<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    Form 10-Q


[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934


For Quarter Ended June 28, 2002                     Commission File Number: 0-45


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



             Minnesota                                  41-0758073
--------------------------------------------------------------------------------
   (State or other jurisdiction of          (IRS Employer Identification Number)
   incorporation or organization)


         1150 Sheldahl Road
        Northfield, Minnesota                             55057
--------------------------------------------------------------------------------
        (Address of principal                           (Zip Code)
         executive offices)




Registrant's telephone number, including area code    (507) 663-8000
                                                   -----------------------------

As of August 20, 2002, 33,659,896 shares of the Registrant's common stock were
outstanding. 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
                                              ---      ---

<PAGE>

                         SHELDAHL, INC. AND SUBSIDIARIES
                                    FORM 10-Q

                                      INDEX

PART I:  Financial Information

         Item 1.  Financial Statements

         Condensed Consolidated Statements of Operations -
                  Six months ended June 28, 2002 and June 29, 2001 ..........  3

         Condensed Consolidated Statements of Operations -
                  Three months ended June 28, 2002 and June 29, 2001 ........  4

         Condensed Consolidated Balance Sheets -
                  As of June 28, 2002 and December 28, 2001 .................  5

         Condensed Consolidated Statements of Cash Flows -
                  Six months ended June 28, 2002 and June 29, 2001 ..........  6

         Notes to condensed consolidated financial statements ...............7-9

         Item 2.  Management's Discussion and Analysis of Consolidated
                  Operating Results and Financial Condition ............... 9-14

         Item 3.  Quantitative and Qualitative Disclosures About
                  Market Risk ............................................... 14

PART II: Other Information

         Item 3.  Default Upon Senior Securities ............................ 15

         Item 6.  Exhibits and Reports on Form 8-K .......................... 15


                                       2

<PAGE>

PART I:   FINANCIAL INFORMATION

Item 1.   Financial Statements

                         SHELDAHL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                    Unaudited


                                                            Six Months Ended
                                                         ----------------------
                                                         June 28,      June 29,
(in thousands, except for per share data)                  2002          2001
                                                         --------      --------
Net sales                                                $ 46,300      $ 58,498
Cost of sales                                              38,502        63,871
                                                         --------      --------

Gross profit (loss)                                         7,798        (5,373)

Expenses:
         Sales and marketing                                2,813         4,230
         Research and development                           1,973         3,237
         General and administrative                         4,360         5,879
         Interest                                           5,149         2,493
                                                         --------      --------
                  Total expenses                           14,295        15,839

Loss before income taxes                                   (6,497)      (21,212)

Income tax provision                                           36          --
                                                         --------      --------

Net loss before preferred dividends                        (6,533)      (21,212)

Convertible preferred stock dividends                      (1,741)       (1,681)
                                                         --------      --------

Net loss applicable to common shareholders               $ (8,274)     $(22,893)
                                                         ========      ========

Net loss per common share - Basic and Diluted            $  (0.25)     $   (.74)
                                                         ========      ========

Number of shares outstanding - Basic and Diluted           32,814        30,742
                                                         ========      ========


        The accompanying notes are an integral part of these statements.


                                       3

<PAGE>

                         SHELDAHL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                    Unaudited


                                                           Three Months Ended
                                                         ----------------------
                                                         June 28,      June 29,
(in thousands, except for per share data)                  2002          2001
                                                         --------      --------
Net sales                                                $ 22,056      $ 30,103
Cost of sales                                              18,944        31,175
                                                         --------      --------

Gross profit (loss)                                         3,112        (1,072)

Expenses:
         Sales and marketing                                1,305         1,715
         Research and development                             860         1,437
         General and administrative                         1,403         3,255
         Interest                                           2,033         1,478
                                                         --------      --------
                  Total expenses                            5,601         7,885

Loss before income taxes                                   (2,489)       (8,957)

Income tax provision                                           18          --
                                                         --------      --------

Net loss before preferred dividends                        (2,507)       (8,957)

Convertible preferred stock dividends                        (841)         (840)
                                                         --------      --------

Net loss applicable to common shareholders               $ (3,348)     $ (9,797)
                                                         ========      ========

Net loss per common share - Basic and Diluted            $  (0.10)     $   (.32)
                                                         ========      ========

Number of shares outstanding - Basic and Diluted           33,106        30,769
                                                         ========      ========


        The accompanying notes are an integral part of these statements.


