##### 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 September 30, 2003 |  | Commission File Number: 0-18393

WINLAND ELECTRONICS, INC.

(Name of small business issuer in its charter)


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

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

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

Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [  ]

There were 2,996,046 shares of Common Stock, $.01 par value, outstanding as of
September 30, 2003.

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

1



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TABLE OF CONTENTS



|                                                 |                                                                   |  |  |  |  |  |  | 
|------------------------------------------------ | ----------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I-FINANCIAL INFORMATION                    
|                                                 | ITEM 1: FINANCIAL STATEMENTS                                     
|NOTES TO THE INTERIM FINANCIAL STATEMENTS       
|                                                 | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|                                                 | ITEM 3. CONTROLS AND PROCEDURES                                  
|PART II  OTHER INFORMATION                     
|                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                         
|SIGNATURES                                      
|EXHIBIT INDEX TO FORM 10-QSB                    
|EX-10.1 2nd Amendment to Employment Agreement   
|EX-31.1 Certification of Chief Executive Officer
|EX-31.2 Certification of Chief Financial Officer
|EX-32.1 Certification of Chief Executive Officer
|EX-32.2 Certification of Chief Financial Officer



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##### Table of Contents






PART I-FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS

WINLAND ELECTRONICS, INC.
BALANCE SHEETS

|                                 |                                |                               |                              |           |               |           |              |           |            |           | 
|-------------------------------- | ------------------------------ | ----------------------------- | ---------------------------- | --------- | ------------- | --------- | ------------ | --------- | ---------- | --------- | 
|                                 |                                |                               |                              |           | September 30, |           | December 31,
|                                 |                                |                               |                              |           | 2003          |           | 2002        
|                                 |                                |                               |                              |           |               |           |             
|                                 |                                |                               |                              |           | (UNAUDITED)   |           |              |           |           
|ASSETS                           |                                |                               |                              |           |               |           |              |          
|Current Assets                   |                                |                               |                              |           |               |           |              |          
|                                 |                                | Cash                          |                              | $         | 1,454,509     |           |              | $         | 692,700    |          
|                                 |                                | Accounts receivable, net      |                              |           | 2,078,768     |           |              |           | 2,091,544  |          
|                                 |                                | Inventories                   |                              |           | 1,681,977     |           |              |           | 1,811,644  |          
|                                 |                                | Prepaid expenses              |                              |           | 262,835       |           |              |           | 145,035    |          
|                                 |                                | Deferred taxes                |                              |           | 186,000       |           |              |           | 186,000    |          
|                                 |                                |                               |                              |           |               |           |              |          
|                                 |                                |                               | Total current assets         |           |               | 5,664,089 |              |           |            | 4,926,923 | 
|                                 |                                |                               |                              |           |               |           |              |          
|Other Assets                     |                                |                               | 8,673                        |           |               |           | 590          |          
|                                 |                                |                               |                              |           |               |           |              |          
|                                 |                                |                               | Total other assets           |           |               | 8,673     |              |           |            | 590       | 
|                                 |                                |                               |                              |           |               |           |              |          
|Property and Equipment, at cost: |                                |                               |                              |           |               |           |              |          
|                                 | Land and land improvements     |                               |                              | 272,901   |               |           |              | 272,901   |           
|                                 | Building                       |                               |                              | 2,983,586 |               |           |              | 2,983,586 |           
|                                 | Machinery and equipment        |                               |                              | 3,926,284 |               |           |              | 3,735,832 |           
|                                 | Data processing equipment      |                               |                              | 1,289,170 |               |           |              | 1,265,396 |           
|                                 | Office furniture and equipment |                               |                              | 332,708   |               |           |              | 352,834   |           
|                                 |                                |                               |                              |           |               |           |              |          
|                                 |                                |                               | Total property and equipment |           |               | 8,804,649 |              |           |            | 8,610,549 | 
|                                 |                                | Less accumulated depreciation |                              |           | (5,073,533    | )         |              |           | (4,556,721 | )        
|                                 |                                |                               |                              |           |               |           |              |          
|                                 |                                |                               | Net property and equipment   |           |               | 3,731,116 |              |           |            | 4,053,828 | 
|                                 |                                |                               |                              |           |               |           |              |          
|                                 |                                |                               | Total assets                 |           | $             | 9,403,878 |              |           | $          | 8,981,341 | 
|                                 |                                |                               |                              |           |               |           |              |          

See Notes to the Interim Financial Statements

2



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WINLAND ELECTRONICS, INC.
BALANCE SHEETS

