Overview:

We are a Wayzata, Minnesota based full-service Electronics Manufacturing Services (EMS) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. Major markets served include industrial equipment and transportation, vision, medical and military/defense. We have operating facilities in Baxter, Bemidji, Blue Earth, Fairmont and Merrifield, Minnesota, Garner, Iowa, Augusta, Wisconsin, and Monterrey, Mexico.

Summary:

For the quarter ended March 31, 2009, we reported net sales of $21.6 million compared to $31.2 million reported in the same quarter of 2008. Sales in the first quarter of 2009 were heavily impacted by the economic downturn as our customers reacted by canceling and delaying orders as well as adjusting their inventory levels to the current demand for their products. The gross profit percentage was 3.9% and 15.3% for the first quarter of 2009 and 2008, respectively. Our gross profits were impacted by volume shortfall, product mix and underutilization of our manufacturing facilities. Loss from operations for the first quarter of 2009 totaled $2.1 million compared to operating income of $1.2 million reported in the first quarter of 2008. Net loss for the first quarter of 2009 totaled $1.3 million, or $(0.47) per diluted common share compared to net income of $0.6 million, or $0.23 per diluted common share, reported in the first quarter of 2008.

(1.) Results of Operations:

The following table presents statement of operations data as percentages of total revenues for the periods indicated:

                                        Three Months Ended
                                             March 31
                                        2009         2008
Net Sales                                 100.0 %      100.0 %
Cost of Goods Sold                         96.1 %       84.7 %
Gross Profit                                3.9 %       15.3 %

Selling Expenses                            6.6 %        4.3 %
General and Administrative Expenses         7.2 %        7.1 %
Income (Loss) from Operations              -9.9 %        3.9 %

Other Expenses, Net                         0.4 %        0.7 %
Income Tax Expense (Benefit)               -4.3 %        1.2 %
Net Income (Loss)                          -6.0 %        2.0 %

Net Sales:

We reported net sales of $21.6 million and $31.2 million for the first quarters ended March 31, 2009 and 2008, respectively. Recent unfavorable economic conditions and uncertainty because of fluctuating circumstances in the global financial markets is impacting businesses around the globe. The global economic downturn has had a negative affect on demand for our customers' products and thus has adversely affected our sales, resulting in a 41% sales decrease in Electronic Board Assembly, a 34% sales decrease in Cable and Wire, and a sales decrease of 17% in Aerospace Systems. Our 90-day order backlog as of March 31, 2009 was approximately $15.2 million, compared to approximately $18.2 million at the beginning of the quarter. We have seen increased customer order cancellations

and reschedules over the past several months and anticipate this trend to continue into the second quarter.

Gross Profit:

Our gross profit for the first quarter of 2009 was $0.8 million or 3.9% of net sales compared to gross profit of $4.8 million or 15.3% of net sales for the first quarter of 2008. Our gross profits were impacted by our volume shortfall causing underutilization of our manufacturing facilities, as well as the mix of products and services. The manufacturing facilities have taken steps first at the end of January and again at the start of April to balance production resources and spending to current customer demand, including work force reductions, reduced management salaries, hiring and wage freezes, and reduced discretionary spending.

Selling Expense:

We had selling expenses of $1.4 million or 6.6% of net sales for the first quarter of 2009 and $1.3 million or 4.3% of net sales for the first quarter of 2008. The increase in selling expense as a percent of sales is mainly due to the shortfall in sales. It is our intent to maintain our sales infrastructure and marketing initiatives during the economic downturn in order to maintain a high level of customer service and expand our customer base as OEM's look to outsourcing and consolidation of their supply base to reduce their costs.

General and Administrative Expense:

Our general and administrative expenses were $1.5 million or 7.2% of net sales for the first quarter of 2009 and $2.2 million or 7.1% of net sales reported for the first quarter of 2008. The $0.7 million decrease in general and administrative expenses for the quarter was the result of decreased personnel and discretionary spending levels as we adjust our cost structure to current customer demand levels.

Other Expense:

Other expenses, net were $85,178 for the quarter ended March 31, 2009 compared to $218,971 for the first quarter of 2008. The decrease in other expenses was mainly due to a decrease in interest expense as a result of lower interest rates.

Income Tax:

Income tax benefit for the three months ended March 31, 2009 was $919,000 compared to an income tax expense of $393,000 for the three months ended March 31, 2008. The effective tax rate of 42% for the first three months of 2009 is the result of higher than estimated research and development credits for 2008. The annual effective tax rate for 2009 is expected to be approximately 39% which is consistent with the 2008 annual effective tax rate.

