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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission File Number: 0-10355

COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Minnesota 41-0957999
- --------------------------------- --------------------
(State or other jurisdiction (Federal Employer
of incorporation or organization) Identification No.)

213 South Main Street
Hector, MN 55342
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (320) 848-6231

Securities registered pursuant to Section 12(b) of the Act (effective January
27, 2003):

Title of each class
Common Stock, $.05 par value

Securities registered pursuant to Section 12(g) of the Act: None

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 to 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.[X]


Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $45,302,000 based upon the closing sale price of
the Company's common stock on the American Stock Exchange ("AMEX") on March 21,
2003.

As of March 21, 2003 there were outstanding 8,129,666 shares of the Registrant's
common stock.

Documents Incorporated by Reference:Portions of the
Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May
21, 2003 are incorporated by reference into
Part III of this Form 10-K.
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PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Communications Systems, Inc. (herein collectively called "CSI" or the "Company")
is a Minnesota corporation organized in 1969 which operates directly and through
its subsidiaries located in the United States (including Puerto Rico), Costa
Rica and the United Kingdom. CSI is principally engaged in the manufacture and
sale of modular connecting and wiring devices for voice and data communications
and the manufacture of media and rate conversion products for telecommunications
networks. The Company is also engaged in the sale of wireless networking
products.

In 1998, the Company acquired JDL Technologies, Inc. ("JDL"). JDL, located in
Edina, Minnesota, provides telecommunications network design, specification, and
training services to educational institutions. JDL also sells internet access
software for use in elementary and secondary schools. The acquisition was
accounted for as a purchase and operations of JDL have been included in
consolidated operations from August 7, 1998.

Also in 1998, the Company acquired Transition Networks, Inc. ("TNI"). TNI,
located in Eden Prairie, Minnesota is a manufacturer of media and rate
conversion products, which permit telecommunications networks to move
information between copper-wired equipment and fiber-optic cable. The
acquisition was accounted for as a purchase and operations of TNI have been
included in consolidated operations from December 1, 1998.

In1999, the Company acquired LANart Corporation, a designer and manufacturer of
application specific integrated circuits. LANart's operations have been merged
into the Company's Transition Networks, Inc. subsidiary. The acquisition was
accounted for as a purchase and operations of LANart Corporation have been
included in consolidated results from April 7, 1999.

Effective March 25, 2002, the Company acquired through a newly formed
subsidiary, MiLAN Technology Corporation, substantially all the assets of the
MiLAN division of Digi International Inc. for approximately $8,100,000 in cash.
MiLAN, located in Sunnyvale, California is a manufacturer of media and rate
conversion products, which permit telecommunications networks to move
information between copper-wired equipment and fiber-optic cable. In addition,
MiLAN is also a supplier of wireless access points, bridges and other networking
products. The acquisition was accounted for as a purchase and operations of
MiLAN have been included in consolidated operations from March 25, 2002.

Additional information on these acquisitions can be found in subparagraphs
(c)(1)(iii) and (c)(1)(iv) under Item 1 herein, in "Acquisitions and
Dispositions" under Item 7, Management's Discussion and Analysis and in Note 10
of Notes to Consolidated Financial Statements under Item 8, herein.

The Company maintains a website at www.commsystems.inc. Our annual reports on
Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form
8-K (and any amendments to these reports) are available free of charge by
linking from our website to the Securities & Exchange Commission website.



(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company divides its businesses into four segments: Suttle, which
manufactures U.S. standard modular connecting and wiring devices for voice and
data communications; Austin Taylor, which manufactures British standard line
jacks, patch panels, wiring harness assemblies, metal boxes, distribution
cabinets and distribution and central office frames; Transition Networks and
MiLAN Technology, which designs and market data transmission, computer network
and media conversion products and print servers, JDL Technologies, Inc. provides
telecommunications network design, specification and training services to
educational institutions. Information regarding operations in the various
segments is set forth in Note 10 of the Notes to Consolidated Financial
Statements under Item 8, herein.

2

(c) NARRATIVE DESCRIPTION OF BUSINESS

(i) Suttle
------
The Company manufactures and markets connectors and wiring devices for voice,
data and video communications under the "Suttle" brand name in the United States
(U.S.) and internationally. The Company also manufactures a line of high
performance fiber-optic connectors, interconnect devices and fiber cable
assemblies for the telecommunications, computer and electronics markets.
Substantially all of Suttle's products are manufactured at the Company's plants
in Hector, Minnesota (Suttle Apparatus Minnesota Division), Humacao, Puerto Rico
(Suttle Caribe, Inc.) and San Jose, Costa Rica (Suttle Costa Rica, S.A.).
Certain products are purchased from contract manufacturers. Segment sales were
$33,159,000 in 2002 or 31% of consolidated revenues and $39,992,000 or 42% in
2001.


Products
--------
Suttle's products are used in on-premise connection of telephones, data
terminals and related equipment. The product line consists primarily of modular
connecting devices and includes numerous types of jacks, connecting blocks and
assemblies, adapters, cords and related equipment, which are offered in a
variety of colors, styles and wiring configurations. Most of the products are
used in voice applications, but the Company continues to develop an expanding
line of products for network systems applications. A significant portion of
Suttle's revenues is derived from sales of a line of corrosion-resistant
connectors, which utilize a water-resistant gel to offer superior performance in
harsh environments. Station apparatus products generally range in price from
$0.70 to $25.00 per unit. A majority of the sales volume, both in units and
revenues, is derived from products selling for under $5.00.

The Company produces high performance fiber-optic connectors, interconnect
devices and fiber cable assemblies that are used in high-speed fiber-optic
networks and local area network connections. The Company's patented Quick Term
TM fiber optic connector significantly reduces installation time and costs
associated with making fiber connections. By eliminating the need for a curing
oven, the product reduces field installation time for this process from 20
minutes to 2 minutes. The Company's fiber-optic connector products range in
price from $2.50 to $1,500.00.

The Company is a manufacturer and seller of DSL (Digital Subscriber Lines)
filters for home and business applications. The Company also resells DSL filter
products procured from offshore sources. These filters permit the user to
receive both analog and digital signals simultaneously and allow a single
telephone line to support uninterrupted voice, fax and internet capabilities.

The Company also produces wireless LAN products targeted at the residential and
small business markets. The channel for these products is primarily through
service providers who are selling broadband connectivity products.

Markets and Marketing
---------------------
Suttle competes in all major areas of the telecommunications connector market
utilizing modular four, six and eight conductor jacks. Customers include the
major telephone companies (frequently referred to as "RBOCs" which are Verizon
Logistics, Bell South, SBC Communications, and Qwest), other telephone
companies, electrical contractors, interconnect companies, original equipment
manufacturers and retailers. These customers are served directly through the
Company's sales staff and through distributors such as Sprint North Supply,
Verizon Logistics, Graybar Electric Company, Alltel Supply, KGP and Anixter
Communications. As a group, sales to the major telephone companies, both
directly and through distribution, were approximately $16,687,000 in 2002 and
$19,394,000 in 2001, which represented 50% of Suttle's sales in 2002 and 48% in
2001.

3

The Company markets business and network systems products, which are an
increasingly important part of its product line. Independent contractors (which
include businesses often referred to as "interconnect companies") are engaged in
the business of engineering, selling, installing and maintaining telephone
equipment for the business community. The Company markets its products to
independent contractors through a network of manufacturer's representatives,
through distributors, and through the Company's sales staff. Sales of products
for business and network systems accounted for 15% and 13% of Suttle's revenues
in 2002 and 2001, respectively. These structured cabling products are also
helping Suttle penetrate new markets in the data-networking world with education
and hospitality/ multiple dwelling unit (MDU) projects. These applications
utilize a blended solution of wireline and wireless products.

Approximately 1% of Suttle's 2002 and 4% of 2001 revenues were derived from
sales in the retail market. The Company is a supplier of telephone connecting
products to retailers, office supply distributors and specialized telephone
stores. Sales to the retail market are made through a limited number of
manufacturers' representatives.

Fiber-optic products are marketed to original equipment manufacturers (OEMs) in
the U.S. and internationally through the Company's sales staff, manufacturers'
representatives and a network of distributors, including Graybar Electric
Company, Arcade Electronics and Branch Datacom. Sales of fiber-optic products
accounted for 5% of Suttle's revenues in 2002 and 6% in 2001. Sales of DSL
products introduced in 2000 represented an additional 4% of sales in 2002 and
11% in 2001.


The balance of Suttle's sales in 2002 and 2001 were to original equipment
manufacturers, non-major telephone companies and international customers. In the
communications industry market, sales to telephone companies are made directly
or through distribution. Sales to OEM customers are made through a nationwide
network of distributors, some of which are affiliates of major telephone
companies, and through the Company's sales staff.

Competition
-----------
Suttle encounters strong competition in all its product lines. The Company
competes primarily on the basis of the broad lines of products offered, product
performance, quality, price and delivery.

Suttle's principal competitors for sales to telephone companies and independent
contractors include Avaya, Ortronics, Leviton, Hubbell, Northern Telecom and
AMP, Inc. Most of these companies have greater financial resources than the
Company. In addition, distributors of the Company's apparatus products also
market products for one or more of these competitors. Avaya markets to telephone
companies and independent contractors directly and through telephone industry
distributors that also market the Company's products.

In retail markets, the Company experiences significant competition from
importers of low-priced modular products that market their products directly and
through a number of distributors to various retail outlets.

The Company's principal competitor for sales to the major telephone companies is
Avaya. To date, foreign manufacturers of apparatus products have not presented
significant competition for sales to this market.

Order Book
----------
Suttle manufactures its products on the basis of estimated customer
requirements. Outstanding customer orders at March 1, 2003 were approximately
$1,714,000 compared to approximately $2,964,000 at March 1, 2002. Because new
orders are filled on a relatively short timetable, the Company does not believe
its order book is a significant indicator of future results.

Manufacturing and Sources of Supply
-----------------------------------
The Company's products are manufactured using plastic parts, wire
sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that Suttle's corrosion-resistant
products utilize a moisture-resistant gel-filled fig available only from Tyco
Electronics. The unavailability of the gel-filled figs from Tyco Electronics
could have a material adverse effect on the Company. The Company has not
generally experienced significant problems in obtaining its required supplies,
although from time to time spot shortages are experienced.

4

Research and Development; Patents
---------------------------------
The Company continually monitors industry requirements and creates new products
to improve its existing station apparatus product line. The Company's
CorroShield line of corrosion resistant products was introduced in 1993, as was
its Flex-Plate line of data products. The Company added additional products to
these product lines in 1994 and 1995. The Company's SpeedStar line of high-speed
data connectors was introduced in early 1996. In 1997, a proprietary Category 5
connector was developed which meets the highest current industry standard. In
2000, DSL (Digital Subscriber Line) filters for home and business applications
were introduced.

Historically, the Company has not relied on patents to protect its competitive
position in the station apparatus market. However, duplication of Company
designs by foreign apparatus manufacturers has caused the Company to apply for
design patents on a number of products.

The Company's "Suttle Apparatus" brand name is important to its business. The
Company regularly supports this name by trade advertising and believes it is
well known in the marketplace.

(ii) Austin Taylor
-------------
Austin Taylor Communications, Ltd. manufactures voice and data connectors and
related ancillary products at its plant in Bethesda, Wales, U.K. Its product
line consists of British standard line jacks, patch panels, data modules, wiring
harness assemblies, metal boxes, distribution cabinets and distribution and
central office frames. In September 2002 Austin Taylor launched its "AT Net"
structured cabling range. Sales by Austin Taylor were $7,139,000, or 7% of
consolidated revenues, in 2002 and $9,620,000 or 10% of consolidated revenues in
2001.

Austin Taylor is a vertically integrated manufacturer with metal stamping, metal
bending, forming and painting. It also has plastic injection molding and printed
circuit board assembly capabilities. Austin Taylor's major customers include
Telewest, Nortel, Avaya, Etisalat and British Telecom. Austin Taylor's products
are also sold through distributors, which include - Comtec, Nimans, RS
Components, Anixter, Metel Trading and Communications Trade Supplies.
Approximately 46% of Austin Taylor sales were to United Kingdom customers in
2002 compared to 32% in 2001.

The Company believes the European telecommunications market will offer
increasing opportunities as the European Economic Community eliminates trade
barriers and standardizes use of modular connector products.

Outstanding customer orders for Austin Taylor products were approximately
$311,000 at March 1, 2003 compared to $527,000 at March 1, 2002. Because Austin
Taylor fills new orders on a relatively short timetable, the Company does not
believe its order book is a significant indicator of future results.