                                       4

<PAGE>

                         SHELDAHL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                    Unaudited

<TABLE>
<CAPTION>
                                                       ASSETS
                                                                                   June 28,    December 28,
(In thousands)                                                                       2002          2001
                                                                                   --------    ------------
<S>                                                                                <C>           <C>
Current assets:
         Cash and cash equivalents                                                 $  3,359      $    197
         Accounts receivable, net                                                    11,640        14,018
         Inventories                                                                 11,896        15,905
         Other current assets                                                         5,602         1,373
                                                                                   --------      --------
                  Total current assets                                               32,497        31,493
                                                                                   --------      --------

         Land and buildings                                                          10,650        10,488
         Machinery and equipment                                                     14,854        15,158
         Construction in progress                                                       463           268
         Less: accumulated depreciation                                                (824)         --
                                                                                   --------      --------
                  Net plant and equipment                                            25,143        25,914
                                                                                                 --------

         Other assets                                                                   181           168
                                                                                   --------      --------

                                                                                   $ 57,821      $ 57,575
                                                                                   ========      ========

                                      LIABILITIES AND SHAREHOLDERS' INVESTMENT

Current liabilities:
         Current maturities of long-term debt                                      $ 41,339      $ 42,571
         Accounts payable                                                            20,304        13,600
         Accrued salaries                                                             2,317         1,346
         Other accrued liabilities                                                   12,101        11,189
                                                                                   --------      --------
                  Total current liabilities                                          76,061        68,706
                                                                                   --------      --------

         Long-term debt                                                               4,339         4,541

         Other non-current liabilities                                                3,413         3,934
                                                                                   --------      --------

Total liabilities                                                                    83,813        77,181
                                                                                   --------      --------

Shareholders' investment:
                  Convertible preferred stock                                            50            53
                  Common stock                                                        8,415         8,014
                  Additional paid-in capital                                         60,773        59,283
                  Accumulated Deficit                                               (95,230)      (86,956)
                                                                                   --------      --------

Total shareholders' investment                                                      (25,992)      (19,606)
                                                                                   --------      --------

                                                                                   $ 57,821      $ 57,575
                                                                                   ========      ========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                       5

<PAGE>

                         SHELDAHL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    Unaudited

<TABLE>
<CAPTION>
                                                                    Six Months Ended
                                                                 ----------------------
                                                                 June 28,      June 29,
(in thousands)                                                     2002          2001
                                                                 --------      --------
<S>                                                              <C>           <C>
Operating activities:
       Net loss applicable to common shareholders                $ (8,274)     $(22,893)
       Adjustments to reconcile net loss
         to net cash used in operating activities:
              Depreciation and amortization                           824         8,250
              Preferred stock dividends                             1,981         1,681

              Net change in other operating activities:
                    Accounts receivable                             2,378         1,669
                    Inventories                                     4,409         4,143
                    Prepaid expenses and other assets              (3,604)         (269)
                    Other assets                                      (13)           71
                    Accounts payable and accrued liabilities        6,699        (8,440)
                    Other non-current liabilities                    (134)         (404)
                                                                 --------      --------

       Net cash provided by (used in) operating activities          4,266       (16,192)
                                                                 --------      --------

Capital expenditures, net                                             (53)       (1,882)
                                                                 --------      --------

Financing activities:
       Net borrowings under revolving credit facility                 391         5,022
       Issuance of senior subordinated notes                         --           5,000
       Repayments of other debt                                    (1,442)       (1,804)
       Stock options exercised                                       --             155
                                                                 --------      --------

       Net cash provided by financing activities                   (1,051)        8,373
                                                                 --------      --------

Net increase (decrease) in cash and cash equivalents                3,162        (9,701)

Cash and cash equivalents at beginning of period                      197         9,701
                                                                 --------      --------

Cash and cash equivalents at end of period                       $  3,359      $   --
                                                                 ========      ========

Supplemental cash flow information:
       Interest paid                                             $  1,022      $  2,493
                                                                 ========      ========
       Income taxes paid                                         $     36      $   --
                                                                 ========      ========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                       6

<PAGE>

                         SHELDAHL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

     ON APRIL 30, 2002 THE COMPANY FILED A VOLUNTARY PETITION FOR REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. EFFECTIVE MAY 17, 2002, THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANT TERMINATED ITS ENGAGEMENT WITH THE COMPANY AND THE
COMPANY HAS NOT ENGAGED A REPLACEMENT FIRM TO SERVE AS ITS INDEPENDENT AUDITOR.
AS A RESULT, THIS FORM 10-Q HAS NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC
ACCOUNTING FIRM AS REQUIRED BY RULE 10-01(d) OF REGULATION S-X. THERE IS NO
ASSURANCE THAT A REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS WOULD NOT HAVE
RESULTED IN CHANGES TO THIS FORM 10-Q.


