<PAGE>

                               FORM 10-K

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

(Mark One)

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

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

Commission file number   0-13257
                         -------

                          NORTECH SYSTEMS INCORPORATED
                          ----------------------------
             (Exact name of registrant as specified in its chapter)

            Minnesota                               41-16810894
------------------------------------                -----------
  (State or other jurisdiction of               (I. R. S.  Employer
  incorporation or organization)                 Identification No.)

             641 East Lake St., Suite 244 Wayzata, MN        55391
             ----------------------------------------        -----
             (Address of principal executive offices)      (Zip code)

Registrant's telephone No., including area code:      (612)  473-4102

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
per share par value.

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 of file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES        X                           NO 
    ----------------                      ----------------


<PAGE>

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K 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. ( )

Based upon the $3.50 per share average of the closing bid and asked prices,
respectively, on February 26, 1999 for the shares of common stock of the
Company, the aggregate market value of the Company's common stock held by
non-affiliates as of such date was $4,313,712.

As of February 26, 1999 there were 2,351,377 shares of the Company's $.01 per
share par value common stock outstanding.



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                                       2

<PAGE>

                     DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference to the parts indicated of
the Annual Report on Form 10-K:

Parts of Annual Report                 Documents Incorporated by
   on Form 10-K                         Reference

Part III

     Item 10                           Reference is made to the Registrant's
          11                           proxy statements to be used in
          12                           connection with the 1998 Annual
                                       Shareholders' meeting and filed with
                                       the Securities and Exchange
                                       Commission no later than
                                       April 30, 1999.



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                                      3

<PAGE>

                          NORTECH SYSTEMS INCORPORATED
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                      INDEX

<TABLE>
<CAPTION>

PART I                                                                              PAGE
<S>                                                                                <C>
Item 1.  Business                                                                   5- 9

Item 2.  Properties                                                                 9-10

Item 3.  Legal Proceedings                                                            10

Item 4.  Submission of Matters to a Vote of Security Holders                          10

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters     10-11

Item 6.  Selected Financial Data                                                      12

Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                       13-14

Item 7a. Quantitative and Qualitative Disclosure about Market Risk                    14

Item 8.  Consolidated Financial Statements and Supplemental Data                   15-34

Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure                                                     35

PART III

Item 10.  Directors and Executive Officers of the Registrant                          35

Item 11.  Executive Compensation                                                      35

Item 12.  Security Ownership of Certain Beneficial Owners and Management              35

Item 13.  Certain Relationships and Related Transactions                              35

PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K           36-39

Signatures                                                                            40
</TABLE>


                                       4

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

DESCRIPTION OF BUSINESS

Nortech Systems Incorporated (the "Company") is a Minnesota corporation
organized in December 1990. Prior to December 1990, the Company operated as DSC
Nortech, Inc., which filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code during 1990. The business and assets of DSC
Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990. The
Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis,
Minnesota. The Company's maintains various manufacturing facilities in Minnesota
locations of Bemidji, Fairmont, Plymouth, Aitkin, and Merrifield as well as
Augusta, Wisconsin. The Company manufactures wire harnesses, cables, electronic
sub-assemblies and components, printed circuit board assemblies as well as
large-screen high resolution video monitors for radar, document and medical
imaging. The Company provides a full "turnkey" contract manufacturing service to
its customers. A majority of revenue is derived from products which are built to
the customer's design specifications. Nortech Medical Services, Inc., its wholly
owned subsidiary, provides service bureau and office management services to
physicians and clinics throughout Minnesota.

The Company believes it provides a high degree of manufacturing sophistication.
This includes the use of statistical process control to insure product quality,
state-of-the-art materials management techniques, allowing just-in-time (JIT)
delivery of products, and the systems necessary to effectively manage the
business. This level of sophistication enables the Company to attract major
original equipment manufacturers (OEM).

The strategy of the Company in that regard has been to expand its customer base,
and has added several new customers from various industries; including Companies
engaged in the production of medical products, super computers, mid-size and
micro computer business systems, defense industry product and industrial
products. The Company strategy is to develop a customer base spanning several
industry segments to avoid the affects of fluctuations within a given industry.
Some of the Company's major customers are G.E. Medical Systems, Raytheon, SPX
Corporation, Imation, Thermo King, Polaris, Fisher-Rosemount, 3M, Allen-Bradley
and United Defense.

The Company believes that contract manufacturing will continue to grow and
expand in the United States because contract manufacturing provides OEMs with
the domestic equivalent of off-shore sourcing without the associated logistical
problems. The contract manufacturer can provide an OEM with a quality product at
a price well below that available in the OEM's own facility. This is due
primarily to the specialization available through the contract manufacturer and
the significantly lower overhead costs.


                                       5

<PAGE>

In 1991, the Company acquired all of the common stock of SMR Computer Services,
Inc. The Company, through its subsidiary (currently named Nortech Medical
Services, Inc.), also provides service bureau and office management services to
physicians.

In March 1995, the Company acquired all of the assets of Monitor Technology
Corporation. The Company has continued the business of Monitor Technology
Corporation which is the manufacturing of large-screen, high resolution video
monitors for radar, document and medical imaging. In addition, this division
provides repair services on internally and externally produced monitors.

In August 1995, the Company acquired all the assets of the Aerospace Division of
Communication Cable, Inc. The Company has continued the business formally
conducted by Aerospace which involves the manufacturing of custom designed,
high-technology electronic cable assemblies for various applications.

In November 1996, the Company acquired the inventory and fixed assets of Zercom
Corporation, a subsidiary of Communication Systems, Inc. The Company has been,
and continues to be a contract manufacturer of electronic sub-assemblies and
components.

The Company has adopted SFAS No.131, disclosure about segments of an enterprise
and related information, the corresponding segmented financial data is shown in
Note 8 of the financial statements.

MARKETING AND SALES  

BUSINESS STRATEGY 

The Company believes the electronic manufacturing sub-contracting business is
emerging from a small job shop oriented business into a dynamic, high technology
electronics industry. The Company operates mainly in the wire harness and cable
assemblies market, and intends to expand from this market segment into complete
electromechanical assemblies using the resources acquired from the recent
addition of Zercom Corporation. Many companies no longer perform this type of
work on a captive, in-house basis, as they are finding that independent
subcontractors can more cost effectively perform this specialized work.

As part of the Company's commitment to quality, the Bemidji location became ISO
9002 Certified in July 1995, the Merrifield Division became ISO 9002 Certified
in October, 1998, and continue to actively maintain their certification. The
Company believes this certification benefits its current customer base as well
as attract new business opportunities.


                                       6

<PAGE>

The Company will continue it's commitment to quality, cost effectiveness and
responsiveness to customer requirements. To achieve these objectives, the
Company will provide complete manufacturing services to customers, from the
procurement of materials to the manufacturing, testing and shipping of products.
The Company will continue its efforts to diversify its customer base and expand
into other segments of the electronic manufacturing subcontract business.

MARKETING.      

The Company is continuing to concentrate its marketing activities in the
medical, industrial and military manufacturing industries. The 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) and statistical quality control (SQC). The Company has
initiated efforts to expand its markets beyond the Upper Midwest area, which
presently extends east to the Ohio/Michigan area, south to Missouri, and west to
Colorado. New market opportunities are continuously being pursued. The Company
markets its products and services primarily through manufacturers'
representatives. The Company's marketing strategy emphasizes the sophistication
of its manufacturing services. The basic systems, procedures, and disciplines
normally associated with a mature corporate environment are in place. All the
Company's employees are well trained in SPC and SQC.

SOURCES AND AVAILABILITY OF MATERIALS

The Company is not dependent on any one supplier for materials for products sold
to customers. Components utilized in the assembly of wire harnesses, cable
assemblies and printed circuit assemblies are purchased directly from the
component manufacturers or from their distributors. On occasion some components
may be placed on a stringent allocation basis; however, due to the excess
manufacturing capacity currently available at most component manufacturers, the
Company does not anticipate any major material purchasing or availability
problems occurring in the foreseeable future.

PATENTS AND LICENSES

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


                                       7

<PAGE>

COMPETITION

The contract manufacturing industry is characterized by competition among a
variety of sources, including small closely-held companies, larger full-service
manufacturers, company-owned facilities and foreign competitors. The Company
does not believe that the smaller operations are significant competitors as they
do not seem to have the capabilities required by target customers of the
Company. The Company also believes that foreign competitors do not provide a
substantial competitive threat because the cable and wire harness industry
involves a high weight-to-cost ratio. Consequently, shipping and transportation
costs decrease the ability of foreign manufacturers to compete in this market
segment. Further, off-shore production cannot effectively meet the requirements
of engineering change order activities, engineering support, delivery
flexibility and just-in-time inventory management techniques presently being
implemented by many major target customers. Therefore, the Company's principal
competitors are larger full-service manufacturers, many of which have
substantially far greater assets and capital resources than are available to the
Company and are better financed than the Company.

