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

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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2001

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

For the transition period from
 to

Commission file number 0-13257

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

|Minnesota(State or other jurisdiction of
incorporation or organization)             |  | 41-16810894(I. R. S. Employer
Identification No.)
|----------------------------------------------------------------------------------- |  | -------------------------------------------------
|1120 Wayzata Blvd E., Suite 201Wayzata, MN(Address of principal executive offices) |  | 55391(Zip code)                                  

Registrant's telephone No., including area code:(952) 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.

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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 / /

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 $10.70 per share average of the closing bid and asked prices, respectively, on March 6, 2002 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 $11,714,456.

As
of March 1, 2002 there were 2,361,192 shares of the Company's $.01 per share par value common stock outstanding.

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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 on Form 10-K |  | Documents Incorporated by Reference                                                                                                                                                                           
|----------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Part III                            |  |                                                                                                                                                                                                               
|Item  10
          11
          12  |  | Reference is made to the Registrant's proxy statements to be used in connection with the 2002 Annual Shareholders' meeting and filed with the Securities and Exchange Commission no later than April 30, 2002.

(The
remainder of this page was intentionally left blank)

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NORTECH SYSTEMS INCORPORATED
Annual Report on Form 10-K
for the year ended December 31, 2001

INDEX

|         |  |                                                                                                 |  | Page 
|-------- |  | ----------------------------------------------------------------------------------------------- |  | -----
|PART I   |  |                                                                                                
|Item 1.  |  | Business                                                                                        |  | 4-7  
|Item 2.  |  | Properties                                                                                      |  | 7    
|Item 3.  |  | Legal Proceedings                                                                               |  | 7    
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                             |  | 7    
|PART II  |  |                                                                                                
|Item 5.  |  | Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters |  | 8    
|Item 6.  |  | Selected Financial Data                                                                         |  | 8    
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations           |  | 9-10 
|Item 7a. |  | Quantitative and Qualitative Disclosure about Market Risk                                       |  | 10   
|Item 8.  |  | Consolidated Financial Statements and Supplemental Data                                         |  | 11-31
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure            |  | 31   
|PART III |  |                                                                                                
|Item 10. |  | Directors and Executive Officers of the Registrant                                              |  | 31   
|Item 11. |  | Executive Compensation                                                                          |  | 31   
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                  |  | 31   
|Item 13. |  | Certain Relationships and Related Transactions                                                  |  | 31   
|PART IV  |  |                                                                                                
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                |  | 32-35
|         |  | Signatures                                                                                      |  | 36   

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PART I

ITEM 1. BUSINESS

Description of Business

Nortech Systems Incorporated and Subsidiary (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 maintains
various manufacturing facilities in Minnesota locations of Bemidji, Fairmont, Baxter, and Merrifield as well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables, electronic
sub-assemblies and components, and printed circuit board assemblies. The Company provides a full "turnkey" contract manufacturing service to its customers. A majority of revenue is derived
from products that are built to the customer's design specifications. Nortech Medical Services, Inc., it's 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, automotive industry, defense industry and industrial products. The Company's 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, Kodak, Thermo King, Polaris, Cubic, Icon Systems, Allen-Bradley, Semitool, Silicon Graphics and United Defense.

The
Company believes that contract manufacturing will continue to grow and expand in the United States and offshore because contract manufacturing provides OEMs 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 with significantly lower overhead costs
and ability to solve logistical problems with offshore manufacturing.

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. and
known as the Company's Medical Management operating segment), also provides service bureau and office management services to physicians. During 1999 this subsidiary was designated a discontinued
operation and continues to be classified as such in the consolidated financial statements.

In
March 1995, the Company acquired all of the assets of Monitor Technology Corporation. The Company had continued the business of Monitor Technology Corporation, (named Imaging
Technologies and known as the Company's Display Products operating segment), which was the manufacturing of large-screen, high-resolution video monitors for radar, document and medical
imaging as well as repair services on internally and externally produced monitors. In June 1999, the Company adopted a formal plan to discontinue the Imaging Technologies Division and it was
ultimately sold in February of 2000.

In
August 1995, the Company acquired all the assets of the Aerospace Division of Communication Cable, Inc. (CCI). The Company has continued the business formerly conducted
by CCI, which involves

4

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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. (CSI). The Company has continued
the business formerly conducted by CSI, which involves contract manufacturing of electronic sub-assemblies and components.

At
December 31, 1998, the Company had reported segment information of its three identifiable segments; Contract Manufacturing, Display Products and Medical Management. However, on
June 30, 1999, the Company formally adopted a plan to dispose of two of the segments, including Display
Products and Medical Management. Thus, the Company's remaining continuing operations fall within the Contract Manufacturing segment.

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, and printed circuit board assemblies markets, and intends to expand from this market segment into
complete electromechanical assemblies using the resources acquired from the 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 location became ISO 9002 Certified in
October 1998, the Aerospace operation became ISO 9001 certified and AS 9000 recognized in April 1999, the Intercon I location became ISO 9002 certified in October 1999. All
operations continue to actively maintain their certifications. The Company believes these certifications benefit its current customer base as well as attract new business opportunities.

The
Company will continue its 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, automotive 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), statistical
quality control (SQC), International Standards Organization (ISO) and Aerospace Systems 9100 (AS). The Company has initiated efforts to expand its markets beyond the Upper Midwest area. New market
opportunities are being pursued in Mexico, Asia and Europe, as well as industry publications and selected trade shows. The Company markets its products and services through internal sales people and
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

5

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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.

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 believes that foreign competitors do provide a substantial competitive threat as shown by the commoditization of
PC/printer cable and the "bargain basement" prices. Many OEM's have moved their manufacturing to foreign soil, and in doing so have minimized freight costs to ship to their locations. Technical
support from foreign competition has improved greatly along with their ability to be more responsive to engineering and schedule changes. The willingness of foreign competitors to "stock" finished
product at warehouse locations in the United States is another competitive move.

The
Company has contractual agreements that allow its products to be manufactured in both China and Mexico, thereby making itself competitive with foreign low cost competitors.

The
Company will pursue acquisitions, mergers, or joint ventures of manufacturing companies/facilities in low cost countries to retain and grow its customer/revenue base and support its
strategic vision to be a competitive world class Electronic Manufacturing Services provider.

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 $10.6 million on December 31, 2000 and approximately $10.8 million on December 31, 2001. This
backlog will be realized as revenue within the first quarter of 2002.

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 on customer receivable collections in any particular industry or geographic area.

One
customer, G.E. Medical, accounted for 24% and 13% of sales for the years ended December 31, 2001 and 2000, respectively. This reflects Nortech Systems, Inc. position as
a key supplier to G.E. Medical and the increased growth rate for the medical industry.

Research and Development

The Company expended no dollars in 2001, 2000 and 1999, on Company-sponsored research and development.

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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 484 full-time, 119 part-time and 112 temporary employees as of December 31, 2001. Manufacturing, manufacturing
product support and medical support services comprise 664 employees while general administration comprises 51 employees.

ITEM 2. PROPERTIES

The Company's Corporate Headquarters consist of approximately 3,648 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The
Corporate Headquarters has a lease with a five-year term that expires in July 31, 2005. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000
square feet of office and manufacturing space and leases another 20,000 square feet of manufacturing and office space in Augusta, Wisconsin.