     These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, these condensed unaudited
consolidated financial statements reflect all adjustments, of a normal and
recurring nature, necessary for a fair statement of the interim periods, on a
basis consistent with the annual audited financial statements. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. Although these disclosures should be considered adequate,
the Company strongly suggests that these condensed unaudited financial
statements be read in conjunction with the financial statements and summary of
significant accounting policies and notes thereto included in the Company's
latest annual report on Form 10-K.

     On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the
outstanding securities of International Flex Holdings, Inc., a Delaware
corporation ("Holdings"), the sole shareholder of International Flex
Technologies, Inc., a Delaware corporation ("IFT"), pursuant to a merger of a
newly formed subsidiary of Sheldahl with and into Holdings (the "Merger").
Although Sheldahl was the legal survivor in the Merger and remains the
registrant with the Securities and Exchange Commission ("SEC") and a listed
company under Nasdaq, under United States generally accepted accounting
principles, as a result of the number of shares issued and sold in these
transactions, Holdings was considered the "acquiror" of Sheldahl for financial
reporting purposes. Among other matters, this required Sheldahl, in this report
and all of its future financial and informational filings with the SEC, to
present the prior historical, financial and other information of Holdings and
IFT. Accordingly, unless otherwise indicated to the contrary herein, the results
of Holdings and IFT will be presented herein as the "Company" for all periods
prior to December 28, 2000 without inclusion of Sheldahl's results for the same
period. For purposes of this report, unless otherwise stated to the contrary,
Company shall refer to Sheldahl, Holdings and IFT on a combined basis for all
periods on or after December 28, 2000.

     On January 5, 2001, the Board of Directors of the Company changed its
fiscal year to the Friday closest to December 31 of each year, beginning with
December 29, 2000.

     The Company has operated in two business divisions identified as the
Materials and Flex Interconnect Division (MFI), and the International Flex
Technologies Division (IFT). IFT's operations ceased May 31, 2002. The MFI
business division specializes in high quality, roll-to-roll flexible circuits
and specialty materials for the automotive, communications, and aerospace
markets. The IFT business division consisted of fine-line, roll-to-roll flexible
circuits including substrates for silicon chip carriers. These products targeted
the telecommunications, computer and medical markets.

1)   (a) Inventories, which are valued at the lower of first-in first-out cost
     or market, consist of (in thousands):

                                             June 28, 2002     December 28, 2001
                                             -------------     -----------------
     Raw materials                              $ 5,675             $ 6,167
     Work-in-process                              2,882               5,164
     Finished goods                               3,339               4,574
                                                -------             -------
                                                $11,896             $15,905
                                                =======             =======



                                       7

<PAGE>

     (b) Petition for relief under Chapter 11 of U.S. Bankruptcy Court and
     Liquidity

     On April 30, 2002, Sheldahl, Inc. filed a voluntary petition for relief
     under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
     Court for the District of Minnesota. ("Court") the case number assigned is
     02-31674. The Debtor claimed total assets of $33,764,000 and total debts of
     $81,930,000.

     On May 7, 2002 the Court approved an interim order authorizing Sheldahl to
     incur post-petition debt as a debtor in possession ("DIP" financing) and to
     grant security to the lenders, Morgenthaler VII, L.P., Ampersand IV Limited
     Partnership and Molex Incorporated (together "Lenders"). The Terms of the
     DIP financing provide for advances of up to $1,500,000 at an initial rate
     of 11% and a subsequent rate of 14%, payable quarterly, in arrears.
     Principal is payable upon the sale of substantially all the assets of the
     Company. Advances under this facility are secured and subordinate to the
     existing security under the pre-petition loans provided under the Credit
     and Security Agreement with Wells Fargo Bank. As of the date of this report
     the Company has no DIP financing outstanding nor did it make any draws
     under the DIP financing facility during the fiscal period. The total
     pre-petition debt outstanding to Wells Fargo is approximately $15,660,000.
     In addition, the Court approved an interim order authorizing Sheldahl to
     continue its factoring agreement with Greenfield Commercial Credit, Inc. As
     of April 30, 2002 and June 28, 2002 the Company had approximately
     $1,050,000 and $750,000, respectively, outstanding under this facility.
     Accompanying the announcement of the Chapter 11 petition, the Company
     announced the intention of the group described above as the Lenders to make
     an offer to acquire substantially all the assets of the Company subject to
     approval of the Court.