(iii) Transition Networks
-------------------
Transition Networks designs, manufactures and markets media converters, baluns,
transceivers, network interface cards, and fiber hubs. Transition Networks sells
its product through distributors, resellers, integrators, and OEMs. Sales by
Transition Networks were $38,507,000 or 36% of consolidated revenues in 2002
compared to $35,246,000 or 37% of consolidated revenues in 2001. Operating
income increased by $1,043,000 to $4,764,000 in 2002. The increase in operating
income can be attributed to increased sales and product cost reductions
resulting in higher gross margins. International sales accounted for 31% of
sales or $11,888,000 in 2002, down slightly compared to $13,041,000 in 2001 when
international sales accounted for 37% of total sales. Sales to major
distributors in 2002 totaled $20,923,000, a 12% increase compared to 2001.

Products
--------
Transition Networks designs, produces, and sells media converter devices that
make it possible to transmit telecommunications signals between systems using
different types of media (for example, between copper and fiber optic networks).
These products are used to support legacy systems as customers' networks grow,
integrate fiber optics into a network, and extend the reach of networks.
Protocols supported include Gigabit Ethernet, Fast Ethernet, Ethernet, Token
Ring, T1/E1, DS3, RS232, RS485, ATM, OC3, OC12, 3270, and 5250. The company uses
Application Specific Integrated Circuits (ASIC) for development of some
products, but is also uses integrated circuits for the development of new
products. Transition Networks may be adversely affected if key components
developed by others are discontinued, Product hardware and software development
is done internally. The software that Transition Networks utilizes to manage our
products is provided free with the product. The concentration of Transition
Networks product development is on hardware; software is developed to support
hardware sales.

5

Transition Networks outsources approximately 15% of its products which are
manufactured offshore, principally in the Far East. These offshore sources of
supply are subject to certain risks, including foreign currency fluctuations and
interference from political sources. The Company has alternate sources of supply
for its products and to date has not had problems obtaining necessary supplies.

Markets and Marketing
---------------------
Transition Networks' products are used in a broad array of markets including
enterprise networks, service providers' networks, and industrial environments
such as in manufacturing processes. Due to its broad customer base and the
nature of the applications for its products, Transition Networks was not
impacted to the extent that other network equipment manufacturers were affected
by the recent economic downturn.

The media conversion product line consists of the different form factors to
address various applications. The chassis based system, the Point System(TM), is
used primarily in telecommunication closets for high-density applications and
when multiple protocols need to be supported. Stand alone media converters are
used typically at a workstation or for lower density applications.

Transition Networks continues to develop products that address the enterprise,
service provider, and industrial markets. This includes developing converters
for emerging protocols and existing protocols in new markets. Some of these
products include DS3, remote management devices, and single fiber products. Some
development efforts are paced by the development of critical components such as
integrated circuits and optical transceivers.

Marketing primarily consists of direct marketing utilizing a telesales force,
tradeshows, trade magazine advertising, public relations activities, and direct
mail. Transition Networks also provides and participates in advertising and
cooperative marketing campaigns with distribution partners.

Research and Development
------------------------
Research and development consists primarily of testing, equipment and supplies
associated with enhancing existing products and developing new products.
Research and development costs are expensed when incurred. Research and
development spending was $482,000 in 2002 compared to $576,000 in 2001.

Competition
-----------
Transition Networks faces strong competition across its entire product line.
Allied Telelsyn a manufacturer of media converters, network interface cards,
transceivers and switch products is the leading competitor. Other competitors
include IMC Networks and Metrobility Optical Solutions. A large number of
competitors exist for the highest volume products in the Ethernet and Fast
Ethernet family. Low cost competitors from China and Taiwan are strongest in the
developing Asian markets, but have had limited success in the North American
market. A deeper penetration of these competitors poses a potential threat to
sales and profit margins. Competition also exists from substitutes such as lower
cost fiber switches.

Order Book
----------
Outstanding customer orders for Transition Networks products were approximately
$491,000 at March 1, 2003 and $387,000 at March 1, 2002. Transition Networks
also fills orders on a relatively short-term basis and therefore does not
believe its order book is a significant indicator of future results.

(iv) JDL Technologies, Inc.
----------------------
JDL Technologies, Inc. provides telecommunications network design,
specification, and training services to educational institutions. JDL also sells
internet access software for use in elementary and secondary schools. JDL
continues to focus on providing services to the top 100 school districts in the
United States, including all hardware, software, training, communications and
services required to meet the business and educational learning requirements of
the individual schools. Sales by JDL for 2002 totaled $17,992,000 and
represented 17% of consolidated revenues. Total sales for 2001 totaled
$10,247,000 or 11% of consolidated revenues. Sales of hardware, software and
related equipment totaled $13,155,000 in 2002 or 73% of total sales compared to
$5,664,000 in 2001 or 55% of total sales. Training, support and consulting
revenue totaled $4,837,000 and $4,584,000 in 2002 and 2001, respectively.

6

Order Book
----------
Outstanding customer orders for JDL products and services were approximately
$4,926,000 as of March 1, 2003 and $8,736,000 at March 1, 2002. JDL does not
believe its order book is a significant indicator of future results.

(v) MiLAN Technology Corporation
----------------------------
Effective March 25, 2002, through its wholly owned subsidiary MiLAN Technology
Corporation, the Company acquired substantially all the assets of the MiLAN
division of Digi International Inc. for approximately $8,100,000 in cash. MiLAN,
located in Sunnyvale, California is a manufacturer of media and rate conversion
products, which permit telecommunications networks to move information between
copper-wired equipment and fiber-optic cable. In addition, MiLAN is also a
supplier of wireless access points, bridges and other networking products. The
acquisition was accounted for as a purchase and operations of MiLAN have been
included in consolidated operations from March 25, 2002. Sales by MiLAN for 2002
totaled $10,503,000 and represented 10% of consolidated revenues.

Products
--------
MiLAN is a supplier of a broad range of networking products of wired and
wireless markets. Main product lines include media converters, Ethernet switches
and wireless access points and bridges. The Company has been developing and
marketing Ethernet based networking products for approximately twelve years.
Product hardware and software development is performed internally.

MiLAN also outsources most of its manufacturing processes. Approximately 85% of
its products are manufactured offshore, principally in the Far East. These
offshore sources of supply are subject to certain risks, including foreign
currency fluctuations and interference from political sources. The Company has
alternate sources of supply for its products and to date has not had problems
obtaining necessary supplies.

Markets and Marketing
---------------------
MiLAN competes in the wired and wireless networking markets. The wired
networking market consists of the media conversion products and the Ethernet
switch markets. MiLAN also offers products in the newest and potentially high
growth wireless market.

MiLAN continues to develop products that address the enterprise, service
provider, and industrial markets and in addition targets specific vertical
markets of government and education.

Marketing primarily consists of tradeshows, trade magazine advertising, public
relations activities, and direct mail. MiLAN also provides and participates in
advertising and cooperative marketing campaigns with distribution partners

Order Book
----------
Outstanding customer orders for MiLAN products were approximately $1,734,000 as
of March 1, 2003. MiLAN does not believe its order book is a significant
indicator of future results.

(d) Employment Levels

As of March 1, 2003 the Company employed 682 people. Of this number, 405 were
employed by Suttle (including 26 in Puerto Rico, 148 in Hector, Minnesota and
231 in Costa Rica), 114 by Austin Taylor Communications, Ltd., 81 by Transition
Networks, Inc., 32 by JDL Technologies, Inc., 34 by MiLAN Technology and 16
general and administrative positions. The Company considers its employee
relations to be good.

7

(e) Factors Affecting Future Performance

From time to time, in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders or the investing
public, the Company may make forward-looking statements concerning possible or
anticipated future financial performance, business activities or plans which are
typically preceded by the words "believes", "expects", "anticipates", "intends"
or similar expressions. For such forward-looking statements, the Company claims
the protection of the safe harbor for forward-looking statements contained in
federal securities laws. Shareholders and the investing public should understand
that such forward looking statements are subject to risks and uncertainties
which could cause actual performance, activities or plans to differ
significantly from those indicated in the forward-looking statements. Such risks
and uncertainties include, but are not limited to: lower sales to RBOCs and
other major customers; competitive products and technologies; our ability to
successfully reduce operating expenses at certain business units; the general
health of the telecom sector, profitability of recent acquisitions; delays in
new product introductions; higher than expected expense related to new sales and
marketing initiatives; availability of adequate supplies of raw materials and
components; fuel prices; and other factors discussed from time to time in the
Company's filings with the Securities and Exchange Commission.

(f) Executive Officers of Registrant

The executive officers of the Company and their ages at March 1, 2003 were as
follows:

Name Age Position(1)
------------------ --- ----------------------------

Curtis A. Sampson 69 Chairman of the Board and
Chief Executive Officer [1970]

Jeffrey K. Berg 60 President and Chief Operating Officer [2000]2

Paul N. Hanson 56 Vice President - Finance, Treasurer
and Chief Financial Officer [1982]

Daniel G. Easter 46 President and General Manager,
Transition Networks, Inc. [2000] 3

Lee N. Ludlam 42 Managing Director,
Austin Taylor Communications, Ltd. [1998]4

Thomas J. Lapping 44 President , JDL Technologies, Inc. [1998]5

Gary D. Nentwig 60 President and General Manager,
MiLAN Technology Corporation [2002]6

David T. McGraw 51 President and General Manager,
Suttle Apparatus Corporation. [2002]7
- ---------------------------------

1 Dates in brackets indicate period during which officers began serving in
such capacity. Executive officers serve at the pleasure of the Board of
Directors and are elected annually for one-year terms.

2 Mr. Berg was appointed Chief Operating Officer of Communications Systems,
Inc. in November 2000 and named President of the Company in March 2002.
Prior to November 2000, Mr. Berg served as President of the Company's
Suttle Apparatus Corporation.

3 Mr. Easter was appointed President of Transition Networks, Inc. in
September 2000. From July 1997 to September 2000 he served as Transition
Networks' Vice President of Sales and Marketing. Prior to July 1997, he was
an executive of Allied Telesyn International Corporation in Seattle, WA.

4 Mr. Ludlam was appointed Managing Director of Austin Taylor in November
1998. From December 1995 to November 1998, he served as Austin Taylor's
Director of Manufacturing.

8

5 JDL Technologies, Inc. was acquired by the Company in 1998. Mr. Lapping
founded JDL Technologies, Inc. in 1989.

6 Mr. Nentwig was appointed President of MiLAN Technology Corporation in
March 2002 (CSI acquired substantially all assets of MiLAN from Digi
International, March 25, 2002). Mr. Nentwig previously served as General
Manger for MiLAN.

7 Mr. McGraw was appointed President of Suttle Apparatus Corporation in
September 2002. From May 2001 to August 2002, he served as Chief Operating
Officer of JDL Technologies, Inc. Prior to May 2001, he was Vice
President-General Manager of Precision Diversified Industries in Plymouth,
MN.

Messrs. Sampson and Hanson each devote approximately 50% of their working time
to the Company's business with the balance devoted to management
responsibilities at Hector Communications Corporation ("HCC"), a diversified
telecommunications holding company also headquartered in Hector, Minnesota, for
which they are separately compensated by HCC.

(g) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES

Financial information about domestic and foreign operations and export sales may
be obtained by reference to Note 10 of the "Notes to Consolidated Financial
Statements" under Item 8 herein.

ITEM 2. PROPERTIES

The administrative and manufacturing functions of CSI are conducted at the
following facilities:

- In Hector, Minnesota the Company owns a 15,000 square foot building where
its executive and administrative offices are located.

- Suttle's manufacturing is conducted at three locations. At Hector,
Minnesota, the Company owns three plants totaling 68,000 feet of
manufacturing space. The Company leases space from the Puerto Rico
Industrial Development Company in a facility in Humacao, Puerto Rico
aggregating 7,000 square feet. The Company leases 40,000 square feet of
manufacturing space in San Jose, Costa Rica. In 2001, the Company began
leasing a 35,000 square foot facility in Waconia, Minnesota utilized as a
distribution center for Suttle and Transition Networks, Inc. products. -
Austin Taylor Communications, Ltd. owns a 40,000 square foot facility.

- Transition Networks, Inc. leases a 20,000 square foot facility in Eden
Prairie, Minnesota where its engineering and administrative facilities are
located.

- JDL Technologies, Inc. leases an 11,000 square foot facility in Edina,
Minnesota, which houses its business operations.

- MiLAN Technology Corporation leases a 24,000 square foot facility in
Sunnyvale, California, which houses its business and distribution
operations.

- The Company owns a 35,000 square foot building in Lawrenceville, Illinois.
This facility is currently leased to other tenants.

CSI believes these facilities will be adequate to accommodate its
administrative, manufacturing and distribution needs for the foreseeable future.


ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.


9

PART II

ITEM 5. MARKET MATTERS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

(a) MARKET INFORMATION

The Company's common stock was traded in the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). Effective January 27, 2003 the Company began trading its common
stock on the American Stock Exchange ("AMEX") under the trading symbol JCS.

