##### Table of Contents



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



---

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

|                                    |  |                                
|----------------------------------- |  | -------------------------------
|For the Quarter Ended June 30, 2002 |  | Commission File Number: 0-18393

WINLAND ELECTRONICS, INC.
(Name of small business issuer in its charter)

|                                                                         |  |                                                   
|------------------------------------------------------------------------ |  | --------------------------------------------------
|Minnesota
(state or other jurisdiction of
incorporation or organization) |  | 41-0992135
(I.R.S. Employer
Identification Number)

1950 Excel Drive, Mankato, Minnesota 56001
(Address of principal executive offices)

(507) 625-7231
(Issuers telephone number)



---

Securities registered pursuant to Section 12(b) of the Exchange Act:

|                             |  |                        
|---------------------------- |  | -----------------------
|Title of Each Class          |  | Name of Exchange       
|                             |  |                        
|Common Stock, $.01 par value |  | American Stock Exchange

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



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Check whether the Issuer (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 Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes x  No o

There were 2,967,692 shares of Common Stock, $.01 par value, outstanding as of
July 25, 2002.

Transitional Small Business Disclosure Format (check one): Yes o No x

1



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TABLE OF CONTENTS



|                                          |  |  |  |  |  |  |  | 
|----------------------------------------- |  |  |  |  |  |  |  | 
|PART I-FINANCIAL INFORMATION             
|PART II  OTHER INFORMATION              
|SIGNATURES                               
|EXHIBIT INDEX TO FORM 10-QSB             
|EX-10.1 Amendment to Employment Agreement
|EX-10.2 Amendment to Employment Agreement



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##### Table of Contents






PART I-FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

WINLAND ELECTRONICS, INC.
BALANCE SHEETS

|                                 |                                            |                              |   |             |           |  |              |            |           | 
|-------------------------------- | ------------------------------------------ | ---------------------------- | - | ----------- | --------- |  | ------------ | ---------- | --------- | 
|                                 |                                            |                              |   | June 30,    |           |  | December 31, |           
|ASSETS                           |                                            | 2002                         |   |             | 2001      | 
|                                 |                                            |                              |   |             |           | 
|                                 |                                            |                              |   | (UNAUDITED) |           |  |              |            |          
|Current Assets                   |                                            |                              |   |             |           |  |              |           
|                                 | Cash                                       |                              | $ | 259,576     |           |  | $            | 399,749    |          
|                                 | Accounts and notes receivable, net         |                              |   | 2,210,393   |           |  |              | 1,993,983  |          
|                                 | Income tax receivable                      |                              |   | 52,837      |           |  |              | 177,000    |          
|                                 | Inventories                                |                              |   | 2,360,532   |           |  |              | 2,439,727  |          
|                                 | Prepaid expenses                           |                              |   | 230,311     |           |  |              | 100,191    |          
|                                 |                                            |                              |   |             |           |  |             
|                                 |                                            | Total current assets         |   |             | 5,113,649 |  |              |            | 5,110,650 | 
|                                 |                                            |                              |   |             |           |  |             
|Other Assets                     |                                            |                              |   |             |           |  |              |           
|                                 | Patent and trademarks, net of amortization |                              |   | 808         |           |  |              | 1,027      |          
|                                 |                                            |                              |   |             |           |  |             
|Property and Equipment, at cost: |                                            |                              |   |             |           |  |              |           
|                                 | Land and land improvements                 |                              |   | 272,901     |           |  |              | 272,901    |          
|                                 | Building                                   |                              |   | 2,983,586   |           |  |              | 2,983,586  |          
|                                 | Machinery and equipment                    |                              |   | 3,666,693   |           |  |              | 3,675,897  |          
|                                 | Data processing equipment                  |                              |   | 1,300,346   |           |  |              | 1,301,598  |          
|                                 | Office furniture and equipment             |                              |   | 352,834     |           |  |              | 353,932    |          
|                                 |                                            |                              |   |             |           |  |             
|                                 |                                            | Total property and equipment |   |             | 8,576,360 |  |              |            | 8,587,914 | 
|                                 | Less accumulated depreciation              |                              |   | (4,248,430  | )         |  |              | (3,884,440 | )        
|                                 |                                            |                              |   |             |           |  |             
|                                 |                                            | Net property and equipment   |   |             | 4,327,930 |  |              |            | 4,703,474 | 
|                                 |                                            |                              |   |             |           |  |             
|                                 |                                            | Total assets                 |   | $           | 9,442,387 |  |              | $          | 9,815,151 | 
|                                 |                                            |                              |   |             |           |  |             