The
Company's Medical Management operating segment operates from a facility shared with Corporate Headquarters located in Wayzata, Minnesota.

The
Company also owns three buildings, which contain approximately 46,900 square feet, and are located in Fairmont, Minnesota. The buildings contain the manufacturing activities of
Aerospace Systems operation, including 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. The Company also assumed the lease of a building in Aitkin, Minnesota, which provides 10,750 square feet, which, was
used for video cable assembly and storage. The lease is scheduled to expire December 1, 2005 at which time the Company has an option to purchase.

The
Company also leases a 7,500 square foot building in Baxter, Minnesota for electronic board repair for medical equipment. The lease is scheduled to expire June 30, 2006.

The
Company believes that each of these locations is adequate and that space is available if needed 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 required to be reported under the instructions to this item have been submitted to a vote of security holders.

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PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Small Cap Market under the symbol
"NSYS".

The
high and low closing sales prices for the Company's Common Stock, as reported on the NASDAQ, for each quarterly period within the two most recent years were as follows:

Quarter Ended

Low

HighMarch 31, 2001

$
6.281

$
9.063June 30, 2001

$
7.030

$
8.360September 30, 2001

$
4.000

$
7.250December 31, 2001

$
4.000

$
6.650March 31, 2000

$
2.313

$
5.313June 30, 2000

$
2.750

$
7.000September 30, 2000

$
6.750

$
12.625December 31, 2000

$
6.375

$
12.563


These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.

As
of March 9, 2002, there were approximately 1,161 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.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial data set forth below have been derived from, and are qualified by reference to the audited Consolidated Financial
Statements of Nortech Systems Incorporated and Subsidiary as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. The audited financial
statements of Nortech Systems Incorporated and Subsidiary referred to above are included elsewhere herein. The selected historical financial data set forth below as of December 31, 1999, 1998
and 1997 and for each of the two years in the period ended December 31, 1998 have been derived from the audited financial statements of Nortech Systems Incorporated and Subsidiary not included
herein. The selected financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes thereto of Nortech Systems Incorporated and Subsidiary included elsewhere herein.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

|                                                                    |  | FOR THE YEARS ENDED
|------------------------------------------------------------------- |  | -------------------
|
|Sales                                                               |  | 58,460,589         
|Income From Continuing Operations                                   |  | 2,102,863          
|Basic Earnings From Continuing Operations Per Share of Common Stock |  | 0.89               
|Total Assets                                                        |  | 29,507,538         
|Total Long-Term Debt                                                |  | 9,791,722          

Certain amounts above have been restated to reflect the results of continuing operations.

For
additional selected Financial Data (Past two years by quarter information), see Note 13 of the Consolidated Financial Statements.

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

Results of Continuing Operations For Years Ended December 31, 2001, 2000, and 1999

Revenues

For the years ended December 31, 2001 and 2000, the Company had sales of $58.5 million and $54.8 million, respectively. The increase of
$3.7 million or 6.8%, resulted primarily from internal growth of our current customer base. The major increases were in the medical and defense industries. The Company's emphasis is to
continually seek mature companies that require a contract manufacturer with a high degree of manufacturing and quality sophistication. For the year ended December 31, 1999 the Company had sales
of $38.5 million. The approximate 42.4% increase in sales in 2000 was attributable primarily to internal growth of our current customer base. The Company expects revenue growth to continue at a
moderate rate for the year 2002.

Gross Profit

For the years ended December 31, 2001, 2000 and 1999, the Company had gross profit of $10.4 million, $10.3 million, and $6.5 million,
respectively. Gross profits as a percentage of gross sales were 17.9%, 18.7%, and 16.7% for the years ended December 31, 2001, 2000 and 1999, respectively. As revenues grow, the Company
continues to strive to hold down cost levels by improving productivity and reducing material costs in order to help offset the request for price reductions from customers. The price competitive nature
of the business requires the use of service, quality and timely delivery to help attract customers.

Selling

Selling expenses were $2.8 million, $2.2 million, and $1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The majority of the increase from 1999 to 2000 and from 2000 to 2001 reflected the costs related to additional internal sales force and commissioned sales on revenue growth.

General and Administrative

For the years ended December 31, 2001, 2000 and 1999, general and administrative expenses were $3.4 million, $4.0 million and
$2.4 million, respectively. The reduction in expenses from 2000 to 2001 reflected the use of cost cutting methods and a reduction in administrative staff. The increase in expenses from 1999 to
2000 reflected the costs related to succession planning and incentive compensation.

Interest Income

Interest income for the years ended December 31, 2001, 2000 and 1999 were $.018 million, $.028 million and $.027 million,
respectively. The interest income was realized as a result of various investments of cash.

Miscellaneous Income

Miscellaneous income was $.003 million, $.016 million and $.039 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The miscellaneous income resulted primarily from charges for miscellaneous services that vary by year.

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Interest Expense

Interest expense was $.78 million, $1.0 million, and $.82 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company has maintained level debt by reinvesting the profits in the
growth of the Company. However, prime lending rates decreased in 2001 resulting in lower interest expense.

Income Taxes

Income tax expense was $1.4 million, $1.1 million, and $.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.

All
of the Alternative Minimum and other tax credits available at the end of December 31, 2000 were used to offset federal income taxes due in 2001.

The
Company utilized operating loss carryforwards of $1.5 million and $.9 million for the years ended December 31, 2000, and 1999, respectively, to offset federal
taxable income. The Company also utilized $.001million of an expiring investment tax credit to offset federal tax and forfeited an additional $.039 million of credits due to expiration in 2000.

Net Income

The Company's net income from continuing operations in 2001 was $2.1 million or $.89 per common share. The Company's net income from continuing operations
in 2000 was $2.0 million or $.86 per common share. The Company's net income from continuing operations in 1999 was $1.1 million or $.46 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 increased from $9.6 million as of December 31, 2000, to $14.5 million on December 31, 2001. Increase in
working capital is due to refinancing majority of its debt with Wells Fargo Bank, N.A on January 31, 2002 (refer to Note 4 in the notes to Consolidated Financial Statements for further
disclosures). Stockholders equity increased from $8.5 million on December 31, 2000, to $10.6 million on December 31, 2001 as a result of the Company's 2001 net profit from
continuing operations. The Company's liquidity and capital resources are strong, 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.

Provision for the Private Securities Litigation Reform Act of 1995

While this release is based on management's best judgment and current expectations, actual results may differ based on many factors, including the Company's
competitive performance and changes in market conditions.

