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**FORM 10-QSB**

**SECURITIES AND EXCHANGECOMMISSION****WASHINGTON, D.C.  20549**

**Quarterly Reportunder Section 13 or 15(d)of the Securities Exchange Act of 1934**

**For QuarterEnded:  June 30, 2001Commission File Number:  0-18393**

**WINLAND ELECTRONICS, INC.**(Exact name of small business issuer asspecified in its charter)

| **Minnesota**              | **41-0992135**       |
|----------------------------|----------------------|
| (state  or other juris-    | (I.R.S.  Employer    |
| diction  of incorporation) | Identification  No.) |

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

Registrant'stelephone number, including area code:(507) 625-7231

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

             Yes ý  No o

Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of the latest practicable date: As of August 8, 2001, the issuer had 2,955,872 shares of Common Stock,$.01 par value, outstanding.

             Transitional Small BusinessDisclosure Format (check one):

             Yeso  No ý

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**PART I-FINANCIAL INFORMATION**

**ITEM 1: FINANCIAL STATEMENTS**

**WINLAND ELECTRONICS, INC.********BALANCESHEETS**

|                              | **June 30,**                                |           | December 31, |       |
|-----------------------------------|---------------------------------------------|----------------|--------------|------------|
| **ASSETS**                        | **2001**                                    |           | 2000         |       |
|                              | ****                                        |           |              |       |
|                              | **(UNAUDITED)**                             |           |         |       |
| Current  Assets                   |                                        |           |         |       |
|                              | Cash                                        | **$**          | **25,117**   |       | $ | 38,961 |   |
|                              | Accounts receivable, net                    | **2,662,959**  |         | 3,435,030  |   |
|                              | Income tax receivable                       | **217,936**    |         | 127,252    |   |
|                              | Inventories                                 | **3,847,521**  |         | 5,270,029  |   |
|                              | Prepaid  expenses                           | **120,983**    |         | 56,599     |   |
|                              | Deferred taxes                              | **244,100**    |         | 244,100    |   |
|                              |                                        | ****           |         |            |   |
|                              | **Total current assets**                    | **7,118,616**  |         | 9,171,971  |   |
|                              |                                             |           |              |       |
| Other  Assets                     |                                        |           |         |       |
|                              | Patent and trademarks, net of  amortization | **1,762**      |         | 2,498      |   |
|                              |                                             |           |              |       |
| Property  and Equipment, at cost: |                                        |           |         |       |
|                              | Land and land improvements                  | **272,901**    |         | 272,901    |   |
|                              | Building                                    | **2,983,586**  |         | 2,983,586  |   |
|                              | Machinery and equipment                     | **3,705,372**  |         | 3,778,392  |   |
|                              | Data processing equipment                   | **1,302,080**  |         | 1,277,413  |   |
|                              | Office furniture and equipment              | **333,807**    |         | 351,960    |   |
|                              |                                        | ****           |         |            |   |
|                              | **Total property and equipment**            | **8,597,746**  |         | 8,664,252  |   |
|                              | Less accumulated depreciation               | **(3,449,150** | )            | (3,131,612 | ) |
|                              |                                        | ****           |         |            |   |
|                              | **Net property and equipment**              | **5,148,596**  |         | 5,532,640  |   |
|                              |                                        | ****           |         |            |   |
| **Total assets**                  | **$**                                       | **12,268,974** |         | $          | 14,707,109 |   |
|                              |                                             |           |              |       |
|                                   |                                             |                |              |            |  |  |  |  |  |