See Notes to the Interim Financial Statements

2



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##### Table of Contents



BALANCE SHEETS

|                                        |                                      |              |                                            |           |             |           |           |              |         |           | 
|--------------------------------------- | ------------------------------------ | ------------ | ------------------------------------------ | --------- | ----------- | --------- | --------- | ------------ | ------- | --------- | 
|                                        |                                      |              |                                            |           | June 30,    |           |           | December 31, |        
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                      | 2002         |                                            |           | 2001        |          
|                                        |                                      |              |                                            |           |             |          
|                                        |                                      |              |                                            |           | (UNAUDITED) |           |           |              |         |          
|Current Liabilities                     |                                      |              |                                            |           |             |           |           |             
|                                        | Note payable to bank                 |              | $                                          | 896,000   |             |           | $         | 1,981,501    |        
|                                        | Current maturities of long-term debt |              |                                            | 414,584   |             |           |           | 472,325      |        
|                                        | Accounts payable                     |              |                                            | 1,098,997 |             |           |           | 931,385      |        
|                                        | Accrued expenses:                    |              |                                            |           |             |           |           |              |        
|                                        |                                      | Compensation |                                            |           | 401,644     |           |           |              | 289,749 |          
|                                        |                                      | Other        |                                            |           | 138,051     |           |           |              | 68,024  |          
|                                        |                                      |              |                                            |           |             |           |          
|                                        |                                      |              | Total current liabilities                  |           |             | 2,949,276 |           |              |         | 3,742,984 | 
|                                        |                                      |              |                                            |           |             |           |          
|Deferred Revenue                        |                                      |              | 183,028                                    |           |             |           | 187,098   |             
|Long-Term Debt, less current maturities |                                      |              | 2,241,906                                  |           |             |           | 2,453,909 |             
|                                        |                                      |              |                                            |           |             |           |          
|                                        |                                      |              | Total long-term liabilities                |           |             | 2,424,934 |           |              |         | 2,641,007 | 
|                                        |                                      |              |                                            |           |             |           |          
|                                        |                                      |              | Total liabilities                          |           |             | 5,374,210 |           |              |         | 6,383,991 | 
|                                        |                                      |              |                                            |           |             |           |          
|Stockholders Equity                    |                                      |              |                                            |           |             |           |           |             
|                                        | Common stock                         |              |                                            | 29,677    |             |           |           | 29,598       |        
|                                        | Additional paid-in capital           |              |                                            | 2,254,558 |             |           |           | 2,249,702    |        
|                                        | Retained earnings                    |              |                                            | 1,783,942 |             |           |           | 1,151,860    |        
|                                        |                                      |              |                                            |           |             |           |          
|                                        |                                      |              | Total stockholders equity                 |           |             | 4,068,177 |           |              |         | 3,431,160 | 
|                                        |                                      |              |                                            |           |             |           |          
|                                        |                                      |              | Total liabilities and stockholders equity |           | $           | 9,442,387 |           |              | $       | 9,815,151 | 
|                                        |                                      |              |                                            |           |             |           |          

See Notes to the Interim Financial Statements

3



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##### Table of Contents



WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Three Months Ended June 30, 2002 and 2001 (UNAUDITED)

|                                                      |                            |                                   |           |           |           |   |           |           |          |  
|----------------------------------------------------- | -------------------------- | --------------------------------- | --------- | --------- | --------- | - | --------- | --------- | -------- | -
|                                                      |                            |                                   |           | 2002      |           |   | 2001      |          
|                                                      |                            |                                   |           |           |           |   |           |          
|Net sales                                             |                            | $                                 | 5,111,078 |           |           | $ | 3,824,474 |          
|Cost of sales                                         |                            |                                   | 3,915,439 |           |           |   | 3,181,071 |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Gross profit                      |           |           | 1,195,639 |   |           |           | 643,403  |  
|                                                      |                            |                                   |           |           |           |  
|Operating expenses:                                   |                            |                                   |           |           |           |   |           |          
|                                                      | General and administrative |                                   |           | 321,752   |           |   |           | 529,360   |         
|                                                      | Research and development   |                                   |           | 165,687   |           |   |           | 207,937   |         
|                                                      | Sales and marketing        |                                   |           | 209,905   |           |   |           | 182,221   |         
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            |                                   | 697,344   |           |           |   | 919,518   |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Operating income (loss)           |           |           | 498,295   |   |           |           | (276,115 | )
|                                                      |                            |                                   |           |           |           |  
|Other income (expenses):                              |                            |                                   |           |           |           |   |           |          
|                                                      | Interest expense           |                                   |           | (64,365   | )         |   |           | (126,459  | )       
|                                                      | Other, net                 |                                   |           | (7,921    | )         |   |           | 11,619    |         
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            |                                   | (72,286   | )         |           |   | (114,840  | )        
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Income (loss) before income taxes |           |           | 426,009   |   |           |           | (390,955 | )
|Income tax (expense) benefit                          |                            |                                   | (75,000   | )         |           |   | 137,000   |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Net income (loss)                 |           | $         | 351,009   |   |           | $         | (253,955 | )
|                                                      |                            |                                   |           |           |           |  
|Earnings (loss) per share data:                       |                            |                                   |           |           |           |   |           |          
|                                                      | Basic                      |                                   | $         | 0.12      |           |   | $         | (0.09     | )       
|                                                      | Diluted                    |                                   |           | 0.12      |           |   |           | (0.09     | )       
|Weighted-average number of common shares outstanding: |                            |                                   |           |           |           |   |           |          
|                                                      | Basic                      |                                   |           | 2,961,030 |           |   |           | 2,952,352 |         
|                                                      | Diluted                    |                                   |           | 3,031,438 |           |   |           | 2,952,352 |         