The table below presents the price range of high and low trades of the Company's
common stock for each quarterly period indicated as reported by NASDAQ. These
prices indicate inter-dealer prices without retail markup, markdowns or
commissions:
2002 2001
------------------------- ------------------------
High Low High Low

First $9.50 $7.00 $10.69 $7.75
Second 8.94 6.10 9.50 7.01
Third 7.20 6.00 8.61 5.40
Fourth 8.64 5.60 8.15 5.85

(b) HOLDERS

At March 1, 2003 there were approximately 790 holders of record of
Communications Systems, Inc. common stock.

(c) DIVIDENDS

The Company had paid regular quarterly dividends since October 1, 1985. The per
share quarterly dividends paid were $.10 in 1999, 2000 and the first three
quarters of 2001. Effective for the quarter beginning October 1, 2001, the CSI
Board of Directors suspended the payment of a regular quarterly dividend due to
the substantial reduction in earnings during the first half of 2001.
Reinstatement of a $.04 quarterly dividend was authorized by the Board of
Directors in the fourth quarter of 2002 payable January 1, 2003. In addition,
the Board of Directors authorized a $.04 quarterly dividend payable April 1,
2003 to shareholders of record on March 18, 2003.


(d) OTHER INFORMATION REGARDING EQUITY COMPENSATION PLANS



Securities Authorized For Issuance Under Equity Compansations Plans
(a) (b) (c)
Number of shares of
Number of shares of common stock remaining
common stock to be available for future
issued upon exercise Weighted-average issuance under equity
of outstanding exercise price of compensation plans
options, warrants outstanding options, (excluding shares in
Plan Category (1) and rights warrants and rights column (a))
--------------- -------------------- -------------------- ---------------------

Equity compensation plans approved by security holders:

1992 Stock Plan 1,166,234 $ 12.02 274,445
1990 Employee Stock Purchase Plan 28,460 $ 5.44 137,654

Equity compensation plans not approved by security holders:
None

(1) The Company does not have individual compensation arrangements involving
the granting of options, warrants and rights.



10


ITEM 6. SELECTED FINANCIAL DATA



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)

Year Ended December 31
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Selected Income Statement Data

Sales $107,300 $ 95,105 $119,720 $117,525 $ 71,570

Costs and Expenses:
Cost of Sales 78,748 69,602 82,355 77,280 50,599
Selling, General and Administrative Expenses 24,612 24,691 29,432 28,907 12,413
-------- -------- -------- -------- --------
Total Costs and Expenses 103,360 94,293 111,787 106,187 63,012

Income From Operations (1) 3,940 812 7,933 11,338 8,558

Other (expense) income, Net (45) 225 339 296 1,259

Income Before Income Taxes (1) 3,895 1,037 8,272 11,634 9,817
Income Tax Expense 1,558 325 1,600 2,620 1,950
-------- -------- -------- -------- --------
Net Income (1) $ 2,337 $ 712 $ 6,672 $ 9,014 $ 7,867
======== ======== ======== ======== ========
Net Income Per Share (1) $ .28 $ .09 $ .76 $ 1.04 $ .87
======== ======== ======== ======== ========
Diluted Net Income Per Share (1) $ .28 $ .09 $ .75 $ 1.03 $ .87
======== ======== ======== ======== ========
Cash Dividends Per Share - $ .30 $ .40 $ .40 $ .38
======== ======== ======== ======== ========

Average Common and Potential Common
Shares Outstanding 8,246 8,365 8,865 8,727 9,084
======== ======== ======== ======== ========

Selected Balance Sheet Data
Total Assets $ 88,758 $ 88,012 $ 93,198 $ 91,476 $ 83,900
Property, Plant and Equipment, Net 7,425 8,137 10,106 10,960 11,379
Working Capital 53,122 51,303 45,486 34,787 37,245
Stockholders' Equity 68,871 67,308 71,267 66,422 63,454

(1) 2002 amounts benefited from the implementation of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets as disclosed in Note
9 of the consolidated financial statements, included in Item 8.



11



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

2002 Compared to 2001
---------------------
Consolidated sales in 2002 increased 13% to $107,300,000 as compared to
consolidated sales of $95,105,000 in 2001. Consolidated gross margins increased
by 12% in 2002 compared to 2001. Consolidated operating income increased 385% to
$3,940,000 in 2002 compared to $812,000 in 2001. Consolidated net income
increased 228% to $2,337,000 in 2002 or $.28 per diluted share compared to
$712,000 or $.09 before goodwill amortization in 2001.

On March 25, 2002 the Company acquired substantially all the assets of the MiLAN
division of Digi International (NASDAQ: DGII) in an all cash transaction valued
at approximately $8,100,000. MiLAN is a growing provider of wireless
telecommunications products, LAN switches, media conversion products and print
servers. The Company has streamlined MiLAN's cost structure and has consolidated
certain functions with other operating business units of CSI during 2002. Fiscal
2002 sales included a $10,503,000 sales contribution from the MiLAN business
unit subsequent to March 25, 2002.

Suttle's sales decreased 17% to $33,159,000 in 2002 as compared to $39,992,000
in 2001. Sales to customers in the United States (U.S.) decreased 19% to
$31,383,000 from $38,982,000 in 2001. Suttle's sales declines are attributable
to the continuing slowdown in capital spending by telecommunications industry
companies and in particular the Regional Bell Operating Company (RBOC)
customers. Suttle has implemented a strategy to utilize offshore manufacturing
for data products as well as utilizing a telesales group to sell voice and data
products to the nation's thousands of telecom and electrical installation
companies. Sales to the RBOC's decreased 14% to $16,687,000 in 2002 from
$19,394,000 in 2001 which represent 50% and 48% of Suttle's U.S. customer sales
in 2002 and 2001, respectively. Sales to distributors, original equipment
manufacturers (OEMs), and electrical contractors decreased to $9,779,000 in 2002
compared to $15,632,000 in 2001. Sales to retail customers decreased 74% in 2002
to $431,000 from $1,651,000 in 2001. Suttle's international sales increased by
76% to $1,776,000 in 2002.

The sales decreases were reflected in most product lines. CorroShield (standard
voice jack for most telephone applications) product sales fell 13% to
$13,389,000 in 2002 from $15,465,000 in 2001. Sales of fiber-optic connector
products decreased 35% to $1,479,000 from $2,283,000 in 2001. Sales of data
products decreased 5% in 2002 to $4,803,000 from $5,056,000 in 2001. Sales of
DSL filters (introduced in 2000) were $1,382,000 or 4% of Suttle's sales in 2002
versus $4,209,000 or 10% of sales in 2001.

Suttle's gross margins decreased 37% to $5,148,000 in 2002 compared to
$8,219,000 in 2001, including a write down of excess and slow-moving inventory
approximating $1,700,000 in 2002. Gross margin as a percentage of sales declined
to 16% in 2002 from 21% in 2001. The decline in gross margin was also due to
price cutting to meet competition and from the effect of excess manufacturing
overhead costs relative to lower volumes. Suttle's operating income decreased
$2,089,000 in 2002 compared to an operating loss of $710,000 before goodwill
amortization in 2001. Suttle is continuing to implement cost reduction measures,
including workforce reductions at its plants in Minnesota, Puerto Rico and Costa
Rica. Suttle is also beginning to utilize offshore manufacturing arrangements in
the Pacific Rim to strengthen the competitive position of traditional products
and the DSL line filter business. Suttle also provides contract manufacturing
with another company, which contributed revenues of approximately $3,000,000 in
2002.

Austin Taylor's sales decreased by 26% in 2002 to $7,138,000 compared to
$9,620,000 in 2001 reflecting a decline in sales to several key United Kingdom
(U.K.) accounts. Gross margin dollars decreased by $21,000 or 3% from prior year
but as a percentage of sales increased 2.7% in 2002 due to cost reduction
measures and workforce reductions implemented in the fourth quarter of 2001.
Selling, general and administrative expenses decreased $382,000. Austin Taylor's
operating loss declined to $377,000 in 2002 from $738,000 before goodwill
amortization in 2001.

12


Transition Networks / MiLAN Technology segment sales increased by 39% to
$49,010,000 in 2002 compared to $35,246,000 in 2001. Sales for this segment
include a $10,503,000 contribution from MiLAN Technology, the assets of which
CSI purchased from Digi International on March 25, 2002. Transition Networks
sales were $38,507,000 in 2002 compared to $35,247,000 in 2001. Combined sales
to international customers were $12,518,000 representing 26% of total segment
sales in 2002 compared to $13,112,000 or 37% in 2001.The demand for media
conversion and related products remained strong in 2002 and is expected to
remain strong throughout 2003. Gross margin increased to $16,887,000 in 2002
from $12,915,000 in 2001. This increase included a $2,230,000 gross margin
contribution from MiLAN. Gross margin as a percentage of sales was 34% in 2002
compared to 37% in 2001. Gross margins were adversely affected by the sale of
the MiLAN acquired inventory, which had lower margins. Selling, general and
administrative expenses increased to $12,528,000 in 2002 compared to $9,515,000
in 2001. MiLAN contributed $2,635,000 of selling, general and administrative
expenses in 2002. Selling, general and administrative expenses as a percentage
of sales were 26% in 2002 and 27% in 2001. Operating income increased to
$4,359,000 compared to $3,340,000 before goodwill amortization in 2001.


JDL Technologies sales increased 76% to $17,992,000 in 2002 compared to
$10,247,000 in 2001. The sales increase was due to higher sales of computer and
network hardware and services to plan, design, implement and manage network data
systems for several large school districts in 2002. Computer and network
hardware sales represented $13,155,000 or 73% of total JDL revenues in 2002
compared to $5,664,000 or 55% of total revenue in 2001. Consulting, training and
support was $4,837,000 or 27% of total sales compared to $4,583,000 or 45% of
total sales in 2001. Gross margin in 2002 was $5,825,000 or 32% compared to
$3,657,000 or 36% in 2001. Higher sales of lower margin computer hardware was
the principal factor in a lower gross margin percentage in 2002 compared to
2001. Selling, general and administrative expenses increased to $3,424,000 in
2002 from $3,371,000 in 2001 but as a percentage of net sales decreased to 14%
from 19%, respectively. Operating income increased to $2,401,000 in 2002
compared to $286,000 in 2001 before goodwill amortization in 2001.

Consolidated investment income decreased $547,000 due to lower earnings on
invested funds and payment in full of a note receivable and accrued interest in
the first quarter. Interest expense decreased by $277,000 in 2002 compared to
2001 due to a decrease in borrowings on the line of credit and lower interest
rates. Income before income taxes increased to $3,895,000 in 2002 compared to
$1,037,000 in 2001. The Company's effective income tax rate was 40% in 2002
compared to 31% in 2001 due to higher U.S. income in 2002, which is taxed at a
higher rate, and lower income in Puerto Rico, which was taxed at a lower rate.
Also, the Company received higher dividends from Puerto Rico in 2002 which are
subject to a toll gate tax of 1.75%. Net income increased $1,624,000 to
$2,337,000 in 2002. 2001 pro forma net income for the twelve months ended
December 31, 2001 excluding goodwill amortization would have been $1,812,000
after tax effect.


2001 Compared to 2000
---------------------
Consolidated sales in 2001 decreased 21% to $95,105,000 as compared to
consolidated sales of $119,720,000 in 2000. Consolidated gross margins decreased
by 4% in 2001 compared to 2000. Consolidated selling, general and administrative
expenses increased 1% to 26% of gross revenue in 2001. Consolidated operating
income decreased 90% to $812,000 in 2001. Consolidated net income decreased 89%
to$712,000 in 2001 or $.09 per diluted share compared to $.75 in 2000.

Overall, operating results of all business segments were adversely affected by
the overall slowdown in economic conditions resulting in decreased capital
spending and reduced equipment purchases by telecommunications service
providers. Pricing pressures and excess manufacturing capacity also resulted in
the Company experiencing decreases in gross margins. The Company's media
conversion business unit, Transition Networks, was not impacted as severely by
the weak market conditions, which resulted in improved profitability as compared
to the previous year. In 2001, the Company's manufacturing operations were
downsized to match existing and anticipated volumes. Employment levels were
reduced 30% in 2001 and in addition, two of three manufacturing facilities in
Puerto Rico were closed to streamline overhead cost structures.

13


Suttle's sales decreased 27% to $39,992,000 in 2001 as compared to $55,111,000
in 2000. Sales to customers in the United States (U.S.) decreased 26% to
$38,980,000 from $53,000,000 in 2000. Sales to the RBOC's decreased 35% to
$19,626,000 from $24,713,000 in 2000. Sales to these customers represent 48% and
56% of Suttle's U.S. customer sales in 2001 and 2000, respectively. Sales to
distributors, original equipment manufacturers (OEMs), and electrical
contractors decreased to $15,632,000 or 20% from prior year. Sales to retail
customers decreased 32% to $1,651,000 in 2001 from $2,413,000 in 2000. Suttle's
international sales decreased by 52% to $1,010,000 in 2001.