|                                     |                                         |                                      |              |                                            |           |               |           |              |           |         |           | 
|------------------------------------ | --------------------------------------- | ------------------------------------ | ------------ | ------------------------------------------ | --------- | ------------- | --------- | ------------ | --------- | ------- | --------- | 
|                                     |                                         |                                      |              |                                            |           | September 30, |           | December 31,
|                                     |                                         |                                      |              |                                            |           | 2003          |           | 2002        
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              |                                            |           | (UNAUDITED)   |           |              |           |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                         |                                      |              |                                            |           |               |           |             
|Current Liabilities                  |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         | Current maturities of long-term debt |              | $                                          | 366,398   |               |           | $            | 413,546   |        
|                                     |                                         | Accounts payable                     |              |                                            | 1,280,630 |               |           |              | 931,933   |        
|                                     |                                         | Accrued expenses:                    |              |                                            |           |               |           |              |           |        
|                                     |                                         |                                      | Compensation |                                            |           | 570,603       |           |              |           | 524,088 |          
|                                     |                                         |                                      | Other        |                                            |           | 248,179       |           |              |           | 151,548 |          
|                                     |                                         | Income tax payable                   |              |                                            | 56,607    |               |           |              | 159,028   |        
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              | Total current liabilities                  |           |               | 2,522,417 |              |           |         | 2,180,143 | 
|                                     |                                         |                                      |              |                                            |           |               |           |             
|Long Term Liabilities                |                                         |                                      |              |                                            |           |               |           |             
|                                     | Deferred revenue                        |                                      |              | 172,853                                    |           |               |           | 178,958      |          
|                                     | Long-term debt, less current maturities |                                      |              | 1,380,470                                  |           |               |           | 2,098,083    |          
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              | Total long-term liabilities                |           |               | 1,553,323 |              |           |         | 2,277,041 | 
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              | Total liabilities                          |           |               | 4,075,740 |              |           |         | 4,457,184 | 
|                                     |                                         |                                      |              |                                            |           |               |           |             
|Stockholders Equity                 |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         | Common stock                         |              |                                            | 29,960    |               |           |              | 29,782    |        
|                                     |                                         | Warrants                             |              |                                            | 43,178    |               |           |              |          |        
|                                     |                                         | Additional paid-in capital           |              |                                            | 2,274,545 |               |           |              | 2,264,710 |        
|                                     |                                         | Retained earnings                    |              |                                            | 2,980,455 |               |           |              | 2,229,665 |        
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              | Total stockholders equity                 |           |               | 5,328,138 |              |           |         | 4,524,157 | 
|                                     |                                         |                                      |              |                                            |           |               |           |             
|                                     |                                         |                                      |              | Total liabilities and stockholders equity |           | $             | 9,403,878 |              |           | $       | 8,981,341 | 
|                                     |                                         |                                      |              |                                            |           |               |           |             

See Notes to the Interim Financial Statements

3



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WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Three Months Ended September 30, 2003 and 2002
(UNAUDITED)

|                                                      |                            |                            |           |           |           |      |           |           |         | 
|----------------------------------------------------- | -------------------------- | -------------------------- | --------- | --------- | --------- | ---- | --------- | --------- | ------- | 
|                                                      |                            |                            |           | 2003      |           | 2002
|                                                      |                            |                            |           |           |           |     
|Net sales                                             |                            | $                          | 4,580,189 |           |           | $    | 4,038,930 |          
|Cost of sales                                         |                            |                            | 3,428,104 |           |           |      | 3,191,279 |          
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            | Gross profit               |           |           | 1,152,085 |      |           |           | 847,651 | 
|                                                      |                            |                            |           |           |           |      |           |          
|Operating expenses:                                   |                            |                            |           |           |           |      |           |          
|                                                      | General and administrative |                            |           | 326,681   |           |      |           | 323,881   |        
|                                                      | Sales and marketing        |                            |           | 238,312   |           |      |           | 236,504   |        
|                                                      | Research and development   |                            |           | 154,303   |           |      |           | 174,570   |        
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            |                            | 719,296   |           |           |      | 734,955   |          
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            | Operating income           |           |           | 432,789   |      |           |           | 112,696 | 
|                                                      |                            |                            |           |           |           |      |           |          
|Other income (expenses):                              |                            |                            |           |           |           |      |           |          
|                                                      | Interest expense           |                            |           | (29,701   | )         |      |           | (61,188   | )      
|                                                      | Other, net                 |                            |           | 6,062     |           |      |           | 658       |        
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            |                            | (23,639   | )         |           |      | (60,530   | )        
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            | Income before income taxes |           |           | 409,150   |      |           |           | 52,166  | 
|Income tax expense                                    |                            |                            | (151,000  | )         |           |      | (22,000   | )        
|                                                      |                            |                            |           |           |           |      |           |          
|                                                      |                            | Net income                 |           | $         | 258,150   |      |           | $         | 30,166  | 
|                                                      |                            |                            |           |           |           |      |           |          
|Earnings per share data:                              |                            |                            |           |           |           |      |           |          
|                                                      | Basic                      |                            | $         | 0.09      |           |      | $         | 0.01      |        
|                                                      | Diluted                    |                            |           | 0.08      |           |      |           | 0.01      |        
|Weighted-average number of common shares outstanding: |                            |                            |           |           |           |      |           |          
|                                                      | Basic                      |                            |           | 2,996,046 |           |      |           | 2,970,627 |        
|                                                      | Diluted                    |                            |           | 3,069,170 |           |      |           | 3,045,642 |        

See Notes to the Interim Financial Statements

4



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WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2003 and 2002
(UNAUDITED)