The Company will continue to pursue marketing opportunities in the Upper
Midwest. Although there presently are no dominant contract manufacturers in the
wire harness and cable or higher level build assembly business in the Upper
Midwest, there are several established competitors. The Company expects its
major competition to come from Americable, OEM Worldwide, MSL, Technical
Services, Inc. and Waters Instruments, Inc., all of which are located in
Minnesota. Each of these companies specializes in molded cables or wire
assemblies and has sufficient manufacturing capabilities to offer a significant
competitive challenge to the Company's operations. The principal competitive
factors in the contract manufacturing industry are price, quality and responsive
service. The Company believes that it can compete favorably in the market
segments to which it sells.

BACKLOG

Historically, the Company's backlog has been running 60 to 90 days, depending on
the customer. However, because of the increased emphasis on just-in-time
manufacturing (JIT), many of the Company's major customers are taking advantage
of the Company's ability to service them adequately under the JIT concept.
Additionally, because of the Company's quality history with customers, many
products now go directly from the Company's shipping dock to the customer's
production line.

The Company's 90 day order backlog was approximately $7,687,000 on December 31,
1997 and approximately $9,210,000 on December 31, 1998.


                                       8

<PAGE>

MAJOR CUSTOMERS

The Company sells its products to companies in the computer, medical,
governmental and various other industries. Historically, the Company has not
experienced significant losses related to the receivables from customers in any
particular industry or geographic area.

No customer accounted for more than 10% of revenue, for the year ended December
31, 1998.

RESEARCH AND DEVELOPMENT  

The Company expended $337,093 in 1998, and $258,712 in 1997 and $273,697 in 1996
on Company-sponsored research and development. This research is related to the
development of large-screen, high resolution video monitors for the Imaging
Division.

COMPLIANCE WITH ENVIRONMENTAL PROVISIONS

Management believes that its manufacturing facilities are currently operating
under compliance with local, state, and federal environmental laws. Any
environmental-oriented equipment is capitalized and depreciated over a
seven-year period. The annualized depreciation expense for this type of
environmental equipment on a Company-wide basis is insignificant.

EMPLOYEES

The Company has 527 full-time and 73 part-time employees as of December 31,
1998, consisting of 555 employees in manufacturing, manufacturing product
support and medical support services and 45 in general administration.

ITEM 2.  PROPERTIES

The Company's headquarters consist of approximately 1,500 square feet located in
Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Company has
a lease for a five year term that expires in June 30, 2002. The Company owns its
Bemidji, Minnesota facility consisting of eight acres of land and 60,000 square
feet of office and manufacturing space and owns another 8,000 square feet of
manufacturing and office space in Augusta, Wisconsin.


                                       9

<PAGE>

The Company's Imaging and Medical Services division operates from a facility
located in Plymouth, Minnesota. The building contains approximately 22,800
square feet and is leased for a term that terminates on May 31, 2000. The
Company has an option to extend the lease for an additional five-year term.

The Company also owns three buildings which contain approximately 46,900 square
feet and are located in Fairmont, Minnesota, which are used for the
manufacturing of the Company's custom designed, high-technology electronic cable
assemblies.

In connection with the Zercom acquisition, the Company acquired the building
with approximately 45,800 square feet in Merrifield, Minnesota. This facility is
used for the building of surface mount printed circuit board assemblies and
electro-mechanical assemblies. A leased building in Aitkin, Minnesota provides
10,750 square feet for video cable assembly and is leased for a term that
terminates December 1, 2005.

The Company believes that each of these locations is adequate and will be
adequate in the foreseeable future for their manufacturing needs.

ITEM 3.  LEGAL PROCEEDINGS

The Company has litigation pending, both offensive and defensive arising from
the conduct of its business, none of which are expected to have any material
effect on the Company's financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters have been submitted to a vote of security holders which are required
to be reported under the instructions to this item.

                              PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the NASDAQ National Market under the
symbol NSYS. Prior to October 11, 1995, the stock was traded on the NASDAQ Small
Cap Market.


                                       10

<PAGE>

The high and low bid quotations for the Company's Common Stock for each
quarterly period within the two most recent years were as follows:

<TABLE>
<CAPTION>
     Quarter Ended                     Low              High
     -------------                     ---              ---- 
     <S>                             <C>               <C>
     March 31, 1997                  $4.750            $6.000
     June 30, 1997                   $4.500            $5.750
     September 30, 1997              $4.500            $5.750
     December 31, 1997               $4.500            $5.875

     March 31, 1998                  $4.266            $5.125
     June 30, 1998                   $4.750            $6.625
     September 30, 1998              $3.625            $5.500
     December 31, 1998               $3.438            $4.438
</TABLE>

The low and high quotations set forth above are as reported by NASDAQ. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.

As of March 1, 1999, there were approximately 1,301 holders of shares of the
Company's Common Stock. The Company has never paid a cash dividend on shares of
its Common Stock and does not intend to pay cash dividends in the foreseeable
future.




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                                       11

<PAGE>

              NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED
                    ---------------------------------------------------------------------------

                    Dec 31, 1998    Dec 31, 1997    Dec 31, 1996     Dec 31, 1995  Dec 31, 1994
                    ------------    ------------    ------------     ------------  ------------
<S>                 <C>             <C>             <C>              <C>           <C>
Sales                $40,355,867     $36,433,918     $26,182,821      $18,305,928   $12,820,709

Net Income (Loss)        329,867         677,671         446,029        1,331,924     1,183,406

Basic Earnings
 Per Share of
 Common Stock               0.14            0.28            0.19             0.55          0.54

Total Assets          24,728,562      24,694,930      22,152,629       13,223,064     6,647,897

Total Long-Term
 Debt                 11,146,537      10,388,620      10,910,757        3,768,685       746,755
</TABLE>

-  Company acquired the assets of Zercom Corporation in November, 1996.

-  Company acquired the assets of Monitor Technology in March, 1995, and
   Aerospace Systems in August, 1995.

          NOTE:  For additional selected Financial Data (Past two years by
                 quarter information), see Note 11 of the Consolidated
                 Financial Statement.


                                       12

<PAGE>

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

RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

REVENUES

For the years ended December 31, 1998, and 1997 the Company had sales of
$40,355,867 and $36,433,918 respectively. The increase of $3,921,949 or 10.8%
resulted primarily from internal growth of our current customer base. For the
year ended December 31, 1996 the Company had sales of $26,182,821. The
approximate 39% increase in sales in 1997 was attributable primarily to
increased sales from the newly acquired divisions in 1996.

GROSS PROFIT

The Company had gross profit of $6,597,719 in 1998, $6,795,052 in 1997, and
$4,627,362 in 1996. Gross profits as a percentage of gross sales were 16.3% in
1998, 18.7% in 1997, and 17.7% in 1996. The Company has experienced gross profit
pressure evolving from a change of product mix and material content offset by
some improvement in manufacturing productivity.

SELLING, GENERAL, AND ADMINISTRATIVE

Selling, general, and administrative expenses were $4,842,867 in 1998,
$4,542,498 in 1997, and $3,306,311 in 1996. The increases each year reflect
additional selling, general and administrative expenses associated with the
acquisitions and increased revenues.

MISCELLANEOUS INCOME

Miscellaneous income was $40,885 in 1998, $53,738 in 1997, and $65,732 in 1996.
The miscellaneous income resulted primarily from charges for interest income and
miscellaneous services.

INTEREST EXPENSE

Interest expense was $1,004,777 in 1998, $1,010,909 in 1997, and $475,057 in
1996. The increased expense for 1997 is due to the increased debt from acquired
operations.


                                       13

<PAGE>

INCOME TAXES 

Income tax expense for 1998 was $124,000, $359,000 in 1997, and $192,000 in
1996.

The Company has recorded deferred tax assets of $1,170,000, the realization of
the deferred tax asset is dependent upon the Company generating sufficient
taxable earnings in future periods. In determining that realization of the
deferred tax asset is more likely than not, the Company gave consideration to
recent earnings history, its expectation for taxable earnings in the future and
the expiration dates associated with tax carryforwards.


