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 Aerospace and Defense, Medical, and Industrial Equipment markets. We maintain manufacturing facilities in Baxter, Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Augusta, Wisconsin; and Monterrey, Mexico.

Summary of Results:

For the quarter ended March 31, 2012, we reported net sales of $28.4 million compared to $29.0 million reported in the same quarter of 2011, a 2% decrease. Our 90-day backlog remained relatively flat at $18.4 from where we started the year. Both our sales and backlog position is showing mixed results due to the sluggish economy and its impact on many of our customers.

Our gross profit in the first quarter of 2012 was 10.6% compared to 11.0% in the first quarter of 2011 due to product and service mix and unabsorbed capacity.

Income from operations was approximately $328,000 for the three months ended March 31, 2012 and $287,000 for the same period in 2011.

Net income for the first quarter of 2012 totaled $0.1 million or $0.04 per diluted common share. Net income for the same period in 2011 totaled $0.6 million or $0.23 per diluted common share. The net after tax impact of the non-operating gain was to increase net income by $0.5 million or $0.19 per diluted common share.

Cash provided from operating activities was $2.7 million in the first quarter of 2012. Cash used in operating activities for the three months ended March 31, 2011 was $3.9 million. The cash used in 2011 was needed to fund the working capital needs of our acquisition.

(1.) Results of Operations:

The following table presents statements of income data as percentages of total net sales for the periods indicated:

                                        Three Months Ended
                                             March 31
                                        2012         2011
Net Sales                                 100.0 %      100.0 %
Cost of Goods Sold                         89.4         89.0
Gross Profit                               10.6         11.0

Selling Expenses                            3.8          3.2
General and Administrative Expenses         5.6          6.8
Income from Operations                      1.2          1.0

Bargain Purchase Gain                       0.0          2.7
Other Expense, Net                         (0.5 )       (0.5 )
Income Before Income Taxes                  0.7          3.2

Income Tax Expense                          0.3          1.1
Net Income                                  0.4 %        2.2 %

Net Sales:

We reported net sales of $28.4 million and $29.0 million for the three months ended March 31, 2012 and 2011, respectively, a 2% decrease with results mixed by customer and industry.

Net sales by industry markets for the three month periods ended March 31, 2012 and 2011 are as follows:

                           Three Months Ended
                                March 31
                         2012     2011      %
(in thousands)            $        $      Change
Aerospace and Defense    4,668    4,410        6
Medical                  7,814    8,009       (2 )
Industrial              15,879   16,579       (4 )
Total Sales             28,361   28,998       (2 )

Backlog:

Our 90-day order backlog as of March 31, 2012 was approximately $18.4 million, compared to approximately $18.5 million at the beginning of the quarter and $20.0 million at March 31, 2011. Backlog by industry market is shown below.

                            Backlog as of the Quarter Ended
                          March 31      December 31    March 31
(in thousands)              2012            2011         2011

Aerospace and Defense   $      2,954    $      3,855   $   2,796
Medical                        5,858           5,657       5,325
Industrial                     9,632           9,016      11,895
Total Backlog           $     18,444    $     18,528   $  20,016

We are gaining traction with our Medical Device customers and several of our larger Industrial customers have increased their order position since the beginning of the year. The Aerospace and Defense orders are down from December 31, 2011 but consistent with March 31, 2011. Two of our largest Defense customers account for the fluctuations.

Our backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.

Gross Profit:

Gross profit percentage for the three months ended March 31, 2012 and 2011 was 10.6% and 11.0% of net sales, respectively. Mix of product and services along with underutilized capacity accounts for the majority of the change in gross margin percentage and to a lesser extent people related costs.

Selling Expense:

Our selling expenses were $1.1 million or 3.8% of net sales and $0.9 million or 3.2% of net sales for the three months ended March 31, 2012 and 2011, respectively. Our selling expense increase in the first quarter of 2012 comes from investing in more resources for our business development infrastructure and marketing initiatives.

General and Administrative Expense:

Our general and administrative expenses were $1.6 million or 5.6% of net sales and $2.0 million or 6.8% of net sales for the three months ended March 31, 2012 and 2011, respectively. People related expenses for open positions and redeployment into manufacturing and sales functions account for the majority of the decrease.

Other Income (Expense):

Other expense for the three months ended March 31, 2012 was $0.1 million compared to other income of $0.7 million for the three months ended March 31, 2011. Other income in the first quarter of 2011 relates primarily to a bargain purchase gain of $0.8 million from the Mankato acquisition in the first quarter of 2011.

Income Taxes:

Our effective tax rate for the three months ended December 31, 2012 and 2011 was 32% and 33%, respectively. The effective tax rate for the year ended December 31, 2012 is expected to be 35% compared to 34% for the year ended December 31, 2011.

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 WFB. We also have real estate and equipment term loans. Both the line of credit and real estate term note are subject to fluctuations in the LIBOR rates. The line of credit, real estate term note, and equipment loans 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 March 31, 2012, we had an outstanding balance of $7.3 million under the line of credit and unused availability of $5.9 million supported by our borrowing base. We believe our financing arrangements (see Note 3) and cash flows provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $13.0 million and $12.3 million as of March 31, 2012 and December 31, 2011. The increase in working capital relates primarily to the reclassification of the real estate term note from current liabilities to long term liabilities as a result of our new financing arrangement.

Net cash provided by operating activities for the three months ended March 31, 2012 was $2.7 million. Income, non-cash items, timing of our payroll accruals, along with strong collections of accounts receivable accounted for the majority of the operating cash provided in the quarter. Net cash used in operating activities for the three months ended March 31, 2011 was $3.9 million. The cash flow used in operations for the three months ended March 31, 2011 was primarily the result of working capital requirements needed to support the newly acquired Mankato operation, which included the purchase of approximately $4.0 million of inventory.

Net cash used in investing activities of $0.5 million for the three months ended March 31, 2012 is comprised of $0.5 million in property and equipment purchases to support the business.

Net cash used in financing activities for the three months ended March 31, 2012 was $2.2 million, mainly due to repayments on the line of credit of $2.1 million and payments on long-term debt of $0.1 million.

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, 2011. There have been no significant changes in these critical accounting policies since December 31, 2011. 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.

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;

†          Successful integration of recent acquisitions

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, 2011.