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 2001 effective average interest rate on variable earnings should not have a material effect on the Company's earnings for
2002.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

|                                   |                                                                                                      | Page
|---------------------------------- | ---------------------------------------------------------------------------------------------------- | ----
|Independent Auditor's Report of:   |                                                                                                      |     
|                                   | Larson, Allen, Weishair & Co., LLP                                                                   |     
|Consolidated Financial Statements: |                                                                                                      |     
|                                   | Consolidated Balance Sheets at December 31, 2001 and 2000                                            |     
|                                   | Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999               |     
|                                   | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 |     
|                                   | Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999           |     
|                                   | Notes to Consolidated Financial Statements                                                           |     

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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, 2001 and 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

LARSON, ALLEN, WEISHAIR & CO., LLP

St.
Cloud, Minnesota
February 13, 2002

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED BALANCE SHEETS        DECEMBER 31, 2001 AND 2000

|                                     |                                                                                                                                                             | 2001                         |                                            | 2000       |           
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------------------------------------------ | ---------- | ----------
|ASSETS                               |                                                                                                                                                             |                              |                                            |            |           
|CURRENT ASSETS                       |                                                                                                                                                             |                              |                                            |            |           
|                                     | Cash and Cash Equivalents                                                                                                                                   |                              | $                                          | 181,730    |           
|                                     | Accounts Receivable, Less Allowance for Uncollectible Accounts                                                                                              |                              |                                            | 9,110,730  |           
|                                     | Inventories                                                                                                                                                 |                              |                                            | 12,451,479 |           
|                                     | Prepaid Expenses                                                                                                                                            |                              |                                            | 306,428    |           
|                                     | Deferred Tax Asset                                                                                                                                          |                              |                                            | 1,492,000  |           
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Current Assets         |                                            | $          | 23,542,367
|                                     |                                                                                                                                                             |                              |                                            |            |           
|PROPERTY AND EQUIPMENT               |                                                                                                                                                             |                              |                                            |            |           
|                                     | Land                                                                                                                                                        |                              | $                                          | 151,800    |           
|                                     | Building and Leasehold Improvements                                                                                                                         |                              |                                            | 4,399,166  |           
|                                     | Manufacturing Equipment                                                                                                                                     |                              |                                            | 4,878,954  |           
|                                     | Office and Other Equipment                                                                                                                                  |                              |                                            | 2,434,429  |           
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Property and Equipment |                                            | $          | 11,864,349
|                                     | Accumulated Depreciation                                                                                                                                    |                              |                                            | (5,999,451 | )         
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Net Property and Equipment   |                                            | $          | 5,864,898 
|                                     |                                                                                                                                                             |                              |                                            |            |           
|OTHER ASSETS                         |                                                                                                                                                             |                              |                                            |            |           
|                                     | Goodwill and Other Intangible Assets                                                                                                                        |                              | $                                          | 83,478     |           
|                                     | Deferred Tax Asset                                                                                                                                          |                              |                                            |           |           
|                                     | Other Assets from Discontinued Operations                                                                                                                   |                              |                                            | 16,795     |           
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Other Assets           |                                            | $          | 100,273   
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Assets                 |                                            | $          | 29,507,538
|                                     |                                                                                                                                                             |                              |                                            |            |           
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                                                                             |                              |                                            |            |           
|CURRENT LIABILITIES                  |                                                                                                                                                             |                              |                                            |            |           
|                                     | Current Maturities of Notes and Capital Lease Payable                                                                                                       |                              | $                                          | 501,681    |           
|                                     | Accounts Payable                                                                                                                                            |                              |                                            | 4,866,442  |           
|                                     | Accrued Payroll and Commissions                                                                                                                             |                              |                                            | 2,171,124  |           
|                                     | Accrued Income Taxes                                                                                                                                        |                              |                                            | 538,706    |           
|                                     | Other Liabilities                                                                                                                                           |                              |                                            | 845,586    |           
|                                     | Net Current Liabilities from Discontinued Operations                                                                                                        |                              |                                            | 159,484    |           
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Current Liabilities    |                                            | $          | 9,083,023 
|                                     |                                                                                                                                                             |                              |                                            |            |           
|LONG-TERM LIABILITIES                |                                                                                                                                                             |                              |                                            |            |           
|                                     | Notes and Capital Lease Payable (Net of Current Maturities)                                                                                                 |                              | $                                          | 9,791,722  |           
|                                     | Deferred Tax Liability                                                                                                                                      |                              |                                            | 61,000     |           
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Long-Term Liabilities  |                                            | $          | 9,852,722 
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             |                              | Total Liabilities                          |            | $         
|                                     |                                                                                                                                                             |                              |                                            |            |           
|COMMITMENTS AND CONTINGENCIES        |                                                                                                                                                             |                              |                                            |            |           
|SHAREHOLDERS' EQUITY                 |                                                                                                                                                             |                              |                                            |            |           
|                                     | Preferred Stock, $1 Par Value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding                                                           |                              | $                                          | 250,000    |           
|                                     | Common Stock $.01 Par Value; 9,000,000 Shares Authorized; 2,361,192 and 2,361,055 Shares Issued and Outstanding at December 31, 2001 and 2000, Respectively |                              |                                            | 23,612     |           
|                                     | Additional Paid-In Capital                                                                                                                                  |                              |                                            | 12,179,399 |           
|                                     | Accumulated Deficit                                                                                                                                         |                              |                                            | (1,881,218 | )         
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             | Total Shareholders' Equity   |                                            | $          | 10,571,793
|                                     |                                                                                                                                                             |                              |                                            |            |           
|                                     |                                                                                                                                                             |                              | Total Liabilities and Shareholders' Equity |            | $         
|                                     |                                                                                                                                                             |                              |                                            |            |           

See accompanying Notes to Consolidated Financial Statements.

13

---



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF INCOME        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                                      |                                                                                      | 2001                              |                   | 2000      |           | 1999        |          
|----------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------- | ----------------- | --------- | --------- | ----------- | ---------
|NET SALES                                             |                                                                                      | $                                 | 58,460,589        |           | $         | 54,775,279  |          
|COST OF GOODS SOLD                                    |                                                                                      |                                   | (48,014,244       | )         |           | (44,507,489 | )        
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|GROSS PROFIT                                          |                                                                                      | $                                 | 10,446,345        |           | $         | 10,267,790  |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|OPERATING EXPENSES                                    |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Selling Expenses                                                                     |                                   | $                 | 2,847,727 |           | $           | 2,186,930
|                                                      | General and Administrative Expenses                                                  |                                   |                   | 3,367,062 |           |             | 4,005,127
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      |                                                                                      | Total Operating Expenses          |                   | $         | 6,214,789 |             | $        
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|INCOME FROM CONTINUING OPERATIONS                     |                                                                                      | $                                 | 4,231,556         |           | $         | 4,075,733   |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|OTHER INCOME (EXPENSE)                                |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Interest Income                                                                      |                                   | $                 | 17,921    |           | $           | 28,197   
|                                                      | Miscellaneous Income                                                                 |                                   |                   | 2,581     |           |             | 16,175   
|                                                      | Interest Expense                                                                     |                                   |                   | (776,195  | )         |             | (997,532 
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      |                                                                                      | Total Other Expense               |                   | $         | (755,693  | )           | $        
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |                                                                                      | $                                 | 3,475,863         |           | $         | 3,122,573   |          
|INCOME TAX EXPENSE                                    |                                                                                      |                                   | (1,373,000        | )         |           | (1,079,000  | )        
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|INCOME FROM CONTINUING OPERATIONS                     |                                                                                      | $                                 | 2,102,863         |           | $         | 2,043,573   |          
|LOSS FROM DISCONTINUED OPERATIONS                     |                                                                                      |                                   |                  |           |           |            |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|NET INCOME (LOSS)                                     |                                                                                      | $                                 | 2,102,863         |           | $         | 2,043,573   |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|EARNINGS (LOSS) PER SHARE:                            |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Basic                                                                                |                                   |                   |           |           |             |          
|                                                      |                                                                                      | Income from Continuing Operations |                   | $         | 0.89      |             | $        
|                                                      |                                                                                      | Loss from Discontinued Operations |                   |           |          |             |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      |                                                                                      |                                   | Net Income (Loss) |           | $         | 0.89        |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Average Number of Common Shares Outstanding Used for Basic Earnings (Loss) Per Share |                                   |                   | 2,361,192 |           |             | 2,357,457
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Diluted                                                                              |                                   |                   |           |           |             |          
|                                                      |                                                                                      | Income from Continuing Operations |                   | $         | 0.86      |             | $        
|                                                      |                                                                                      | Loss from Discontinued Operations |                   |           |          |             |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      |                                                                                      |                                   | Net Income (Loss) |           | $         | 0.86        |          
|                                                      |                                                                                      |                                   |                   |           |           |             |          
|                                                      | Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options       |                                   |                   | 2,457,088 |           |             | 2,449,528
|                                                      |                                                                                      |                                   |                   |           |           |             |          