NET INCOME

The Company's net income in 1998 was $329,867 or $.14 per common share. The
Company's net income in 1997 was $677,671 or $.28 per common share. The
Company's net income in 1996 was $446,029 or $.19 per common share. The Company
believes that the effect of inflation on past operations has not been
significant and anticipates that inflation will not have a significant impact on
future operations.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital rose from $9,670,225 as of December 31, 1997, to
$10,984,033 on December 31, 1998. Stockholders equity increased from $7,813,823
on December 31, 1997, to $8,364,571 on December 31, 1998 due to the Company's
1998 net income, and conversion of redeemable common stock to stockholders
equity. The Company's liquidity and capital resources have improved
substantially, and the Company believes that its' future financial requirements
can be met with funds generated from the operating activities and from the
Company's operating line of credit.

UPDATE ON YEAR 2000 STATUS

Nortech Systems, Inc recognizes the dangers of the "Year 2000 Problem". To
ensure a minimum negative impact on business operations Nortech has established
a Y2K Initiative. The Y2k Initiative addresses the effects on the company, our
vendors and our customers. We have completed the inventory and evaluation phase,
and are nearing completion of the implementation phase. Testing is nearly
completed on most systems. Monitoring and evaluation will continue throughout
1999 and into 2000 until we are sure all issues have been properly resolved.

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Upward and downward changes in market interest rates and their impact on the
reported interest expense of the Company's variable rate borrowings will effect
the Company's future earnings.  However, a ten-percent change in the 1998
effective average interest rate on variable earnings should not have a material
effect on the Company's earnings for 1999.


                                       14

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report of :
    Larson, Allen, Weishair & Co., LLP                                       16

Consolidated Financial Statements:
    Consolidated Balance Sheets at December 31, 1998 and 1997                17

    Consolidated Statements of Income for the years ended
    December 31, 1998, 1997 and 1996                                          18

    Consolidated Statements of Stockholders' Equity for the years
    ended December 31, 1998, 1997 and 1996                                    19

    Consolidated Statements of Cash Flows for the years ended
    December 31, 1998, 1997 and 1996                                       20-21


    Notes to Consolidated Financial Statements                             22-34
</TABLE>



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                                       15

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
Nortech Systems Incorporated and Subsidiary
Bemidji, Minnesota


We have audited the accompanying consolidated balance sheets of Nortech Systems
Incorporated and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.



                                            LARSON, ALLEN, WEISHAIR & CO., LLP


St. Cloud, Minnesota
February 12, 1999


                                       16

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                    1998                 1997
                                                                                ------------         ------------
                                       ASSETS
 <S>                                                                            <C>                  <C>
 CURRENT ASSETS
  Cash and Cash Equivalents (Including Interest Bearing Cash of
   $203,886 and $463,248 at December 31, 1998 and 1997)                         $    415,446         $    714,169
  Accounts Receivable, Less Allowance for Uncollectible                         
   Accounts (1998 - $151,627; 1997 - $84,128)                                      5,381,344            5,008,689
  Inventories                                                                      9,383,875            9,242,467
  Prepaid Expenses and Other                                                         325,822              226,387
  Deferred Tax Asset                                                                 695,000              671,000
                                                                                ------------         ------------
           Total Current Assets                                                 $ 16,201,487         $ 15,862,712
                                                                                ------------         ------------
 PROPERTY AND EQUIPMENT (At Cost)
  Land                                                                               141,300              141,300
  Building and Leasehold Improvements                                              3,778,573            3,765,161
  Manufacturing Equipment                                                          4,577,838            4,439,401
  Office and Other Equipment                                                       3,052,834            2,805,557
                                                                                ------------         ------------
           Total                                                                $ 11,550,545         $ 11,151,419
  Accumulated Depreciation                                                        (4,785,474)          (3,851,810)
                                                                                ------------         ------------
           Total Property and Equipment (At Depreciated Cost)                   $  6,765,071         $  7,299,609
                                                                                ------------         ------------
OTHER ASSETS
  Goodwill and Other Intangible Assets                                          $  1,229,754         $    905,359
  Deferred Tax Asset                                                                 475,000              570,000
  Other Assets                                                                        57,250               57,250
                                                                                ------------         ------------
           Total Other Assets                                                   $  1,762,004         $  1,532,609
                                                                                ------------         ------------
           Total Assets                                                         $ 24,728,562         $ 24,694,930
                                                                                ------------         ------------
                                                                                ------------         ------------
                        LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Line of Credit                                                                $         --         $    500,000
  Current Maturities of Long-Term Debt                                               810,934            1,038,397
  Accounts Payable                                                                 3,232,593            3,013,131
  Accrued Payroll                                                                    682,539            1,082,293
  Other Liabilities                                                                  491,388              558,666
                                                                                ------------         ------------
           Total Current Liabilities                                            $  5,217,454         $  6,192,487
                                                                                ------------         ------------
LONG-TERM DEBT
  Notes Payable (Net of Current Maturities Shown Above)                         $ 11,146,537         $ 10,388,620
                                                                                ------------         ------------
REDEEMABLE COMMON STOCK
  $.01 Par Value; 0 and 50,000 Shares Issued and
   Outstanding at December 31, 1998 and 1997
   Redeemable at $6 Per Share                                                   $         --         $    300,000
                                                                                ------------         ------------
STOCKHOLDERS' EQUITY
  Preferred Stock, $1 Par Value; 1,000,000 Shares
   Authorized; 250,000 Shares Issued and Outstanding                            $    250,000         $    250,000
  Common Stock $.01 Par Value; 9,000,000 Shares
   Authorized; 2,351,377 and 2,312,362 Shares Issued and
   Outstanding, Net of Redeemable Shares Reported Above,
   at December 31, 1998 and 1997, Respectively                                        23,514               23,124
  Additional Paid-In Capital                                                      12,131,045           11,910,554
  Accumulated Deficit                                                             (4,039,988)          (4,369,855)
                                                                                ------------         ------------
           Total Stockholders' Equity                                           $  8,364,571         $  7,813,823
                                                                                ------------         ------------
           Total Liabilities and Stockholders' Equity                           $ 24,728,562         $ 24,694,930
                                                                                ------------         ------------
                                                                                ------------         ------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       17

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                       1998              1997                1996
                                                   ------------      ------------        ------------
<S>                                                <C>               <C>                 <C>
SALES                                              $ 40,355,867      $ 36,433,918        $ 26,182,821

COST OF SALES                                       (33,758,148)      (29,638,866)        (21,555,459)
                                                   ------------      ------------        ------------

GROSS PROFIT                                       $  6,597,719      $  6,795,052        $  4,627,362

SELLING, GENERAL AND
 ADMINISTRATIVE EXPENSES                             (4,842,867)       (4,542,498)         (3,306,311)


RESEARCH AND DEVELOPMENT COSTS                         (337,093)         (258,712)           (273,697)


INTEREST INCOME                                          24,832            37,423              33,668

MISCELLANEOUS INCOME                                     16,053            16,315              32,064

INTEREST EXPENSE                                     (1,004,777)       (1,010,909)           (475,057)
                                                   ------------      ------------        ------------

INCOME BEFORE INCOME TAX PROVISION                 $    453,867      $  1,036,671        $    638,029

INCOME TAX EXPENSE                                     (124,000)         (359,000)           (192,000)
                                                   ------------      ------------        ------------

NET INCOME                                         $    329,867      $    677,671        $    446,029
                                                   ------------      ------------        ------------
                                                   ------------      ------------        ------------

BASIC EARNINGS PER SHARE
  OF COMMON STOCK                                  $       0.14      $       0.28        $       0.19
                                                   ------------      ------------        ------------
                                                   ------------      ------------        ------------
AVERAGE NUMBER OF COMMON
 SHARES OUTSTANDING USED FOR BASIC
 EARNINGS PER SHARE                                   2,347,391         2,362,362           2,384,512
                                                   ------------      ------------        ------------
                                                   ------------      ------------        ------------
DILUTED EARNINGS PER SHARE
  OF COMMON STOCK                                  $       0.14      $       0.28        $       0.18
                                                   ------------      ------------        ------------
                                                   ------------      ------------        ------------
AVERAGE NUMBER OF COMMON
 SHARES OUTSTANDING PLUS DILUTIVE
 COMMON STOCK OPTIONS                                 2,372,448         2,387,829           2,429,071
                                                   ------------      ------------        ------------
                                                   ------------      ------------        ------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       18