|                                                      |                            |                            |            |           |           |      |            |           |           | 
|----------------------------------------------------- | -------------------------- | -------------------------- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | 
|                                                      |                            |                            |            | 2003      |           | 2002
|                                                      |                            |                            |            |           |           |     
|Net sales                                             |                            | $                          | 14,370,370 |           |           | $    | 13,435,655 |          
|Cost of sales                                         |                            |                            | 10,817,645 |           |           |      | 10,306,797 |          
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            | Gross profit               |            |           | 3,552,725 |      |            |           | 3,128,858 | 
|                                                      |                            |                            |            |           |           |      |            |          
|Operating expenses:                                   |                            |                            |            |           |           |      |            |          
|                                                      | General and administrative |                            |            | 1,043,341 |           |      |            | 948,875   |          
|                                                      | Sales and marketing        |                            |            | 694,357   |           |      |            | 682,446   |          
|                                                      | Research and development   |                            |            | 530,829   |           |      |            | 489,038   |          
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            |                            | 2,268,527  |           |           |      | 2,120,359  |          
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            | Operating income           |            |           | 1,284,198 |      |            |           | 1,008,499 | 
|                                                      |                            |                            |            |           |           |      |            |          
|Other income (expenses):                              |                            |                            |            |           |           |      |            |          
|                                                      | Interest expense           |                            |            | (108,692  | )         |      |            | (204,320  | )        
|                                                      | Other, net                 |                            |            | 10,284    |           |      |            | 4,070     |          
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            |                            | (98,408    | )         |           |      | (200,250   | )        
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            | Income before income taxes |            |           | 1,185,790 |      |            |           | 808,249   | 
|Income tax expense                                    |                            |                            | (435,000   | )         |           |      | (146,000   | )        
|                                                      |                            |                            |            |           |           |      |            |          
|                                                      |                            | Net income                 |            | $         | 750,790   |      |            | $         | 662,249   | 
|                                                      |                            |                            |            |           |           |      |            |          
|Earnings per share data:                              |                            |                            |            |           |           |      |            |          
|                                                      | Basic                      |                            | $          | 0.25      |           |      | $          | 0.22      |          
|                                                      | Diluted                    |                            |            | 0.25      |           |      |            | 0.22      |          
|Weighted-average number of common shares outstanding: |                            |                            |            |           |           |      |            |          
|                                                      | Basic                      |                            |            | 2,986,653 |           |      |            | 2,963,871 |          
|                                                      | Diluted                    |                            |            | 3,056,739 |           |      |            | 3,013,365 |          

See Notes to the Interim Financial Statements

5



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WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(UNAUDITED)

|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |            |          |  
|-------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------------------------- | --------- | --------- | ------- | ---- | ---------- | ---------- | -------- | -
|                                                                     |                                                                                   |                                             |                                                                       |           | 2003      |         | 2002
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |     
|Cash Flows From Operating Activities                                 |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     | Net income                                                                        |                                             | $                                                                     | 750,790   |           |         | $    | 662,249    |           
|                                                                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                             |                                                                       |           |           |         |      |            |           
|                                                                     |                                                                                   | Depreciation and amortization               |                                                                       |           | 532,525   |         |      |            | 569,427    |         
|                                                                     |                                                                                   | Loss on disposal of equipment               |                                                                       |           | 754       |         |      |            | 3,232      |         
|                                                                     |                                                                                   | Investor relations expense, warrants issued |                                                                       |           | 13,219    |         |      |            |           |         
|                                                                     |                                                                                   | Changes in assets and liabilities:          |                                                                       |           |           |         |      |            |            |         
|                                                                     |                                                                                   |                                             | Accounts receivable                                                   |           |           | 12,776  |      |            |            | (250,930 | )
|                                                                     |                                                                                   |                                             | Income tax receivable                                                 |           |           |        |      |            |            | 153,997  |  
|                                                                     |                                                                                   |                                             | Inventories                                                           |           |           | 129,667 |      |            |            | 312,828  |  
|                                                                     |                                                                                   |                                             | Prepaid expenses                                                      |           |           | (96,211 | )    |            |            | (68,465  | )
|                                                                     |                                                                                   |                                             | Accounts payable                                                      |           |           | 348,697 |      |            |            | 45,893   |  
|                                                                     |                                                                                   |                                             | Accrued expenses, including deferred
revenue and income taxes payable |           |           | 34,620  |      |            |            | 235,478  |  
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     |                                                                                   | Net cash provided by operating activities   |                                                                       |           | 1,726,837 |         |      |            | 1,663,709  |         
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |           
|Cash Flows From Investing Activities                                 |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     | Purchases of property and equipment                                               |                                             |                                                                       | (210,280  | )         |         |      | (86,664    | )         
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|                                                                     |                                                                                   | Net cash used in investing activities       |                                                                       |           | (210,280  | )       |      |            | (86,664    | )       
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|Cash flows From Financing Activities                                 |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     | Net payments on revolving credit agreement                                        |                                             |                                                                       |          |           |         |      | (1,415,501 | )         
|                                                                     | Payments on long-term borrowings, including capital
lease obligations             |                                             |                                                                       | (764,761  | )         |         |      | (306,674   | )         
|                                                                     | Proceeds from issuance of common stock                                            |                                             |                                                                       | 10,013    |           |         |      | 8,685      |           
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     |                                                                                   | Net cash used in financing activities       |                                                                       |           | (754,748  | )       |      |            | (1,713,490 | )       
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|                                                                     |                                                                                   |                                             | Net increase (decrease) in cash                                       |           |           | 761,809 |      |            |            | (136,445 | )
|Cash                                                                 |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     | Beginning                                                                         |                                             |                                                                       | 692,700   |           |         |      | 399,749    |           
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|                                                                     | End                                                                               |                                             | $                                                                     | 1,454,509 |           |         | $    | 263,304    |           
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|Supplemental Disclosures of Cash Flow Information
Cash payments for: |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     |                                                                                   | Interest                                    |                                                                       | $         | 108,082   |         |      | $          | 204,091    |         
|                                                                     |                                                                                   | Income tax                                  |                                                                       |           | 537,421   |         |      |            | (17,084    | )       
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           
|Supplemental Schedule of Noncash Financing Activities                |                                                                                   |                                             |                                                                       |           |           |         |      |           
|                                                                     | Warrants Issued in Connection with Investors Relations                            |                                             |                                                                       |           |           |         |      |            |           
|                                                                     | Services to be Provided                                                           |                                             | $                                                                     | 43,178    |           |         | $    |           |           
|                                                                     |                                                                                   |                                             |                                                                       |           |           |         |      |            |           