See
accompanying Notes to Consolidated Financial Statements.

14

---



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

|        |                   | Preferred
Stock |   | Common
Stock |  | Additional
Paid-In
Capital |        | Accumulated
Deficit |   | Total
Shareholders'
Equity | 
|------- | ----------------- | --------------- | - | ------------ |  | -------------------------- | ------ | ------------------- | - | -------------------------- | 
|BALANCE |                   |                 |   |              |  |                            |        |                     |   |                            | 
|        | DECEMBER 31, 1998 |                 | $ | 250,000      |  | $                          | 23,514 |                     | $ | 12,131,045                 | 
|        | 1999 Net Loss     |                 |   |             |  |                            |       |                     |   |                           | 
|        | Issuance of Stock |                 |   |             |  |                            | 5      |                     |   | 1,570                      | 
|        |                   |                 |   |              |  |                            |        |                     |   |                            | 
|BALANCE |                   |                 |   |              |  |                            |        |                     |   |                            | 
|        | DECEMBER 31, 1999 |                 | $ | 250,000      |  | $                          | 23,519 |                     | $ | 12,132,615                 | 
|        | 2000 Net Income   |                 |   |             |  |                            |       |                     |   |                           | 
|        | Issuance of Stock |                 |   |             |  |                            | 92     |                     |   | 25,421                     | 
|        |                   |                 |   |              |  |                            |        |                     |   |                            | 
|BALANCE |                   |                 |   |              |  |                            |        |                     |   |                            | 
|        | DECEMBER 31, 2000 |                 | $ | 250,000      |  | $                          | 23,611 |                     | $ | 12,158,036                 | 
|        | 2001 Net Income   |                 |   |             |  |                            |       |                     |   |                           | 
|        | Issuance of Stock |                 |   |             |  |                            | 1      |                     |   | 21,363                     | 
|        |                   |                 |   |              |  |                            |        |                     |   |                            | 
|BALANCE |                   |                 |   |              |  |                            |        |                     |   |                            | 
|        | DECEMBER 31, 2001 |                 | $ | 250,000      |  | $                          | 23,612 |                     | $ | 12,179,399                 | 
|        |                   |                 |   |              |  |                            |        |                     |   |                            | 

See
accompanying Notes to Consolidated Financial Statements.

15

---

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

|                                                     |                                                                                                               | 2001                                 |                                            | 2000      |           | 1999      |           
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | --------- | --------- | --------- | ----------
|CASH PROVIDED BY OPERATING ACTIVITIES                |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     | Net Income (Loss)                                                                                             |                                      | $                                          | 2,102,863 |           | $         | 2,043,573 
|                                                     | Plus Loss from Discontinued Operations                                                                        |                                      |                                            |          |           |           |          
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     | Income from Continuing Operations                                                                             |                                      | $                                          | 2,102,863 |           | $         | 2,043,573 
|                                                     | Adjustments to Reconcile Net Income from Continuing Operations to Net Cash Provided by Continuing Operations: |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               | Depreciation and Amortization        |                                            |           | 1,181,754 |           |           
|                                                     |                                                                                                               | Deferred Taxes                       |                                            |           | 22,000    |           |           
|                                                     |                                                                                                               | Loss (Gain) on Disposal of Assets    |                                            |           |          |           |           
|                                                     |                                                                                                               | Loss on Disposal of Stock Investment |                                            |           |          |           |           
|                                                     | Changes in Current Operating Items:                                                                           |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               | Accounts Receivable                  |                                            |           | (529,939  | )         |           
|                                                     |                                                                                                               | Inventory                            |                                            |           | (856,344  | )         |           
|                                                     |                                                                                                               | Prepaid Expenses                     |                                            |           | (258,966  | )         |           
|                                                     |                                                                                                               | Accounts Payable                     |                                            |           | (877,394  | )         |           
|                                                     |                                                                                                               | Accrued Payroll and Commissions      |                                            |           | 502,376   |           |           
|                                                     |                                                                                                               | Accrued Income Taxes                 |                                            |           | 356,376   |           |           
|                                                     |                                                                                                               | Other Liabilities                    |                                            |           | (592,856  | )         |           
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               |                                      | Net Cash Provided by Continuing Operations |           | $         | 1,049,870 |           
|                                                     |                                                                                                               |                                      | Net Cash Used by Discontinued Operations   |           |           |          |           
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               |                                      | Net Cash Provided by Operating Activities  |           | $         | 1,049,870 |           
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|CASH FLOWS FROM INVESTING ACTIVITIES                 |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     | Proceeds from Sale of Discontinued Operations                                                                 |                                      | $                                          |          |           | $         | 250,000   
|                                                     | Proceeds from Sale of Assets                                                                                  |                                      |                                            |          |           |           | 206,691   
|                                                     | Acquisition of Equipment & Leasehold Improvements                                                             |                                      |                                            | (711,968  | )         |           | (949,814  
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               |                                      | Net Cash Used by Investing Activities      |           | $         | (711,968  | )         
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|CASH FLOWS FROM FINANCING ACTIVITIES                 |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     | Payments on Long-Term Debt                                                                                    |                                      | $                                          | (939,534  | )         | $         | (1,137,932
|                                                     | Proceeds from Long-Term Debt                                                                                  |                                      |                                            | 234,000   |           |           | 825,000   
|                                                     | Issuance of Common Stock                                                                                      |                                      |                                            | 21,364    |           |           | 25,513    
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|                                                     |                                                                                                               |                                      | Net Cash Used by Financing Activities      |           | $         | (684,170  | )         
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                               | $                                    | (346,268                                   | )         | $         | 74,498    |           
|Cash and Cash EquivalentsBeginning                  |                                                                                                               |                                      | 527,998                                    |           |           | 453,500   |           
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           
|CASH AND CASH EQUIVALENTSENDING                     |                                                                                                               | $                                    | 181,730                                    |           | $         | 527,998   |           
|                                                     |                                                                                                               |                                      |                                            |           |           |           |           

See
accompanying Notes to Consolidated Financial Statements.