<PAGE>

                 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                        Additional                                 Total
                                  Preferred           Common             Paid-In            Accumulated         Stockholders'
                                     Stock             Stock             Capital              Deficit              Equity
                                ---------------------------------------------------------------------------------------------
<S>                              <C>                 <C>                <C>                  <C>                 <C>
BALANCE
 DECEMBER 31, 1995               $   250,000         $    22,009        $11,242,672          $(5,478,515)        $ 6,036,166

    1996 Net Income                       --                  --                 --              446,029             446,029

    Issuance of Stock -
     Other                                --               1,115            667,882                   --             668,997
                                ---------------------------------------------------------------------------------------------

BALANCE
 DECEMBER 31, 1996               $   250,000         $    23,124        $11,910,554          $(5,032,486)        $ 7,151,192

    1997 Net Income
                                          --                  --                 --              677,671             677,671

    Dividends Paid                        --                  --                 --              (15,040)            (15,040)
                                ---------------------------------------------------------------------------------------------

BALANCE
 DECEMBER 31, 1997               $   250,000         $    23,124        $11,910,554          $(4,369,855)        $ 7,813,823

1998 Net Income                           --                  --                 --              329,867             329,867

    Issuance of Stock -
     Stock Options and Other              --                  60             22,821                   --              22,881

    Conversion of
     Redeemable Stock                     --                 330            197,670                   --             198,000
                                ---------------------------------------------------------------------------------------------

BALANCE
 DECEMBER 31, 1998               $   250,000         $    23,514        $12,131,045          $(4,039,988)        $ 8,364,571
                                ---------------------------------------------------------------------------------------------
                                ---------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       19

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                             1998                 1997                1996
                                                        ------------         ------------        ------------
<S>                                                     <C>                  <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Cash Received from Customers                          $ 39,999,265         $ 35,137,009        $ 24,375,341
  Cash Paid to Suppliers and Employees                   (38,318,916)         (33,970,078)        (23,904,901)
  Interest Expense Paid                                   (1,031,625)            (985,519)           (403,003)
  Interest Income Received                                    24,832               37,423              33,668

  Income Taxes Paid                                         (189,843)             (56,400)           (205,900)
                                                        ------------         ------------        ------------
      Net Cash Provided (Used) by
       Operating Activities                             $    483,713         $    162,435        $   (104,795)
                                                        ------------         ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisition of Businesses                             $    (24,839)        $         --        $ (1,559,492)
  Proceeds from Sale of Assets                                 2,500              300,000                  --
  Acquisition of Property and Equipment                     (458,551)            (753,533)           (718,835)

  Costs to Acquire Product Technology                       (332,000)                  --                  --
                                                        ------------         ------------        ------------
      Net Cash Used by
       Investing Activities                             $   (812,890)        $   (453,533)       $ (2,278,327)
                                                        ------------         ------------        ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net Proceeds Under Line of Credit                     $         --         $         --        $    500,000
  Payments on Long-Term Debt                              (1,349,829)          (2,720,271)           (431,453)
  Proceeds from Long-Term Debt                             1,380,283            2,505,451           3,156,115
  Proceeds from Sale of Stock                                     --                   --                 597
  Purchase of Redeemable Stock                                    --                   --            (531,600)
  Payment of Dividends                                            --              (15,040)                 --
                                                        ------------         ------------        ------------
      Net Cash Provided (Used) by
       Financing Activities                             $     30,454         $   (229,860)       $  2,693,659
                                                        ------------         ------------        ------------

NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                   $   (298,723)        $   (520,958)       $    310,537

Cash and Cash Equivalents - Beginning                        714,169            1,235,127             924,590
                                                        ------------         ------------        ------------
CASH AND CASH EQUIVALENTS - ENDING                      $    415,446         $    714,169        $  1,235,127
                                                        ------------         ------------        ------------
                                                        ------------         ------------        ------------
</TABLE>

NON-CASH TRANSACTIONS

During 1996 the Company issued a long-term note payable in the amount of 
$4,865,390 as part of the purchase price for certain assets of another 
corporation.

During 1998 the Company recorded a reduction of $300,000 in a long-term note 
pursuant to a 1996 asset purchase agreement. In addition, accounts payable 
includes $150,000 of costs to acquire product technology. Also goodwill was 
reduced by $102,000 as a result of an adjustment to the purchase price of an 
acquired business.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       20

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                1998               1997              1996
                                                            -----------        -----------       -----------
  <S>                                                       <C>                <C>               <C>
  RECONCILIATION OF NET INCOME TO NET
   CASH PROVIDED (USED) BY OPERATING ACTIVITIES
   Net Income                                                $   329,867        $   677,671       $   446,029
   Adjustments to Reconcile Net Income to
   Net Cash Provided (Used) by Operating Activities:
    Depreciation and Amortization                             1,073,534          1,145,032           693,456
    Deferred Taxes                                               71,000            209,000           110,000
    Compensation from Stock Grants                               22,880                 --                --
    Gain on Sale of Assets                                       (2,500)              (299)               --
    Changes in Current Operating Items:
       Accounts Receivable                                     (372,655)        (1,312,926)       (1,839,544)
       Inventory                                               (141,408)        (2,512,967)         (482,103)
       Prepaid Assets                                           (99,435)          (137,566)           42,880
       Accounts Payable                                          69,462          1,416,805           541,446
       Accrued Payroll                                         (399,754)           408,990           266,287
       Accrued Liabilities                                      (67,278)           268,695           116,754
                                                            -----------        -----------       -----------
  Net Cash Provided (Used) by
   Operating Activities                                     $   483,713        $   162,435       $  (104,795)
                                                            -----------        -----------       -----------
                                                            -----------        -----------       -----------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       21

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           BUSINESS DESCRIPTION 
           Nortech Systems Incorporated (the "Company") is a Minnesota 
           corporation with headquarters in Wayzata, Minnesota, a suburb of 
           Minneapolis, Minnesota. The Company has manufacturing facilities 
           and engineering support located in Bemidji, Fairmont, Plymouth, 
           Merrifield and Aitkin, Minnesota and Augusta, Wisconsin.

           The Company manufactures wire harnesses, cables and electromechanical
           assemblies, printed circuit boards and higher-level assemblies for a
           wide range of commercial and defense industries. The Company also
           manufactures and markets high performance display monitors for
           medical imaging, radar document imaging and industrial applications.
           The Company provides a full "turn-key" contract manufacturing service
           to its customers. All products are built to the customer's design
           specifications.

           Nortech Medical Services, Inc., its wholly owned subsidiary, provides
           service bureau and office management services to physicians and
           clinics throughout Minnesota.

           USE OF ESTIMATES
           The preparation of financial statements in conformity with generally
           accepted accounting principles requires management 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 the financial statements. Estimates also affect the
           reported amounts of revenue and expense during the reporting period.
           Actual results could differ from those estimates.

           PRINCIPLES OF CONSOLIDATION
           The consolidated financial statements include the accounts of the
           Company and its wholly owned subsidiary. All significant intercompany
           accounts and transactions have been eliminated.

           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).

           PROPERTY AND EQUIPMENT
           The Company capitalizes the cost of purchased software, equipment,
           and leasehold improvements. Expenditures for maintenance and repairs
           and minor renewals and betterments which do not improve or extend the
           life of the respective assets are expensed. The assets and related
           depreciation accounts are adjusted for property retirements and
           disposals with the resulting gain or loss included in results of
           operations. Fully depreciated assets remain in the accounts until
           retired from service.


                                       22

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

           DEPRECIATION
           Property and equipment are depreciated by the straight-line and
           accelerated methods of depreciation. Accelerated depreciation did not
           materially exceed straight-line depreciation for the years ended
           December 31, 1998, 1997, and 1996. Depreciation was calculated over
           estimated useful lives as follows:

<TABLE>
                <S>                                                     <C>
                Leasehold Improvements                                      7 Years     
                Buildings and Improvements                                 31 Years     
                Manufacturing Equipment                                 5 - 7 Years     
                Office Equipment and Purchased Software                 5 - 7 Years     
</TABLE>

           REVENUE RECOGNITION
           Sales are recorded by the Company when products are shipped to the
           customer.

           GOODWILL
           Goodwill representing the excess of the purchase price over the fair
           value of the net assets of the acquired entities (see Note 3), is
           being amortized on a straight-line basis over the period of expected
           benefit of fifteen years. Total amortization of goodwill recorded for
           fiscal years 1998, 1997 and 1996 was $67,293, $67,954, and $54,614,
           respectively. The carrying value of goodwill is reviewed periodically
           based on the undiscounted cash flows of the entity acquired over the
           remaining amortization period. Should this review indicate that
           goodwill will not be recoverable, the Company's carrying value of the
           goodwill will be reduced by the estimated shortfall of undiscounted
           cash flows.