The sales decreases were reflected in most product lines with the exception of
fiber-optic products and DSL (Digital Subscriber Line) filters. CorroShield
(standard voice jack for most telephone applications) product sales fell 34% to
$15,465,000 in 2001 from $23,412,000 in 2000. Sales of fiber-optic connector
products increased 13% to $2,283,000 from $2,023,000 in 2000. Sales of data
products decreased 43% in 2001 to $5,056,000 from $8,863,000 in 2000. DSL
filters (introduced in 2000) sales were $4,209,000 or 10% of Suttle's sales in
2001 versus $2,271,000 or 4% of sales in 2000.

Suttle's gross margins declined 53% to $8,219,000 with the gross margin
percentage declining to 20.6% in 2001 from 31.6% in 2000. The gross margin
decline was due primarily to lower business volumes, excess overhead costs and
pricing reductions due to competitive pressures. Selling, general and
administrative expenses decreased $700,000 or 9% in 2001. Operating income
declined by $8,500,000 or 89% in 2001.

Austin Taylor's sales decreased by 5% to $9,620,000 in 2001. The sales decrease
was due to below plan sales to several key United Kingdom (U.K.) accounts. Gross
margin decreased by $565,000 or 44% from prior year and as a percentage of sales
decreased 5.2% in 2001. The gross margin decline was due to excess overhead
costs, pricing reductions and payment of severance costs associated with the
resizing of the operations in the third and fourth quarters of 2001. Selling,
general and administrative expenses increased $67,000 in 2001. Operating income
declined $632,000 in 2001.

Transition Network sales decreased $4,327,000 or 11% to $35,246,000 in 2001.
Operating income increased by $1,413,000 or 146% to $2,118,000 in 2001. Sales to
distributors were $18,640,000 in 2001 or 53% of total sales compared to
$21,760,000 or 55% of total sales in 2000. The balance of sales in both years
was made to system integrators and resellers, to OEMs and through catalog sales.
Sales to international customers were $13,112,000 and were 37% of total sales in
2001 compared to $14,237,000 or 36% in 2000. Gross margin dollars decreased by
$2,198,000 and as a percentage of sales decreased by 1.5% in 2001. Selling,
general and administrative expenses decreased by $3,611,000 and 6% as a
percentage of sales in 2001.

JDL Technologies sales decreased 31% to $10,247,000 in 2001 compared to
$14,887,000 in 2000. The sales decrease was due to lower sales of computer and
network hardware in 2001 compared to 2000. Operating income increased by
$564,000 or 78% compared to 2000. Computer and network hardware sales
represented $5,664,000 or 55% of total JDL revenues in 2001 compared to 83% of
total revenue in 2000. Consulting, training and support was $4,535,000 or 45% of
total sales compared to 17% of total sales in 2000. Gross margin in 2001 was
$3,657,000 or 36% compared to $3,556,000 or 24% in 2000. The higher gross margin
in 2001 is consistent with increased revenues in consulting, training, and
design services as compared to 2000. Selling, general and administrative
expenses decreased to $3,816,000 in 2001 from $4,278,000 in 2000, but as a
percentage of net sales increased 8% to 37% in 2001.

Consolidated investment income, net of interest expense, decreased by $114,000
in 2001 due to decreased earnings on invested funds. Income from continuing
operations before income taxes decreased 90% to $812,000 in 2001. The Company's
effective income tax rate was 31.3% in 2001 as compared to 19.3% in 2000. The
increase in the tax rate was attributable to higher U.S. and U.K. earnings as a
percentage of total earnings, which are subject to higher tax rates than
attributable to Puerto Rico operations.

Acquisitions and Dispositions
-----------------------------
Effective March 25, 2002, the Company acquired substantially all the assets of
the MiLAN division of Digi International, Inc. for approximately $8,100,000 in
cash. MiLAN, located in Sunnyvale, California is a manufacturer of media and
rate conversion products, which permit telecommunications networks to move
information between copper-wired equipment and fiber-optic cable. In addition,
MiLAN is also a supplier of wireless access points, bridges and other networking
products. The acquisition was accounted for as a purchase and operations of
MiLAN have been included in consolidated operations from March 25, 2002.

14


The acquisitions the Company has made over the past several years have served to
expand the Company's product offerings and customer base in both U.S. and
international markets. The Company is a growth-oriented manufacturer of
telecommunications connecting and networking devices. The Company is continuing
to search for acquisition candidates with products that will enable the Company
to better serve its target markets.

Effects of Inflation
--------------------
Inflation has not had a significant effect on operations. The Company does not
have long-term production or procurement contracts and has historically been
able to adjust pricing and purchasing decisions to respond to inflationary
pressures.

European Currency
-----------------
In January 1999, the European Monetary Union (EMU) entered into a three-year
transition phase during which a common currency called the Euro was introduced
in participating countries. Initially, this new currency is being used for
financial transactions. It will eventually replace the national currencies of
participating nations.

The introduction of the Euro has not had a material effect on its business at
this time. The United Kingdom, where Austin Taylor is located, is not among the
countries converting to the Euro. The Company does conduct significant business
in other participating European nations, nor does it hold assets valued in other
European currencies. The Company will continue to monitor the European currency
situation and take action as required.

Liquidity and Capital Resources
-------------------------------
At December 31, 2002, the Company had approximately $19,816,000 of cash and cash
equivalents compared to $22,240,000 of cash and cash equivalents at December 31,
2001. The Company had working capital of approximately $53,122,000 and a current
ratio of 3.7 to 1 compared to working capital of $51,303,000 and a current ratio
of 3.5 to 1 at the end of 2001. The increase in working capital was primarily
due to an increase in trade receivables, inventories and improved 2002
operations.

Cash flow provided by operating activities was approximately $7,452,000 in 2002
compared to $11,634,000 provided by operations in 2001. The decrease was
primarily due to the Company's increased inventory requirements and prepayments,
and accounts receivable levels after eliminating the effect associated with the
addition of the MiLAN business unit.

Investing activities used $6,924,000 of cash in 2002 compared to cash of
$5,092,000 provided by investing activities in 2001. The Company purchased
substantially all the assets of MiLAN for approximately $8,100,000 in cash in
the first quarter of 2002 financed through internal cash flows. Cash investments
in new plant and equipment totaled $1,740,000 in 2002 compared to $984,000 in
2001. The Company expects to invest $1,500,000 on capital additions in 2003. The
Company invested approximately $5,825,000 in the purchase of debt securities in
1999 and redeemed them in the second quarter of 2001.

Net cash used in financing activities was $2,991,000 in 2002 compared to
$5,797,000 in 2001. No dividends were paid on common stock in 2002 compared to
dividend payments of $2,554,000 in 2001. Proceeds from common stock issuances,
principally exercises of key employee stock options, totaled $11,700 in 2002 and
$83,000 in 2001. The Company purchased and retired 182,574 and 395,252 shares of
its stock in open market transactions during 2002 and 2001 respectively. Board
authorizations are outstanding to purchase 297,065 additional shares. The
Company may purchase and retire additional shares in 2003 if warranted by market
conditions and the Company's financial position. The Company paid down its notes
payable by $2,000,000 in the second quarter of 2002.

The bulk of Suttle's operations were located in Puerto Rico until December 2001
The Company's earnings in Puerto Rico are sheltered from U.S. income tax by the
possessions tax credit (Internal Revenue Code Section 936). The amount of the
possessions tax credit is limited to a percentage of the Company's Puerto Rico
payroll and depreciation. U.S. income tax expense on the Company's earnings in
Puerto Rico, after full utilization of the available tax credits, was $0 in 2002
and 2001 and $82,000 in 2000.

15


Under provisions of the Small Business Job Protection Act of 1996, the
possessions tax credit was repealed for years after 1995. However, companies
like CSI which currently qualify for the credit, may continue to claim the
credit until 2005, subject to certain limitations. As of July 1, 1996, the
credit no longer applies to investment income earned in Puerto Rico. The credit
continued to apply to business income earned in Puerto Rico through 2001. For
the years 2002 to 2005, the amount of Puerto Rico business income eligible for
the credit will be limited to an inflation-adjusted amount based on Puerto Rico
business income earned from 1990 to 1994. The possessions tax credit has had a
materially favorable effect on the Company's income tax expense. Had the Company
incurred income tax expense on Puerto Rico operations at the full U.S. rate,
income tax expense would have increased by $52,000, $564,000 and $1,908,000 in
2002, 2001 and 2000, respectively.

In December 2001 the Company reduced its operations in Puerto Rico in order to
match anticipated business volume requirements. By reducing its Puerto Rico
operations the Company substantially reduced the amount of possessions tax
credit available to shelter earnings from U.S. income tax. As a result, the
Company expects its corporate income tax rate on future earnings will more
closely match normal U.S. income tax rates. The effective tax rate in 2002 was
40% compared to 31% in 2001.

At December 31, 2002 approximately $17,209,000, $5,254,000 and $1,604,000 of
assets were invested in the Company's subsidiaries in Puerto Rico, the United
Kingdom and Costa Rica, respectively. The Company expects to maintain these
investments as needed to support the continued operation of the subsidiaries.
The Company uses the U.S. dollar as its functional currency in Costa Rica. The
United Kingdom is a politically and economically stable country. Accordingly,
the Company believes its risk of material loss due to adjustments in foreign
currency markets to be small.

At December 31, 2002, the Company's outstanding obligations for notes payable
totaled $7,000,000. The Company paid this credit line in full in March 1, 2003.
The unused portion of the Company's credit line ($10,000,000 at March 1, 2003)
is available for use. In the opinion of management, based on the Company's
current financial and operating position and projected future expenditures,
sufficient funds are available to meet the Company's anticipated operating and
capital expenditure needs.

Critical Accounting Policies
----------------------------
Allowance for Doubtful Accounts: We record a provision for doubtful accounts
based on specific identification of our accounts receivable. This involves a
degree of judgement based on discussion with our internal sales and marketing
groups, our customer base and the examination of the financial stability of our
customers. There can be no assurance that our estimates will match actual
amounts ultimately written off. During periods of downturn in the market for our
products or economic recession, a greater degree of risk exists concerning the
ultimate collectability of our accounts receivable due to the impact that these
conditions might have on our customer base.

Sales Returns: An allowance is established for possible return of products. The
amount of the allowance is an estimate, which is based on historical ratios of
returns to sales, the historical average length of time between the sale and the
return and other factors. Though management considers these balances adequate
and proper, changes in customers' behavior versus historical experience or
changes in the Company's return policies are among the factors that would result
in materially different amounts for this item.

Inventory Valuation: The Company's inventories are valued at the lower of cost
or market. Reserves for overstock and obsolescence are estimated. The amount of
the reserve is determined based on projected sales information, plans for
discontinued products and other factors. Though management considers these
balances adequate and proper, changes in sales volumes due to unexpected
economic or competitive conditions are among the factors that would result in
materially different amounts for this item. In 2002, we recorded a $1,700,000
charge reflecting an adjustment to our inventory to lower of cost or market .
This charge represents excess and obsolete inventory.

Income Taxes: In the preparation of the Company's consolidated financial
statements, management calculates income taxes. This includes estimating current
tax liability as well as assessing temporary differences resulting from
different treatment of items for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, which are recorded on
the balance sheet. These assets and liabilities are analyzed regularly and
management assesses the likelihood that deferred tax assets will be recovered
from future taxable income.

16


Warranty: We provide a standard product warranty program for our product lines
and a five year warranty on certain equipment purchased from a third party and
installed at our customer location. We provide reserves for the estimated cost
of product warranties at the time revenue is recognized. We estimate the costs
of our warranty obligations based on our warranty policy or applicable
contractual warranty, our historical experience of known product failure rates,
and use of materials and service delivery costs incurred in correcting product
failures. Management reviews the estimated warranty liability on a quarterly
basis to determine its adequacy. Though management considers these balances
adequate and proper, changes in the Company's warranty policy or a significant
change in product defects versus historical averages are among the factors that
would result in materially different amounts for this item.


Recently Issued Accounting Pronouncements
-----------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
This statement applies to intangibles and goodwill acquired after June 30, 2001,
as well as goodwill and intangibles previously acquired. Under this statement,
goodwill as well as other intangibles determined to have an infinite life will
no longer be amortized; however, these assets will be reviewed for impairment on
a periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. We adopted this standard effective January 1, 2002. We
assessed the fair value of our business units to determine whether goodwill
carried on our financial statements was impaired and the extent of such
impairment, if any. We used the discounted cash flows method using market-based
rates of return to provide indications of value. Based upon these assessments,
we determined that our current goodwill balances were not impaired as of January
1, 2002. We will continue to reassess the value of our business units and
related goodwill balances at the beginning of each year or at other times if
events have occurred or circumstances exist that indicate the carrying amount of
goodwill may not be recoverable. As of December 31, 2002 and 2001 the Company
had net goodwill of $5,412,000 and $4,638,000, respectively. Goodwill
amortization expense recorded during the twelve months ended December 31, 2002
and 2001 was $0 and $2,092,000 respectively.