16

---



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2001, 2000, AND 1999

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 located in Bemidji, Fairmont, Merrifield and Baxter, Minnesota as well as 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 provides a full "turn-key" contract manufacturing service to its customers. All products are built to the customer's design specifications. Products are sold to
customers both domestically and internationally. The Company also provides repair service on circuit boards used in machines in the medical industry.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Cash and Cash Equivalents

The Company considers its investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of short term repurchase
agreements.

Receivables

Accounts receivable are reported net of an allowance for uncollectible accounts. The allowance for losses arising from uncollectible accounts is based on
historical bad debt experience and an evaluation of periodic aging of the accounts. The allowance for uncollectible accounts for continuing operations was $318,557 and $187,294 at December 31,
2001 and 2000, respectively.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net
realizable value). Costs include material, labor, and overhead required

17

---

in the warehousing and production of the Company's products. Inventory is shown net of reserve for excess and obsolete inventory as follows:

2001

2000Raw Materials

$
10,430,426

$
9,455,764Work in Process


1,676,730


1,848,025Finished Goods


1,698,373


1,298,626Reserves


(1,354,050
)

(1,007,280
)Total

$
12,451,479

$
11,595,135


Property and Equipment and Depreciation

Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and
minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation is removed from the accounts and the resulting gain or loss is
reflected in operations. Property and equipment are depreciated by the straight-line and accelerated methods of depreciation over their estimated useful lives. Accelerated depreciation did
not materially exceed straight-line depreciation for the years ended December 31, 2001, 2000, and 1999.

Goodwill

Goodwill representing the excess of the purchase price over the fair value of the net assets of the acquired entities is being amortized on a
straight-line basis over the period of expected benefit of fifteen years. Total amortization of goodwill recorded from continuing operations for each of the three years in the period ended
December 31, 2001 was $8,121. 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

Intangible assets represent certification costs which are being amortized over a period of seven years. The related amortization expense from continuing
operations for each of the three years in the period ended December 31, 2001 was $8,151.

Preferred Stock

Preferred stock issued is noncumulative and nonconvertible.

Revenue Recognition

Revenue from product sales is recognized upon shipment to customer, title passing and all obligations of the Company have been satisfied. Provisions for discounts
and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.

18

---

Shipping and Handling Costs

The Company's shipping and handling costs charged to its customers are included in net sales, while the corresponding shipping expenses are included in cost of
goods sold for all periods presented.

Advertising

Advertising costs are charged to operations as incurred. Total amounts charged to expense for continuing operations for each of the three years in the period
ended December 31, 2001 were $131,199, $94,860, and $139,594, respectively.

Income Taxes

The Company accounts for income taxes under FASB Statement No. 109, which requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are recognized 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.

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.

Stock Based Compensation

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Option ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25, compensation cost is
determined based on the difference, if any, on the grant date between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized
over the vesting period.

Net Income (Loss) Per Common Share

The Company computes earnings per share pursuant to SFAS No. 128, "Earnings per Share". In accordance with SFAS No. 128, basic net income (loss) per
share is computed using the weighted-average number of common shares outstanding. Diluted income per share is computed using the weight-average number of common shares outstanding and potential common
shares from the assumed exercise of stock options outstanding during the period using the treasury stock method.

19

---

Cash Flow Information

The Company paid income taxes of $994,624 and $80,880 for the years ended December 31, 2001 and 2000, respectively, and received a net income tax refund of
$6,461 for the year ended December 31, 1999. Continuing operations of the Company paid interest expenses of $713,352, $996,663 and $840,746 for the years ended December 31, 2001, 2000
and 1999, respectively.

During
the year ended December 31, 2000, the trade of the prior leased building, forgiveness of debt, and establishment of the capital lease payable resulted in a
non-cash transaction of $204,879.

During
the year ended December 31, 1999, the Company had a $2,418,245 non-cash transaction resulting from the reduction of discontinued assets to their net realizable
values.

Segment Reporting Information

During 1999, the Company formally adopted a plan to dispose of two of its operating segments, including Display Products and Medical Management. See additional
disclosures regarding these discontinued operations in Note 9. The Company's results from continuing operations for the years ending December 31, 2001, 2000 and 1999, consist entirely of
the Contract Manufacturing segment.

Foreign
revenues for the Contract Manufacturing operating segment represent 2% of consolidated revenues for the years ended December 31, 2001, 2000 and 1999.
Long-lived assets related to the Contract Manufacturing operating segment are located entirely within the United States.

Recent Pronouncements Not Yet Adopted

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (SFAS No. 141), Business Combinations and No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method.
SFAS No. 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS No. 142 also requires an evaluation
of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets upon adoption. After transition, the impairment tests will be performed
annually. SFAS No. 142 becomes effective for the first quarter of 2002. Management believes that SFAS No. 141 and SFAS No. 142 will have no significant effect on the balance
sheet, results of operations and cash flows of the Company.

In
August 2001, the FASB issued SFAS No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. As of December 31, 2001, management believes that SFAS No. 144 will have no significant effect on the balance sheet, results of
operations, and cash flows of the Company.

20

---

Reclassifications

Certain reclassifications were made to the 1999 and 2000 financial statements to conform to the 2001 presentation. Such reclassifications had no impact on net
income or equity.

NOTE 2    MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. With regard
to cash, the Company maintains its excess cash balances in checking and money market accounts at three high-credit quality financial institutions. These balances exceed the federally
insured limit by $132,419 and $288,435 at December 31, 2001 and 2000, respectively. The Company has not experienced any losses in any of the short-term investment instruments it has
used for excess cash balances. The Company does not require collateral on its receivables; however, credit risk is limited due to the large number of customers comprising the Company's customer base
and their dispersion across different geographic areas and industries. Historically, the Company has not suffered significant losses with respect to trade accounts receivable.

One
customer accounted for 17% of accounts receivable at December 31, 2001 and approximately 24%, 13% and 12% of sales for the years ended December 31, 2001, 2000, and
1999, respectively.

NOTE 3    OTHER LIABILITIES

The Company has self insured its employee health and dental plans. It has contracted with two separate administrative service companies to supervise and
administer the programs and act as representatives. The Company's health plan insures for excessive or unexpected claims and is liable for claims not to exceed $60,000 per individual per plan year and
an estimated aggregate amount of $3,483,000 for the current plan year. The Company's dental plan pays claims based on actual amounts
incurred. Estimated claims for incurred health and dental services of approximately $391,413 and $485,403 were included in other liabilities at December 31, 2001 and 2000, respectively.