           INTANGIBLE ASSETS
           Costs related to the conceptual formulation and design of products
           and processes are expensed as research and development. Costs
           incurred to acquire product and process technology are capitalized.
           Capitalized costs are amortized on a straight-line basis over the
           estimated useful life.

           The Company acquired intangible assets including patent rights,
           licenses, design rights and purchased product technology in the
           amount of $482,000 during 1998. No related amortization expense was
           recognized at December 31, 1998, as the acquired technology was not
           yet in production. The remaining intangible assets, including
           purchased technology and certification costs, are being amortized
           over a period of 3 to 7 years. The related amortization expense for
           fiscal years 1998, 1997 and 1996 was $13,152, $52,151, and $13,152
           respectively.

           CASH AND CASH EQUIVALENTS
           The Company considers its investments with an original maturity of
           three months or less to be cash equivalents. At December 31, 1998 and
           1997, the Company had invested excess funds of $0 and $116,219,
           respectively, in repurchase agreements collateralized by government
           backed securities. Due to the short-term nature of the agreements,
           the Company does not take possession of the securities, which are
           instead held at the Company's principal bank from which it purchases
           the securities.

           ADVERTISING
           Advertising costs are charged to operations as incurred. Total
           amounts charged to expense were $119,889, $124,997, and $65,234 for
           the years ended December 31, 1998, 1997, and 1996, respectively.


                                       23

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

           INCOME TAXES
           The Company has adopted FASB Statement No. 109, Accounting for Income
           Taxes, which requires an asset and liability approach to financial
           accounting and reporting for income taxes. Deferred income tax assets
           and liabilities are computed annually for differences between the
           financial statement and tax bases 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. The provision for
           income taxes is the tax payable or refundable for the period plus or
           minus the change during the period in deferred tax assets and
           liabilities.

           PREFERRED STOCK
           Preferred stock issued is noncumulative and nonconvertible.

           FAIR VALUE OF FINANCIAL INSTRUMENTS
           The carrying amounts for all financial instruments approximate fair
           values. The carrying amounts for cash, receivables, accounts payable
           and accrued liabilities approximate fair value because of the short
           maturity of these instruments. The carrying value of long-term debt
           materially approximates fair value based on current rates at which
           the Company could borrow funds with similar remaining maturities.

           RECLASSIFICATIONS
           Certain reclassifications have been made to the 1997 financial
           statements to conform with the 1998 presentation. Such
           reclassifications had no impact on net income or equity.

           DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
           The Company has adopted SFAS No. 131, Disclosures about Segments of
           an Enterprise and Related Information, effective January 1, 1998.
           SFAS No. 131 establishes disclosure requirements for reportable
           segments based on how a company is managed rather than on the
           industry, geographic and major customer approach of SFAS No. 14. 

NOTE 2     INVENTORIES

           Inventories consist of the following:

<TABLE>
<CAPTION>
                                                         1998          1997 
                                                      ----------    ----------
           <S>                                        <C>           <C>
           Raw Materials                              $6,259,890    $5,961,221
           Work in Process                             1,386,502     1,659,244
           Finished Goods                              1,737,483     1,622,002
                                                      ----------    ----------
           Total                                      $9,383,875    $9,242,467
                                                      ----------    ----------
                                                      ----------    ----------
</TABLE>


                                      24

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1     ACQUISITIONS

           In 1996 the Company acquired the business described below, which has
           been accounted for by the purchase method of accounting. The results
           of the operations of the acquired Company is included in the
           Company's consolidated statement of income from the dates of the
           acquisition.

           ZERCOM CORPORATION
           On November 4, 1996, the Company acquired substantially all of the
           assets of Zercom Corporation (Zercom). Zercom is a contract
           manufacturer of electronic sub-assemblies and components. Zercom also
           manufactures a line of proprietary products for sport fishermen.

           The purchase price was $6,424,882, consisting of a cash payment of
           $1,500,000, issuance of promissory notes totaling $4,865,390, and
           acquisition costs of $59,492.

           The excess of the purchase price over the estimated fair value of the
           net assets acquired is being amortized on a straight-line basis over
           15 years.

           A summary of the purchase price allocation for the 1996 acquisition
           of Zercom is as follows:

<TABLE>
           <S>                                                   <C>
           Net Working Capital Items                             $2,392,185   
           Property, Plant and Equipment                          3,930,872   
           Other Assets                                              42,333   
           Excess of Cost Over Fair Value of Net                             
            Assets of Purchased Business                             59,492   
                                                                 ----------
           Total                                                 $6,424,882 
                                                                 ----------
                                                                 ----------
</TABLE>

           The following proforma unaudited consolidated statements of income
           for the Company is presented as though the acquisition of Zercom
           Corporation had occurred on January 1, 1996.

<TABLE>
<CAPTION>
            (Unaudited)                                       1996    
           ------------                                       ----
           <S>                                            <C>
           Revenues                                       $39,702,215   
           Net Income                                     $   230,045   
           Net Income Per Share of Common Stock           $      0.10   
</TABLE>

           The proforma financial information is presented for information
           purposes only and is not necessarily indicative of the operating
           results that would have occurred had the acquisitions been
           consummated as of the above dates, nor are they necessarily
           indicative of future operating results.


                                       25

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 2     LONG-TERM DEBT

<TABLE>
<CAPTION>
                     Description                                1998            1997    
   -------------------------------------------------------- ------------    ------------
   <S>                                                      <C>             <C>         
   Notes Payable - Norwest Bank North Country, N.A.,
    Revolving Lines of Credit, Borrowing Limit of
    $5,500,000; Promissory Note of $1,500,000;
    Interest at LIBOR Index Plus 2% and Highest
    Prime Rate in "Money Rate" Table in Wall Street
    Journal; Due January 2000; Secured by Accounts
    Receivable, Equipment, Inventory, General
    Intangibles and Personal Guarantee and Stock
    Pledged By a Shareholder                                $  6,675,000    $  5,069,717

   Notes Payable - Norwest Bank North Country, N.A.,
    Interest Ranging From 7.5% to 8.2%, Monthly
    Installment Payments Through January 2001;
    Secured by Accounts Receivable, Equipment,
    Inventory, General Intangibles and Real Estate             1,202,266       1,480,579

   Note Payable - Communications Systems, Inc,
    Interest at Prime as Established by First Bank
    Minneapolis, Semi-Annual Principal Payments
    of $200,000;  Due November 2001; Secured by
    Underlying Assets Purchased                                3,765,390       4,465,390

   Notes Payable - Other, Interest Ranging From
    4.9% to 9%; Monthly Installment Payments
    Through March 2009; Secured by Land, Building,
    Leasehold Improvements, Equipment and Vehicle                                       
                                                                 314,815         411,331
                                                            ------------    ------------

   Total Long-Term Debt                                     $ 11,957,471   $  11,427,017
   Current Maturities                                            810,934       1,038,397
                                                            ------------    ------------
   Long-Term Debt - Net of
    Current Maturities                                      $ 11,146,537   $  10,388,620
                                                            ------------    ------------
                                                            ------------    ------------
</TABLE>


                                       26

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 4     LONG-TERM DEBT (CONTINUED)

           Maturity requirements by year on long-term debt are as follows:
<TABLE>
<CAPTION>
    Years Ending December 31,                           Amounts   
    ------------------------                          ----------
              <S>                                     <C>
              1999                                    $  810,934    
              2000                                     7,700,705   
              2001                                     3,407,399   
              2002                                        23,175   
              2003                                        15,258   
                                                                     
</TABLE>

           The maximum and average amounts outstanding on the Company's
           long-term lines of credit were $6,675,000 and $6,317,527 during 1998,
           and $4,389,281 and $3,804,534 during 1997, respectively.

NOTE 5     LEASE OBLIGATION

           The Company has entered into various operating leases for production
           and office equipment, office space and buildings. The Company has the
           option to purchase equipment upon lease expiration at fair market
           value. The Company also has the option to purchase a building under
           an operating lease which, however, is subject to cancellation fees
           until December 1999. The monthly rent expense on another building
           under operating lease is subject to an annual adjustment for the
           increase in the Consumer Price Index.

