 and
$128,047, respectively. As of December 31, 2010 there was approximately $27,000 of unrecognized compensation expense related to unvested option awards that we expect to recognize over a
weighted-average period of 0.85 years.

Stock Options with Performance-Based Vesting

As mentioned previously, the vesting of options granted under the 2007 Plan was conditional upon the Company meeting established performance measurements. 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 ever 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, 2010 and 2009
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, 2010, 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, 2010


736,750

$
7.20Granted





Exercised


(4,000
)

3.13Forfeited


(69,600
)

6.21OutstandingDecember 31, 2010


663,150

$
7.32


5.54

$
4,627Exercisable on December 31, 2010


303,250

$
7.30


4.31

$



The
weighted-average grant-date fair value of options granted during 2009 was $1.92. There were no grants during the year ended December 31, 2010. The weighted-average
fair value of options vested during the years ended December 31, 2010 and 2009 were $3.69 and $3.70, respectively. The total intrinsic value of options exercised during the year ended
December 31, 2010 was $20. There were no options exercised during the year ended December 31, 2009. Cash received from option exercise under all share-based payment arrangements for the
year ended December 31, 2010 was $12,500. We recognize the tax benefit from the exercise of options in the statement of cash flows as a cash inflow from financing activities.

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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 8  INCENTIVE PLANS (Continued)

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the "2010 Plan"). The total
number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were issued during the year. The 2010 Plan provides that
Units issued shall fully vest three years from the grant date unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of
common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units
as of the calendar year immediately preceding the redemption date. The Units issued during the year ended December 31, 2010 have a book value per Unit of $6.84 and have a weighted average life
remaining of two years at December 31, 2010. Total compensation expense related to these Units based on the estimated appreciation over their remaining term for the year ended
December 31, 2010 was $5,096.

NOTE 9  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 2017.

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, 2010 future minimum lease payments, net of sublease income, was $0.

Rent
expense for the years ended December 31, 2010 and 2009 amounted to approximately $914,000 and $875,000 respectively.

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

Years Ending December 31,

Amount2011

$
303,0002012


461,0002013


461,0002014


458,0002015


398,000Thereafter


328,000Total

$
2,409,000


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. Expenses under the Plan were $338,000 and $44,000 for the years ended December 31, 2010 and 2009, respectively. Due to the economic downturn
and cost reduction efforts this benefit was reduced in 2009 and reinstated in its entirety in 2010.

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 9  COMMITMENTS AND CONTINGENCIES (Continued)

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.

NOTE 10 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.

2010

2009Diluted Net Income (Loss) Per Common ShareNet Income (Loss)

$
506,766

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


2,742,389


2,738,982Stock options





Weighted average common shares for diluted net income (loss) per common share


2,742,389


2,738,982Diluted net income (loss) per common share*

$
0.18

$
(1.40
)


For
the year ended December 31, 2010 and 2009, the effect of all stock options is antidilutive either due to net loss incurred in 2009 or because to include them would be
antidilutive in 2010. Therefore, no outstanding options were included in the computation of per-share amounts.

NOTE 11 RESTRUCTURING AND IMPAIRMENT CHARGES

To better align our cost structure with 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 was 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 were for certain assets identified that are no longer being used in our operations
as a result of the restructuring.

In
2010, we abandoned a second building in Fairmont and recognized an impairment charge of $56,000 based on a real estate appraisal completed. At December 31, 2010 the two
remaining buildings are classified as held for sale and included in Other Assets on the balance sheet.

NOTE 12 BUSINESS ACQUISITION

On May 4, 2010, we acquired all of the intellectual property and assets, excluding cash and receivables, of Trivirix Corporation, Milaca, MN for cash of
$403,000. The fair value of assets acquired included $303,000 in inventory and $100,000 in property and equipment. This operation specializes in design, manufacturing and post-production
services of complex electronic and electromechanical medical devices for diagnostic,

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 12  BUSINESS ACQUISITION (Continued)

analytical
and other life-science applications. This acquisition expands our capabilities and expertise serving medical electronics manufacturers. The acquisition has been accounted for as
a business combination and results of operations for Milaca since the date of acquisition are included in the consolidated financial statements.