See Notes to the Interim Financial Statements

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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 September 30, 2003 and December 31, 2002 as
follows:

|                     |       |   |                    |           |                   |   |           |           | 
|-------------------- | ----- | - | ------------------ | --------- | ----------------- | - | --------- | --------- | 
|                     |       |   | September 30, 2003 |           | December 31, 2002
|                     |       |   |                    |           |                  
|Raw Materials        |       | $ | 1,183,037          |           |                   | $ | 1,462,315 |          
|Work In Process      |       |   | 251,868            |           |                   |   | 138,663   |          
|Finished Goods       |       |   | 530,072            |           |                   |   | 395,666   |          
|Obsolescence reserve |       |   | (283,000           | )         |                   |   | (185,000  | )        
|                     |       |   |                    |           |                   |   |           |          
|                     | Total |   | $                  | 1,681,977 |                   |   | $         | 1,811,644 | 
|                     |       |   |                    |           |                   |   |           |          

Note 3. Financing Arrangement

The Company has a $2,500,000 annual revolving line-of-credit agreement with M&I
Bank of Minneapolis, Minnesota through June 28, 2004. Interest on advances
accrues at the banks reference rate and is due monthly and is subject to
certain restrictive requirements. There were no advances outstanding on the
revolving line-of-credit agreement at September 30, 2003 or December 31, 2002.

Under the agreement with M&I Bank, advances are due on demand, secured by
substantially all assets of the Company, and are subject to a defined borrowing
base equal to 75 percent of qualified accounts receivable, 50 percent of
qualified inventory, and 25 percent of net book value of unencumbered
equipment. The total availability on the line of credit was $2,466,579 at
September 30, 2003.

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Note 4. Major Customers and Enterprisewide Disclosures

Major Customers:The Company has customers which accounted for more than 10
percent of net sales for the three and nine months ended September 30, 2003 and
2002, as follows:

|                  |            |  |                    |    |                    |  |  |    |  
|----------------- | ---------- |  | ------------------ | -- | ------------------ |  |  | -- | -
|                  |            |  | Three Months Ended |    | Three Months Ended
|                  |            |  | September 30, 2003 |    | September 30, 2002
|                  |            |  |                    |    |                   
|Sales percentage: |            |  |                    |    |                    |  |  |   
|                  | Customer A |  |                    | 53 | %                  |  |  | 46 | %
|                  | Customer B |  |                    | 9  | %                  |  |  | 19 | %

|                  |            |  |                    |    |                    |  |  |    |  
|----------------- | ---------- |  | ------------------ | -- | ------------------ |  |  | -- | -
|                  |            |  | Nine Months Ended  |    | Nine Months Ended 
|                  |            |  | September 30, 2003 |    | September 30, 2002
|                  |            |  |                    |    |                   
|Sales percentage: |            |  |                    |    |                    |  |  |   
|                  | Customer A |  |                    | 54 | %                  |  |  | 49 | %
|                  | Customer B |  |                    | 16 | %                  |  |  | 18 | %

The above customers had net receivables at September 30, 2003 and December 31, 2003 as follows:

|                                |            |  |                    |    |                   |  |  |    |  
|------------------------------- | ---------- |  | ------------------ | -- | ----------------- |  |  | -- | -
|                                |            |  | September 30, 2003 |    | December 31, 2002
|                                |            |  |                    |    |                  
|Accounts receivable percentage: |            |  |                    |    |                   |  |  |   
|                                | Customer A |  |                    | 47 | %                 |  |  | 34 | %
|                                | Customer B |  |                    | 9  | %                 |  |  | 17 | %

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

|                                                                           |  |                    |           |                    |  |   |           | 
|-------------------------------------------------------------------------- |  | ------------------ | --------- | ------------------ |  | - | --------- | 
|                                                                           |  | Three Months Ended |           | Three Months Ended
|                                                                           |  | September 30, 2003 |           | September 30, 2002
|                                                                           |  |                    |           |                   
|Proprietary microprocessors and mechanically
controlled sensors and alarms |  | $                  | 715,364   |                    |  | $ | 689,054   | 
|Electronic controls and assemblies for
OEM customers                       |  |                    | 3,864,825 |                    |  |   | 3,349,876 | 
|                                                                           |  |                    |           |                    |  |   |           | 
|                                                                           |  | $                  | 4,580,189 |                    |  | $ | 4,038,930 | 
|                                                                           |  |                    |           |                    |  |   |           | 

|                                                                           |  |                    |            |                    |  |   |            | 
|-------------------------------------------------------------------------- |  | ------------------ | ---------- | ------------------ |  | - | ---------- | 
|                                                                           |  | Nine Months Ended  |            | Nine Months Ended 
|                                                                           |  | September 30, 2002 |            | September 30, 2002
|                                                                           |  |                    |            |                   
|Proprietary microprocessors and mechanically
controlled sensors and alarms |  | $                  | 1,934,741  |                    |  | $ | 1,991,511  | 
|Electronic controls and assemblies for
OEM customers                       |  |                    | 12,435,629 |                    |  |   | 11,444,144 | 
|                                                                           |  |                    |            |                    |  |   |            | 
|                                                                           |  | $                  | 14,370,370 |                    |  | $ | 13,435,655 | 
|                                                                           |  |                    |            |                    |  |   |            | 

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Note 5. Earnings 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.