See Notes tothe Interim Financial Statements
**WINLAND ELECTRONICS, INC.****BALANCESHEETS**
 **June 30,** December  31, **LIABILITIES AND STOCKHOLDERS'  EQUITY****2001** 2000  ****   **(UNAUDITED)**   Current  Liabilities     Note payable to bank**$****3,474,501** $3,924,501  Current maturities of long-term  debt**573,334** 713,845  Accounts payable**821,216** 2,107,319  Accrued expenses:     Compensation**391,207** 225,767  Other**49,430** 125,719   ****   **Total current liabilities****5,309,688** 7,097,151         Deferred  Revenue**191,168** 195,238 Long-Term  Debt, less current maturities**2,658,010** 2,924,885 Deferred  Taxes**189,300** 189,300  ****   **Total long-term liabilities****3,038,478** 3,309,423     **Total liabilities****8,348,166** 10,406,574    Stockholders'  Equity     Common stock**29,559** 29,523  Additional paid-in capital**2,246,169** 2,242,423  Retained earnings**1,645,080** 2,028,589   ****   **Total stockholders' equity****3,920,808** 4,300,535  ****   **Total liabilities and stockholders' equity****$****12,268,974** $14,707,109    
See Notes tothe Interim Financial Statements
**WINLAND ELECTRONICS, INC.********STATEMENTSOF INCOME********For the Three Months Ended June 30, 2001 and 2000********(UNAUDITED)**
 **2001** 2000         Net  sales**$****3,824,474** $5,104,968 Cost  of sales**3,181,071** 4,082,014  ****   **Gross profit****643,403** 1,022,954         Operating  expenses:     General and administrative**529,360** 417,167  Research and development**207,937** 259,860  Marketing**182,221** 160,365   ****   **919,518** 837,392  ****        **Operating income (loss)****(276,115****)**185,562  **** **** Other  income (expenses):     Interest expense**(126,459**)(105,581) Other income, net**11,619** 30,450   ****   **(114,840****)**(75,131)         **Income (loss) before income taxes****(390,955**)110,431      Income  tax (expense) benefit**137,000** (44,584) ****   **Net income (loss)****$****(253,955**)$65,847         Earnings  (loss) per share data:     Basic**$****(0.09**)$0.02  Diluted**(0.09**)0.02      Weighted-average  number of common shares outstanding:     Basic**2,952,352** 2,939,063  Diluted**2,952,352** 3,007,551           
See Notes tothe Interim Financial Statements

** **

**WINLAND ELECTRONICS, INC.****STATEMENTSOF INCOME****For the Six Months Ended June 30, 2001 and 2000(UNAUDITED)**
 **2001** 2000  ****       Net  sales**$****8,355,581** $9,322,658 Cost  of sales**7,013,131** 7,479,395  ****   **Gross profit****1,342,450** 1,843,263         Operating  expenses:     General and administrative**847,991** 747,510  Research and development**462,277** 500,873  Marketing**351,548** 305,189   ****   **1,661,816** 1,553,572     **Operating income (loss)****(319,366**)289,691      Other  income (expenses):     Interest expense**(282,400**)(212,045) Other income, net**12,256** 58,687   ****   **(270,144****)**(153,358) ****        **Income (loss) before income taxes****(589,510**)136,333      Income  tax (expense) benefit**206,000** (54,184) ****   **Net income (loss)****$****(383,510**)$82,149         Earnings  (loss) per share data:     Basic**$****(0.13**)$0.03  Diluted**(0.13**)0.03      Weighted-average  number of common shares outstanding:     Basic**2,952,333** 2,925,456  Diluted**2,952,333** 3,025,982 
See Notes tothe Interim Financial Statements
**WINLAND ELECTRONICS, INC.****STATEMENTSOF CASH FLOWS********For the Six Months Ended June 30, 2001 and 2000********(UNAUDITED)**
 **2001** 2000  ****  Cash Flows From  Operating Activities     Net income (loss)**$****(383,510**)$82,149  Adjustments to reconcile net income (loss) to net cash  provided by (used in) operating activities:     Depreciation and amortization**410,781** 417,540  Loss on disposal of equipment**7,726** 350  Changes in assets and liabilities:     Accounts receivable**772,071** (193,861) Income taxes receivable**(90,684**)3,732  Inventories**1,422,508** (565,925) Prepaid expenses**(64,384**)(23,752) Accounts payable**(1,286,103**)460,371  Accrued expenses, including deferred revenue**85,081** (63,363)  ****   **Net cash  provided by operating activities****873,486** 117,241    Cash Flows From  Investing Activities     Purchases of property and equipment**(48,226**)(190,255) Proceeds from sale of equipment**14,500** -   ****   **Net cash used in  investing activities****(33,726**)(190,255)   Cash flows From  Financing Activities     Net borrowings (payments) on revolving credit agreement**(450,000**)365,000  Payments on long-term borrowings, including capital lease  obligations**(407,386****)**(349,523) Proceeds from issuance of common stock**3,782** 66,965   ****   **Net cash  provided by (used in) financing activities****(853,604**)82,442          **Net decrease in  cash****(13,844**)9,428      Cash     Beginning**38,961** 40,017   ****   End**$****25,117** $49,445         Supplemental  Disclosures of Cash Flow Information     Cash payments (refunds) for:     Interest**$****282,495** $221,827  Income taxes**(115,316**)50,453    
See Notes to Interim Financial Statements