In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 establishes accounting
and disclosure requirements for a company's obligations under certain guarantees
that it has issued. A guarantor is required to recognize a liability for the
obligation it has undertaken in issuing a guarantee, including the ongoing
obligation to stand ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur. The objective of the
initial measurement of that liability is the fair value of the guarantee at its
inception. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. FIN 45 also requires expanded disclosure of
information related to product warranty amounts recorded in the financial
statements. The disclosure provisions are effective for interim and annual
periods ending after December 15, 2002. The adoption of FIN 45 is further
discussed with appropriate disclosures in Note 1 of the consolidated financials
statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment to SFAS No. 123. This
standard provides alternative methods of transition for any voluntary changes to
the fair value based method of accounting for stock-based employee compensation.
It also amends the disclosure requirements to require prominent disclosure in
both the annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The new disclosure requirements will be effective for interim
periods beginning after December 15, 2002. We will continue to apply the
principles of APB Opinion No. 25 and related interpretations in accounting for
our stock based compensation plans.


17


ITEM 7a. Market Risk Disclosures

The Company has no freestanding or embedded derivatives. All contracts that
contain provisions meeting the definition of a derivative also meet the
requirements of, and have been designated as normal purchases or sales. The
Company's policy is to not use freestanding derivatives and to not enter into
contracts with terms that cannot be designated as normal purchases or sales.

The vast majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically not been
material to the Company. At December 31, 2002 our bank line of credit carried a
variable interest rate based on our bank's average certificate of deposit rate
plus 1.5%. The Company's investments are money market type of investments that
earn interest at prevailing market rates and as such do not have material risk
exposure.

Based on the Company's operations, in the opinion of management, no material
future losses or exposure exist relative to market risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) FINANCIAL STATEMENTS
REPORT OF MANAGEMENT

The management of Communications Systems, Inc. and its subsidiary companies is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with accounting
principles generally accepted in the United States of America and include
amounts that are based on management's informed judgments and estimates.

In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.

The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present, to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.

/s/ Curtis A. Sampson /s/ Paul N. Hanson
- ------------------------------------ -----------------------------------
Curtis A. Sampson Paul N. Hanson
Chairman and Chief Executive Officer Chief Financial Officer



18





INDEPENDENT AUDITORS' REPORT

Shareholders and Board of Directors
Communications Systems, Inc.

We have audited the accompanying consolidated balance sheets of Communications
Systems, Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also include the financial
statement schedule listed in the Index at Item 15. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule 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 financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2002
and 2001 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 9 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 3, 2003
Minneapolis, Minnesota



19

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS
December 31
-----------------------------
2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 19,816,328 $ 22,239,883
Trade accounts receivable, less allowance
for doubtful accounts of $1,061,000
and $1,064,000, respectively 19,128,399 8,804,828
Related party receivables (Note 1) 412,930 531,972
Inventories (Note 2) 28,958,291 24,931,739
Note receivable (Note 1) 2,765,390
Other current assets 1,339,024 556,906
Deferred income taxes (Note 7) 3,354,568 2,176,405
------------ ------------
TOTAL CURRENT ASSETS 73,009,540 72,007,123

PROPERTY, PLANT AND
EQUIPMENT, net (Notes 1 and 3) 7,424,550 8,136,673

OTHER ASSETS:
Excess of cost over net assets
acquired (Notes 1 and 9) 5,253,793 4,638,068
Investments (Note 1) 22,554 60,019
Deferred income taxes (Note 7) 2,796,978 3,070,027
Other assets 251,077 99,893
------------ ------------
TOTAL OTHER ASSETS 8,324,402 7,868,007
------------ ------------
TOTAL ASSETS $ 88,758,492 $ 88,011,803
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable (Note 1) $ 7,000,000 $ 9,000,000
Accounts payable 5,291,706 5,567,390
Accrued compensation and benefits 2,655,056 2,671,269
Other accrued liabilities 1,797,656 1,218,844
Dividends payable 325,714
Income taxes payable 2,817,082 2,246,299
------------ ------------
TOTAL CURRENT LIABILITIES 19,887,214 20,703,802

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (Notes 1 and 6)
Preferred stock, par value $1.00 per share;
3,000,000 shares authorized; none issued
Common stock, par value $.05 per share;
30,000,000 shares authorized;
8,142,716 and 8,262,314 shares issued
and outstanding, respectively 407,135 413,116
Additional paid-in capital 27,613,163 27,855,529
Retained earnings 40,920,358 39,463,137
Cumulative other comprehensive loss (Note 1) (69,378) (423,781)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 68,871,278 67,308,001
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,758,492 $ 88,011,803
============ ============

See notes to consolidated financial statements.

20



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31
---------------------------------------------------
2002 2001 2000
------------ ------------ ------------

SALES (Note 10): $107,299,857 $ 95,105,438 $119,720,115

COSTS AND EXPENSES:
Cost of sales 78,748,160 69,602,302 82,354,384
Selling, general and administrative expenses 24,611,972 24,690,686 29,432,373
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 103,360,132 94,292,988 111,786,757
------------ ------------ ------------
OPERATING INCOME 3,939,725 812,450 7,933,358

OTHER INCOME (EXPENSE):
Investment income 238,316 785,323 1,028,681
Interest expense (283,369) (560,524) (689,867)
------------ ------------ ------------
OTHER (EXPENSE) INCOME, net (45,053) 224,799 338,814
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,894,672 1,037,249 8,272,172

INCOME TAX EXPENSE (Note 7) 1,558,000 325,000 1,600,000
------------ ------------ ------------
NET INCOME $ 2,336,672 $ 712,249 $ 6,672,172
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment 354,403 (72,810) (382,435)
Unrealized holding gain on debt securities 73,800
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
BEFORE INCOME TAXES 354,403 (72,810) (308,635)
Income tax expense related to unrealized
gains and losses on debt securities 25,614
------------ ------------ ------------
354,403 (72,810) (334,249)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 2,691,075 $ 639,439 $ 6,337,923
============ ============ ============
BASIC NET INCOME
PER COMMON SHARE (Note 1) $ .28 $ .09 $ .76
============ ============ ============
DILUTED NET INCOME
PER COMMON SHARE (Note 1) $ .28 $ .09 $ .75
============ ============ ============

AVERAGE BASIC SHARES OUTSTANDING 8,245,352 8,363,046 8,750,279
AVERAGE DILUTED SHARES OUTSTANDING 8,246,481 8,364,553 8,865,466

See notes to consolidated financial statements.




21



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Cumulative
Additional Stock Option Other
Common Stock Paid-in Retained Notes Comprehensive
Shares Amount Capital Earnings Receivable Income (Loss) Total
--------- --------- ----------- ----------- ----------- ------------ -----------

BALANCE AT DECEMBER 31, 1999 8,551,272 $ 427,564 $25,302,306 $40,996,869 $ (288,225) $ (16,722) $66,421,792
Net income 6,672,172 6,672,172
Issuance of stock under
Employee Stock Purchase Plan 30,515 1,526 316,211 317,737
Issuance of stock to
Employee Stock Ownership Plan 23,692 1,184 306,812 307,996
Issuance of stock under
Employee Stock Option Plan 290,159 14,508 3,323,673 3,338,181
Stock issued as compensation 8,000 400 119,600 120,000
Tax benefit from non qualified
employee stock options 397,420 397,420
Purchase of common stock (286,729) (14,336) (888,887) (1,843,058) (2,746,281)
Shareholder dividends (3,516,065) (3,516,065)
Collection of stock option
notes receivable 288,225 288,225
Other comprehensive loss (334,249) (334,248)
--------- --------- ----------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 2000 8,616,909 430,846 28,877,135 42,309,918 - (350,971) 71,266,928
Net income 712,249 712,249
Issuance of stock under
Employee Stock Purchase Plan 15,657 783 82,363 83,146
Issuance of stock to
Employee Stock Ownership Plan 25,000 1,250 219,075 220,325
Purchase of common stock (395,252) (19,763) (1,323,044) (1,885,563) (3,228,370)
Shareholder dividends (1,673,467) (1,673,467)
Other comprehensive loss (72,810) (72,810)
--------- --------- ----------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 2001 8,262,314 413,116 27,855,529 39,463,137 - (423,781) 67,308,001
Net income 2,336,672 2,336,672
Issuance of stock under
Employee Stock Purchase Plan 36,276 1,814 188,744 190,558
Issuance of stock to
Employee Stock Ownership Plan 25,000 1,250 187,250 188,500
Issuance of stock under
Employee Stock Option Plan 1,700 85 11,645 11,730
Purchase of common stock (182,574) (9,130) (630,005) (553,737) (1,192,872)
Shareholder dividends (325,714) (325,714)
Other comprehensive loss 354,403 354,403
--------- --------- ----------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 2002 8,142,716 $ 407,135 $27,613,163 $40,920,358 $ - $ (69,378) $68,871,278
========= ========= =========== =========== =========== ============ ===========

See notes to consolidated financial statements.



22



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 2,336,672 $ 712,249 $ 6,672,172
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,633,671 5,015,807 5,098,123
Increase in deferred taxes (905,114) (674,963) (666,985)
Tax benefit from non-qualified stock options 397,420
Changes in assets and liabilities net of
effects from acquisitions:
Trade and related party receivables 2,333,236 3,948,522 (2,222,176)
Inventories 1,075,464 2,491,627 (6,455,692)
Other current assets (824,839) 116,531 (55,759)
Accounts payable (389,124) (256,841) (2,071,389)
Accrued expenses 621,730 (462,842) 739,557
Income taxes payable 570,087 743,567 (1,272,969)
------------ ------------ ------------
Net cash provided by operating activities 7,451,783 11,633,657 162,302

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,740,220) (984,369) (2,276,790)
Maturities of debt securities 21,809 5,856,488 214,973
Increase in other assets 157,015 19,686 309,833
Collection of notes receivable 2,765,390 200,000 400,000
Payment for purchase of MiLAN Technology Corporation (8,127,751)
------------ ------------ ------------
Net cash (used in) provided by investing activities (6,923,757) 5,091,805 (1,351,984)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (2,000,000) (101,438) (38,518)
Proceeds from notes payable 96,921
Collection of stock option note receivable 288,225
Dividends paid (2,553,858) (3,490,761)
Proceeds from issuance of stock 202,288 83,146 3,655,918
Purchase of stock (1,192,872) (3,224,897) (2,746,281)
----------- ------------ ------------
Net cash used in financing activities (2,990,584) (5,797,047) (2,234,496)

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 39,003 (9,906) (92,103)
------------ ------------ ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,423,555) 10,918,509 (3,516,281)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,239,883 11,321,374 14,837,655
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,816,328 $ 22,239,883 $ 11,321,374
============ ============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 973,932 $ 342,335 $ 2,885,278
Interest paid 356,357 507,014 682,679
Dividends declared not paid 325,714 - -

See notes to consolidated financial statements.


23

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: The Company is principally engaged in the manufacture
and sale of modular connecting and wiring devices for voice and data
communications. The Company sells these products to telephone companies,
electrical contractors, interconnect companies, original equipment manufacturers
and retailers. The Company also owns subsidiaries which manufacture media and
rate conversion products (products that permit telecommunications networks to
move information between copper wired equipment and fiber-optic cable) and offer
internet network design, specification and training services to educational
institutions. The Company's operations are located in the United States, United
Kingdom, Puerto Rico, and Costa Rica.

Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
transactions and accounts have been eliminated.

Use of estimates: The presentation 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 and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company's estimates consist principally of reserves
for doubtful accounts, sales returns, warranty costs, lower of cost or market
inventory adjustments, provision for income taxes and deferred taxes, and
goodwill and other intangible asset impairment review.

Financial instruments: The fair value of the Company's financial instruments,
which consist of marketable securities, accounts receivable, notes receivable,
accounts payable, accrued expenses and notes payable, approximate their carrying
value due to their short-term nature and the variable interest rate on
outstanding indebtedness.

Cash equivalents: For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.

Accounts receivable from related parties: The Company provides services for
Hector Communications Corporation ("HCC"), a former subsidiary of the Company.
Several of the Company's officers and directors work in similar capacities for
HCC. Outstanding receivable balances from HCC were $74,000 and $154,000 at
December 31, 2002 and 2001, respectively. Accounts with HCC are handled on an
open account basis. The Company also has certain receivables with employees and
an officer, the majority of which are repaid through biweekly payroll
deductions. These receivables totaled $339,000 and $378,000 as of December 31,
2002 and 2001 respectively. These receivables earn interest ranging from 6.5% to
8 % and have maturity dates extending to 2006. The officer receivable of
$174,000 was paid in full in January 2003.