Note 6. Stock Options, Warrants and Stock-Based Compensation Plans

Warrants:On February 19, 2003, the Company granted to Hayden Communications,
Inc., an investor relations firm, warrants to purchase 36,000 shares of common
stock. Warrants to purchase 1,500 shares of common stock vest each month
beginning March 19, 2003 and continuing during the two-year contractual period.
The warrants term will extend three years from the date of full vesting. The
contract for services to be provided by Hayden Communications, Inc. does
provide both parties with a cancellation right. Such a cancellation would
limit the warrants to those vested up to the time of termination. On September
30, 2003, warrants to purchase 36,000 shares of common stock were outstanding,
of which 10,500 shares were exercisable. The exercise price of such
outstanding warrants is $2.04 per share.

The warrants have been valued using the Black-Scholes pricing model. Because
the contract can be terminated, the Company is reflecting the value of the
warrants as a prepaid expense and amortizing the expense as investor relations
expense over the life of the contract. In addition, the total value of the
outstanding warrants, $43,178, is reflected in the stockholders equity section
at September 30, 2003.

Stock-Based Compensation Plans:The Company has a stock-based compensation
plan. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no stock-based employee compensation cost
has been recognized, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant. There were options to purchase 18,000 shares issued to an employee
during the three months ended September 30, 2003, representing pro forma
compensation expense of $18,983. The effect on net income and earnings per
share for the compensation cost for the stock-based compensation plan has been
determined based on the grant date fair values of awards (the method described
in FASB Statement No. 123, Accounting for Stock Based Compensation) and is
reflected in the table below.

|                               |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                               |                                                                                                                                               |  | Three Months Ended |         | Nine Months Ended
|                               |                                                                                                                                               |  | September 30,      |         | September 30,    
|                               |                                                                                                                                               |  |                    |         |                  
|                               |                                                                                                                                               |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                               |                                                                                                                                               |  |                    |         |                   |  |      |         |     
|Net Income:                    |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |        
|                               | As reported                                                                                                                                   |  | $                  | 258,150 |                   |  | $    | 30,166  |      |  | $ | 750,790 |   |  | $ | 662,249 |  
|                               | Deduct total stock-based employee compensation
expense determined under the fair value-based
method for all awards net of related tax effects |  |                    | (8,767  | )                 |  |      | (51,405 | )    |  |   | (39,761 | ) |  |   | (62,065 | )
|                               |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                               | Pro forma                                                                                                                                     |  | $                  | 249,383 |                   |  | $    | (21,239 | )    |  | $ | 711,029 |   |  | $ | 600,184 |  
|                               |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Basic Earnings per share       |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |        
|                               | As reported                                                                                                                                   |  | $                  | 0.09    |                   |  | $    | 0.01    |      |  | $ | 0.25    |   |  | $ | 0.22    |  
|                               | Pro forma                                                                                                                                     |  | $                  | 0.08    |                   |  | $    | (0.01   | )    |  | $ | 0.24    |   |  | $ | 0.20    |  
|Diluted Earnings per per share |                                                                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |        
|                               | As reported                                                                                                                                   |  | $                  | 0.08    |                   |  | $    | 0.01    |      |  | $ | 0.25    |   |  | $ | 0.22    |  
|                               | Pro forma                                                                                                                                     |  | $                  | 0.08    |                   |  | $    | (0.01   | )    |  | $ | 0.23    |   |  | $ | 0.20    |  

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Note 7. Product Warranties:

The Company provides a limited warranty for a period of one year for its
products. The Companys standard warranties require the Company to repair or
replace defective products during such warranty period at no cost to the
customer. The Company estimates the costs that may be incurred under its basic
limited warranty and records a liability in the amount of such costs at the
time product revenue is recognized. Factors that affect the Companys warranty
liability include the number of units sold, historical and anticipated rates of
warranty claims, and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary. The Company utilizes historical trends and actuarial analysis tools
to assist in determining the appropriate loss reserve levels.

Changes in the Companys warranty liability, which is included in other
accruals on the balance sheets, during the period are approximately as follows:

|                   |                                                 |   |                                 |         |      |   |        |         |  
|------------------ | ----------------------------------------------- | - | ------------------------------- | ------- | ---- | - | ------ | ------- | -
|                   |                                                 |   | Nine Months Ended September 30,
|                   |                                                 |   |                                
|                   |                                                 |   | 2003                            |         | 2002
|                   |                                                 |   |                                 |         |     
|Balance, Beginning |                                                 | $ | 95,000                          |         |      | $ | 25,000 |        
|                   | Accruals for products Sold                      |   |                                 | 135,700 |      |   |        | 107,400 |  
|                   | Charges in accruals for pre-existing warranties |   |                                 | (90,700 | )    |   |        | (35,300 | )
|                   |                                                 |   |                                 |         |      |   |        |        
|Balance, Ending    |                                                 | $ | 140,000                         |         |      | $ | 97,100 |        
|                   |                                                 |   |                                 |         |      |   |        |        