     On August 15, 2002 the Bankruptcy court approved the sale of the continuing
     operating assets of the Company as defined in the Asset Purchase Agreement
     ("APA"), previously filed with the Bankruptcy Court. The investors are
     Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex
     Incorporated (together "Buyers") who have formed a company by the name of
     Northfield Acquisition Co. to purchase these assets. The assets to be sold
     are described in detail in the APA but include all the Company's operations
     in Northfield, Minnesota. The terms of the sale allow the senior secured
     creditors, principally, Wells Fargo Bank Minnesota, National Association,
     to be paid in full. Changes to the APA made in the August 15, 2002 hearing
     include (i) an increase from $750,000 to $927,000 in the amount payable to
     the Company's creditors described in paragraph 2.1.1 of the APA, and (ii)
     the identification of assets to remain in the bankruptcy estate including
     principally the Longmont, CO facility and approximately 30 pieces of
     equipment. Northfield Acquisition Co. agreed to put $1,000,000 in escrow to
     assure the realization of at least $1,500,000 on the sale of these Colorado
     assets. As a result, the Company expects there will be insufficient
     proceeds to fully pay the unsecured creditors and no proceeds are allocated
     to preferred and common stockholders. Under most circumstances, the
     subordinated creditors have agreed not to participate in any claims of the
     creditors. The Company expects to close the sale of substantially all of
     its assets as contemplated by the APA within 30 days following its August
     26, 2002 announcement that the Bankruptcy Court had approved the sale.

2)   Segment Reporting

     The following is a summary of certain financial information relating to the
     two segments for the three and six months ended as follows:

<TABLE>
<CAPTION>
                                                     Three months ended            Six months ended
                                                    June 28,      June 29,      June 28,      June 29,
                                                      2002          2001          2002          2001
                                                    --------      --------      --------      --------
     <S>                                            <C>           <C>           <C>           <C>
     Total sales by segment:
     MFI                                            $ 18,633      $ 22,312      $ 38,195      $ 42,729
     IFT                                               3,423         7,791         8,105        15,769
                                                    --------      --------      --------      --------
     Total company sales                            $ 22,056      $ 30,103      $ 46,300      $ 58,498
                                                    ========      ========      ========      ========
</TABLE>

                                       8

<PAGE>


<TABLE>
<CAPTION>
     Operating Profit (loss) by segment:
     <S>                                            <C>           <C>           <C>           <C>
     MFI:
     ---
     Before general and administrative expenses     $  2,187      $    110         3,744        (3,964)
     General and administrative expenses               1,426         2,055         3,077         3,459
     Interest expense                                  1,766         1,048         4,279         1,746
                                                    --------      --------      --------      --------
     Total                                            (1,005)       (2,993)       (3,612)       (9,169)
                                                    --------      --------      --------      --------

     IFT:
     ---
     Before general and administrative expenses       (1,240)       (4,334)         (732)       (8,876)
     General and administrative expenses                 (23)        1,200         1,283         2,420
     Interest expense                                    267           430           870           747
                                                    --------      --------      --------      --------
     Total                                            (1,484)       (5,964)       (2,885)      (12,043)
                                                    --------      --------      --------      --------

     Total segments operating losses                $ (2,489)     $ (8,957)     $ (6,497)     $(21,212)
                                                    ========      ========      ========      ========
</TABLE>

3)   Reclassifications

     Certain amounts previously reported in 2001 have been reclassified to
     conform to the 2002 presentation.

Item 2.   Management's discussion and analysis of financial condition and
          results of operations

     ON APRIL 30, 2002 THE COMPANY FILED A VOLUNTARY PETITION FOR REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. EFFECTIVE MAY 17, 2002, THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANT TERMINATED ITS ENGAGEMENT WITH THE COMPANY AND THE
COMPANY HAS NOT ENGAGED A REPLACEMENT FIRM TO SERVE AS ITS INDEPENDENT AUDITOR.
AS A RESULT, THIS FORM 10-Q HAS NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC
ACCOUNTING FIRM AS REQUIRED BY RULE 10-01(d) OF REGULATION S-X. THERE IS NO
ASSURANCE THAT A REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS WOULD NOT HAVE
RESULTED IN CHANGES TO THIS FORM 10-Q.

Results of Operations

     The consolidated financial statements that accompany this discussion show
the operating results from operations of the Company for the quarters ended June
28, 2002 and June 29, 2001.

     The following tables shows sales, cost of sales, gross profit, sales,
research and development and general and administration and operating profit
before interest by segment (in thousands) for the three and six month periods
ending June 28, 2002 compared to June 29, 2001:


                                       9

<PAGE>

<TABLE>
<CAPTION>
Three months ended                                  June 28, 2002                                June 29, 2001
------------------                       -------------------------------------       --------------------------------------
                                                                       Total                                         Total
                                           MFI           IFT          Company           MFI            IFT          Company
                                         --------      --------       --------       --------       --------       --------
<S>                                      <C>           <C>            <C>            <C>            <C>            <C>
Sales                                    $ 18,633      $  3,423       $ 22,056       $ 22,312       $  7,791       $ 30,103
Cost of sales                              14,511         4,433         18,944         20,215         10,960         31,175
Gross profit (loss)                         4,122        (1,010)         3,112          2,097         (3,169)        (1,072)
% of sales                                   22.1%        (29.5%)         14.1%           9.4%         (40.7%)         (3.6%)
Sales, marketing, research &
development expense                         1,935           230          2,165          1,987          1,165          3,152
% of sales                                   10.4%          6.7%           9.8%           8.9%          15.0%          10.5%

