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. We provide value added services and technical support including design, testing, prototyping and supply chain management to customers in the industrial equipment and transportation, vision, medical and military/defense industries. We maintain manufacturing facilities in Baxter, Bemidji, Blue Earth, Fairmont and Merrifield, Minnesota, Garner, Iowa, Augusta, Wisconsin, and Monterrey, Mexico.

The U.S. economy is currently experiencing a period of declining growth that has had a negative impact on our results of operations as our customers demand for our products and services have been impacted. These economic conditions led us to implement a restructuring of our operations to match resources with current demand as discussed in Note 9. At this time we do not foresee any additional restructuring activities, however we will continue to assess market conditions and evaluate the need for additional changes.

Summary of Results:

Our second quarter showed signs we are nearing the bottom of the economic downturn, with revenue down only 8% compared to first quarter 2009 levels. We also saw improvements in our Loss from Operations, before restructuring charges, of 26% quarter over quarter from cost reduction initiatives. The restructuring of our capacity levels to match current customer demand will not be completed until August 2009 when we will begin to fully experience the cost savings from these events.

Net cash flow provided by operating activities for the second quarter was a positive $1.3 million, including one-time restructuring and impairment charges of $0.6 million, compared to net cash used in the first quarter of $3.1 million as we continue to focus on working capital and cash flow management.

For the quarter ended June 30, 2009, we reported net sales of $19.9 million compared to $32.0 million reported in the same quarter of 2008, a 38% decline year over year. Sales in the second quarter of 2009 for our Commercial operations, including Cable and Wire and Electronic Board Assembly, continued to be impacted by the economic downturn as commercial customers continued to cancel and delay orders as they adjust their inventory levels to the current demand for their products. Our Aerospace operations saw a sales decline due to the end of major contracts and the timing of new replacement business. The gross profit percentage was 6% and 14% for the second quarter of 2009 and 2008, respectively. Our gross profits were heavily impacted by lower production volume, resulting in the under utilization of our manufacturing facilities.

Loss from operations for the second quarter of 2009 totaled $2.2 million, including one-time restructuring and impairment charges, or $1.6 million excluding one-time restructuring and impairment charges compared to income

from operations of $1.1 million reported in the second quarter of 2008. Loss from operations for the first six months of 2009 totaled $4.3 million compared to income from operations of $2.4 million reported in the first six months of 2008. Net loss for the second quarter of 2009 totaled $1.5 million or $(0.56) per diluted common share compared to net income of $0.6 million, or $0.20 per diluted common share, reported in the second quarter of 2008. Net loss for the six months ended June 30, 2009 totaled $2.8 million, or $(1.04) per diluted common share compared to net income of $1.2 million, or $0.43 per diluted common share for the six months ended June 30, 2008. The impact of the one-time restructuring charges per diluted common share was $(0.14) for the three and six months ended June 30, 2009.

(1.) Results of Operations:

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

                                         Three Months Ended       Six Months Ended
                                              June 30                 June 30
                                         2009         2008        2009        2008
Net Sales                                  100.0 %      100.0 %    100.0 %     100.0 %
Cost of Goods Sold                          94.5 %       86.0 %     95.3 %      85.3 %
Gross Profit                                 5.5 %       14.0 %      4.7 %      14.7 %

Selling Expenses                             5.7 %        4.5 %      6.1 %       4.4 %
General and Administrative Expenses          7.8 %        6.0 %      7.5 %       6.6 %
Restructuring and Impairment Charges         3.2 %        0.0 %      1.6 %       0.0 %
Income (Loss) from Operations              -11.2 %        3.5 %    -10.5 %       3.7 %

Other Expenses, Net                          1.0 %        0.6 %      0.6 %       0.7 %
Income Tax Expense (Benefit)                -4.4 %        1.2 %     -4.3 %       1.2 %
Net Income (Loss)                           -7.8 %        1.7 %     -6.8 %       1.8 %

Net Sales:

We reported net sales of $19.9 million and $32.0 million for the quarters ended June 30, 2009 and 2008, respectively. Net sales for the six months ended June 30, 2009 and 2008 were $41.4 million and $63.2 million respectively. The global economic downturn has had a negative affect on demand for our customers' products and thus has adversely affected our sales. For the three months ended June 30, 2009 we saw sales decreases in our Aerospace operation of 37%, Electronic Board Assembly of 37%, and Cable and Wire of 41% compared to the three months ended June 30, 2008. For the six months ended June 30, 2009, sales decreased in our Aerospace operation by 27%, Electronic Board Assembly by 39% and Cable and Wire by 37% compared to the same period in 2008.