           Rent expense for the years ended December 31, 1998, 1997, and 1996,
           was $675,200, $548,943, and $451,659, respectively. The future
           minimum lease payments are as follows:


<TABLE>
<CAPTION>
    Years Ending December 31,                           Amounts   
    ------------------------                          ----------
              <S>                                     <C>

              1999                                    $  467,905  
              2000                                       325,283  
              2001                                       201,483  
              2002                                       134,317  
              2003                                        51,975  
                                                      ----------
              Total                                   $1,180,963  
                                                      ----------
                                                      ----------
</TABLE>


                                       27

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 6     INCOME TAXES

The provision for income taxes for each of the three years in the
period ended December 31, 1998, consists of the following:

<TABLE>
<CAPTION>
                                          1998          1997        1996 
                                        --------      --------    --------
<S>                                     <C>           <C>         <C>
Current Taxes - Federal                 $  8,000      $ 31,000    $ 10,000 
Current Taxes - State                     45,000       119,000      72,000 
Deferred Taxes                            71,000       209,000     110,000 
                                        --------      --------    --------
    Total Expense                       $124,000      $359,000    $192,000 
                                        --------      --------    --------
                                        --------      --------    --------
</TABLE>

Net deferred tax assets at December 31, 1998 and 1997, consist of the 
following:

<TABLE>
<CAPTION>
                                                          1998                 1997        
                                                       ----------           ----------
<S>                                                    <C>                  <C>
Net Operating Loss (NOL) Carryforwards                 $  883,000           $1,100,000        
Tax Credit Carryforwards                                  305,000              240,000        
Allowance for Doubtful Accounts                            60,000               35,000        
Inventory Obsolescence Reserve                            210,000              125,000        
Accrued Vacation                                          140,000              135,000        
Health Insurance Reserve                                   65,000               55,000        
Property and Equipment                                   (328,000)             259,000        
Valuation Allowance                                      (165,000)            (190,000)       
                                                       ----------           ----------
    Total                                              $1,170,000           $1,241,000        
                                                       ----------           ----------
                                                       ----------           ----------
</TABLE>

The statutory rate reconciliation for each of the three years in the
period ended December 31, 1998 is as follows:


<TABLE>
<CAPTION>
                                                 1998             1997            1996  
                                              ---------        ---------       ---------
<S>                                           <C>              <C>             <C>
Statutory Tax Provision                       $ 154,000        $ 353,000       $ 217,000    
State Income Taxes                               36,000           72,000          78,000    
Additional Credit Carryforwards                 (55,000)              --              --    
Reduction in Deferred Tax Valuation                                                         
 Allowance (Net of Expired Tax                                                              
 Credit Carryforwards)                          (25,000)         (50,000)       (100,000)   
Other                                            14,000          (16,000)         (3,000)  
                                              ----------       ---------       ---------
    Income Tax Expense                        $ 124,000        $ 359,000       $ 192,000    
                                              ----------       ---------       ---------
                                              ----------       ---------       ---------
</TABLE>


                                       28

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 6     INCOME TAXES (CONTINUED)

           The Company has available for Federal income tax purposes, operating
           loss carryforwards, unused investment and other tax credits, and
           unused research and development credits which may provide future tax
           benefits, expiring as follows:

<TABLE>
<CAPTION>
                                                                      Investment and              Research and
                                            Operating Loss           Other Tax Credit             Development Tax
                 Year of Expiration          Carryforward              Carryforwards           Credit Carryforward
                 ------------------         --------------           ----------------          -------------------
                    <S>                      <C>                        <C>                        <C>
                        1999                 $       --                 $    4,000                 $       --    
                        2000                  1,221,800                     50,900                     97,600  
                        2001                    767,300                     40,000                         --    
                        2002                    253,200                         --                         --    
                        2003                    109,700                         --                         --    
                    Later Years                      --                     18,500                         --    
                                             ----------                 ----------                 ----------
                       Totals                $2,352,000                 $  113,400                 $   97,600  
                                             ----------                 ----------                 ----------
                                             ----------                 ----------                 ----------
</TABLE>

           The Company utilized operating loss carryforwards of $506,000
           $1,341,000 and $642,000 for the years ended December 31, 1998, 1997,
           and 1996, respectively, to offset federal taxable income. 

           At December 31, 1998, the Company has Alternative Minimum Tax credit
           carryforwards of approximately $94,000. These credits do not expire.

NOTE 7     EMPLOYEE STOCK OPTIONS AND AWARD PLANS

           In 1992, the Company approved the adoption of a fixed stock based
           compensation plan. The purpose of the Plan is to promote the
           interests of the Company and its shareholders by providing officers,
           directors and other key employees with additional incentive and the
           opportunity, through stock ownership, to increase their proprietary
           interest in the Company and their personal interest in its continued
           success.


                                       29

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 7     EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED)

           The Company has adopted the disclosure-only provisions of Statement
           of Financial Accounting Standards No. 123, "Accounting for
           Stock-Based Compensation." Accordingly, no compensation cost has been
           recognized for the stock option plans. Had compensation cost for the
           Company's stock option plan been determined based on the fair market
           value at the grant date consistent with the provisions of SFAS No.
           123, the Company's net earnings and earnings per share would have
           been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                              1998           1997           1996   
                                                            --------       --------       --------
           <S>                                              <C>            <C>            <C>
           Net Earnings - as Reported                       $329,867       $677,671       $446,029   
           Net Earnings - Pro Forma                         $259,366       $612,402       $413,236   
                                                                                                     
           Basic Earnings Per Share - as Reported           $   0.14       $   0.28       $   0.19   
           Basic Earnings Per Share - Pro Forma             $   0.11       $   0.25       $   0.17   
                                                                                                     
           Diluted Earnings Per Share - as Reported            $0.14          $0.28          $0.18   
           Diluted Earnings Per Share - Pro Forma              $0.11          $0.25          $0.17   
</TABLE>

           The assumption regarding stock options issued is that compensation
           cost is recognized over the graded vesting period of the options,
           which ranges from zero to five years. Options granted before 1995
           were not considered in the calculation. No options were granted
           during the year ended December 31, 1998 or 1996.


           The fair value of each option grant issued is estimated on the date
           of grant using the Black-Scholes option-pricing model with the
           following weighted-average assumptions:

<TABLE>
                                                        1997     
                                                        ----
           <S>                                          <C>
           Expected Lives (Years)                        10     
           Dividend Yield                               0.0%  
           Expected Volatility                           45%    
           Risk-Free Interest Rate                      6.25% 
</TABLE>
           
           The total number of shares of common stock that may be granted under
           the plan is 200,000. The plan provides that shares granted come from
           the Company's authorized but unissued common stock. The price of the
           options granted to the plan will not be less that 100% of the fair
           market value of the 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.


                                       30

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


NOTE 7     EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED)

           Information regarding the Company's common stock options is as
           follows:

<TABLE>
<CAPTION>
                                                    1998                          1997                          1996      
                                           ----------------------       -------------------------      -----------------------
                                                        Weighted-                       Weighted-                    Weighted-   
                                                         Average                         Average                      Average    
                                                        Exercise                        Exercise                     Exercise    
                                           Shares         Price         Shares           Price          Shares         Price     
                                           -------       -------        -------       -----------      -------       ---------
           <S>                             <C>          <C>             <C>           <C>              <C>           <C>     
           Options Outstanding,                                                                                                  
            Beginning of Year              252,500      $   4.61        137,500       $    4.29        137,500       $  4.29     
           Options Exercised                 1,000          5.25             --              --             --            --     
           Options Forfeited                 4,000          5.25             --              --             --            --     
           Options Granted                      --            --        115,000           5.00              --            --
           Options Outstanding,                                                                                                  
            End of Year                    247,500      $   4.60        252,500       $    4.61        137,500       $  4.29     
                                           -------      --------        -------       ---------        -------       -------
                                           -------      --------        -------       ---------        -------       -------
           Option Price Range                                                                                                    
            of Exercised Shares            $  5.25                      $    --                        $    --                   
           Weighted Average                                                                                                      
            Fair Value of Options                                                                                                
           Granted During the                                                                                                    
            Year                           $    --                      $  3.31                        $    --                   
</TABLE>

           The following table summarizes information about fixed-price stock
           options outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                    Outstanding              Exercisable            Remaining
                Exercise Prices       12/31/98                12/31/98           Contractual Life
                ---------------     -----------              -----------        ----------------
                     <S>               <C>                      <C>                    <C>
                     1.625              15,000                  15,000                 4 Years  
                     1.75               17,500                  17,500                 3 Years  
                     3.625              10,000                  10,000                 5 Years  
                     5.00              115,000                  46,000                 8 Years  
                     5.25               95,000                  57,000                 7 Years  
</TABLE>

           During 1993, the Company adopted a gain-sharing plan. The purpose of
           the Plan is to provide a bonus for increased output, improved quality
           and productivity and reduced costs. The Company has authorized 50,000
           shares to be available under this Plan.