Note 8. New Accounting Standards

Recent pronouncements: In September 2001, the Financial Accounting Standards
Board (FASB) issued Statement No. 143, Asset Retirement Obligations. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement will be effective for the Companys
fiscal year ending 2003. Management does not expect the adoption of this
standard to have a material impact on the Companys financial statements.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendments of FASB Statement No. 13, and Technical
Corrections. The Company does not believe that the adoption of this
pronouncement will have a material effect on its financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation establishes standards for
identifying a variable interest entity and for determining under what
circumstances a variable interest entity should be consolidated with its
primary beneficiary. Until now, a company generally has included another entity
in its consolidated financial statements only if it controlled the entity
through voting interests. Interpretation No. 46 changes that by requiring a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. As of September 30, 2003 the requirements of Interpretation
No. 46 do not apply to the Company.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
No. 150, Accounting for Certain Financial Instruments With Characteristics of
Both Liabilities and Equity, which requires the issuer to classify certain
freestanding financial instruments as liabilities. Under the provisions of
Statement No. 150, common stock issued with mandatory redemption features that
require the Company to repurchase the shares upon an event that is certain to
occur, such as termination of employment or death of the stockholder, is no
longer classified as equity; instead, these shares will be reported as shares
subject to mandatory redemptionand classified as a liability in the balance
sheet. In such circumstances, disclosure of the components of this liability
will be included in the notes to the financial statements. The requirements of
Statement No. 150 will apply to the Company for its quarter ending September
30, 2004. The effect of the adoption of this standard will be reported as a
cumulative effect of a change in accounting principle in the year of adoption,
and restatement of previously issued financial statements is not permitted.
The Company does not believe that the adoption of this pronouncement will have
a material effect on its financial statements.

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

RESULTS OF OPERATIONS
Three and Nine months ended September 30, 2003 v.
Three and Nine months ended September 30, 2002

Net Sales: The Company recorded net sales of $4,580,189 for the three months
ended September 30, 2003, an increase of $541,259, or 13.4%, from $4,038,930
for the same period in 2002. The increase in sales for the three months ended
September 30, 2003 is primarily attributed to an increase in 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, also increased 3.8% for the three months ended September 30,
2003, compared to 2002. The Company recorded net sales of $14,370,370 for the
first nine months of 2003, an increase of $934,715, or 7.0%, from $13,435,655
for the same period in 2002. The increase in sales for the nine months ended
September 30, 2003 is attributed to increased sales to OEM customers. Due to
reduced shipments, sales of Winlands proprietary products declined 2.9% during
the first nine months of 2003, compared to the same period in 2002.

The Companys OEM customers have given the Company purchase orders having an
aggregate value of $9.3 million for delivery during the remainder of 2003 and
into 2004. The Company expects to receive additional orders from current OEM
customers for future production. Although the Company has purchase orders in
place for many of its OEM customers which are scheduled to be fulfilled in
2003, these customers may terminate their relationship with the Company at any
time pursuant to certain cancellation provisions. Therefore, there is no
assurance that the Company will continue to be engaged by any of these
customers. In June the Company announced that orders from Johnson Outdoors,
Inc. (JOI) would be reduced in the coming years. Sales to JOI represented 9%
of total sales for the quarter ended September 30, 2003 and 16% for the first
nine months of 2003. The Company expects to experience reduced sales from JOI
for the remainder of 2003 when compared to 2002, with more significant
reductions expected in 2004 annual sales when compared to historical sales
levels.

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 affect on the Companys short-term, and potentially long-term,
results. In addition, the Company continues to manufacture and hold a steady
share of the security retail and environmental sensors market with its
proprietary microprocessors and mechanically controlled sensors and alarms.

Gross Profits: Gross profit dollars increased 35.9% to $1,152,085 or 25.2% of
net sales for the three months ended September 30, 2003, compared to $847,651
or 21.0% of net sales for the same period in 2002. For the first nine months
of 2003 gross profits were $3,552,725 or 24.7% of net sales, compared to
$3,128,858 or 23.3% of net sales for the same period in 2002. The increase in
gross profit for the quarter and nine months ended September 30, 2003 is
attributed to an increase in sales, as well as a more a profitable sales mix.
For the first nine months of 2003 the Company saw increases in salaries and
related expenses, warranty reserves, and premiums for product liability
insurance. For the first nine months of 2003 the Company also experienced
increases in the administrative expenses related to the Arrow Electronics, Inc.
In Plant Store (IPS), which started in April of 2002. 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 has seen the use of the IPS reduce shipping and carrying costs of
inventory.

Operating Expenses: General and administrative expense was $326,681 or 7.1% of
net sales for the three months ended September 30, 2003, compared to $323,881
or 8.0% of net sales for the same period in 2002. For the first nine months of
2003 general and administrative expense was $1,043,341 or 7.3.% of net sales,
compared to $948,875 or 7.1% of net sales for the same period in 2002. The
increase for both the quarter and first nine months of 2003 is attributed to
increased group insurance expense, employee training, increased expenses
connected with corporate governance and investor relations, and increases in
bad debt reserves related to specific customer accounts, as well as increases
in employee incentive plan accruals, offset in part by decreased telephone
expense and reductions in professional fees. Salaries and related employee
expenses were down for the quarter but exceeded 2002 levels for the first nine
months of 2003.

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Sales and marketing expense (including project management) was $238,312 or 5.2%
of net sales for the three months ended September 30, 2003, compared to
$236,504 or 5.9% of net sales for the same period in 2002. Sales and marketing
expense for the first nine months of 2003 was $694,357 or 4.8% of net sales,
compared to $682,446 or 5.1% of net sales for the same period in 2002. The
increase for the three and nine months ended September 30, 2003 is attributed
to increased salaries and employee related costs, travel expense, and
commissions expense, offset by a reduction in accrued employee incentive plan
expense, leased vehicle expense and group insurance expense. Employee training
declined slightly for the quarter but was up for the first nine months when
compared to the same period in 2002.