See Notes to the Interim Financial Statements

4



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##### Table of Contents



WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Six Months Ended June 30, 2002 and 2001 (UNAUDITED)

|                                                      |                            |                                   |           |           |           |   |           |           |           |  
|----------------------------------------------------- | -------------------------- | --------------------------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                                                      |                            |                                   |           | 2002      |           |   | 2001      |          
|                                                      |                            |                                   |           |           |           |   |           |          
|Net sales                                             |                            | $                                 | 9,396,725 |           |           | $ | 8,355,581 |          
|Cost of sales                                         |                            |                                   | 7,115,518 |           |           |   | 7,013,131 |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Gross profit                      |           |           | 2,281,207 |   |           |           | 1,342,450 |  
|                                                      |                            |                                   |           |           |           |  
|Operating expenses:                                   |                            |                                   |           |           |           |   |           |          
|                                                      | General and administrative |                                   |           | 624,994   |           |   |           | 847,991   |          
|                                                      | Research and development   |                                   |           | 314,468   |           |   |           | 462,277   |          
|                                                      | Sales and marketing        |                                   |           | 445,942   |           |   |           | 351,548   |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            |                                   | 1,385,404 |           |           |   | 1,661,816 |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Operating income (loss)           |           |           | 895,803   |   |           |           | (319,366  | )
|                                                      |                            |                                   |           |           |           |  
|Other income (expenses):                              |                            |                                   |           |           |           |   |           |          
|                                                      | Interest expense           |                                   |           | (143,133  | )         |   |           | (282,400  | )        
|                                                      | Other, net                 |                                   |           | 3,412     |           |   |           | 12,256    |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            |                                   | (139,721  | )         |           |   | (270,144  | )        
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Income (loss) before income taxes |           |           | 756,082   |   |           |           | (589,510  | )
|Income tax (expense) benefit                          |                            |                                   | (124,000  | )         |           |   | 206,000   |          
|                                                      |                            |                                   |           |           |           |  
|                                                      |                            | Net income (loss)                 |           | $         | 632,082   |   |           | $         | (383,510  | )
|                                                      |                            |                                   |           |           |           |  
|Earnings (loss) per share data:                       |                            |                                   |           |           |           |   |           |          
|                                                      | Basic                      |                                   | $         | 0.21      |           |   | $         | (0.13     | )        
|                                                      | Diluted                    |                                   |           | 0.21      |           |   |           | (0.13     | )        
|Weighted-average number of common shares outstanding: |                            |                                   |           |           |           |   |           |          
|                                                      | Basic                      |                                   |           | 2,960,439 |           |   |           | 2,952,333 |          
|                                                      | Diluted                    |                                   |           | 3,007,096 |           |   |           | 2,952,333 |          

See Notes to the Interim Financial Statements

5



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WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001 (UNAUDITED)