21

---



NOTE 4    LONG-TERM DEBT

|Description                                                                                                                                                                                                                                                                       |                                                           | 2001 |           | 2000       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---- | --------- | ---------- | -
|Revolving Lines of CreditWells Fargo Bank Minnesota, N.A., Borrowing Limit of $6,000,000; Interest at Highest Prime Rate in "Money Rate" Table in Wall Street Journal; Due January 2002; Secured by Accounts Receivable,
Equipment, Inventory, and General Intangibles           |                                                           | $    | 5,029,698 |            | $
|Promissory Notes PayableWells Fargo Bank Minnesota, N.A., Interest at Highest Prime Rate in "Money Rate" Table in Wall Street Journal; Due January 2002; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal
Guaranty of Majority Stockholder |                                                           |      | 1,400,000 |            |  
|Notes PayableWells Fargo Bank Minnesota, N.A., Interest at 4.75%, Monthly Installment Payments Through March 2004; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Real Estate                                                                     |                                                           |      | 787,569   |            |  
|Note PayableCommunications Systems, Inc., Interest at Prime as Established by U.S. Bank Minneapolis, Balloon Payment Due January 2002; Secured by Underlying Assets Purchased                                                                                                    |                                                           |      | 2,765,390 |            |  
|Notes PayableOther, Interest Ranging From 8.0% to 8.5%; Monthly Installment Payments Through 2009; Secured by Land, Building, Leasehold Improvements, Equipment and Vehicle                                                                                                      |                                                           |      | 87,043    |            |  
|Capitalized Lease PayableCity of Augusta, Wisconsin, Monthly Installment Payments through December 2003: See Footnote 5 for Additional Capital Lease Disclosures                                                                                                                 |                                                           |      | 223,703   |            |  
|                                                                                                                                                                                                                                                                                  |                                                           |      |           |            |  
|                                                                                                                                                                                                                                                                                  | Total Notes and Capital Lease Payable                     |      | $         | 10,293,403 |  
|                                                                                                                                                                                                                                                                                  | Current Maturities of Notes and Capital Lease Payable     |      |           | (501,681   | )
|                                                                                                                                                                                                                                                                                  |                                                           |      |           |            |  
|                                                                                                                                                                                                                                                                                  | Notes and Capital Lease PayableNet of Current Maturities |      | $         | 9,791,722  |  
|                                                                                                                                                                                                                                                                                  |                                                           |      |           |            |  

The
weighted average interest rate on the Company's two lines of credit was 6.92% and 9.24% for the years ended December 31, 2001 and 2000, respectively.

The
Company refinanced its lines of credit and $5,031,410 of notes payable with Wells Fargo Bank, N.A on January 31, 2002. The refinanced debt was structured using three
instruments including a $1,750,000 equipment note, a $2,500,000 real estate note and an $8,000,000 revolving line of credit.

The
$1,750,000 equipment note and the $2,500,000 real estate notes are payable in monthly principal installments of $29,167 and $13,889, respectively, plus accrued interest, and mature
February 2007. The $8,000,000 revolving line of credit requires monthly interest payments and is scheduled to mature January 31, 2005. The term notes and revolving line of credit bear
interest equal to the prime rate published by Well's Fargo Bank, N.A and are secured by substantially all the Company's assets.

22

---

The
refinanced line of credit agreement includes a provision that commits the Company to pay a minimum of $150,000 of interest annually.

All
Wells Fargo Bank, N.A. debt agreements contain certain covenants, which, among other things, will require the Company to adhere to regular reporting requirements, maintain certain
financial ratios, and limit the amount of annual capital expenditures. There were no covenant violations at or for the year ended December 31, 2001.

Maturity
requirements, which reflect the terms of the refinanced debt, are as follows:

Years Ending December 31,

Amount2002

$
501,6812003


716,4682004


516,6672005


6,445,8102006


516,667Later Years


1,481,850$
10,179,143


NOTE 5    CAPITAL LEASE

In January 2000, the former manufacturing facility in Augusta, Wisconsin was traded for a new facility with the same lessor. The Company entered into a
capital lease for this location and will take ownership upon maturity of lease in 2003. Depreciation on the building under capital lease is included in depreciation expense. The Company's land and
building held under the capital lease on the balance sheet consist of the following:

2001

2000Land

$
10,000

$
10,000Building


368,912


368,912Less: Accumulated Depreciation


18,918


9,459Total

$
359,994

$
369,453


Minimum
future lease obligations on the long-term capital lease in effect at December 31, 2001 are as follows:

Years Ending December 31,

Amount2002

$
42,0002003


217,000Total Minimum Lease Payments

$
259,000Less: Amount Representing Interest


35,297Capitalized Lease Obligation

$
223,703


23

---



NOTE 6    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. No preferred stock dividends were declared or paid during the years ended December 31, 2001, 2000, and 1999.

NOTE 7    OPERATING LEASES

The Company has entered into various operating leases for production and office equipment, office space and buildings. The Company has the option to purchase
various equipment upon lease expiration at fair market value. The Company also has the option to purchase the Aitkin, MN manufacturing plant, currently under an operating lease, upon expiration of
lease. The Company has the option to renew the lease for the Baxter, MN facility for an additional five years upon expiration of the initial lease term.

Rent
expense from continuing operations, which includes amounts for short term leases, for the years ended December 31, 2001, 2000, and 1999, was $661,475, $619,065, and $459,739,
respectively.

The
future minimum lease payments are as follows:

Years Ending December 31,

Amount2002

$
364,9142003


259,5092004


206,9612005


137,2522006


19,800Total

$
988,436


NOTE 8    INCOME TAXES

The provision for income taxes for each of the three years in the period ended December 31, 2001, consists of the following:

2001

2000

1999Current TaxesFederal

$
1,116,000

$
154,000

$
17,000Current TaxesState


235,000


117,000


68,000Deferred Taxes


22,000


808,000


556,000Total Expense

$
1,373,000

$
1,079,000

$
641,000


24

---

Net
deferred tax assets at December 31, 2001 and 2000, consist of the following:

|                                           |       | 2001 |         | 2000      |  
|------------------------------------------ | ----- | ---- | ------- | --------- | -
|Tax Credit Carryforwards                   |       | $    |        |           | $
|Unrealized Loss on Discontinued Operations |       |      | 117,000 |           |  
|Allowance for Doubtful Accounts            |       |      | 126,000 |           |  
|Inventory Reserves                         |       |      | 644,000 |           |  
|Accrued Vacation                           |       |      | 219,000 |           |  
|Accrued Warranty                           |       |      | 19,000  |           |  
|Health Insurance Reserve                   |       |      | 149,000 |           |  
|Accrued Bonuses                            |       |      | 190,000 |           |  
|Other Reserves                             |       |      | 28,000  |           |  
|Property and Equipment                     |       |      | (61,000 | )         |  
|                                           |       |      |         |           |  
|                                           | Total |      | $       | 1,431,000 |  
|                                           |       |      |         |           |  

The
statutory rate reconciliation for each of the three years in the period ended December 31, 2001 is as follows:

|                                                                                        |                    | 2001 |           | 2000      |   | 1999      |          
|--------------------------------------------------------------------------------------- | ------------------ | ---- | --------- | --------- | - | --------- | ---------
|Statutory Tax Provision                                                                 |                    | $    | 1,182,000 |           | $ | 1,062,000 |          
|State Income Taxes                                                                      |                    |      | 209,000   |           |   | 200,000   |          
|Additional Credit Carryforwards                                                         |                    |      | (18,000   | )         |   | (22,000   | )        
|Reduction in Deferred Tax Valuation Allowance (Net of Expired Tax Credit Carryforwards) |                    |      |          |           |   | (165,000  | )        
|Other                                                                                   |                    |      |          |           |   | 4,000     |          
|                                                                                        |                    |      |           |           |   |           |          
|                                                                                        | Income Tax Expense |      | $         | 1,373,000 |   | $         | 1,079,000
|                                                                                        |                    |      |           |           |   |           |          

All
of the Alternative Minimum and other tax credits available at the end of December 31, 2000 were used to offset federal income taxes due in 2001.

