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 mainly 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, Augusta, Wisconsin, and Monterrey, Mexico.

During the nine months of 2009, we experienced a period of declining growth from the overall poor global economy that resulted in a negative impact on our financial performance. The reduction in revenue led us to implement a restructuring of our operations to match resources with current demand levels as discussed in Note 9. At this time we do not foresee any additional restructuring activities, we will continue to assess market conditions and evaluate the need for any additional actions but it appears that our level of business has stabilized.

Our third quarter revenue was down only 6% compared to second quarter levels, as we continue to see some stabilization with our customer demand. We have also begun to see improvements in our Loss

from Operations, before restructuring charges due to the cost reduction and capacity adjustment initiatives, improving our gross margin by three percentage points over the second quarter.

Summary of Results:

For the quarter ended September 30, 2009, we reported net sales of $18.7 million compared to $31.7 million reported in the same quarter of 2008, a 41% decline year over year. We continue to see stabilization in our top line as third quarter sales were down only slightly compared to second quarter sales. The gross profit percentage was 8.7% and 13.6% for the third 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. The cost reductions and capacity restructuring initiative are beginning to take hold as we saw continued improvement in the gross margin percentage over second quarter. The full impact of the cost savings from these events will not be realized until the fourth quarter.

Loss from operations for the third quarter of 2009 totaled $1.1 million, including one-time restructuring and impairment charges, or $0.8 million excluding one-time restructuring and impairment charges compared to income from operations of $0.9 million reported in the third quarter of 2008. The 2009 third quarter loss, before restructuring costs, improved 48%, on lower revenue, when compared to the second quarter. Loss from operations for the first nine months of 2009 totaled $5.5 million compared to income from operations of $3.3 million reported in the first nine months of 2008.

Net loss for the third quarter of 2009 totaled $0.9 million or $(0.31) per diluted common share, or $(0.23) excluding one-time restructuring and impairment charges, compared to net income of $0.5 million, or $0.18 per diluted common share, reported in the third quarter of 2008. Net loss for the nine months ended September 30, 2009 totaled $3.7 million, or $(1.35) per diluted common share, or $(1.13) excluding one-time restructuring and impairment charges, compared to net income of $1.7 million, or $0.61 per diluted common share for the nine months ended September 30, 2008. The impact of the one-time restructuring charges per diluted common share was $(0.08) and $(0.22) for the three and nine months ended September 30, 2009.

Net cash used in operating activities for the first nine months of 2009 was $2.6 million but the net cash provided over the past six months has been positive $0.5 million as we focused on improving operating profit, working capital and operating cash flows.

(1.) Results of Operations:

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

                                         Three Months Ended      Nine Months Ended
                                           September 2009          September 2009
                                         2009         2008        2009        2008
Net Sales                                  100.0 %      100.0 %    100.0 %     100.0 %
Cost of Goods Sold                          91.3 %       86.4 %     94.1 %      85.7 %
Gross Profit                                 8.7 %       13.6 %      5.9 %      14.3 %

Selling Expenses                             5.5 %        4.7 %      5.9 %       4.5 %
General and Administrative Expenses          7.5 %        5.8 %      7.5 %       6.3 %
Restructuring and Impairment Charges         1.9 %        0.0 %      1.7 %       0.0 %
Income (Loss) from Operations               -6.2 %        3.1 %     -9.2 %       3.5 %

Other Expenses, Net                          1.2 %        0.4 %      0.8 %       0.6 %
Income Tax Expense (Benefit)                -2.8 %        1.1 %     -3.8 %       1.1 %
Net Income (Loss)                           -4.6 %        1.6 %     -6.2 %       1.8 %

Net Sales:

We reported net sales of $18.7 million and $31.7 million for the quarters ended September 30, 2009 and 2008, respectively. Net sales for the nine months ended September 30, 2009 and 2008 were $60.1 million and $94.9 million respectively.
Aerospace and Defense sales for the three-months ended September 30, 2009 were down 63%, Medical sales were down 11%, and Industrial sales were down 30% compared to the three-months ended September 30, 2008. For the nine-months ended September 30, 2009, Aerospace and Defense sales were down 41%, Medical sales down 11% and Industrial sales were down 40% compared to the same period in 2008. Aerospace and Defense sales were down due to the end of major contracts and the timing of other new replacement business. The slow economy has caused lower Medical and Industrial sales, with a larger impact on Industrial sales. Net sales by industry markets for the three and nine month periods ended September 30, 2009 and 2008 are as follows:

                           Three Months Ended         Nine Months Ended
                              September 30               September 30
                         2009     2008      %       2009     2008      %
(in thousands)            $        $      Change     $        $      Change
Aerospace and Defense    4,978   13,496      -63 % 21,531   36,299      -41 %
Medical                  4,721    5,311      -11 % 12,597   14,219      -11 %
Industrial               8,952   12,850      -30 % 26,564   44,362      -40 %
Total Sales             18,651   31,657      -41 % 60,692   94,880      -36 %

Backlog:

Our 90-day order backlog as of September 30, 2009 was approximately $14.2 million, compared to approximately $13.9 million at the beginning of the quarter and approximately $26.2 million on September 30, 2008. During the quarter we saw increased customer orders and scheduling activity along with higher levels of quoting from both new and existing customers. Backlog by industry market is shown below.