|                                                  |                                                                                          |                                           |                                              |            |            |          |   |          |          |            |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------- | ---------- | ---------- | -------- | - | -------- | -------- | ---------- | -
|                                                  |                                                                                          |                                           |                                              |            | 2002       |          |   | 2001     |         
|                                                  |                                                                                          |                                           |                                              |            |            |          |   |          |         
|Cash Flows From Operating Activities              |                                                                                          |                                           |                                              |            |            |          |   |         
|                                                  | Net income (loss)                                                                        |                                           | $                                            | 632,082    |            |          | $ | (383,510 | )       
|                                                  | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                           |                                              |            |            |          |   |          |         
|                                                  |                                                                                          | Depreciation and amortization             |                                              |            | 386,596    |          |   |          | 410,781  |           
|                                                  |                                                                                          | Loss on disposal of equipment             |                                              |            | 3,122      |          |   |          | 7,726    |           
|                                                  |                                                                                          | Changes in assets and liabilities:        |                                              |            |            |          |   |          |          |           
|                                                  |                                                                                          |                                           | Accounts and notes receivable                |            |            | (216,410 | ) |          |          | 772,071    |  
|                                                  |                                                                                          |                                           | Income taxes receivable                      |            |            | 124,163  |   |          |          | (90,684    | )
|                                                  |                                                                                          |                                           | Inventories                                  |            |            | 79,195   |   |          |          | 1,422,508  |  
|                                                  |                                                                                          |                                           | Prepaid expenses                             |            |            | (130,120 | ) |          |          | (64,384    | )
|                                                  |                                                                                          |                                           | Accounts payable                             |            |            | 167,612  |   |          |          | (1,286,103 | )
|                                                  |                                                                                          |                                           | Accrued expenses, including deferred revenue |            |            | 177,852  |   |          |          | 85,081     |  
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|                                                  |                                                                                          | Net cash provided by operating activities |                                              |            | 1,224,092  |          |   |          | 873,486  |           
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|Cash Flows From Investing Activities              |                                                                                          |                                           |                                              |            |            |          |   |         
|                                                  | Purchases of property and equipment                                                      |                                           |                                              | (13,955    | )          |          |   | (48,226  | )       
|                                                  | Proceeds from sale of equipment                                                          |                                           |                                              |           |            |          |   | 14,500   |         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|                                                  |                                                                                          | Net cash used in investing activities     |                                              |            | (13,955    | )        |   |          | (33,726  | )         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|Cash Flows From Financing Activities              |                                                                                          |                                           |                                              |            |            |          |   |         
|                                                  | Net payments on revolving credit agreement                                               |                                           |                                              | (1,085,501 | )          |          |   | (450,000 | )       
|                                                  | Payments on long-term borrowings, including capital
lease obligations                    |                                           |                                              | (269,744   | )          |          |   | (407,386 | )       
|                                                  | Proceeds from issuance of common stock                                                   |                                           |                                              | 4,935      |            |          |   | 3,782    |         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|                                                  |                                                                                          | Net cash used in financing activities     |                                              |            | (1,350,310 | )        |   |          | (853,604 | )         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|                                                  |                                                                                          |                                           | Net decrease in cash                         |            |            | (140,173 | ) |          |          | (13,844    | )
|Cash                                              |                                                                                          |                                           |                                              |            |            |          |   |         
|                                                  | Beginning                                                                                |                                           |                                              | 399,749    |            |          |   | 38,961   |         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|                                                  | End                                                                                      |                                           | $                                            | 259,576    |            |          | $ | 25,117   |         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  
|Supplemental Disclosures of Cash Flow Information |                                                                                          |                                           |                                              |            |            |          |   |         
|                                                  | Cash payments for:                                                                       |                                           |                                              |            |            |          |   |          |         
|                                                  |                                                                                          | Interest                                  |                                              | $          | 143,110    |          |   | $        | 282,495  |           
|                                                  |                                                                                          | Income taxes                              |                                              |            | 28,000     |          |   |          | (115,316 | )         
|                                                  |                                                                                          |                                           |                                              |            |            |          |  

See Notes to Interim Financial Statements

6



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WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles in the
United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission. In managements opinion all adjustments
necessary for a fair presentation of the results for the interim period have
been reflected in the interim financial statements. The results of operations
for any interim period are not necessarily indicative of the results for a full
year. All adjustments to the financial statements are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted. Such disclosures are
those that would substantially duplicate information contained in the most
recent audited financial statements of the Company, such as significant
accounting policies, lease and license commitments and stock options.
Management presumes that users of the interim statements have read or have
access to the audited financial statements included in the companys most
recent annual report on Form 10-KSB.

Note 2. Inventories

Major components of inventory at June 30, 2002 and December 31, 2001 are as
follows:

|                     |       |   |               |           |  |                   |           |           | 
|-------------------- | ----- | - | ------------- | --------- |  | ----------------- | --------- | --------- | 
|                     |       |   | June 30, 2002 |           |  | December 31, 2001 |          
|                     |       |   |               |           |  |                   |          
|Raw Materials        |       | $ | 1,562,614     |           |  | $                 | 2,006,461 |          
|Work In Process      |       |   | 299,012       |           |  |                   | 138,859   |          
|Finished Goods       |       |   | 595,478       |           |  |                   | 429,407   |          
|Obsolescence reserve |       |   | (96,572       | )         |  |                   | (135,000  | )        
|                     |       |   |               |           |  |                  
|                     | Total |   | $             | 2,360,532 |  |                   | $         | 2,439,727 | 
|                     |       |   |               |           |  |                  

Note 3. Financing Arrangement

The Company has a $3,500,000 revolving line-of-credit agreement through
September 15, 2002. Interest on advances is at two percentage points over the
banks reference rate (6.75 percent at June 30, 2002) and is due monthly.
Advances outstanding on the revolving line-of-credit agreement at June 30, 2002
and December 31, 2001, were $896,000 and $1,981,501, respectively.

Advances are due on demand, are secured by substantially all assets of the
Company, and are subject to a defined borrowing base equal to 75 percent of
qualified accounts receivable and 50 percent of eligible inventories. In
addition, the agreement contains certain reporting and operating covenants. At
June 30, 2002, the Company had additional borrowing capacity on the revolving
line-of-credit of over $1,753,000 according to the borrowing base formula. At
June 30, 2002, the Company is in compliance with all covenants.

The Company is currently evaluating various options to meet and secure the
future financial needs of the Company beyond September 15, 2002. There is no
assurance that the Company will be successful in obtaining financing
arrangements on terms acceptable to the Company. The Company may find it
necessary to accept financing arrangements which limit the Companys ability to
achieve growth.