Profit before general administration
and interest                             $  2,187      $ (1,240)      $    947       $    110       $ (4,334)      $ (4,224)

General administration                   $  1,426      $     23       $  1,403       $  2,055       $  1,200       $  3,255

Operating profit before interest
                                         $    761      $ (1,217)      $   (456)      $ (1,945)      $ (5,534)      $ (7,479)
</TABLE>

<TABLE>
<CAPTION>
Six months ended                                    June 28, 2002                                June 29, 2001
----------------                         -------------------------------------       --------------------------------------
                                                                       Total                                         Total
                                           MFI           IFT          Company           MFI            IFT          Company
                                         --------      --------       --------       --------       --------       --------
<S>                                      <C>           <C>            <C>            <C>            <C>            <C>
Sales                                    $ 38,195      $  8,105       $ 46,300       $ 42,729       $ 15,769       $ 58,498
Cost of sales                              30,427         8,075         38,502         42,266         21,605         63,871
Gross profit (loss)                         7,768            30          7,798            463         (5,836)        (5,373)
% of sales                                   20.3%          0.4%          16.8%           1.1%         (37.0%)         (9.2%)
Sales, marketing, research &
development expense                         4,024           762          4,786          4,427          3,040          7,467
% of sales                                   10.5%          9.4%          10.3%          10.4%          19.3%          12.8%

Profit before general administration
and interest                             $  3,744      $   (732)      $  3,012       $ (3,964)      $ (8,876)      $(12,840)

General administration                   $  3,077      $  1,283       $  4,360       $  3,459       $  2,420       $  5,879

Operating profit before interest         $    687      $ (2,015)      $ (1,348)      $ (7,423)      $(11,296)      $(18,719)
</TABLE>


     Net Sales. For the three months and six months ended June 28, 2002, the
Company's net sales decreased by approximately $8.0 million, or 26.7%, and $12.2
million or 20.9%, as compared to the same period in the prior year,
respectively. IFT, which ceased operations at the end of May 2002, is
responsible for $4.4 million and $7.7 million of the three and six month decline
in net sales. Sales in the MFI segment declined $3.6 and $4.5 million for the
three and six-month periods ended June 28, 2002. The Company attributes the
decline in sales occurring primarily in the most recent three-month period
primarily to the absence of high volume product sales and partially due to a
slowdown in orders following the Company's bankruptcy filing in the first month
of the fiscal quarter.

     Cost of Sales/Gross Profit. For the three months and six months ended June
28, 2002, the Company's gross profit increased approximately $4.2 million to
14.1% of sales and $13.2 million to 16.8%, as compared to the same period in the
prior year, respectively. The improved gross profit is generally evenly split
between the two segments as shown above. Depreciation expense declined nearly


                                       10

<PAGE>

$4.0 and $7.0 million in the three and six month periods in 2002 compared to
2001 as a result of the Company's asset impairment charge recorded in the fourth
fiscal quarter of the fiscal year ended December 28, 2001. Depreciation expense
declined as a result of the reduced carrying value of the assets affected by the
asset impairment charge. The Company attributes substantially all of the
remainder of the improvement in gross profit to the substantial cost reductions
which occurred in May and September 2001. These reductions were primarily the
result of a reduction in the number of employees.

     Sales and Marketing Expenses. For the three months and six months ended
June 28, 2002, sales and marketing expenses decreased approximately $0.4 and
$1.4 million compared to the same period in the prior year, respectively. The
Company attributes the majority of this reduction in expense to the cost
reductions referred to above. The majority of the reductions have occurred in
the IFT segment as can be seen from the above segment table.

     Research and Development Expenses. For the three months and six months
ended June 28, 2002, research and development expenses decreased approximately
$0.6 and $1.3 million compared to the same period in the prior year,
respectively. The Company attributes the majority of this reduction in expense
to the cost reductions referred to above the majority of which occurred in the
IFT segment.

     General and Administrative Expenses. For the three months and six months
ended June 28, 2002, general and administrative expenses decreased approximately
$1.9 and $1.5 million compared to the same period in the prior year,
respectively. The decreases are largely related to decreases in the IFT segment.
The Company's actual expenses related to the closing of the Endicott, NY
facility were substantially lower than expected causing the Company to reduce
the charge recorded in the first fiscal quarter 2002. In addition, the cost
reductions referred to above contributed to a smaller portion of the decrease.