           In accordance with the terms of the Plan, employees can acquire newly
           issued shares of common stock for 90% of the current market value.
           5,218 shares have been issued under this Plan through December 31,
           1998.


                                       31

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 8     SEGMENT REPORTING INFORMATION

           Nortech Systems, Inc. manufactures and sells a variety of products
           used in the computer, medical, government and defense industries,
           primarily for the commercial industrial market. The Company's
           principal businesses are based upon the nature of the manufacturing
           operations of the respective location.

           The Company has three principal businesses:

            1.             CONTRACT MANUFACTURING - Includes the manufacture
                  of wire harnesses, cable and electromechanical assemblies, 
                  printed circuit board assemblies, and higher-level assemblies,
                  all of which are manufactured under contract specifications. 
                  These products are sold primarily to the commercial and 
                  defense industries. 

            2.             DISPLAY PRODUCTS - Includes the design, 
                  manufacture, and marketing of high-performance display 
                  monitors. The products are sold primarily to the medical, 
                  industrial, and service industries. 

            3.             MEDICAL MANAGEMENT - Provides service bureau and
                  office management services to physicians and clinics.

           Each of these is a business segment, with its respective financial
           performance detailed in this report.

<TABLE>
<CAPTION>
           BUSINESS SEGMENT NET REVENUES                       1998                   1997                 1996
           -----------------------------                   -----------             -----------        ------------
           <S>                                             <C>                     <C>                <C>
           Contract Manufacturing                          $35,356,813             $32,907,137        $ 23,600,741
           Display Products                                  4,577,625               3,085,129           2,094,395
           Medical Management                                  421,429                 441,652             487,685
                  Total                                    $40,355,867             $36,433,918         $26,182,821
                                                           -----------             -----------        ------------
                                                           -----------             -----------        ------------

           BUSINESS SEGMENT PROFIT (LOSS)                      1998                     1997                 1996
                                                            -----------             -----------        ------------
           Contract Manufacturing                           $1,009,898              $ 1,221,901        $   964,346
           Display Products                                   (540,339)                (433,380)          (441,962)
           Medical Management                                 (139,692)                (110,850)           (76,355)
                  Total                                       $329,867              $   677,671            446,029
                                                            -----------             -----------        ------------
                                                            -----------             -----------        ------------

           BUSINESS SEGMENT ASSETS                             1998                     1997               1996
                                                            -----------             -----------        ------------
           Contract Manufacturing                           $20,737,352             $21,016,701        $ 19,238,772
           Display Products                                   3,846,402               3,408,630           2,680,254
           Medical Management                                   144,808                 269,599             233,603
                  Total                                     $24,728,562             $24,694,930        $ 22,152,629
                                                            -----------             -----------        ------------
                                                            -----------             -----------        ------------
</TABLE>


                                       32

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 8        BUSINESS SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
              BUSINESS SEGMENT PROPERTY, PLANT AND                                                                    
               EQUIPMENT AND INTANGIBLE ASSETS                             1998              1997           1996    
                                                                        -----------       -----------    ------------
              <S>                                                       <C>               <C>            <C>
              Depreciation and Amortization:                                                                          
              Contract Manufacturing                                    $   874,360       $   914,264    $   466,668  
              Display Products                                              186,613           182,929        150,454  
              Medical Management                                             12,561            47,839         76,334  
                Total                                                   $ 1,073,534        $1,145,032    $   693,456  
                                                                        -----------       -----------    ------------
                                                                        -----------       -----------    ------------
              Additions:                                                                                              
              Contract Manufacturing                                    $   428,396       $   725,777    $   670,383  
              Display Products                                              512,155            13,707         87,472  
              Medical Management                                                 --            14,049         20,472  
                Total                                                   $   940,551       $   753,533    $   778,327  
                                                                        -----------       -----------    ------------
                                                                        -----------       -----------    ------------

              GEOGRAPHIC AREA NET TRADE REVENUES                           1998  
                                                                        -----------       
              United States                                             $38,403,780                                   
              Foreign                                                     1,952,087                                   
                Total                                                   $40,355,867                                   
                                                                        -----------       -----------    ------------
                                                                        -----------       -----------    ------------
</TABLE>

NOTE 9     MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

           The Company sells its products to companies in the computer, medical,
           governmental and various other industries. Historically, the Company
           has not experienced significant losses related to receivables from
           customers in any particular industry or geographic area.

           The Company maintains its excess cash balances in checking and money
           market accounts at three financial institutions. These balances
           exceed the federally insured limit by $166,225 and $540,000 at
           December 31, 1998 and 1997, respectively. The Company has not
           experienced any losses in any of the short-term investment
           instruments it has used for excess cash balances.

           One customer accounted for approximately 12.7% of sales for the year
           ended December 31, 1997.

           Two customers accounted for approximately 11.3% and 17.5% of sales,
           respectively, for the year ended December 31, 1996.

NOTE 10    PREFERRED STOCK TRANSACTIONS

           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. Preferred stock dividends of $0,
           $15,040, and $0 were paid during the years ended December 31, 1998,
           1997, and 1996, respectively.


                                       33

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE 12   SUPPLEMENTARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                             Quarter Ending    Quarter Ending    Quarter Ending    Quarter Ending      Total      
                                                3/31/98           6/30/98           9/30/98           12/31/98          1998      
                                             --------------    --------------    --------------    --------------   -------------
               <S>                           <C>               <C>                 <C>              <C>             <C>
               NET SALES                     $ 10,491,792      $  9,582,777        $ 9,625,049      $ 10,656,249    $  40,355,867
                                                                                                                                
               GROSS PROFIT                     1,750,416         1,778,825          1,735,116         1,333,362        6,597,719
                                                                                                                                
               NET INCOME                         246,430           187,840            126,719          (231,122)         329,867
                                                                                                                                
               BASIC EARNINGS PER SHARE                                                                                         
                OF COMMON STOCK                      0.11              0.08               0.05             (0.10)            0.14
</TABLE>


<TABLE>
<CAPTION>
                                             Quarter Ending    Quarter Ending    Quarter Ending    Quarter Ending      Total     
                                                3/31/97           6/30/97           9/30/97           12/31/97          1997     
                                             --------------    --------------    --------------    --------------   -------------
               <S>                           <C>               <C>                 <C>              <C>             <C>

               NET SALES                     $  8,564,846      $   9,039,176       $ 8,693,449      $10,136,447     $36,433,918 
                                                                                                                                
               GROSS PROFIT                     1,520,489          1,655,316         1,564,735        2,054,512       6,795,052 
                                                                                                                                
               NET INCOME                         132,755            167,255           140,555          237,106         677,671 
                                                                                                                                
               BASIC EARNINGS PER SHARE                                                                                         
                OF COMMON STOCK                      0.06               0.07              0.06             0.09            0.28 
</TABLE>
          
           In the 4th quarter of 1998, the Company had an inventory write down
           of approximately $240,000 of pretax income. This reduced basic and
           diluted earnings per share by .07.


                                       34

<PAGE>

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

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors and executive officers of the Registrant
will be included in the Registrant's 1998 proxy statement to be filed with the
Securities and Exchange Commission not later than April 30, 1999 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 1998 proxy statements to be filed with the Securities and
Exchange Commission not later than April 30, 1999 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 1998 proxy
statements to be filed with the Securities and Exchange Commission not later
than April 30, 1999 and said portions of the proxy statements are incorporated
herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.



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


                                       35

<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(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 15.

(a) 2. Consolidated Financial Schedule -  The following Consolidated Financial
       Statement Schedule supporting the Consolidated Financial Statements and 
       the accountant's report thereon are included in this Annual Report on
       Form 10-K:

                                                                        PAGE

    Independent Auditors' Report on Supplementary Information

        Larson, Allen, Weishair & Co. , LLP                              41

    Consolidated Financial Statement Schedule for the years ended
        December 31, 1998, 1997 and 1996

        II   Valuation and Qualifying Accounts                           42

    All other schedules are omitted since they are not applicable, not required,
    or the required information is included in the financial statements or notes
    thereto.

(a) 3.  THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT:

The following exhibits are incorporated by reference to exhibits 10.1, 10.2 and
23.1 respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.