7



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Note 4. Stock Options

As of June 30, 2002, options to purchase 307,000 shares of common stock were
outstanding under the Companys 1997 Stock Option Plan, of which 169,000 shares
were exercisable. At June 30, 2002, the exercise prices of all outstanding
options range from $.53 to $2.938 per share.

Note 5. Major Customers and Enterprisewide Disclosures

Major Customers:The Company has customers that accounted for more than 10
percent of net sales for the three and six months ended June 30, 2002 and 2001,
as follows:

|                  |            |  |                    |    |   |                    |  |    |  
|----------------- | ---------- |  | ------------------ | -- | - | ------------------ |  | -- | -
|                  |            |  | Three Months Ended |    |   | Three Months Ended | 
|                  |            |  | June 30, 2002      |    |   | June 30, 2001      | 
|                  |            |  |                    |    |   |                    | 
|Sales percentage: |            |  |                    |    |   |                    |  |   
|                  | Customer A |  |                    | 48 | % |                    |  | 39 | %
|                  | Customer B |  |                    | 19 | % |                    |  | 11 | %
|                  | Customer C |  |                    | 1  | % |                    |  | 15 | %

|                  |            |  |                  |    |   |                  |  |    |  
|----------------- | ---------- |  | ---------------- | -- | - | ---------------- |  | -- | -
|                  |            |  | Six Months Ended |    |   | Six Months Ended | 
|                  |            |  | June 30, 2002    |    |   | June 30, 2001    | 
|                  |            |  |                  |    |   |                  | 
|Sales percentage: |            |  |                  |    |   |                  |  |   
|                  | Customer A |  |                  | 50 | % |                  |  | 30 | %
|                  | Customer B |  |                  | 18 | % |                  |  | 15 | %
|                  | Customer C |  |                  | 1  | % |                  |  | 26 | %

The Company has customers that accounted for more than 10% of net receivables
at June 30, 2002 and December 31, 2001, as follows:

|                                |            |  |               |    |   |                   |  |    |  
|------------------------------- | ---------- |  | ------------- | -- | - | ----------------- |  | -- | -
|                                |            |  | June 30, 2002 |    |   | December 31, 2001 | 
|                                |            |  |               |    |   |                   | 
|Accounts receivable percentage: |            |  |               |    |   |                   |  |   
|                                | Customer A |  |               | 40 | % |                   |  | 38 | %
|                                | Customer B |  |               | 20 | % |                   |  | 17 | %
|                                | Customer C |  |               | 0  | % |                   |  | 2  | %
|                                | Customer D |  |               | 11 | % |                   |  | 12 | %

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##### Table of Contents



Enterprisewide Disclosures:The following table presents three-month revenues
from external customers for each of the Companys groups of products and
services:

|                                                                           |  |                    |           |  |                    |   |           | 
|-------------------------------------------------------------------------- |  | ------------------ | --------- |  | ------------------ | - | --------- | 
|                                                                           |  | Three Months Ended |           |  | Three Months Ended |  
|                                                                           |  | June 30, 2002      |           |  | June 30, 2001      |  
|                                                                           |  |                    |           |  |                    |  
|Proprietary microprocessors and mechanically
controlled sensors and alarms |  | $                  | 621,377   |  |                    | $ | 729,655   | 
|Electronic controls and assemblies for
OEM customers                       |  |                    | 4,489,701 |  |                    |   | 3,094,819 | 
|                                                                           |  |                    |           |  |                    |  
|                                                                           |  | $                  | 5,111,078 |  |                    | $ | 3,824,474 | 
|                                                                           |  |                    |           |  |                    |  

|                                                                           |  |                  |           |  |                  |   |           | 
|-------------------------------------------------------------------------- |  | ---------------- | --------- |  | ---------------- | - | --------- | 
|                                                                           |  | Six Months Ended |           |  | Six Months Ended |  
|                                                                           |  | June 30, 2002    |           |  | June 30, 2001    |  
|                                                                           |  |                  |           |  |                  |  
|Proprietary microprocessors and mechanically
controlled sensors and alarms |  | $                | 1,302,460 |  |                  | $ | 1,338,209 | 
|Electronic controls and assemblies for
OEM customers                       |  |                  | 8,094,265 |  |                  |   | 7,017,372 | 
|                                                                           |  |                  |           |  |                  |  
|                                                                           |  | $                | 9,396,725 |  |                  | $ | 8,355,581 | 
|                                                                           |  |                  |           |  |                  |  

Note 6. Earnings (Loss) Per Share

Basic per-share amounts are computed, generally, by dividing net income or loss
by the weighted-average number of common shares outstanding. Diluted
per-share amounts assume the conversion, exercise, or issuance of all potential
common stock instruments unless the effect is antidilutive.