The
Company utilized operating loss carryforwards of $1,468,100 and $902,000 for the years ended December 31, 2000, and 1999, respectively, to offset federal taxable income. The
Company also utilized $1,400 of an expiring investment tax credit to offset federal tax and forfeited an additional $38,700 of credits due to expiration in 2000.

25

---



NOTE 9    DISCONTINUED OPERATIONS

On June 30, 1999, the Company adopted a formal plan to sell two of their operating segments, Display Products and Medical Management. On
February 22, 2000, the fixed assets and inventory of the Display Products segment were sold to Computron Display Systems. Under the terms of the purchase agreement, the Company sold these
assets for $300,000, of which $50,000 was held in escrow to cover future warranty expenses. The assets of Medical Management to be sold consist primarily of receivables and equipment, with an
anticipated disposal date occurring prior to December 31, 2002. Results of operations for these segments for the years ended December 31, 2001 and 2000 have been recorded against the
reserve established in 1999 to absorb future losses. Results of these operations for the year ending December 31, 1999 have been classified as discontinued.

The
net current liabilities and net non-current assets of discontinued operations consist of the following:

2001

2000Cash

$
6,665

$
21,115Accounts Receivable


41,788


64,589Prepaid Expenses


3,859


8,858Accrued Expenses


(211,796
)

(505,798
)Net Current Liabilities of Discontinued Operations

$
(159,484
)
$
(411,236
)Equipment, Net

$
16,795

$
30,401Net Non-Current Assets of Discontinued Operations

$
16,795

$
30,401


The
amount of "Loss from Discontinued Operations" for the year ended December 31, 1999 on the accompanying income statement is a combination of the operating results through the
measurement

26

---

date as well as the estimated loss on disposal of the discontinued operations. The components of the "Loss from Discontinued Operations" includes the following:

1999Discontinued Operations:Loss from operations of segments to be disposed of, net of income tax benefit of $83,000 at December 31, 1999

$
153,278Estimated loss on disposal of segments, net of income tax benefit of $1,564,000 at December 31, 1999


2,905,187Loss from Discontinued Operations

$
3,058,465Earnings (Loss) per Share:BasicLoss from discontinued operations

$
(0.07
)Estimated loss on segment disposal


(1.23
)Total Loss from Discontinued Operations

$
(1.30
)DilutedLoss from discontinued operations

$
(0.06
)Estimated loss on segment disposal


(1.23
)Total Loss from Discontinued Operations

$
(1.29
)


Net
sales of the Display Products and Medical Management segments for the years ending December 31, 2000 and 1999 were $619,472 and $2,413,638, respectively. Net sales Medical
Management segment were $430,365 for the year ending December 31, 2001. These amounts are not included in net sales in the accompanying statements of income.

NOTE 10    401(k) RETIREMENT PLAN

The Company has a 401(k) profit sharing plan for its employees. The Plan is a defined contribution plan covering all employees of the Company except for employees
covered by a collective bargaining agreement and non-resident aliens earning non-U.S. source income. Employees are eligible to participate in the Plan after completing six
months of service and attaining the age of 21. Employees are allowed to contribute up to 15% of their wages to the Plan. The Company matches 25% of the employees' contribution, however, employer
contributions are limited to 4% of covered compensation. This limit was increased to 6% effective January 1, 2001. The Company made contributions of $100,448, $63,105, and $51,171 during the
three years ended December 31, 2001, 2000, and 1999, respectively.

27

---



NOTE 11    STOCK OPTIONS AND GAINSHARING INCENTIVE PLANS

Stock Options

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.

The
total number of shares of common stock that may be granted under the plan is 350,000, of which 45,500 shares remain available at December 31, 2001. The plan provides that
shares granted come from the Company's authorized but unissued common stock. The price of the options granted under the plan will not be less than 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.

The
fair value of each option grant issued is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were made in estimating fair value:

2001

2000

1999Expected Lives (Years)

10

10

10Dividend Yield

0.0%

0.0%

0.0%Expected Volatility

57%

99%

61%Risk-Free Interest Rate

3.25%

6.48 - 6.68%

5.75%


The
Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly,
no compensation costs were charged to operations for the years ending December 31, 2001, 2000, and 1999. Had compensation cost for the Company's stock option plan been determined pursuant to
SFAS No. 123, net earnings (loss) and earnings (loss) per share would have been as follows:

|                                  |             | 2001 |   | 2000      |  | 1999 |          
|--------------------------------- | ----------- | ---- | - | --------- |  | ---- | ---------
|Net Earnings (Loss)               |             |      |   |           |  |      |          
|                                  | As Reported |      | $ | 2,102,863 |  | $    | 2,043,573
|                                  | Pro Forma   |      | $ | 2,024,059 |  | $    | 1,952,077
|Basic Earnings (Loss) Per Share   |             |      |   |           |  |      |          
|                                  | As Reported |      | $ | 0.89      |  | $    | 0.86     
|                                  | Pro Forma   |      | $ | 0.86      |  | $    | 0.83     
|Diluted Earnings (Loss) Per Share |             |      |   |           |  |      |          
|                                  | As Reported |      | $ | 0.86      |  | $    | 0.83     
|                                  | Pro Forma   |      | $ | 0.84      |  | $    | 0.81     

28

---

Following
is a summary of the fixed stock option plan transactions during 2001, 2000 and 1999.

|                                                               |  | 2001 |         | 2000 |   | 1999
|-------------------------------------------------------------- |  | ---- | ------- | ---- | - | ----
|
|Options Outstanding, Beginning of Year                         |  |      | 297,500 |      | $ | 4.39
|Options Exercised                                              |  |      |        |      |   |    
|Options Forfeited                                              |  |      | (6,000  | )    |   | 3.13
|Options Granted                                                |  |      | 6,000   |      |   | 3.13
|                                                               |  |      |         |      |   |     
|Options Outstanding, End of Year                               |  |      | 297,500 |      | $ | 4.39
|                                                               |  |      |         |      |   |     
|Option Price Range of Exercised Shares                         |  | $    |        |      |   |     
|Weighted Average Fair Value of Options Granted During the Year |  | $    | 3.13    |      |   |     

The
following table summarizes information about fixed-price stock options outstanding at December 31, 2001:

Exercise Prices

Outstanding
12/31/2001

Exercisable
12/31/2001

Remaining
Contractual Life1.750

15,500

15,500

1 Years1.625

15,000

15,000

2 Years3.625

16,000

16,000

3 Years5.250

89,000

89,000

4 Years5.000

110,000

88,000

6 Years5.500

4,000

4,000

7 Years3.125

34,000

8,000

9 Years4.000

8,000

1,600

9 Years3.125

6,000

6,000

10 Years


Employee Gainsharing

During 1993, the Company adopted an employee gainsharing 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. During 2001, 137 gainsharing shares were issued in connection with this plan. Through December 31, 2001, 9,033 shares have been issued under this
Plan.