     Interest Expense. For the three months and six months ended June 28, 2002,
interest expense increased approximately $0.6 and $2.7 million compared to the
same period in the prior year, respectively. This increase is related to a net
increase in debt of approximately $12.5 million. This increase is substantially
due to the subordinated debt issues in August and October 2001 and the May 2001,
which was outstanding for only a portion of the fiscal quarter ended June 29,
2001. These combineddebt issues carry an average rate of approximately 18%, a
higher rate than the average interest rate on the senior debt.

     EBITDA. For the three and six months ended June 28, 2002, EBITDA, defined
as earnings before interest, taxes, depreciation and amortization, was
approximately $(0.2) and $(0.5) million compared to $(3.2) and $(10.5) million
for the same period in the prior year, respectively. Excluding the IFT segment,
MFI, which represents the segment being sold as a continuing operation, had
EBITDA of approximately $1.0 and $1.5 million in the three and six months ended
June 28, 2002. Both segments improved EBITDA as a result of the cost reductions
referred to above. The negative EBITDA produced by the IFT segment has been
eliminated from continuing operations.

Financial Condition
-------------------

     As a result of continuing decreases in sales in both the Company's MFI and
IFT segments and a resulting lack of liquidity, on April 30, 2002, Sheldahl
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Minnesota (the "Court").
The case number is 02-31674. Sheldahl claimed total assets of $33,764,000 and
total debts of $81,930,000.

     Under Chapter 11, Sheldahl is operating its business as a
debtor-in-possession. As of the petition date, actions to collect pre-petition
indebtedness are stayed and other contractual obligations against Sheldahl may
not be enforced. In addition, under the Bankruptcy Code, Sheldahl may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Court in accordance with the
reorganization process. Substantially all pre-petition liabilities are subject
to settlement under a plan of reorganization to be voted upon by creditors and
equity holders and approved by the Court.


                                       11

<PAGE>

     On May 7, 2002 the Court approved an interim order authorizing Sheldahl to
incur post petition debt as a debtor in possession ("DIP" financing) and to
grant security to the lenders, Morgenthaler VII, L.P., Ampersand IV Limited
Partnership and Molex Incorporated (together "Lenders"). The Terms of the DIP
financing provide for advances of up to $1,500,000 at an initial rate of 11% and
a subsequent rate of 14%, payable quarterly, in arrears. Principal is payable
upon the sale of substantially all the assets of the Company. Advances under
this facility are secured and subordinate to the existing security under the
pre-petition loans provided under the Credit and Security Agreement with Wells
Fargo Bank. The Company has not requested or received any draws under this DIP
facility as of the date of this report. The total pre-petition debt outstanding
to Wells Fargo is approximately $15,660,000.

     In addition, the Court approved an interim order authorizing Sheldahl to
continue its factoring agreement with Greenfield Commercial Credit, Inc. As of
April 30, and June 28, 2002 the Company had approximately $1,050,000 and
$750,000, respectively, outstanding under this facility.

     Accompanying the announcement of the Chapter 11 petition, the Company
announced the intention of the group described above as the Lenders to make an
offer to acquire substantially all the assets of the Company subject to approval
of the Court. Sheldahl anticipated that all proceeds of the sale of its assets
would be used to pay creditors and that there would be no residual value for
preferred or common shareholders.

     On August 15, 2002 the Bankruptcy Court approved the sale of substantially
all the assets of the Company to a Buyers group consisting of the Lenders.
During the fiscal quarter ending June 28, 2002 the Company closed its facility
in Endicott, NY and sold all the equipment in this location. The Longmont, CO
facility is in the process of being sold and the majority of the equipment at
Longmont is being shipped to the Company's Northfield, MN facilities. The sale
to the Buyers includes the facilities and operations in Minnesota and represents
the Materials and Flex Interconnect ("MFI") operating segment. The Company
expects to close the sale of substantially all of its assets as contemplated by
the APA within 30 days following its August 26, 2002 announcement that the
Bankruptcy Court had approved the sale.

     Cash Flows. Net cash generated by operating activities for the fiscal six
months ended June 28, 2002 was approximately $4.3 million compared to
approximately $(16.2) million used for such activities in the same period in the
prior year. During the six months ended June 28, 2002 operating funds of
approximately $5.5 million were used by the net loss prior to
depreciation/amortization and other non-cash charges. Operating funds were
generated by decreases in accounts receivable and inventories of approximately
$6.8 million. Prepaid expenses and other assets used funds of approximately $3.6
million which was more than offset by the generation of funds from accounts
payable and accrued expenses of approximately $6.7 million.

     Investments by the Company were approximately $0.05 million. Substantially
all of these investments were in the form of capital expenditures.