NOTE 13 SUBSEQUENT EVENT (UNAUDITED)

On November 15, 2010, the Company entered into an Asset Purchase Agreement with Winland Electronics, Inc. (Winland) to acquire substantially all of
Winland's EMS assets and assume certain liabilities relating to their EMS operations located in Mankato, MN. The purchase was completed on January 1, 2011. Winland is a designer and
manufacturer of custom electronic control products and systems. This purchase will provide needed manufacturing capacity, particularly for supporting medical and industrial customers with printed
circuit board assemblies and higher-level builds.

We
paid $1,042,389 in cash at closing and will make deferred payments of $250,000 on each July 1, 2011 and October 1, 2011. We also agreed to purchase a minimum of
$2,200,000 of inventory as consumed over the next 24 months.

In
connection with the acquisition, Nortech also entered into an agreement to manufacture certain products related to the production of Winland's remaining proprietary monitoring devices
business unit and Nortech also agreed to a six year agreement to lease office and manufacturing space at 1950 Excel Drive, Mankato, Minnesota, 56001, and sublease 1,000 square feet back to
Winland for one year.

The
following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

Accounts receivable

$
1,914,723Property, plant and equipment


2,451,000Accounts payable assumed


(1,772,334
)Lease payoff


(259,385
)Net assets acquired

$
2,334,004Cash Paid at Closing


1,042,389Due to Winland


500,000Purchase price


1,542,389Bargain purchase gain


791,615Net assets acquired

$
2,334,004


We
will recognize a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired.

The
Mankato operations results are not included in the consolidated financial statements since the date of acquisition was after December 31, 2010; however the table below
reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of January 1, 2010:

Pro Forma
For the Year Ended
December 31, 2010
(unaudited)Net Sales

$
114,473,000Net Loss

$
(291,000
)Basic Loss per Common Share

$
(0.11
)


Combined
results for the two companies for the year ended December 31, 2010 were adjusted for the following in order to create the unaudited proforma results in the table
above:



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Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2010 AND 2009

NOTE 13  SUBSEQUENT EVENT (UNAUDITED) (Continued)



The
pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest
period presented. In addition they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.

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Table of Contents

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 11, 2011, (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 11, 2011

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

SCHEDULE IIValuation and Qualifying Accounts

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

Classification

Balance at
Beginning
of Year

Additions Charged
to Costs
and Expenses

Deductions

Balance at
End of
YearYear Ended December 31, 2010:Allowance for Uncollectible Accounts

$
138,000

$
58,000

$
(110,000
)
$
86,000Inventory Reserves


1,095,000


1,243,000


(1,296,000
)

1,042,000Self-insurance Accrual


310,000


3,110,000


(3,385,000
)

35,000Year 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
)

310,000


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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, 2010. 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, 2010,
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 2010 proxy statement to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2010, 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 2010 proxy statements to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2010, 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 2010 proxy statements
to be filed with the Securities and Exchange Commission within 120 days after December 31, 2010, 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 2010 proxy statements to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2010, 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, 2010.

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


663,150

$
7.32


167,950Equity compensation plans not approved by security holders


0


0


0Total


663,150

$
7.32


167,950


(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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Table of Contents

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item will be included in the Registrant's 2010 proxy statements to be filed with the Securities and Exchange Commission within
120 days after December 31, 2010, 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 2010 proxy statements to be filed with the Securities and Exchange Commission within
120 days after December 31, 2010, 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


38Consolidated Financial Statement Schedule for the years ended December 31,2010 and 2009:Schedule II Valuation and Qualifying Accounts


39


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:


10.7

First Amendment to Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank, National Association10.8

Winland Asset Purchase Agreement23.1

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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Table of Contents

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 11, 2011

/s/RICHARDG. WASIELEWSKI Richard G. Wasielewski Chief Financial Officer and
Principal Accounting OfficerMarch 11, 2011

/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 11, 2011

/s/MICHAELJ. DEGEN Michael J. Degen President, Chief Executive
Officer and DirectorMarch 11, 2011

/s/MYRONKUNINMyron Kunin Chairman and DirectorMarch 11, 2011

/s/RICHARDW. PERKINS Richard W. Perkins, DirectorMarch 11, 2011

/s/C. TRENTRILEY C. Trent Riley, DirectorMarch 11, 2011

/s/KENLARSON Ken Larson, Director


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Table of Contents

INDEX TO EXHIBITS

DESCRIPTIONS OF EXHIBITS

10.7

First Amendment to Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank, National Association10.8

Winland Asset Purchase Agreement23.1

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.


44

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