NOTE 12    CONTINGENT LIABILITIES

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

29

---



NOTE 13    SUPPLEMENTARY FINANCIAL INFORMATION

|                                           |  | Quarter
Ending
3/31/2001 |            | Quarter
Ending
6/30/2001 |   | Quarter
Ending
9/30/2001 |  | Quarter
Ending
12/31/2001 |            | Total
2001
|------------------------------------------ |  | ------------------------ | ---------- | ------------------------ | - | ------------------------ |  | ------------------------- | ---------- | ----------
|NET SALES                                  |  | $                        | 14,845,304 |                          | $ | 12,622,055               |  | $                         | 13,706,447 |           
|GROSS PROFIT                               |  |                          | 2,693,272  |                          |   | 1,999,326                |  |                           | 2,326,341  |           
|NET INCOME FROM CONTINUING OPERATIONS      |  |                          | 494,106    |                          |   | 302,040                  |  |                           | 361,249    |           
|BASIC EARNINGS PER SHARE OF COMMON STOCK   |  |                          | 0.21       |                          |   | 0.13                     |  |                           | 0.15       |           
|DILUTED EARNINGS PER SHARE OF COMMON STOCK |  |                          | 0.20       |                          |   | 0.12                     |  |                           | 0.15       |           

|                                           |  | Quarter
Ending
3/31/2000 |            | Quarter
Ending
6/30/2000 |   | Quarter
Ending
9/30/2000 |  | Quarter
Ending
12/31/2000 |            | Total
2000
|------------------------------------------ |  | ------------------------ | ---------- | ------------------------ | - | ------------------------ |  | ------------------------- | ---------- | ----------
|NET SALES                                  |  | $                        | 12,568,981 |                          | $ | 13,199,584               |  | $                         | 13,724,356 |           
|GROSS PROFIT                               |  |                          | 2,213,021  |                          |   | 2,361,225                |  |                           | 2,712,915  |           
|NET INCOME FROM CONTINUING OPERATIONS      |  |                          | 410,220    |                          |   | 448,009                  |  |                           | 546,616    |           
|BASIC EARNINGS PER SHARE OF COMMON STOCK   |  |                          | 0.17       |                          |   | 0.19                     |  |                           | 0.23       |           
|DILUTED EARNINGS PER SHARE OF COMMON STOCK |  |                          | 0.17       |                          |   | 0.19                     |  |                           | 0.22       |           

30

---



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 2001 proxy statement to be filed with the
Securities and Exchange Commission not later than April 30, 2002 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 2001 proxy statements to be filed with the Securities and
Exchange Commission not later than April 30, 2002 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 2001 proxy statements
to be filed with the Securities and Exchange Commission no later than April 30, 2002 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.)

31

---

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 11.                                                           
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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:

PageIndependent Auditor's Report on Supplementary InformationLarson, Allen, Weishair & Co, LLP

34Consolidated Financial Statement Schedule for the years ended December 31, 2001, 2000 and 1999II Valuation and Qualifying Accounts

35


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 and 23.1 respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

| | 10.1 |  | Letter of Undertaking, Promissory Notes for Real Estate, Equipment and Revolving Line of Credit between Wells Fargo Bank Minnesota National Association (formerly Norwest Bank Minnesota South, N.A), 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 exhibit is incorporated by reference to exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

| | 10.2 |  | Lease Agreement for Augusta building at 750 Industrial Park Drive, and Sales Agreement for Augusta building at 350 Industrial Park Drive, both in Augusta, Wisconsin.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following exhibit is incorporated by reference to exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.

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

The
following exhibit is incorporated by reference to exhibit 10.1 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.
| | ---- |  | ------------------------------------------------------------------------

32

---

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

| | 10.1 |  | Master lease agreement for equipment between Norwest Leasing Company and the Company.                               
| | ---- |  | --------------------------------------------------------------------------------------------------------------------
| | 10.6 |  | Security Agreement covering Notes in Exhibits 10.1.                                                                 
| | 10.7 |  | Promissory Note for 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.
| | 10.4 |  | Security Agreement covering Promissory Notes in Exhibits 10.2 and 10.3.                                                                                      
| | 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 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)                                        

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.
| | --- |  | -------------------------------------------------

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
| | --- |  | ------

None.

33

---



INDEPENDENT AUDITOR'S 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 2001, 2000, and 1999, 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 13, 2002

34

---



NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY        SCHEDULE II        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

|Column A                        |                                  | Column B |           | Column C  |   | Column D |         | Column E
|------------------------------- | -------------------------------- | -------- | --------- | --------- | - | -------- | ------- | --------
|
|Year Ended December 31, 2001:   |                                  |          |           |           |   |          |         |         
|                                | Allowance for Doubtful Accounts  |          | $         | 187,294   |   | $        | 131,263 |         
|                                | Inventory Obsolescence Reserve   |          |           | 1,007,280 |   |          | 346,770 |         
|                                |                                  |          |           |           |   |          |         |         
|                                |                                  | $        | 1,194,574 |           | $ | 478,033  |         | $       
|                                |                                  |          |           |           |   |          |         |         
|Year Ended December 31, 2000:   |                                  |          |           |           |   |          |         |         
|                                | Allowance for Doubtful Accounts  |          | $         | 102,030   |   | $        | 85,264  |         
|                                | Inventory Obsolescence Reserve   |          |           | 765,008   |   |          | 611,693 |         
|                                | Deferred Tax Valuation Allowance |          |           | 165,000   |   |          |        |         
|                                |                                  |          |           |           |   |          |         |         
|                                |                                  | $        | 1,032,038 |           | $ | 696,957  |         | $       
|                                |                                  |          |           |           |   |          |         |         
|Year Ended December 31, 1999: * |                                  |          |           |           |   |          |         |         
|                                | Allowance for Doubtful Accounts  |          | $         | 111,627   |   | $        | (9,597  | )       
|                                | Inventory Obsolescence Reserve   |          |           | 419,295   |   |          | 345,713 |         
|                                | Deferred Tax Valuation Allowance |          |           | 165,000   |   |          |        |         
|                                |                                  |          |           |           |   |          |         |         
|                                |                                  | $        | 695,922   |           | $ | 336,116  |         | $       
|                                |                                  |          |           |           |   |          |         |         

---

35

---



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 29, 2002 |  | By:                         
|March 29, 2002 |  | By:                         

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 29, 2002 |  | By: |  | /s/QUENTIN E. FINKELSONQuentin E. Finkelson President,
Chief Executive Officer and Director
|-------------- |  | --- |  | -------------------------------------------------------------------------------------------
|March 29, 2002 |  | By: |  | /s/MYRON KUNINMyron Kunin, Director                                                        
|March 29, 2002 |  | By: |  | /s/RICHARD W. PERKINSRichard W. Perkins, Director                                          
|March 29, 2002 |  | By: |  | /s/MICHAEL J. DEGENMichael J. Degen, Director                                              

36

---



INDEX TO EXHIBITS

DESCRIPTIONS OF EXHIBITS

|10.3 |  | Letter of Undertaking, Promissory Notes for Real Estate, Equipment and Revolving Line of Credit between Wells Fargo Bank Minnesota National Association (formerly Norwest Bank Minnesota South, N.A), 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.                                                                                         

37

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