Property, plant and equipment: Property, plant and equipment are recorded at
cost. Depreciation is computed using principally the straight-line method.
Depreciation included in costs and expenses was $2,564,000, $2,905,000 and
$2,969,000 for 2002, 2001 and 2000, respectively. Maintenance and repairs are
charged to operations and additions or improvements are capitalized. Items of
property sold, retired or otherwise disposed of are removed from the asset and
accumulated depreciation accounts and any gains or losses on disposal are
reflected in operations.

Excess of cost over net assets acquired (Goodwill) and other intangible assets:
Goodwill represents the amount by which the purchase price and transaction costs
of business the Company has acquired exceed the estimated fair value of the net
tangible assets and separately identifiable assets of these businesses. The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets" on January 1, 2002. Under SFAS No. 142,
goodwill and intangible assets with indefinite useful lives are not amortized,
but are tested at least annually for impairment. Intangible assets with discrete
useful lives (consisting of a royalty agreement) will continue to be amortized
over its remaining life of five years. Amortization included in costs and
expenses was $70,000, $2,129,000 and $1,974,000 in 2002, 2001 and 2000,
respectively.

Note receivable: The note receivable at December 31, 2001 represented the
balance due from the sale of the Company's contract manufacturing operations
sold in 1996. The original amount was $4,866,000 and the maturity date was
November 1, 2001. The note and accrued interest was paid in full in January
2002.

24


Recoverability of long-lived assets: The Company reviews its long-lived assets
periodically to determine potential impairment by comparing the carrying value
of the assets with expected net cash flows expected to be provided by operating
activities of the business or related products. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
determine how an impairment loss should be recognized. An impairment loss would
be measured by comparing the amount by which the carrying value exceeds the fair
value of the asset based on market value that is based on the discounted cash
flows expected to be generated by the asset. At December 31, 2002 and 2001, no
impairment loss provision is required or recorded in the consolidated financial
statements.

Investments: The Company owns available-for-sale marketable securities with a
cost of $34,346 and market value of $26,551.

Notes payable: The Company has a $10,000,000 line of credit from U.S. Bank.
Outstanding borrowings against the line of credit at December 31, 2002 and 2001
were $7,000,000 and $9,000,000 respectively. Interest on borrowings on the
credit line is at the bank's average CD rate plus 1.5% (2.9% at December 31,
2002). The outstanding balance was paid in full on March 3, 2003. The credit
agreement matures June 30, 2003 and is secured by assets of the Company.

Warranty: We provide reserves for the estimated cost of product warranties at
the time revenue is recognized. We estimate the costs of our warranty
obligations based on our warranty policy or applicable contractual warranty,
historical experience of known product failure rates, and use of materials and
service delivery costs incurred in correcting product failures. Management
reviews the estimated warranty liability on a quarterly basis to determine its
adequacy.

The following table presents the changes in the Company's warranty liability for
the year ended December 31, 2002, the majority of which relates to a five year
obligation to provide for potential future liabilities for network equipment
sales.

Beginning Balance $ 286,358
Actual warranty costs paid (149,828)
Amounts charged to expense 526,142
---------
Ending balance $ 662,672
=========

Foreign currency translation: Assets and liabilities denominated in foreign
currencies were translated into U.S. dollars at year-end exchange rates. Revenue
and expense transactions were translated using average exchange rates. The
cumulative foreign currency translation balance is $69,000 and $424,000 at
December 31, 2002 and 2001, respectively.

Revenue recognition: The Company recognizes revenue for all domestic and
international sales at the shipping point based on shipping terms of FOB
shipping point. The Company sells products directly to its customers and through
distributors. Risk of loss transfers at the point of shipment and the Company
has no further obligation for performance after such time. The Company
establishes an allowance for sales returns based on historical experience.
Payment terms for distributors are consistent with the terms of the Company's
direct customers.

Research and development: Research and development consists mostly of outside
testing, equipment and supplies associated with enhancing existing products and
developing new products. Research and development costs are expensed when
incurred was $482,000 in 2002, $576,000 in 2001, and $640,000 in 2000.

Net income per share: Basic net income per common share is based on the weighted
average number of common shares outstanding during each year. Diluted net income
per common share adjusts for the effect the dilutive effect of potential common
shares outstanding. The Company's only potential common shares outstanding are
stock options, which resulted in a dilutive effect of 1,129 shares, 1,507
shares, and 115,187 shares in 2002, 2001 and 2000, respectively. The Company
calculates the dilutive effect of outstanding options using the treasury stock
method. Options to purchase 1,165,000, 1,075,000 and 968,000 shares of common
stock at a range of $6.90 to $18.91 were outstanding during 2002, 2001 and 2000
but were not included in the computation of diluted earnings per share because
the options' price was greater than the average market price of common stock.

25


Stock-based employee compensation plans: The Company has adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" for
measurement and recognition of stock-based transactions with its employees and
accordingly no stock-based employee compensation cost is reflected in net
income. If the Company had elected to recognize compensation cost for its stock
based transactions using the method prescribed by SFAS No. 123, pro forma net
income and net income per share would have been as follows:

Year Ended December 31
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net Income
As reported $ 2,337,000 $ 712,000 $ 6,672,000
Compensation expense, net of ta $ (606,000) $ (732,000) $ (1,088,000)
Pro forma $ 1,731,000 $ (20,000) $ 5,584,000

Earnings Per Share-Basic
As reported $ . 28 $ .09 $ . 76
Pro forma $ . 21 $ .00 $ . 64

Earnings Per Share-Diluted
As reported $ . 28 $ .09 $ . 75
Pro forma $ . 21 $ .00 $ . 63

Information on the Company's stock-based compensation plans and data used to
calculate compensation expense in the table above are described in more detail
in Note 6.

Recently issued accounting pronouncements: In November 2002, the FASB issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 establishes accounting and disclosure requirements for a company's
obligations under certain guarantees that it has issued. A guarantor is required
to recognize a liability for the obligation it has undertaken in issuing a
guarantee, including the ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. FIN 45 also
requires expanded disclosure of information related to product warranty amounts
recorded in the financial statements. The disclosure provisions are effective
for interim and annual periods ending after December 15, 2002 and are included
within Note 1 above.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment to SFAS No. 123. This
standard provides alternative methods of transition for any voluntary changes to
the fair value based method of accounting for stock-based employee compensation.
It also amends the disclosure requirements to require prominent disclosure in
both the annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The new disclosure requirements will be effective for interim
periods beginning after December 15, 2002 and are included within Note 1 above.
We will to apply the principles of APB Opinion No. 25 and related
interpretations in accounting for our stock based compensation plans.

NOTE 2 - INVENTORIES

Inventories are carried at the lower of cost (first-in, first out method) or
market and consist of:
December 31
-------------------------------
2002 2001
------------ ------------
Finished goods $ 14,188,306 $ 15,821,487
Raw and processed materials 14,769,985 9,110,252
------------ ------------
$ 28,958,291 $ 24,931,739
============ ============

26

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and the estimated useful lives are as follows:

December 31
Estimated --------------------------
useful life 2002 2001
----------- ------------ ------------
Land $ 290,939 $ 290,939
Buildings and improvements 7-30 years 3,547,305 3,116,949
Machinery and equipment 3-15 years 26,700,103 26,545,446
Furniture and fixtures 5-10 years 3,435,868 3,001,702
------------ ------------
33,974,215 32,955,036
Less accumulated depreciation 26,549,665 24,818,363
------------ ------------
$ 7,424,550 $ 8,136,673
============ ============

NOTE 4 - EMPLOYEE BENEFIT PLANS

The Company has an Employee Savings Plan (401(k)) and matches a percentage of
employee contributions up to six percent of compensation. Contributions to the
plan in 2002, 2001 and 2000 were $312,000, $263,000, and $347,000, respectively.

The Company does not provide post retirement benefits to its employees.


NOTE 5 - COMMITMENTS AND CONTINGENCIES

The Company leases land, buildings and equipment under operating leases with
original terms from one to ten years. Certain of these leases contain renewal
and purchase options. Rent expense charged to operations was $1,135,000
$1,078,000 and $901,000 in 2002, 2001 and 2000 respectively. Sublease income
received was $57,000, $34,000 and $10,000 in 2002, 2001 and 2000 respectively.
At December 31, 2002, the Company was obligated under noncancellable operating
leases to make minimum annual future lease payments as follows:

Year Ending December 31:
2003 $ 943,000
2004 983,000
2005 634,000
2006 628,000
2007 227,000
-----------
$ 3,415,000
===========

In the ordinary course of business, the Company is exposed to legal actions and
incurs costs to pursue and defend legal claims. Company management is not aware
of any outstanding or pending legal actions that would materially affect the
Company's financial position or results of operations.

NOTE 6 - COMMON STOCK AND STOCK OPTIONS

Common shares are reserved in connection with the Company's 1992 stock plan
under which 1,900,000 shares of common stock may be issued pursuant to stock
options, stock appreciation rights, restricted stock or deferred stock granted
to officers and key employees. Exercise prices of stock options under the plan
cannot be less than fair market value of the stock on the date of grant. Rules
and conditions governing awards of stock options, stock appreciation rights and
restricted or deferred stock are determined by the Compensation Committee of the
Board of Directors, subject to certain limitations incorporated into the plan.
At December 31, 2002, 199,445 shares remained available to be issued under the
plan. Options expire five years from date of grant with one-third of the options
vesting after six months and the remaining two-thirds vesting equally over the
next two years.

Common shares are also reserved for issuance in connection with a nonqualified
stock option plan under which up to 200,000 shares may be issued to nonemployee
directors. The plan provides for the automatic grant of nonqualified options for
3,000 shares of common stock annually to each nonemployee director concurrent
with the annual stockholders' meeting. Exercise price will be the fair market
value of the stock at the date of grant. Options granted under this plan vest
when issued and expire ten years from date of grant. At December 31, 2002,
75,000 shares are available to be issued under the plan.

The Company issued 8,000 fully vested common shares of stock to JDL Technologies
employees as compensation for services during 2000. No shares were issued in
2002 or 2001. Compensation expense recorded in 2000 related to these shares was
$120,000.

27


Changes in outstanding employee and director stock options during the three
years ended December 31, 2002 were as follows:
Weighted
average
Number of exercise price
shares per share
------------ -----------
Outstanding at December 31, 1999 1,156,992 $ 12.66
Granted 363,100 16.79
Exercised (290,159) 12.98
Canceled (146,537) 11.81
------------
Outstanding at December 31, 2000 1,083,396 14.17
Granted 269,520 8.03
Exercised - -
Canceled (275,105) 12.98
------------
Outstanding at December 31, 2001 1,077,811 13.01
Granted 248,580 8.42
Exercised (1,700) 6.27
Canceled (158,457) 13.20
------------
Outstanding at December 31, 2002 1,166,234 $ 12.02
============



At December 31, 2002, 889,702 stock options are currently exercisable at a
weighted average price of $12.02. The following table summarizes the status of
Communications Systems, Inc. stock options outstanding at December 31, 2002:

Weighted Average Weighted
Remaining Average
Range of Exercise Prices Shares Option Life Exercise Price
- ------------------------ -------- ----------- -----------------
$ 5.31 to $ 9.99 480,855 4.1 years $ 8.26
$10.00 to $12.00 239,429 1.8 years 10.22
$12.01 to $14.99 59,000 6.3 years 13.62
$15.00 to $18.91 386,950 1.8 years 17.17

On October 29, 1999 the Board of Directors adopted a shareholders' rights plan.
Under this plan, the Board of Directors declared a distribution of one right per
share of common stock. Each right entitles the holder to purchase 1/100th of a
share of a new series of Junior Participating Preferred Stock of the Company at
an initial exercise price of $65. The rights expire on October 26, 2009. The
rights will become exercisable only following the acquisition by a person or
group, without the prior consent of the Board of Directors, of 15% or more of
the Company's voting stock, or following the announcement of a tender offer or
exchange offer to acquire an interest of 15% or more. If the rights become
exercisable, each rightholder will be entitled to purchase, at the exercise
price, common stock with a market value equal to twice the exercise price.
Should the Company be acquired, each right would entitle the holder to purchase,
at the exercise price, common stock of the acquiring company with a market value
equal to twice the exercise price. Any rights owned by the acquiring person or
group would become void.

The fair value of the Company's stock options and Employee Stock Purchase Plan
transactions used to compute pro forma net income and net income per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model. The following table displays the assumptions used in the
model.
Year Ended December 31
---------------------------------------
2002 2001 2000
--------- ---------- ----------
Expected volatility 33% 33% 34%
Risk free interest rate 4.6% 4.7% 6.1%
Expected holding period - employees 4 years 4 years 4 years
Expected holding period - directors 7 years 7 years 7 years
Dividend yield 1.9% 3.6% 2.4%

Information regarding the effect on net income and earnings per common share had
the Company applied the fair value expense recognition provisions of SFAS No.
123 is included in Note 1.