(2.) Liquidity and Capital Resources:

We have satisfied our liquidity needs over the past several years through revenue generated from operations and an operating line of credit through Wells Fargo Bank, N.A. (WFB). Both the line of credit and real estate term note are subject to variations in the LIBOR rates. The line of credit and real estate term note with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial ratios, and limit the amount of annual capital expenditures. As of March 31, 2009, we are not in compliance with certain financial covenants. These covenant violations constitute an event of default under the current credit agreement and also result in a cross-default under our indebtedness related to the Blue Earth County Industrial Revenue Bond debt (Blue Earth). Although WFB is not presently exercising its rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. As such, we have reclassified all outstanding debt with WFB

and Blue Earth, including the related interest rate swap, as current on our March 31, 2009 balance sheet.

We are presently negotiating with WFB relating to a new financing agreement that meets our current financial position and projected cash flows. We expect this agreement to be in place on or about May 31, 2009. However, we cannot be certain that we will be able to enter into a new financing agreement with terms favorable to Nortech given the current capital market conditions. As previously stated, we have implemented various cost-reduction and cash-management measures over the past several months, including employee layoffs, reducing management salaries, hiring and wage freezes, and cutting discretionary spending to adjust to the lower customer demand levels. We continue to focus our efforts on lowering inventory levels and collecting accounts receivable within terms in order to improve our cash position. We expect our working capital position and current availability under our existing line of credit will allow us to meet our future projected cash requirements.

The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets. On March 31, 2009, we had an outstanding balance of $7.1 million under the line of credit and unused availability of $4.7 million supported by our borrowing base level.

The following unaudited ratios are not required under the SEC guidelines or accounting principles generally accepted in the United States of America, however, we believe they are meaningful measures and are useful to readers of our financial statements.

                                           March 31,      December 31,     December 31,     December 31,
                                              2009            2008             2007             2006

Current Ratio
(Current Assets / Current Liabilities)            1.43             1.74             1.68             1.63

Working Capital
(Current Assets - Current Liabilities)    $ 10,380,231    $  15,777,784    $  14,812,352    $  12,711,278

Quick Ratio
(Cash + Accounts Receivable / Current
Liabilities)                                      0.57             0.65             0.75             0.75

Accounts Receivable to Working Capital
(Average Accounts Receivable/ Working
Capital)                                          1.29             0.97             1.01             1.14

Inventory to Working Capital
(Average Inventory/ Working Capital)              1.85             1.33             1.18             1.25

Our working capital of $10.4 million as of March 31, 2009 decreased from $15.8 million at December 31, 2008. In addition to the reclassification of outstanding WFB and Blue Earth debt from long-term to current liabilities, the working capital decrease can be attributed to decreases in inventories, which were offset by a decrease in accounts payable and increases in accounts receivable.

Net cash used in operating activities for the three months ended March 31, 2009 was $3.1 million, which is up from the $2.3 million of net cash used in operating activities for the three months ended March 31, 2008. The cash flow used in operations for the three months ended March 31, 2009 is the result of a net loss of $1.3 million, adjusted for noncash adjustments including depreciation, amortization and stock-based compensation expense which combined totaled $0.5 million in positive

adjustments, plus the net change in operating assets and liabilities of $2.3 million. A decrease in inventories of $3.0 million offset by a decrease in accounts payable, income taxes payable, and accruals totaling $5.1 million account for the majority of net cash used in the first quarter of 2009.

Net cash used in investing activities of $0.2 million for the three months ended March 31, 2009 is comprised entirely of equipment purchases.

Net cash provided by financing activities for the three months ended March 31, 2009 was $2.5 million, consisting primarily of line of credit advances of $2.8 million, offset by principal payments on long-term debt.

(3.) Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes in these critical accounting policies since December 31, 2008, other than the adoption of SFAS 157 and 159 as discussed in Note 4 of the Condensed Notes to the Consolidated Financial Statements in this Form 10-Q. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

(4.) Forward-Looking Statements:

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as "anticipate," "believe," "estimate," "expect," "forecast," "intend," "possible," "potential," "predict," "project," or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

† Volatility in the marketplace which may affect market supply and demand for our products;

†          Increased competition;
†          Changes in the reliability and efficiency of operating facilities or
those of third parties;

†          Risks related to availability of labor;

†          Increase in certain raw material costs such as copper;

†          Commodity and energy cost instability;

†          General economic, financial and business conditions that could affect
our financial condition and results of operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our report on Form 10-K for fiscal year ended December 31, 2008.