Winlands sales and marketing efforts are focused on building long-term
relationships with targeted OEM strategic accounts in the markets that it
serves. The Company relies on direct sales people along with an extensive
referral network to promote its services and uncover new opportunities.
Management believes that augmenting its direct sales force with a referral
network and utilizing independent sales representatives on a limited basis will
effectively provide Winland an opportunity to build market share in the EMS
(Electronic Manufacturing Services) market. The Company recently added the new
sales position of EMS business development manager to focus exclusively on
strategic account development at select targeted accounts that best align with
the Companys value proposition. In an effort to expand sales coverage within
the Midwest, the Company is currently interviewing independent sales
representative firms in the Chicago, St. Louis, and Kansas City. Winlands
proprietary products in the Environmental Sensors and Security Retail sectors
are marketed through a network of dealers and distributors and supported by
internal staff.

Research and development expense (including the development of new Company
products as well as design services and support to the OEM customer base) was
$154,303 or 3.4% of net sales for the three months ended September 30, 2003,
compared to $174,570 or 4.3% of net sales for the same period in 2002. The
decrease in research and development expense for the three months ended
September 30, 2003 compared to 2002 is primarily attributed to decreased new
product development and accrued employee incentive plan expense, offset in part
by an increase in outside consulting expense and group insurance expense.
Research and development expense was $530,829 or 3.7% of net sales for the
first nine months of 2003, compared to $489,038 or 3.6% of net sales for the
same period in 2002. The increase for the first nine months of 2003 is
attributed to increased warranty expense associated with designs for customers
as well as salaries and related employee expenses when compared to 2002.

Interest Expense: Interest expense was $29,701 or 0.6% of net sales for the
three months ended September 30, 2003, compared to $61,188 or 1.5% of net sales
for the same periods in 2002. For the first nine months of 2003 interest
expense was $108,692 or 0.8% of net sales, compared to $204,320 or 1.5% of net
sales for the same period in 2002. The decrease in interest expense for the
third quarter and first nine months of 2003 was due to a reduction in
short-term and long-term debt. During the first nine months of 2003, the
Company has not borrowed on its revolving line-of-credit and has paid down
$764,761 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 $258,150 or $0.09 per basic
and $0.08 diluted share for the three months ended September 30, 2003, compared
to net income of $30,166 or $0.01 per basic and diluted share for the same
period in 2002. Net income for the first nine months of 2003 was $750,790 or
$0.25 per basic and diluted share, compared to $662,249 or $0.22 per basic and
diluted share. The increase in net income for the three and nine months ended
September 30, 2003 is primarily attributed to increased sales and gross profit
margins on a more profitable sales mix coupled with the Companys ability to
maintain consistent direct and indirect expenses. In addition, the ability to
lower overall debt levels resulted in significant reductions in interest
expense for 2003 compared to 2002.

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

The Company uses a 37% blended federal and state income tax rate. In 2002, the
37% blended rate was offset, in part, by a tax benefit from the use of net
operating losses and tax credits generated in previous years resulting in a 16%
blended federal and state income tax rate. Year-to-date pre-tax net income was
$1,185,790 for 2003 and $808,249 for 2002, resulting in income tax expense of
$435,000 and $146,000, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $1,726,837 for the nine months ended
September 30, 2003, compared to $1,663,709 for the same period in 2002, an
increase of $63,128. This change was primarily due to increased net income
levels and an increase in accounts payable. Cash provided by operations was
used to pay down $764,761 of the Companys long-term debt and for the purchase
of equipment.

The Company has funded its current operations and strengthened its cash
position with working capital provided by operations.

The current ratio at September 30, 2003 was 2.25 to 1, compared to 2.26 to 1 at
December 31, 2002. Working capital equaled $3,141,672 on September 30, 2003,
compared to $2,746,780 on December 31, 2002. The increase in working capital
is primarily attributed to increased cash, prepaid expense, and decreased
income tax payable, offset in part by decreased inventory levels and increased
accounts payable and accrued expenses.

On June 30, 2003, the Company entered into a revolving credit agreement with
M&I Bank of Minneapolis, Minnesota. There were no advances outstanding on the
revolving line-of-credit agreement at September 30, 2003 or December 31, 2002.
The agreement with M&I Bank is also subject to certain restrictive
requirements.

Management believes that our cash balance, availability of funds under a new
line of credit agreement, and anticipated cash flows from operations will be
adequate to fund our cash requirements for the next twelve months.

A summary of our contractual cash obligations at September 30, 2003 is as
follows:

|                                   |  |                        |           |      |  |           |        |      |  |      |         |            |  |   |           |  |  |   |         |          |  |   |        | 
|---------------------------------- |  | ---------------------- | --------- | ---- |  | --------- | ------ | ---- |  | ---- | ------- | ---------- |  | - | --------- |  |  | - | ------- | -------- |  | - | ------ | 
|                                   |  | Payments due by period
|                                   |  |                       
|                                   |  |                        |           |      |  | Remainder |        |      |  |      |         |            |  |   |           |  |  |   |         |          |  |  
|                                   |  |                        |           |      |  | Of        |        |      |  |      |         |            |  |   |           |  |  |   |         | 2007 and
|Contractual Obligations            |  | Total                  |           | 2003 |  | 2004      |        | 2005 |  | 2006 |         | thereafter
|                                   |  |                        |           |      |  |           |        |      |  |      |         |           
|Long-term debt,
including interest |  | $                      | 1,895,000 |      |  | $         | 86,200 |      |  | $    | 515,200 |            |  | $ | 1,129,700 |  |  | $ | 105,600 |          |  | $ | 58,300 | 
|Operating leases                   |  |                        | 0         |      |  |           | 0      |      |  |      | 0       |            |  |   | 0         |  |  |   | 0       |          |  |   | 0      | 
|Total contractual cash
obligations |  | $                      | 1,895,000 |      |  | $         | 86,200 |      |  | $    | 515,200 |            |  | $ | 1,129,700 |  |  | $ | 105,600 |          |  | $ | 58,300 | 

There are no off balance sheet contractual cash obligations.