Our 90-day order backlog as of June 30, 2009 was approximately $13.9 million, compared to approximately $15.2 million at the beginning of the quarter and approximately $27.3 million on June 30, 2008. We have seen increased customer order cancellations and reschedules over the past three quarters and anticipate this trend to continue into the third and fourth quarters but to a lesser extent.

Gross Profit:

Gross profit decreased to 5.5% and 4.7% of net sales for the three months and six months ended June 30, 2009, respectively, from 14.0% and 14.7% of net sales for the three months and six months ended June 30, 2008, respectively. The decrease in gross profit as a percentage of net sales was the result of our lower production volumes causing under utilization of our manufacturing facilities, as well as the

mix of products and services. We continue to implement cost reduction initiatives to better align our production facilities with the lower demand levels.

Selling Expense:

We had selling expenses of $1.1 million or 5.7% of net sales for the second quarter of 2009 and $1.4 million or 4.5% of net sales for the second quarter of 2008. Selling expenses for the six months ended June 30, 2009 and 2008 were $2.5 million or 6.1% of net sales and $2.8 million or 4.4% of net sales, respectively. Selling expense dollars are down as a result of cost management but it is our intent to maintain our sales infrastructure and marketing initiatives during the economic downturn. We will continue to maintain our high level of customer service and take advantage of the opportunity to expand our customer base at this time as OEM's look to further outsource and consolidate their supply base to reduce costs and risks in the supply chain.

General and Administrative Expense:

Our general and administrative expenses were $1.5 million or 7.8% of net sales for the three months ended June 30, 2009 compared to $1.9 million or 6.1% of net sales reported for the three months ended June 30, 2008. General and administrative expenses for the six months ended June 30, 2009 were $3.1 million or 7.5% of net sales compared to $4.2 million or 6.6% of net sales for the same period in 2008. The $0.4 million or 21% decrease and $1.1 million or 26% decrease for the three month and six month periods ended June 30, 2009, respectively, were the result of adjusting our cost structure by reducing personnel and discretionary spending levels.

Other Expense:

Other expenses, net were $193,632 for the quarter ended June 30, 2009 compared to $193,495 for the quarter ended June 30, 2008. Other expenses, net were $278,810 for the six months ended June 30, 2009 compared to $412,455 for the six months ended June 30, 2008. The decrease in other expenses was mainly due to a decrease in interest expense as a result of lower borrowing levels and interest rates.

Income Tax:

Income tax benefit for the three months ended June 30, 2009 was $867,000 compared to an income tax expense of $367,000 for the three months ended June 30, 2008. Income tax benefit for the six months ended June 30, 2009 was $1.8 million compared to income tax expense of $0.8 million for the six months ended June 30, 2008. The annual effective tax rate for 2009 is expected to be approximately 37% compared to 39% for 2008. The decrease in the annual effective tax rate from 2008 to 2009 primarily relates to the absence of the domestic production deduction due to the projected loss in 2009.

At June 30, 2009 we had $146,000 of net uncertain tax benefit positions that would reduce our effective income tax rate if recognized, an increase of $57,000 over December 31, 2008. $46,000 of the increase relates to restricted stock deductions, with the remaining increase relating to R&E credits and the
Section 199 deduction. Due to statute expiration, a decrease could occur with respect to this FIN 48 reserve of approximately $40,000 during fiscal year 2009.