28

EMPLOYEE STOCK PURCHASE PLAN

The Company maintains an Employee Stock Purchase Plan for which 300,000 common
shares have been reserved. Under the terms of the plan, employees may acquire
shares of common stock, subject to limitations, through payroll deductions at
85% of the lower of fair market value for such shares on one of two specified
dates in each plan year. Shares issued to employees under the plan were 36,276,
15,657 and 30,515 for the plan years ended August 31, 2002, 2001 and 2000,
respectively. At December 31, 2002 employees had subscribed to purchase an
additional 28,460 shares in the current plan year ending August 31, 2002.


EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

All eligible employees of the Company participate in the ESOP after completing
one year of service. Contributions are allocated to each participant based on
compensation and vest 30% after three years of service and incrementally
thereafter, with full vesting after seven years. At December 31, 2002, the ESOP
held 309,606 shares of the Company's common stock, all of which has been
allocated to the accounts of eligible employees. Contributions to the plan are
determined by the Board of Directors and can be made in cash or shares of the
Company's stock. The Company's 2002 ESOP contribution was $255,040 for which the
Company issued 32,000 shares of common stock to the ESOP in February 2003. The
2001 ESOP contribution was $188,500 for which the Company issued 25,000 shares
in February 2002. The 2000 ESOP contribution was $220,325 for which the Company
issued 25,000 shares in February 2001.

PURCHASES OF COMMUNICATIONS SYSTEMS, INC. COMMON STOCK

The Company's Board of Directors has authorized the purchase and retirement,
from time to time, of shares of the Company's stock on the open market, or in
private transactions consistent with overall market and financial conditions. In
2002, the Company purchased and retired 182,574 shares at a cost of $1,193,000.
In 2001, the Company purchased and retired 395,252 shares at a cost of
$3,228,000. At December 31, 2002, 297,065 additional shares could be repurchased
under outstanding Board authorizations.


NOTE 7 - INCOME TAXES

Income tax expense from continuing operations consists of the following:

Year Ended December 31
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Currently payable income taxes (benefit):
Federal $ 2,000,000 $ 746,000 $ 1,109,000
State 260,000 101,000 131,000
Puerto Rico 161,000 163,000 573,000
Foreign 42,000 (10,000) 57,000
----------- ----------- -----------
2,463,000 1,000,000 1,870,000
Tax effect of disqualified employee
incentive stock options 0 0 397,000

Deferred income benefit (905,000) (675,000) (667,000)
----------- ----------- -----------
$ 1,558,000 $ 325,000 $ 1,600,000
=========== =========== ===========

A subsidiary, Suttle Caribe, Inc., operates in Puerto Rico, and s qualified
under Internal Revenue Service Code section 936 for credit against U.S. income
taxes. Under provisions of the Omnibus Budget Reconciliation Act of 1993,
Congress set limits on the section 936 credit that went into effect for the
1994-tax year. As a result of the tax credit limitation, the Company incurred $0
in 2002 and 2001 and $82,000 in 2000 of U.S. federal income tax expense on
earnings in Puerto Rico.

29

Earnings of Suttle Caribe, Inc. are subject to Puerto Rico income taxes at a 4%
flat rate through 2016, subject to satisfaction of the employment and investment
requirements of the tax exemption grant received by the Company. Distributions
by Suttle Caribe, Inc. to the parent company of income earned prior to December
31, 2000 are subject to a tollgate tax at rates which, depending on various
factors, range from 3.5% to 10%. The Company has provided for and prepaid
tollgate taxes at a 1.75% rate on its Puerto Rico earnings for each year since
1993. The Company has recognized tollgate tax expense at the 3.5% rate on
earnings from years prior to 1993 only to the extent distributions were received
from Suttle Caribe, Inc. The cumulative amount of undistributed prior earnings
on which no tollgate tax has been recognized was approximately $9,986,000 at
December 31, 2002.

Austin Taylor Communications, Ltd. operates in the U.K. and is subject to U.K.
rather than U.S. income taxes. U.K. pretax loss was $349,000, $706,000, and
$74,000 in 2002, 2001 and 2000, respectively. Suttle Costa Rica, S.A. operates
in Costa Rica and is currently exempt from Costa Rica income taxes. Accumulated
earnings in Costa Rica on which no U.S. income tax has been accrued was
$2,869,000 at December 31, 2002. It is the Company's intention to reinvest the
remaining undistributed earnings of its Puerto Rico, U.K. and Costa Rica
subsidiaries to support the continued operation of those subsidiaries.

The provision for income taxes varied from the federal statutory tax rate as
follows:

Year Ended December 31
--------------------------------
2002 2001 2000
------ ------ ------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Surtax exemption (1.0) (1.0) (1.0)
U.S. taxes not provided on Puerto Rico
operations (1.3) (54.4) (23.1)
State income taxes, net of federal benefit 4.4 6.4 1.8
Nondeductible goodwill amortization 41.4 5.2
Other 2.9 3.9 1.4
------ ------ ------
Effective tax rate 40.0% 31.3% 19.3%
====== ====== ======



Deferred tax assets and liabilities as of December 31 related to the following:

2002 2001
----------- -----------
Current assets:
Bad debts $ 395,809 $ 299,462
Inventory 2,091,861 1,354,724
Accrued expenses 866,898 522,219
----------- -----------
$ 3,354,568 $ 2,176,405
=========== ===========
Long term assets and (liabilities):
Depreciation $ (366,699) $ (292,130)
Net operating loss carryforward 877,324 954,752
Loss reserves on notes receivable 147,725 148,000
Excess of cost over net assets 472,357 565,620
Other 4,012 (500)
Alternative minimum tax credits 1,662,259 1,694,285
----------- -----------
$ 2,796,978 $ 3,070,027
=========== ===========

As part of the LANart acquisition, the Company purchased net operating loss
carryforwards in the amount of $3,416,000. At December 31, 2002, the Company has
$2,580,000 available net operating loss carryforwards for income tax purposes,
which expire 2014. The Company also has alternative minimum tax carryforwards of
approximately $1,662,000 at December 31, 2002, which are available to reduce
future regular income taxes over an indefinite period.


NOTE 8 - ACQUISITIONS

Effective March 25, 2002, the Company acquired substantially all the assets of
MiLAN Technology Corporation for approximately $8,100,000 in cash. MiLAN,
located in Sunnyvale, California is a manufacturer of media and rate conversion
products, which permit telecommunications networks to move information between
copper-wired equipment and fiber-optic cable. In addition, MiLAN is also a
supplier of wireless access points, bridges and other networking products. The
acquisition was accounted for as a purchase and operations of MiLAN have been
included in consolidated operations from March 25, 2002.

30


The fair value of assets acquired in the transaction was $8,390,156 and
liabilities of $262,405 were assumed as follows:

Equipment and fixtures $ 5,120
Identifiable intangible asset (royalty agreement) 201,341
Excess of cost over net assets acquired 635,046
Accounts receivable 2,426,713
Inventory 5,121,936
Accrued expenses (262,405)
-----------
Total purchase price $ 8,127,751
===========



NOTE 9 - GOODWILL

On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under this statement goodwill as well as other intangibles
determined to have an infinite life will no longer be amortized; however, these
assets will be reviewed for impairment on a periodic basis. Statement No. 142
also includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. Management
assessed the fair value of the business units to determine whether goodwill
carried on the financial statements was impaired and the extent of such
impairment, if any using the discounted cash flows method. Based upon these
assessments, management determined that the current goodwill balances were not
impaired as of January 1, 2002. Management will continue to reassess the value
of our business units and related goodwill balances at the beginning of each
year or at other times if events have occurred or circumstances exist that
indicate the carrying amount of goodwill may not be recoverable. As of December
31, 2002, 2001 and 2000 the Company had net goodwill of $5,254,000, $4,638,000
and $6,729,000, respectively.

The following table adjusts net income for goodwill amortization expense
recognized for the years ended December 31:

2002 2001 2000
----------- ----------- -----------
Reported net income $ 2,336,672 $ 712,249 $ 6,672,172
Add back: Goodwill amortization,
net of taxes - 1,099,616 1,688,244
----------- ----------- -----------
Adjusted net income $ 2,336,672 $ 1,811,865 $ 8,360,416
=========== =========== ===========

Basic Net Income Per Share:
Reported net income $ .28 $ .09 $ .76
Goodwill amortization - .13 .19
----------- ----------- -----------
Adjusted net income $ .28 $ .22 $ .95
=========== =========== ===========

Diluted Net Income Per Share:
Reported net income $ .28 $ .09 $ .75
Goodwill amortization - .13 .19
----------- ----------- -----------
Adjusted net income $ .28 $ .22 $ .94
=========== =========== ===========

NOTE 10- INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS

The Company classifies its businesses into four segments: Suttle, which
manufactures U.S. standard modular connecting and wiring devices for voice and
data communications; Austin Taylor, which manufactures British standard line
jacks, patch panels, wiring harness assemblies, metal boxes, distribution
cabinets and central office frames; Transition Networks and MiLAN Technology
(substantially all assets of MiLAN purchased March 25, 2002), which designs and
markets data transmission, computer network and media conversion products and
print servers; and JDL Technologies (JDL) which provides telecommunications
network design, specification and training services to educational institutions.

31

Suttle products are sold principally to United States (U.S.) customers. Suttle
operates manufacturing facilities in the U.S. (including Puerto Rico) and Costa
Rica. Austin Taylor operates in the United Kingdom (U.K.). Transition Networks
manufactures its products in the United States and makes sales in both the U.S.
and U.K. markets. JDL Technologies operates in the U.S. and makes sales in the
U.S. and Latin America. Consolidated sales to U.S. customers were approximately
80%, 75% and 78% of total consolidated revenues in 2002, 2001 and 2000
respectively. At December 31, 2002, foreign earnings in excess of amounts
received in the United States were approximately $5,738,000. In addition, the
cumulative amount of undistributed prior earnings of Suttle Caribe, Inc. on
which no Puerto Rico tollgate tax has been recognized was approximately
$9,986,000 at December 31, 2002.

In 2002, 2001 and 2000, no customer accounted for more than 10% of consolidated
sales.

The Company's station apparatus products are manufactured using plastic parts,
wire sub-assemblies, fasteners, brackets, electronic circuit boards and other
components, most of which are fabricated by the Company. There are multiple
sources of supply for the materials and parts required and the Company is not
dependent upon any single supplier, except that the Company's corrosion
resistant products utilize a moisture-resistant gel-filled fig available only
from Tyco Electronics. The unavailability of the gel-filled figs from Tyco
Electronics could have a material adverse effect on the Company. The Company has
not generally experienced significant problems in obtaining its required
supplies, although from time to time spot shortages are experienced.

Information concerning the Company's operations in the various segments for the
twelve-month periods ended December 31, 2002, 2001 and 2000 is as follows:


Austin Transition JDL
Suttle Taylor Networks/MiLAN Technologies Corporate Consolidated
---------------------------------------------------------------------------------------
Year Ended December 31, 2002:

Revenues $ 33,158,835 $ 7,138,507 $ 49,010,021 $ 17,992,494 $ - $107,299,857
Cost of sales 28,010,474 6,447,388 32,122,860 12,167,438 78,748,160
---------------------------------------------------------------------------------------
Gross profit 5,148,361 691,119 16,887,161 5,825,056 28,551,697
Selling, general and
administrative expenses 5,857,979 1,068,505 12,528,377 3,424,067 1,733,044 24,611,972
---------------------------------------------------------------------------------------
Operating income (loss) $ (709,618) $ (377,386) $ 4,358,784 $ 2,400,989 $ (1,733,044) $ 3,939,725
=======================================================================================
Depreciation and amortization $ 1,676,270 $ 418,669 $ 317,539 $ 127,131 $ 94,062 $ 2,633,671
=======================================================================================
Assets $ 47,661,213 $ 5,262,680 $ 24,806,207 $ 4,258,465 $ 6,769,927 $ 88,758,492
=======================================================================================
Capital expenditures $ 559,418 $ 251,922 $ 555,655 $ 281,747 $ 91,478 $ 1,740,220
=======================================================================================

Year Ended December 31, 2001:
Revenues $ 39,992,065 $ 9,619,676 $ 35,246,495 $ 10,247,202 $ - $ 95,105,438
Cost of sales 31,773,239 8,907,386 22,331,941 6,589,736 69,602,302
---------------------------------------------------------------------------------------
Gross profit 8,218,826 712,290 12,914,554 3,657,466 25,503,136
Selling, general and
administrative expenses 6,839,035 1,450,668 9,515,050 3,370,997 3,514,936 24,690,686
Goodwill amortization 287,047 58,338 1,281,549 444,554 (2,071,488) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 1,092,744 $ (796,716) $ 2,117,955 $ (158,085) $ (1,443,448) $ 812,450
=======================================================================================
Depreciation and amortization $ 2,064,281 $ 595,815 $ 1,638,446 $ 599,352 $ 113,913 $ 5,015,807
=======================================================================================
Assets $ 48,183,054 $ 5,359,069 $ 18,472,817 $ 7,020,893 $ 8,975,970 $ 88,011,803
=======================================================================================
Capital expenditures $ 681,841 $ 22,719 $ 117,126 $ 92,665 $ 70,018 $ 984,369
=======================================================================================