The Company has granted options to purchase shares of common stock at various
amounts per share. Those options were not included in the computation of
diluted earnings per share for the three months and six months ended June 30,
2001 because the Company incurred year-to-date losses. The inclusion of
potential common shares in the calculation of diluted loss per share would have
an antidilutive effect. Therefore, basic and diluted loss per share amounts
are the same for the period presented for 2001.

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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

RESULTS OF OPERATIONS
Three and six months ended June 30 2002 v.
Three and six months ended June 30, 2001

Net Sales: The Company recorded net sales of $5,111,078 for the three months
ended June 30, 2002, an increase of $1,286,604, or 33.6% from $3,824,474 for
the same period in 2001. For the first six months of 2002 the Company recorded
net sales of $9,396,725, an increase of $1,041,144, or 12.5 % from $8,355,581
for the same period in 2001. The increase in sales for both the three and six
months ended June 30, 2002 are attributed to increased sales to original
equipment manufacture (OEM) customers. Sales of Winlands proprietary
products, which include the security/industrial sensors, DC motor controls and
utility controls, declined for both the three and six months ended June 30,
2002, compared to the same periods in 2001.

The Company currently has orders and forecasts from its major OEM customers for
delivery during the remainder of 2002 and 1st quarter of 2003 having an
aggregate value of $7.2 million. These are at various stages of completion.
The Company also has several smaller customer commitments to be completed in
2002 and early 2003. The Company expects to receive additional orders from
current OEM customers for 2002 and 2003 production.

The Company has continued to position itself as a full service designer and
manufacturer of custom controls and assemblies for OEM customers. The Company
continues to explore additional geographic regions to market its OEM services,
primarily through networking with referral sources in the Chicago and
Minneapolis areas. The loss of any significant OEM customer would likely have
an adverse effect on the Companys short-term, and potentially long-term,
results.

Gross Profits: Gross profit increased 85.8% to 1,195,639 or 23.4% of net sales
for the three months ended June 30, 2002, compared to $643,403 or 16.8% of net
sales for the same period in 2001. For the first six months of 2002 gross
profit was $2,281,207 or 24.3% of net sales, an increase from $1,342,450 or
16.1% for the same period in 2001. For the first six months of 2002 gross
profit increased $938,757, a 69.9% increase over the same period in 2001. The
increase in gross profits for the quarter ended June 30, 2002 is primarily
attributed to a more profitable sales mix and the Companys ability to maintain
lower direct and variable indirect expenses as sales increased from the latter
part of 2001 into the first and second quarter of 2002. Reductions in cost of
good sold, as a percentage of sales, for the first six months of 2002 are
primarily in salaries and employee related expenses, as well as lower
information technology and facility expenses, offset in part by increased
warranty and obsolescence reserves, commissions expense, accrued employee
incentive plan expense and the administrative expenses related to the new Arrow
Electronics, Inc. In Plant Store (IPS). Inventory in the IPS, although
located on Company premises, is owned by Arrow Electronics, Inc. and is
invoiced to the Company when utilized by the Company in manufacturing. The
Company expects the use of the IPS to reduce shipping and carrying costs of
inventory.

Operating Expenses: General and administrative expense was $321,752 or 6.3% of
net sales for the three months ended June 30, 2002, compared to $529,360 or
13.8% of net sales for the same period in 2001. For the first six months of
2002 the general and administrative expense was $624,994 or 6.7% of net sales,
compared to $847,991 or 10.1% of net sales for the same period in 2001. The
decrease in general and administrative expenses for the three and six months
ended June 30, 2002 is attributed primarily to reductions in salaries,
executive severance expense for the former CEO of the Company, leased vehicle
expense and professional fees, offset in part by increased employee incentive
plan accruals, investor relations, and directors and officers insurance premium
expenses.

Sales and marketing expense (including project management) was $209,905 or 4.1%
of net sales for the three months ended June 30, 2002, compared to $182,221 or
4.8% of net sales for the same period in 2001. For the first six months of
2002 sales and marketing expense was $445,942 or 4.7% of net sales,
compared to $351,548 or 4.2% of net sales for the same period in 2001. The
increase in sales and


10Table of Contents

marketing expense for both the three and six months ended June 30, 2002 is
primarily attributable to increased salaries and employee related costs due to
reassignment of certain personnel and the addition of a Vice President of
Sales. In addition, the Company incurred increased expense related to employee
incentive plan accruals, offset in part by decreased leased vehicle expenses,
information technology expenses and promotional expenses.

Winlands sales and marketing efforts continued to favor building direct
personal contact with high-potential OEM customer prospects and developing an
extensive referral network. Management believes that relationships built on
networking, referrals and face-to-face contact will provide Winland an
opportunity to build market share in the EMS (Electronic Manufacturing
Services) market.