Restructuring and Impairment Charges:

In conjunction with the one-time restructuring costs, we recognized $0.6 million of restructuring and impairment charges during the three months and six months ended June 30, 2009 to Income (Loss) from Operations. The restructuring and impairment costs for the three months and six months ended June 30, 2009 included $0.5 million in non-cash impairment charges for property and equipment that will no longer be used in operations and $0.1 million related to employee benefits, contract termination costs, and other expenses incurred to relocate production.

The cash charges consist of employee benefit costs of approximately $46,000, lease termination fees of $14,000, and other expense incurred to relocate production of $44,000. Total cash paid in the second quarter of 2009 was $18,000 with the remaining accrued liabilities of approximately $86,000 expected to be paid over the next three months.

In relation to the restructuring charges, we currently expect to recognize approximately $1.2 million in total restructuring and impairment costs primarily over the course of fiscal year 2009. The remaining $0.6 million will consist entirely of cash charges, of which $0.4 million we be paid over the third and fourth quarters. The restructuring of our capacity levels to match current customer demand will not be completed until August 2009 when we will begin to fully experience the cost savings from these events.

(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 fluctuations 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 performance, and limit the amount of annual capital expenditures. 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 June 30, 2009, we had an outstanding balance of $6.4 million under the line of credit and unused availability of $3.4 million supported by our borrowing base level.

On August 6, 2009 we entered into a second amended and restated credit agreement with WFB which includes covenants and performance requirements that better tie to our current business and financial position. The credit agreement provides for a line of credit arrangement of $12 million (see Note 4). We believe our financing arrangements and anticipated cash flows from operations will be sufficient to satisfy our working capital needs.

Along with the previously mentioned restructuring, 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 have begun to see the positive impact on our Income (Loss) from Operations and Cash Flow from Operating Activities. The full impact of the cost reductions will not be felt until the end of the third quarter. In the meantime, we continue to focus our efforts on lowering inventory levels and collecting accounts receivable within terms in order to improve our cash position.

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.

                                       June 30,      December 31,     December 31,     December 31,
                                         2009            2008             2007             2006

Current Ratio
(Current Assets / Current
Liabilities)                                 1.73             1.74             1.68             1.63
Working Capital
(Current Assets - Current
Liabilities)                         $ 14,115,311    $  15,777,784    $  14,812,352    $  12,711,278
Quick Ratio
(Cash + Accounts Receivable /
Current Liabilities)                         0.66             0.65             0.75             0.75
Accounts Receivable to Working
Capital
(Average Accounts Receivable/
Working Capital)                             0.91             0.97             1.01             1.14
Inventory to Working Capital
(Average Inventory/ Working
Capital)                                     1.23             1.33             1.18             1.25

Our working capital of $14.1 million as of June 30, 2009 decreased from $15.8 million at December 31, 2008. The working capital decrease can be attributed to decreases in inventories and accounts receivable and an increase in borrowing levels.

Net cash provided from operations for the second quarter, including one-time restructuring charges, was $1.3 million as a result of our focus on working capital management. Net cash used in operating activities for the six months ended June 30, 2009 was $1.8 million, which is down from the $2.0 million of net cash used in operating activities for the six months ended June 30, 2008. The cash flow used in operations for the six months ended June 30, 2009 is the result of a net loss of $2.8 million, adjusted for noncash adjustments including depreciation, amortization, stock-based compensation expense and non-cash restructuring and impairment charges which combined totaled $1.5 million in positive adjustments, plus the net change in operating assets and liabilities of $0.5 million. Decreases in inventories of $3.8 million, accounts receivable of $1.2 million, and prepaids of $0.3 million were offset by a decrease in accounts payable, income taxes payable, and accruals totaling $5.8 million. These changes account for the majority of net cash used in the first six months of 2009.

Net cash used in investing activities of $0.2 million for the six months ended June 30, 2009 is comprised primarily of equipment purchases.

Net cash provided by financing activities for the six months ended June 30, 2009 was $2.0 million, consisting primarily of line of credit advances.

(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 No.'s 157 and 165 as discussed in Notes 1 and 5 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.

†          Additional impairment or restructuring charges

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 the fiscal year ended December 31, 2008.