Year Ended December 31, 2000:
Revenues $ 55,111,481 $ 10,148,260 $ 39,573,541 $ 14,886,833 $ - $119,720,115
Cost of sales 37,692,631 8,870,492 24,460,842 11,330,419 82,354,384
---------------------------------------------------------------------------------------
Gross profit 17,418,850 1,277,768 15,112,699 3,556,414 37,365,731
Selling, general and
administrative expenses 7,539,489 1,383,796 13,126,188 3,833,823 3,549,077 29,432,373
Goodwill amortization 287,047 58,338 1,124,137 444,554 (1,914,077) 0
---------------------------------------------------------------------------------------
Operating income (loss) $ 9,592,314 $ (164,366) $ 862,374 $ (721,963) $ (1,635,000) $ 7,933,358
=======================================================================================
Depreciation and amortization $ 2,085,318 $ 676,609 $ 1,631,879 $ 558,607 $ 145,710 $ 5,098,123
=======================================================================================
Assets $ 47,739,407 $ 6,503,926 $ 20,925,554 $ 9,691,659 $ 8,337,508 $ 93,198,054
=======================================================================================
Capital expenditures $ 1,478,871 $ 233,405 $ 223,434 $ 306,107 $ 34,973 $ 2,276,790
=======================================================================================


32


(b) SUPPLEMENTAL FINANCIAL INFORMATION

Unaudited Quarterly Operating Results
(in thousands except per share amounts)

Quarter Ended
------------------------------------------------
March 31 June 30 Sept 30 Dec 31
- -------------------------------------------------------------------------------
2002

Sales $ 23,920 $ 27,175 $ 28,987 $ 27,218
Gross Margins 6,377 4,635 9,152 8,388
Operating income 651 (1,529) 2,768 2,049
Net Income 470 (1,042) 1,670 1,239

Basic Net Income per Share $ .06 $ (.13) $ .20 $ .15
Diluted Net Income per Share $ .06 $ (.13) $ .20 $ .15


2001

Sales $ 23,094 $ 25,682 $ 23,073 $ 23,256
Gross Margins 6,642 6,948 5,610 6,303
Operating income 202 379 (491) 722
Net Income 185 314 (196) 409

Basic Net Income per Share $ .02 $ .04 $ (.02) $ .05
Diluted Net Income per Share $ .02 $ .04 $ (.02) $ .05


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

The information called for by paragraphs [a], [c], [d], [e], and [f] of Item 401
under Regulation S-K, to the extent applicable, will be set forth under the
caption "Election of Directors" in the Company's definitive proxy material for
its May 21, 2003 Annual Meeting of Shareholders to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated by reference herein. The information called for by paragraph [b] of
Item 401 is set forth under Item 1[c] herein. The information called for by Item
405 under Regulation S-K, to the extent applicable, will be set forth under the
caption "Certain Transactions" in the Company's above referenced definitive
proxy material.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 402 under Regulation S-K to the extent
applicable, will be set forth under the caption "Executive Compensation" in the
Company's definitive proxy materials for its May 21, 2003 Annual Meeting to be
filed within 120 days from the end of the Registrant's fiscal year, which
information is expressly incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 403 under Regulation S-K will be set forth
under the captions "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
materials for its May 21, 2003 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.

33





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 404 under Regulation S-K will be set forth
under the caption "Certain Transactions" in the Company's definitive proxy
materials for its May 21, 2003 Annual Meeting to be filed within 120 days from
the end of the Registrant's fiscal year, which information is expressly
incorporated herein by reference.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer, Curtis A. Sampson, and Chief Financial
Officer, Paul N. Hanson, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K

(a) (1) Consolidated Financial Statements

The following Consolidated Financial Statements of Communications Systems, Inc.
and subsidiaries appear at pages 20 to 34 herein:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000

Notes to Consolidated Financial Statements

(a) (2) Consolidated Financial Statement Schedule Page Herein
----------------------------------------- -----------

The following financial statement schedule is being
filed as part of this Form 10-K Report:

Independent Auditors' Report 19

Schedule II - Valuation and Qualifying Accounts and Reserves 39

All other schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.

(a) (3) Exhibits

The exhibits which accompany or are incorporated by reference in this report,
including all exhibits required to be filed with this report, are described on
the Exhibit Index, which begins on page 37 of the sequential numbering system
used in this report.

(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 2002

Not Applicable.


34




SIGNATURES

Pursuant to the requirements of Section 13 or 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.

COMMUNICATIONS SYSTEMS, INC.

Dated: March 28, 2003 /s/ Curtis A.Sampson
----------------------------------
Curtis A. Sampson, Chairman of the
Board of Directors and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:

Each person whose signature appears below constitutes and appoints
CURTIS A. SAMPSON and PAUL N. HANSON as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.

Signature Title Date
--------- ----- ----
/s/Curtis A.Sampson Chairman of the Board of Directors, March 28, 2003
- ----------------------- and Director (Principal Executive
Curtis A. Sampson Officer)


/s/Paul N. Hanson Vice President, Treasurer and March 28, 2003
- ----------------------- Chief Financial Officer (Principal
Paul N. Hanson Financial Officer and Principal
Accounting Officer)

/s/Randall D. Sampson Director March 28, 2003
- -----------------------
Randall D. Sampson

/s/Edwin C. Freeman Director March 28, 2003
- -----------------------
Edwin C. Freeman

/s/Luella G. Goldberg Director March 28, 2003
- -----------------------
Luella Gross Goldberg

/s/Frederick M. Green Director March 28, 2003
- -----------------------
Frederick M. Green

/s/Paul J. Anderson Director March 28, 2003
- -----------------------
Paul J. Anderson

/s/Gerald D. Pint Director March 28, 2003
- -----------------------
Gerald D. Pint

/s/Wayne E. Sampson Director March 28, 2003
- -----------------------
Wayne E. Sampson


35





Signatures

Pursuant to the requirements of Section 13 or 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 thereto duly authorized.

Communications Systems, Inc.

By /s/ Curtis A. Sampson
----------------------------
Curtis A. Sampson
Date: March 28, 2003 Chairman and
Chief Executive Officer

/s/ Paul N. Hanson
-----------------------------
Date: March 28, 2003 Paul N. Hanson
Vice President and
Chief Financial Officer

CERTIFICATIONS
I, Curtis A. Sampson certify that:

1. I have reviewed this Annual Report on Form 10-K of Communications
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

36


6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

By /s/ Curtis A. Sampson
----------------------------
Curtis A. Sampson
Date: March 28, 2003 Chairman and
Chief Executive Officer

I, Paul N. Hanson, certify that:

1. I have reviewed this Annual Report on Form 10-K of Communications
Systems, Inc.;

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

By /s/ Paul N. Hanson
----------------------------
Paul N. Hanson
Date: March 28, 2003 Vice President and
Chief Financial Officer

37




- --------------------------------------------------------------------------------






SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934

OF

COMMUNICATIONS SYSTEMS, INC.

FOR

YEAR ENDED DECEMBER 31, 2002





--------------------------------
FINANCIAL STATEMENT SCHEDULE
















- --------------------------------------------------------------------------------






38






COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves

Balance at Additions Deductions Balance
Beginning of Charged to Cost from at End
Description Period and Expenses Reserves of Period

Allowance for doubtful accounts:

Year ended:


December 31, 2002 $ 1,064,000 $ 88,000 $ 91,000 (A) $1,061,000

December 31, 2001 $ 913,000 $ 287,000 $136,000 (A) $1,064,000

December 31, 2000 $ 908,000 $ 36,000 $ 31,000 (A) $ 913,000

Reserve for assets transferred under contractual arrangements and notes receivable:

Year Ended:

December 31, 2002 $ 434,000 $ - $ - $ 434,000

December 31, 2001 $ 434,000 $ - $ - $ 434,000

December 31, 2000 $ 434,000 $ - $ - $ 434,000

- ----------------------------------
(A) Accounts determined to be uncollectible and charged off against reserve.



39





SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OF

COMMUNICATIONS SYSTEMS, INC.

FOR

YEAR ENDED DECEMBER 31, 2002



EXHIBITS












- --------------------------------------------------------------------------------



40




COMMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 2002

Regulation S-K Location in Consecutive Numbering
Exhibit Table System as Filed With the
Reference Title of Document Securities and Exchange Commission
- ------------- ----------------- ----------------------------------

3.1 Articles of Incorporation, as Filed as Exhibit 3.1 to the Form
amended 10-K of the Company for its year
ended December 31, 1989 (the "1989
Form 10-K") and incorporated
herein by reference.

3.2 Bylaws, as amended Filed as Exhibit 3.2 to the 1989
Form 10-K and incorporated herein
by reference.

10.1 1987 Stock Plan Filed as Exhibit 10.1 to the Form
10-K Report of the Company for its
year ended December 31, 1993 (the
"1993 Form 10-K") and incorporated
herein by reference.

10.2 Employee Savings Plan Filed as Exhibit 10.2 to the 1993
Form 10-K and incorporated herein
by reference.

10.3 Employee Stock Ownership Filed as Exhibit 10.3 to the 1993
Plan Form 10-K and incorporated herein
by reference.

10.4 Employee Stock Purchase Plan Filed as Exhibit 10.4 to the 1993
Form 10-K and incorporated herein
by reference.

10.5 Stock Option Plan for Filed as Exhibit 10.5 to the 1993
Nonemployee Directors Form 10-K and incorporated herein
by reference.

10.6 1992 Stock Plan Filed as Exhibit 10.6 to the 1993
Form 10-K and incorporated herein
by reference.

10.7 Flexible Benefit Plan Filed as Exhibit 10.7 to the 1993
Form 10-K and incorporated herein
by reference.

10.8 Supplemental Executive Filed as Exhibit 10.8 to the 1993
Retirement Plan Form 10-K and incorporated herein
by reference.

10.9 Form of Rights Agreement, Filed as Exhibit 1 to the
dated as of October 26, 1999 Company's Form 8-A on November 8,
between the Company and 1999 and incorporated herein by
Wells Fargo Bank Minnesota, reference.
National Association

21 Subsidiaries of the Registrant Filed herewith at page 42.
23 Independent Auditors' Consent Filed herewith at page 42.
24 Power of Attorney Included in signatures at page 35.
99.1 Certification under U.S.C.
ss. 1350 Filed herewith at page 42

The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to CSI's Assistant
Secretary at the executive offices of the Company.


41

SUBSIDIARIES OF COMMUNICATIONS SYSTEMS, INC.
--------------------------------------------
EXHIBIT 21
----------
Subsidiaries Jurisdiction of Incorporation
------------ -----------------------------
Suttle Apparatus Corporation Illinois
Suttle Costa Rica, S.A. Costa Rica
Tel Products, Inc. Minnesota
Suttle Caribe, Inc. Minnesota
Austin Taylor Communications, Ltd. United Kingdom
Automatic Tool & Connector Company, Inc. New Jersey
JDL Technologies, Inc. Minnesota
Transition Networks, Inc. Minnesota
LANart Corporation Massachusetts
MiLAN Technology Corporation California

All such subsidiaries are 100%-owned directly by Communications Systems, Inc.
The financial statements of all such subsidiaries are included in the
consolidated financial statements of Communications Systems, Inc.


EXHIBIT 23
----------
INDEPENDENT AUDITORS' CONSENT
-----------------------------

We consent to the incorporation by reference in Registration Statement Nos.
33-28486, 33-39862, 33-39864, 33-60930, 33-83662, 33-99564, 33-99566, 333-92063,
333-98323 and 333-98325 of Communications Systems, Inc. of our report dated
March 3, 2003 on the consolidated financial statements and schedule of
Communications Systems, Inc. and subsidiaries appearing in this Annual Report on
Form 10-K of Communications Systems, Inc. for the year ended December 31, 2002.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 28, 2003
Minneapolis, Minnesota

EXHIBIT 99.1
------------

CERTIFICATION PURSUANT TO 18 U.S.C.ss.1350
AS ADOPTED PURSUANT TOss.906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned certify pursuant to 18 U.S.C.ss.1350, that:

(1) The accompanying Annual Report on Form 10-K for the year ended December 31,
2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

(2) The information contained in the accompanying Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

By /s/ Curtis A. Sampson
--------------------------
Curtis A. Sampson
Date: March 28, 2003 Chairman and
Chief Executive Officer

By /s/ Paul N. Hanson
---------------------------
Paul N. Hanson
Date: March 28, 2003 Vice President and
Chief Financial Officer

42