Research and development expense (including the development of new company
products as well as design services and support to the OEM customer base) was
$165,687 or 3.2% of net sales for the three months ended June 30, 2002,
compared to $207,937 or 5.4% of net sales for the same period in 2001. The
research and development expense for the first six months of 2002 was $314,468
or 3.3% of net sales, compared to $462,277 or 5.5% of net sales for the same
period in 2001. The decline in research and development expense for the three
and six months ended June 30, 2002 compared to 2001 is primarily attributable
to employee attrition and reassignment without replacement. Accordingly, total
salaries and related expenses decreased, as well as decreased facility,
information technology and leased vehicle expenses, offset in part by employee
incentive plan accruals.

Interest Expense: Interest expense was $64,365 or 1.3% of net sales and
$143,133 or 1.5% of net sales for the three and six months ended June 30, 2002,
compared to $126,459 or 3.3% of net sales and $282,400 or 3.4% of net sales
for the same periods in 2001, respectively. The decrease in interest expense
for the second quarter and first six months of 2002 was due to a reduction in
short-term and long-term debt as well as lower interest rates on short-term
debt. During the first six months of 2002, the Company paid down $1,085,501
(55 percent) on its line-of-credit and paid down $269,744 of long-term debt.
All of the cash used to reduce debt was generated from the Companys operating
activities.

Net Earnings: The Company reported net income of $351,009 or $0.12 per basic
and diluted share and $632,082 or $0.21 per basic and diluted share for the
three and six months ended June 30, 2002, compared to a net losses of $253,955
or ($0.09) per basic and diluted share and $383,510 or ($0.13) per basic and
diluted share for the same periods in 2001. The net income for the first six
months of 2002 is primarily due to increased gross profit margins based on a
more profitable sales mix and the Companys ability to maintain lower direct
and variable indirect expenses as sales increased from the latter part of 2001
into the first six months of 2002. Bottom line performance also benefited from
overall reductions in operating expenses and interest expense.

The Company believes inflation has not significantly affected its results of
operations.

The Company uses a 37% blended federal and state income tax rate, offset in
part, by a tax benefit from the use of net operating losses and tax credits
generated in previous years.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $1,224,092 for the six months ended
June 30, 2002, compared to $873,486 for the same period in 2001, an improvement
of $350,606. Cash provided by operations was used to pay down $1,085,501 of
the Companys revolving line-of-credit (a reduction of approximately 55%),
reduce long-term debt and to a lesser degree, for the purchase of equipment.
The Company has funded its current operations with working capital provided by
operations.

The current ratio at June 30, 2002 and December 31, 2001 was 1.7 to 1 and 1.4
to 1, respectively. Working capital equaled $2,164,373 on June 30, 2002,
compared to $1,367,666 on December 31, 2001. The increase in working capital
is attributed to reductions in short-term and long-term debt, offset in part by
increased accounts payable and accrued expenses, as well as, decreased cash,
inventory and income tax receivable.

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The Company has a $3,500,000 revolving line-of-credit agreement with Wells
Fargo Bank, through September 15, 2002. Interest on advances is at two
percentage points over the banks reference rate (6.75 percent at June 30,
2002) and is due monthly. Advances outstanding on the revolving line-of-credit
at June 30, 2002 and December 31, 2001 were $896,000 and $1,981,501,
respectively. Advances are due on demand, are secured by substantially all
assets of the Company, and are subject to a defined borrowing base equal to 75
percent of qualified accounts receivable and 50 percent of eligible inventory.
In addition, the line-of-credit agreement contains certain reporting and
operating covenants.

In order to continue operations in the ordinary course, the Company will seek
to renew or refinance its line of credit agreement, which currently expires
September 15, 2002.

A summary of our contractual cash obligations at June 30, 2002 is as follows:

|                                               |  |                        |           |  |      |   |         |      |  |   |         |  |  |      |         |  |            |   |           |  |  |          |         | 
|---------------------------------------------- |  | ---------------------- | --------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  | ---------- | - | --------- |  |  | -------- | ------- | 
|                                               |  | Payments due by period |          
|                                               |  |                        |          
|                                               |  |                        |           |  |      |   |         |      |  |   |         |  |  |      |         |  |            |   |           |  |  | 2006 and |        
|Contractual Obligations                        |  | Total                  |           |  | 2002 |   |         | 2003 |  |   | 2004    |  |  | 2005 |         |  | thereafter |  
|                                               |  |                        |           |  |      |   |         |      |  |   |         |  |  |      |         |  |            |  
|Long-term debt,
including interest             |  | $                      | 3,059,500 |  |      | $ | 259,300 |      |  | $ | 561,300 |  |  | $    | 963,700 |  |            | $ | 1,111,300 |  |  | $        | 163,900 | 
|Operating leases                               |  |                        | 20,300    |  |      |   | 10,200  |      |  |   | 10,100  |  |  |      | 0       |  |            |   | 0         |  |  |          | 0       | 
|Purchase agreement for
manufacturing
equipment |  |                        | 0         |  |      |   | 0       |      |  |   | 0       |  |  |      | 0       |  |            |   | 0         |  |  |          | 0       | 
|Total contractual cash
obligations             |  | $                      | 3,079,800 |  |      | $ | 269,500 |      |  | $ | 571,400 |  |  | $    | 963,700 |  |            | $ | 1,111,300 |  |  | $        | 163,900 | 