                               Backlog as of the Quarter Ended
                        September 30       June 30       September 30
(in thousands)              2009             2009            2008
Aerospace and Defense   $       4,942    $      5,455   $       13,744
Medical                         2,788           1,676            4,347
Industrial                      6,477           6,805            8,113
Total Backlog           $      14,207    $     13,936   $       26,204

Gross Profit:

Gross profit percentages were 8.7% and 5.9% of net sales for the three months and nine months ended September 30, 2009, respectively, compared to 13.6% and 14.3% of net sales for the three months and nine months ended September 30, 2008, respectively. In the third quarter of 2009 we saw a significant gross profit improvement of three percentage points over second quarter, while only experiencing a portion of the expected savings coming as a result of the capacity restructuring that was completed in August. The year over year decline in gross profit as a percentage of net sales was the result of under utilization of our manufacturing facilities, as well as the mix of products and services.

Selling Expense:

We had selling expenses of $1.0 million or 5.5% of net sales for the third quarter of 2009 and $1.5 million or 4.7% of net sales for the third quarter of 2008. Selling expenses for the nine months ended September 30, 2009 and 2008 were $3.6 million or 5.9% of net sales and $4.3 million or 4.5% of net sales, respectively. Selling expenses are down $0.5 million in the third quarter as a result of cost management and avoidance. Our intent is to maintain our sales infrastructure and marketing initiatives during the economic downturn, providing high levels of customer service and taking advantage of the opportunities to expand our customer base.

General and Administrative Expense:

Our general and administrative expenses were $1.4 million or 7.5% of net sales for the three months ended September 30, 2009 compared to $1.8 million or 5.8% of net sales reported for the three months ended September 30, 2008. General and administrative expenses for the nine months ended September 30, 2009 were $4.5 million or 7.5% of net sales compared to $6.0 million or 6.3% of net sales for the same period in 2008. The $0.5 million or 24% decrease and $1.5 million or 25% decrease for the three month and nine month periods ended September 30, 2009, respectively, were the result of adjusting our cost structure by reducing personnel and discretionary spending levels.

Other Expense:

Other expenses, net were $227,443 for the quarter ended September 30, 2009 compared to $115,866 for the quarter ended September 30, 2008. Other expenses, net were $506,253 for the nine months ended September 30, 2009 compared to $528,332 for the nine months ended September 30, 2008. The three-month increase in other expenses relates primarily to finance and legal charges incurred in securing the Second Amended and Restated debt agreement. The nine-month decrease in other expenses was mainly due to a decrease in interest expense.

Income Tax:

Income tax benefit for the three months ended September 30, 2009 was $523,000 compared to an income tax expense of $331,000 for the three months ended September 30, 2008. Income tax benefit for the nine months ended September 30, 2009 was $2.3 million compared to income tax expense of $1.1 million for the nine months ended September 30, 2008. The annual effective tax rate for 2009 is

expected to be approximately 37% compared to 39% for 2008. The 2009 annual effective tax rate is being impacted by the loss of the domestic production deduction in 2009.

Restructuring and Impairment Charges:

In conjunction with the one-time restructuring costs, we recognized $0.4 million and $1.0 million of restructuring and impairment charges during the three months and nine months ended September 30, 2009, respectively, to Loss from Operations. The restructuring and impairment costs for the nine months ended September 30, 2009 included $0.5 million in non-cash impairment charges for property and equipment that will no longer be used in operations and $0.5 million related to employee benefits, contract termination costs, and other expenses incurred to relocate production.

The nine-month cash charges consist of employee benefit costs of approximately $46,000, lease termination fees of $50,000, and other expenses incurred to relocate production of $318,000. Total cash paid in the first nine months of 2009 was $414,000 with the remaining accrued liabilities of approximately $87,000 expected to be paid over the next nine months.

(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 September 30, 2009, we had an outstanding balance of $7.1 million under the line of credit and unused availability of $1.9 million supported by our borrowing base.

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. We believe our new financing arrangements and our return to positive cash flows from operations, exclusive of one-time restructuring charges, will be sufficient to satisfy our working capital needs.

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.

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

Current Ratio                                   1.73             1.74             1.68             1.63
(Current Assets / Current
Liabilities)
Working Capital                      $    13,392,423    $  15,777,784    $  14,812,352    $  12,711,278
(Current Assets - Current
Liabilities)
Quick Ratio                                     0.65             0.65             0.75             0.75
(Cash + Accounts Receivable /
Current Liabilities)
Accounts Receivable to Working
Capital                                         0.89             0.97             1.01             1.14
(Average Accounts Receivable/
Working Capital)
Inventory to Working Capital                    1.22             1.33             1.18             1.25
(Average Inventory/ Working
Capital)

Our working capital of $13.4 million as of September 30, 2009 decreased from $15.8 million at December 31, 2008. Our increased focus on inventory management has driven our total inventory down $4.9 million since December 31, 2008 while accounts receivable decreased $1.5 million due to lower net sales. These decreases in current assets were partially offset by lower accounts payable and accruals of $3.4 million.

Net cash used in operations for the three and nine months ended September 30, 2009 was $0.9 million and $2.6 million, respectively. Net cash used in operating activities for the nine months ended September 30, 2008 was $1.1 million. The cash flow used in operations for the nine months ended September 30, 2009 is the result of a net loss of $3.7 million, adjusted for noncash adjustments including depreciation, amortization, stock-based compensation expense and non-cash restructuring and impairment charges which combined totaled $2.7 million in positive adjustments, plus the net change in operating assets and liabilities of $1.6 million. Decreases in inventories of $4.9 million, accounts receivable of $1.4 million, and prepaids of $0.1 million were offset by a decrease in accounts payable, income taxes payable, and accruals totaling $8.2 million. These changes account for the majority of net cash used in the first nine months of 2009 and are directly related to the shortfall in net sales.

Net cash used in investing activities of $0.4 million for the nine months ended September 30, 2009 is comprised of equipment purchases and proceeds from the sale of assets. We continue to monitor our capital expenditures closely in order to maintain our current business levels.

Net cash provided by financing activities for the nine months ended September 30, 2009 was $2.5 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. 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.