CRITICAL ACCOUNTING POLICIES

The critical accounting policies to follow include, but are not limited to,
revenue recognition, income taxes, product warranties, depreciation and
long-lived assets. Some of the most critical policies are also discussed
below.

The Company derives revenue from primarily two sources: (1) product sales and
out of warranty repair revenue, which includes custom electronic controls and
assemblies for original equipment manufacturers and proprietary products in the
security/industrial and motor control markets and (2) engineering design
services which may include programming and prototypes. The Company recognizes
revenue from the sale of products and out of warranty repairs when the product
is delivered to a common carrier for shipment to a customer. A portion of the
Companys business involves the Company shipping product to a primary
customers location where it is held in a separate warehouse. Revenue is
recognized when the customer notifies the Company that the inventory has been
removed from that warehouse and title to the product is transferred. Revenue
recognition occurs for engineering design services as the progress billings are made and at the
conclusion of the project. For all sales,
the Company uses either a binding
purchase order or customer accepted and signed engineering quote as evidence of
the arrangement.

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The allowance for doubtful accounts is estimated at $62,200 at September 30,
2003. During the first nine months of 2003 the Company increased the allowance
$52,200 based on current expectations with regard to specific customers. The
Company has not experienced significant bad debt write offs the last several
years, therefore, the current allowance is believed to be adequate for any
exposures to loss on September 2003 accounts receivable.

The Company has established a reserve for slow moving and obsolete inventories
and believes the reserve of $283,000 at September 30, 2003 is adequate. The
reserve is based on an analysis of the existing inventory, including applying
probability of obsolescence percentages to the aged inventory brackets and
specific identification of obsolete inventory in connection with decisions to
exit certain markets.

In addition, the Company has established a reserve of $140,000 for rework and
warranties. This reserve is based on historical experience and analysis of
specific known and potential warranty issues. A portion of the reserve is
based on a percentage of the sales for the six-month period ended September 30,
2003. The percentage used reflects historical experience. Specifically
identified or potential warranty issues are analyzed to determine the
probability and the Companys financial exposure and the reserve is
established. The Company believes that the estimated reserve at September 30,
2003 is adequate.

At September 30, 2003, the financial statements reflect a net deferred tax
asset of $186,000. Deferred taxes are provided on an asset and liability
method, whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. During the
year ended December 31, 2001, the Company recorded a valuation allowance of
$315,200, or 100% of the net deferred tax assets. Since 2001 represented the
second consecutive loss year, the valuation allowance was established by
management due to the difficulties in predicting when the net deferred tax
assets would be utilized and the amount of future taxable income that may be
generated. Realization of deferred tax assets is dependent on future taxable
income during the period that deductible temporary differences and
carryforwards are to be available to reduce taxable income. In 2002, because
income was at a record high, the Company eliminated the previously recorded
valuation allowance as in the opinion of management it is more likely than not
that the deferred income tax assets will be realized due to future
profitability.

The income tax expense for the twelve months ended December 31, 2002 reflects a
reduction of approximately $315,000 over standard tax rates due to the use of
credit carryforwards and temporary book/tax differences that were reflected in
the deferred tax asset valuation allowance at December 31, 2001. The income
tax expense for the nine months ended September 30, 2003 reflects a reduction
of approximately $73,000.

The Company depreciates property and equipment over its estimated useful life.
There were no impairment charges taken for the six months ended September 30,
2003.

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 purchase order levels, building market share
in the EMS market, growth strategies, financial results, product development,
sales efforts and sufficiency of capital. 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 customers 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 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 well as the timing of such and the availability and costs
of any competing products or services on the market.

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ITEM 3. CONTROLS AND PROCEDURES



| |  | (a) Evaluation of Disclosure Controls Procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys Chief Executive Officer, Lorin E. Krueger, and Chief
Financial Officer, Jennifer A. Thompson, have reviewed the Companys
disclosure controls and procedures as of the end of the period
covered by this report. Based upon this review, these officers
believe that the Companys disclosure controls and procedures are
effective in ensuring that information that is required to be
disclosed by the Company in reports that it files under the
Securities Exchange Act of 1934 is recorded, processed and
summarized and reported within the time periods specified in the
rules of the Securities and Exchange Commission.
|
| |  | (b) Changes in Internal Controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | There were no changes in the Companys internal controls over
financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial
reporting.                                                                                                                                                                                                                                                                                                                                                               




PART II  OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits. See Exhibit Index following the
signature page.                                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K.A Form 8-K dated July 22,
2003 announcing second quarter earnings was filed. A Form 8-K
dated August 18, 2003 was filed with respect to a letter to
shareholders regarding second quarter results.

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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: November 13, 2003 |  | /s/ Lorin E. Krueger                           
|                         |  | Lorin E. Krueger, President and Chief Executive
|                         |  | Officer (Principal Executive Officer)          
|                         |  |                                                
|                         |  | 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 |  | Commission File No. 0-18393
|September 30, 2003           |  |                            

WINLAND ELECTRONICS, INC.

|            |  |                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                       
|            |  |                                                                                                   
|10.1*       |  | Second Amendment to Employment Agreement dated August 27, 2003 for Lorin
E. Krueger               
|            |  |                                                                                                   
|31.1*       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|            |  |                                                                                                   
|31.2*       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|            |  |                                                                                                   
|32.1*       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|            |  |                                                                                                   
|32.2*       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

*Filed herewith

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