        10.1  Master lease agreement for equipment Amplicon Financial and the
              Company.

        10.2  Amendments to Promissory Notes, Loan Agreement Mortgage and
              Guaranty between Norwest Bank Minnesota South, N.A. (formerly
              Northern National Bank), and the Company.

        23.1  Letter of Consent from Larson, Allen, Weishair & Company in
              reference to the S-8 Forms filed June 21, 1994 and June 30, 1993.

The following exhibits are incorporated by reference to exhibits 10.1, 10.2 and
23.1 respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.


                                       36

<PAGE>

         10.1 Master lease agreement for equipment between Norwest Leasing
              Company and the Company.

         10.2 Land contract between the city of Augusta and the Company for the
              purchase of building and land in Augusta, Wisconsin.

The following exhibits are incorporated by reference to exhibits 10.1, 10.2,
10.3, 10.4, 10.5, 10.6, 10.7 and 10.8 respectively, to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.

         10.1 Promissory Note for acquisition of division between Company and
              Northern National Bank dated December 31, 1996.

         10.2 Revolving Note for working capital line of credit between
              Company and Northern National Bank dated December 31, 1996.

         10.3 Promissory Note for equipment purchases between Company and
              Northern National Bank dated December 31, 1996.

         10.4 Revolving Note for the working capital line of credit between
              Company and Northern National Bank dated December 31, 1996.

         10.5 Revolving Note for repurchase of stock between Company and
              Northern National Bank dated May 10, 1996.

         10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10.3,
              10.4 and 10.5.

         10.7 Promissory Note for acquisition of division between Company and
              Communications Systems, Inc. dated November 4, 1996.

         10.8 Promissory Note for the acquisition of division between Company
              and Communications Systems, Inc. dated November 4, 1996.

The following exhibits are incorporated by reference to exhibits 10.2, 10.3,
10.4, 10.5, and 10.6, respectively, to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.

         10.2 Promissory Note for purchase of facility in Fairmont,
              Minnesota between Company and Northern National Bank dated
              December 29, 1995.

         10.3 Promissory Note for purchase of capital equipment located at
              Fairmont, Minnesota facility between Company and Northern
              National Bank dated December 29, 1995.


                                       37

<PAGE>

         10.4 Security Agreement covering Promissory Notes in Exhibits 10.2 and
              10.3.

         10.5 Asset Purchase Agreement for the purchase of assets of Monitor
              Technology Corporation dated February 24, 1995.

         10.6 Asset Purchase Agreement for the purchase of Aerospace Division of
              Communication Cable, Inc. dated August 23, 1995.

The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and
10.5, respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.

         10.2 Promissory Note and Loan Agreement for capital equipment line 
              of credit between the Company and Northern National Bank dated
              April 29, 1994.

         10.3 Loan Agreement for Real Estate between the Company and Northern
              National Bank dated March 18, 1994.

         10.5 Promissory Notes and Loan Agreement for Real Estate between the
              Company and MMCDC and MMCDC/NNC dated March 18, 1994.

The following exhibits are incorporated by reference to Exhibits 10.3 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.

         10.3 Promissory Notes for capital equipment between the Company and 
              City of Augusta, Wisconsin dated August 17, 1993.

The following exhibits are incorporated by reference to Exhibits 3.1, 3.2 and
10.3 respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.

          3.1 Articles of Incorporation (SMR) dated August 9,1991

          3.2 Bylaws (SMR)

         10.3 Promissory Note and Mortgage between the Company and Joint 
              Economic Development Commission, Inc. dated June 28, 1991.

The following exhibit is incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.

          3.1 Articles of Incorporation dated October 30, 1990.


                                       38

<PAGE>

The following exhibit is incorporated by reference to Exhibit 3.2 to the Annual
Report on Form 10-K for the year ended December 31, 1984:

          3.2 Bylaws

(b)       Reports on Form 8-K.

          None.



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


                                       39

<PAGE>

                                  SIGNATURES


Pursuant to the requirements of Section 13 of 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 INCORPORATED

March 31, 1999                       By:  /s/           GARRY M. ANDERLY    
                                                --------------------------------
                                                        Garry M. Anderly
                                                   Principal Financial Officer
                                                              and
                                                   Principal Accounting Officer


March 31, 1999                       By:  /s/          QUENTIN E FINKELSON 
                                                --------------------------------
                                                       Quentin E. Finkelson
                                                            President
                                                              and
                                                      Chief Executive Officer

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

March 31, 1999                       By:  /s/          QUENTIN E FINKELSON 
                                                --------------------------------
                                                       Quentin E. Finkelson
                                                    President, Chief Executive
                                                      Officer and Director


March 31, 1999                            /s/              MYRON KUNIN 
                                                --------------------------------
                                                     Myron Kunin, Director


March 31, 1999                            /s/         RICHARD W. PERKINS
                                                --------------------------------
                                                  Richard W. Perkins, Director


March 31, 1999                            /s/            MICHAEL J. DEGEN
                                                --------------------------------
                                                  Michael J. Degen, Director


                                       40

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995




                         INDEPENDENT AUDITORS' REPORT ON
                            SUPPLEMENTARY INFORMATION

Board of Directors
Nortech Systems Incorporated and Subsidiary
Bemidji, Minnesota



Our report on the basic consolidated financial statements of Nortech Systems 
Incorporated and Subsidiary for 1998, 1997 and 1996, precedes the 
consolidated financial statements. The audits were made for the purpose of 
forming an opinion on the basic consolidated financial statements taken as a 
whole. The schedule on the following page is presented for purposes of 
complying with the Securities and Exchange Commission's rules and is not part 
of the basic consolidated financial statements. This schedule has been 
subjected to the auditing procedures applied in the audits of the basic 
consolidated financial statements and, in our opinion, fairly states in all 
material respects the financial data required to be set forth therein in 
relation to the basic consolidated financial statements taken as a whole.



                                            LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 12, 1999


                                      41

<PAGE>

                   NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
               Column A                              Column B     Column C      Column E     Column F
--------------------------------------              ---------    ----------   -----------   ---------
                                                                 Additions
                                                    Balance at    Charged                   Balance at
                                                    Beginning     to Costs                    End of
                Classification                      Of Period   And Expenses  Add (Deduct)   Period
                --------------                      ---------   ------------  ------------  ----------
<S>                                                 <C>          <C>          <C>           <C>
Year Ended December 31, 1998:
      Allowance for Doubtful Accounts               $ 84,128     $  67,499    $             $151,627
                                                                                       -    
      Inventory Obsolescence Reserve                 320,000       200,000                   520,000
                                                                                       -    
      Deferred Tax Valuation Allowance               190,000                    (25,000)     165,000
                                                                         -                  
                                                    ---------    ----------   -----------   ---------
                                                    $594,128     $ 267,499    $ (25,000)    $836,627
                                                    ---------    ----------   -----------   ---------
                                                    ---------    ----------   -----------   ---------

Year Ended December 31, 1997:                                                               
      Allowance for Doubtful Accounts               $ 22,301     $  61,827    $             $ 84,128
                                                                                       -    
      Inventory Obsolescence Reserve                 120,000       200,000                   320,000
                                                                                       -    
      Deferred Tax Valuation Allowance               240,000                    (50,000)     190,000
                                                                         -                  
                                                    ---------    ----------   -----------   ---------
                                                    $382,301     $ 261,827    $ (50,000)    $594,128
                                                    ---------    ----------   -----------   ---------
                                                    ---------    ----------   -----------   ---------
                                                                                            
Year Ended December 31, 1996:                                                               
      Allowance for Doubtful Accounts               $  6,053     $  16,248    $             $ 22,301
                                                                                       -    
      Inventory Obsolescence Reserve                 120,000                                 120,000
                                                                         -             -    
      Deferred Tax Valuation Allowance               400,000                   (160,000)     240,000
                                                                         -                  
                                                    ---------    ----------   -----------   ---------
                                                    $526,053     $  16,248    $(160,000)    $382,301
                                                    ---------    ----------   -----------   ---------
                                                    ---------    ----------   -----------   ---------
</TABLE>


                                       42


<PAGE>

                              INDEX TO EXHIBITS


DESCRIPTIONS OF EXHIBITS

     10.1  Master lease agreement for equipment Amplicon Financial and the
           Company.

     10.2  Amendments to Promissory Notes, Loan Agreement Mortgage and Guaranty
           between Norwest Bank Minnesota South, N.A. (formerly Northern 
           National Bank), and the Company.

     23.1  Letter of Consent from Larson, Allen, Weishair & Company in reference
           to the S-8 Forms filed June 21, 1994 and June 30, 1993.


                                       43