We also have a commercial commitment as described below:

|                 |  |              |           |  |                        |   |         |                    |  |                   
|---------------- |  | ------------ | --------- |  | ---------------------- | - | ------- | ------------------ |  | ------------------
|Other Commercial |  | Total Amount |           |  |                        |   |         |                    | 
|Commitment       |  | Committed    |           |  | Outstanding at 6/30/02 |   |         | Date of Expiration
|                 |  |              |           |  |                        |   |         |                   
|Line of credit   |  | $            | 3,500,000 |  |                        | $ | 896,000 |                    |  | September 15, 2002

The Company continues to explore other financing sources, including asset-based
lending, to provide financing beyond September 15, 2002. There is no assurance
that the Company will be successful in obtaining financing arrangements on
terms acceptable to the Company. The Company may find it necessary to accept
financing arrangements, which limit the Companys ability to achieve growth.

CAUTIONARY STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-QSB and other
written and oral statements made from time to time by the Company do not relate
strictly to historical or current facts. As such, they are considered
forward-looking statements which provide current expectations or forecasts of
future events. Such statements can be identified by the use of terminology
such as anticipate, believe, estimate, expect, intend, may,
could, possible, plan, project, should, will, forecast and
similar words or expressions. The Companys forward-looking statements
generally relate to the Companys growth strategies, financial results, product
development and sales efforts. One must carefully consider forward-looking
statements and understand that such statements involve a variety of risks and
uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed below. Consequently, no
forward-looking statement can be guaranteed and actual results may vary
materially. As provided for under the Private Securities Litigation Reform Act
of 1995, the Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Companys actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document and elsewhere by or on behalf of the Company.

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The Company derives a significant portion of its revenues from a small number
of major OEM customers that are not subject to any long-term contracts with the
Company. If any major customer should for any reason decrease the volume of
their business or stop doing business with the Company, the Companys business
would be adversely affected. Some of the Companys customers are not large,
well-established companies, and the business of each customer is subject to
various risks such as market acceptance of new products and continuing
availability of financing. To the extent that the Companys customers
encounter difficulties, or the Company is unable to meet the demands of its OEM
customers, the Company could be adversely affected.

The Companys ability to increase revenues and profits is dependent upon its
ability to retain valued existing customers and obtain new customers that fit
its customer profile. The Company competes for new customers with numerous
independent contract design and manufacturing firms in the United States and
abroad, many of whom have greater financial resources and more established
reputations. The Companys ability to compete successfully in this industry
depends, in part, upon the price at which the Company is willing to manufacture
a proposed product and the quality of the Companys design and manufacturing
services. There is no assurance that the Company will be able to continue to
obtain contracts from existing and new customers on financially advantageous
terms, and the failure to do so could prevent the Company from achieving the
growth it anticipates.

The Companys ability to execute its initiatives to increase sales and expand
market share depends upon its ability to develop additional value added
capabilities and/or proprietary products and technologies and on the
availability of sufficient financing, both equity and debt, to meet fixed and
variable costs associated with such growth. In the current economic
environment, banks and other sources of financing are becoming increasingly
conservative in their lending and investment policies. There is no assurance
that the Company will be able to obtain the financing necessary to achieve its
goals.

The Companys success in providing an improved mix of higher margin products
and services depends on the effectiveness of its new product development and
planning efforts as wells as the timing of such and the availability and costs
of any competing products or services on the market.




PART II  OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits. See Exhibit Index immediately following the signature page.                                                                                                           
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K.One report on Form 8-K was
filed during the quarter ended June 30, 2002. This report,
filed in April 2002, announced the postponement of the annual
meeting.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|       |  |               |  |                                                                                                                    
|------ |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------
|       |  |               |  | WINLAND ELECTRONICS, INC.
(Company)                                                                              
|      
|Dated: |  | July 25, 2002 |  | /s/ Lorin E. Krueger
Lorin E. Krueger, President and
Chief Executive Officer (Principal
Executive Officer)         
|      
|       |  |               |  | /s/ Jennifer A. Thompson
Jennifer A. Thompson, Chief
Financial Officer (Principal
Financial and Accounting Officer)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549




EXHIBIT INDEX TO FORM 10-QSB

|                                           |  |                            
|------------------------------------------ |  | ---------------------------
|For the fiscal quarter
ended
June 30, 2002 |  | Commission File No. 0-18393



---

WINLAND ELECTRONICS, INC.



---

|            |  |                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                    
|            |  |                                                                                                
|10.1        |  | Amendment to Employment Agreement dated March 25, 2002 between the
Company and Kirk P. Hankins*
|10.2        |  | Employment Agreement dated April 8, 2002 between the Company and Dale
Nordquist*               



|* |  | Management agreement or compensatory plan or arrangement.
|- |  | ---------------------------------------------------------

15