     Cash was used by financing activities in the amount of approximately $1.0
million. Since the Company's bankruptcy filing, the Company has not received any
advances under its debt facilities nor made any payments other than those from
Greenfield Commercial Credit, Inc. pursuant to a factoring agreement for the
Company's foreign accounts receivable.

     Liquidity and Capital Resources. Net working capital deficit was
approximately $(43.6) million at June 28, 2002 up from approximately $(37.2)
million at December 28, 2001. The increase in the working capital deficit of
$6.4 million is primarily the result of an increase in current liabilities of
approximately $7.4 million offset by an increase in current assets of
approximately $1.0 million. The increase in current liabilities is primarily due
to an increase in accounts payable and partially due to an increase in other
accrued liabilities and accrued compensation. The increase in current assets is
primarily due to an increase in prepaid expenses and cash. Prepaid expenses
increased primarily due to deposits required by the Company's vendors for cash
in advance of shipping product to the Company. Accrued liabilities increased
primarily due to accrued interest and preferred stock dividend accruals.

     During the first fiscal quarter ended March 29, 2002 the Company was out of
compliance with certain terms of the Credit and Security Agreement with its
primary financial institution, however, no event


                                       12

<PAGE>

of default was declared. And although no default was declared under the
Company's note payable to IBM during the first fiscal quarter, the Company
continued to withhold payment under this note payable. In addition, the Company
was in non-payment status under two substantial master lease agreements. In
April 2002 one of these two lessors, filed a lawsuit to collect payment. Due to
the Company's Chapter 11 filing an automatic stay is in effect with regard to
this lawsuit. The Company expects to pay all the amounts due under the Credit
and Security Agreement upon sale of the assets to the Buyers group. In addition,
the Company has negotiated settlement terms with the lessors of the two
substantial master lease agreements. The Company settled the terms of its
facilities lease with IBM in connection with the closing of the Endicott, NY
operations and has ceased using the patents under the intellectual property
agreement with IBM.

     Subsequent Events. On May 2, 2002, subsequent to the Company's Chapter 11
filing, the Company was notified by the NASD that the Company's common stock
securities would be delisted from The Nasdaq Stock Market at the opening of
business on May 10, 2002 due to the Chapter 11 filing. The Company took no
action with respect to this notice.

     Effective May 17, 2002 Arthur Andersen LLP terminated its relationship as
independent public accountants of Sheldahl, Inc. The Company originally intended
to obtain the Bankruptcy Court's approval of payments to engage Arthur Andersen
for additional post-petition services, however, the current status of the
Minneapolis office of Arthur Andersen is such that the Company cannot expect
continuity of professional staff from this office. and so elected not to seek
the Court's approval to engage Arthur Andersen. As a result, the Company
accepted termination of Arthur Andersen.

     On August 15, 2002 the Bankruptcy court approved the sale of the continuing
operating assets of the Company as defined in the Asset Purchase Agreement
("APA"), previously filed with the Bankruptcy Court. The investors are
Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex Incorporated
(together "Buyers") who have formed a company by the name of Northfield
Acquisition Co. to purchase these assets. The assets to be sold are described in
detail in the APA but include all the Company's operations in Northfield,
Minnesota. The terms of the sale allow the senior secured creditors,
principally, Wells Fargo Bank Minnesota, National Association to be paid in
full. The $750,000 described in paragraph 2.1.1 of the APA was increased to
$927,000 and the principal assets to remain in the bankruptcy estate were listed
and mainly include the Longmont, CO facility and a specific list of
approximately 30 pieces of equipment. Northfield Acquisition Co. agreed to put
$1,000,000 in escrow to assure the realization of a certain amount of up to
$1,500,000 on the sale of these Colorado assets. As a result there will be
insufficient proceeds to fully pay the unsecured creditors and no proceeds are
allocated to preferred and common stockholders. Under most circumstances, the
subordinated creditors have agreed not to participate in any claims of the
creditors. The Company expects to close the sale of substantially all of its
assets as contemplated by the APA within 30 days following its August 26, 2002
announcement that the Bankruptcy Court had approved the sale.

New Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 141, business combinations initiated after
June 30, 2001 must be accounted for using the purchase method of accounting.
Under SFAS No. 142, amortization of goodwill and indefinite-lived assets will
cease, and the carrying value of these assets will instead be evaluated for
impairment using a fair-value-based test, applied at least annually. The Company
will adopt SFAS No. 142 in fiscal 2002. Management believes that the adoption of
SFAS No.'s 141 and 142 will not have an impact on the Company's financial
position or results of operations, because at the beginning of the fiscal 2002,
the Company has no intangible assets or goodwill.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company will adopt the SFAS No.
143 on January 1, 2003. The Company does not expect the adoption of SFAS No. 143
will have a significant impact on its financial position or results of
operations.


                                       13

<PAGE>

     In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous guidance for
financial accounting and reporting for the impairment or disposal of long-lived
assets and for segments of a business to be disposed of. The Company will adopt
the SFAS No. 144 standard on January 1, 2002. SFAS No. 144 is not expected to
have a significant impact on its financial position or results of operations.

     The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," December 30, 2000. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains or losses to offset
related results on the hedged item in the income statement and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The adoption of SFAS No. 133 did not
have a material impact on the Company's results of operations or financial
position.

Cautionary Statement

     Statements included in this management's discussion and analysis of
financial and results of operations condition, in the letter to shareholders,
elsewhere in this Form 10-Q, in the Company's annual report, and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual financial performance and cause it to differ
materially from that expressed in any forward-looking statement: (i) the
Company's ability to generate value for its creditors through the bankruptcy
process is dependent upon completing a sale of Sheldahl's assets to the Lenders
or any other buyer on terms acceptable to the Court and subject to review by
creditors' committees; (ii) Certain customers and suppliers may be reluctant to
deal with a company in reorganization under Chapter 11 and the Company's
operations may suffer as a result; (iii) a continued general downturn in the
automotive market, the Company's principal market, could have a material adverse
effect on the demand for the electronic components supplied by the Company to
its customers; (iv) as a debtor-in-possession under the supervision of the
Court, the Company may not engage in transactions outside the ordinary course of
business without the approval of the Court, after notice and an opportunity for
a hearing, which limit's management's flexibility in the operation of the
Company's business; and (v) the extremely competitive conditions that currently
exist in the automotive and data communications markets are expected to
continue, including development of new technologies, the introduction of new
products, and the reduction of prices. The foregoing list should not be
construed as exhaustive and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect the events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk
          ----------------------------------------------------------

     The Company's Credit and Security Agreement, carries interest rate risk.
Amounts borrowed under this Agreement are subject to interest charges at a rate
equal to the lender's prime rate plus six percent, which as of August 26, 2002
was 10.75%. Should the lenders base rate change, the Company's interest expense
will increase or decrease accordingly. As of June 28, 2002, the Company had
borrowed approximately $15.7 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost the Company $157,000 in
additional gross interest cost on an annual basis.


                                       14

<PAGE>

PART II - OTHER INFORMATION

Item 3.   Default Upon Senior Securities
          ------------------------------

          The Company failed to meet all the financial covenants, particularly
          the level of pre-tax income (loss) for the months of February and
          March 2002 under the Credit and Security Agreement with the Company's
          senior credit facility ("Credit Agreement"). This constituted an event
          of default under the terms of the Credit Agreement. The lenders to
          this Credit Agreement did not issue a default notice nor did it take
          any actions allowed under the terms of the Credit Agreement as a
          result of this default.

Item 6.   Exhibits and Reports on Form 8-K
          --------------------------------

          A)   Exhibits

               None.

          B)   Reports on Form 8-K

               Current Report on Form 8-K filed May 2, 2002 and dated April 30,
               2002, reporting items 3 and 7.


                                       15

<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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.


                                       SHELDAHL, INC.
                                       (Registrant)


Dated August 29,2002                   By  /s/ Benoit Pouliquen
      ---------------                      President and
                                           Chief Executive Officer


Dated August 29, 2002                  By  /s/ Owen Gohlke
      ---------------                      Chief Accounting Officer


                                       16

<PAGE>

                         Sheldahl, Inc. and Subsidiaries
                 Schedule II: Valuation and Qualifying Accounts

Allowance for Doubtful Accounts:
-------------------------------

The transactions in the allowance for doubtful accounts for the periods ending
June 28, 2002 and December 28, 2001 were as follows:

                                                June 28, 2002      Dec. 28, 2001
                                                -------------      -------------
Balance, beginning of period                       $ 1,118            $ 1,623
Write-offs                                            (299)              (530)
Provision                                              208                484
Acquired in Merger                                    --                 (459)
                                                   -------            -------

Balance, end of period                             $ 1,027            $ 1,118
                                                   =======            =======

Facility Consolidation Cost Reserves:
------------------------------------

The transactions in the restructuring reserves accounts for the periods ending
June 28, 2002 and December 28, 2001 were as follows:

                                                June 28, 2002      Dec. 28, 2001
                                                -------------      -------------
Balance, beginning of period                       $   990            $ 1,855
Reserves established in connection with Merger          31                683
Reserve utilized during the period                    (427)            (1,548)
                                                   -------            -------

Balance, end of period                             $   594            $   990
                                                   =======            =======


                                       17