 

**WINLAND ELECTRONICS, INC.********NOTESTO THE INTERIM FINANCIAL STATEMENTS********(UNAUDITED)**

**Note 1.  Basis ofPresentation**

The accompanying unaudited financialstatements have been prepared by the Company in  accordance withaccounting principles generally accepted in the United States of America,pursuant to the rules and regulations of the Securities and ExchangeCommission.  In management's opinion alladjustments necessary for a fair presentation of the results for the interimperiod have been reflected in the interim financial statements.  The results of operations for any interimperiod are not necessarily indicative of the results for a full year.  All adjustments to the financial statementsare of a normal recurring nature.  Certaininformation and footnote disclosures normally included in financial statementshave been condensed or omitted. Such disclosures are those that wouldsubstantially duplicate information contained in the most recent auditedfinancial statements of the Company, such as significant accounting policies,lease and license commitments and stock options.   Management presumes that users of the interim statements haveread or have access to the audited financial statements included in theCompany's most recent annual report on Form 10-KSB.

**Note 2.  Inventories**

Major components of inventory at June 30,2001 and December 31, 2000 are as follows:
 June  30, December  31,  2001 2000    Raw Materials$2,862,915 $4,713,476 Work In Process241,054 288,991 Finished Goods798,177 319,562 Obsolescence reserve(54,625)(52,000)    Total3,847,521 5,270,029    
**Note 3.  FinancingArrangement**

The Company has a $4,500,000 revolvingline-of-credit agreement which is renegotiatedAugust31 of each year.  Interest on advancesis at the bank's reference rate (7 percent at June 30, 2001) and is duemonthly. Advances outstanding on the revolving line-of-credit agreement at June30, 2001 and December 31, 2000, were $3,474,501 and $3,924,501, respectively.

Advances are due on demand, are securedby substantially all assets of the Company, and are subject to a definedborrowing base equal to 80 percent qualified accounts receivable and 60 percentof eligible inventories and 25 percent of work in process.  In addition, the agreement contains certainreporting and operating covenants. The bank has waived the Company's complianewith certain covenants until December 31, 2001.
**Note 4.  Stock Options**

As of June 30, 2001, the Company's 1989and 1997 Stock Option Plans in aggregate had options to purchase 350,500 sharesof common stock, of which 240,700 shares were exercisable.  At June 30, 2001, the exercise prices of all outstanding options range from $1.75 to$2.938 per share.

**Note 5. Major Customersand Enterprisewide Disclosures**

**MajorCustomers**: The Company hascustomers that accounted for more than 10 percent of net sales for the threemonths and six months ended June 30, 2001, and 2000, as follows:
 Three  Months Ended Three  Months Ended  June  30, 2001 June  30, 2000    Sales percentage:     Customer A39%39% Customer B11%17% Customer C15%20%
 
 Six  Months Ended Six  Months Ended  June  30, 2001 June  30, 2000    Sales percentage:     Customer A30%37% Customer B15%21% Customer C26%15%
**EnterprisewideDisclosures:**The following tablepresents three month and six month revenues from external customers for each ofthe Company's groups of products and services:
 Three  Months Ended Three  Months Ended  June  30, 2001 June  30, 2000 *    Proprietary  microprocessors and mechanically controlled sensors and alarms$720,006 $711,588 Electronic controls  and assemblies for OEM customers3,104,468 4,393,380     $3,824,474 $5,104,968    
 
 Six  Months Ended Six  Months Ended  June  30, 2001 June  30, 2000 *    Proprietary  microprocessors and mechanically controlled sensors and alarms$1,318,498 $1,314,790 Electronic controls  and assemblies for OEM customers7,037,083 8,007,868  $8,355,581 $9,322,658 
* DC Motor Control sales of $25,288 and$103,924 for the three months and six months ended June 30, 2000, werepreviously reported as OEM sales.
**Note 6.  Earnings (Loss)per Share**

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

The Company has granted options topurchase shares of common stock at various amounts per share.  Those options were not included in thecomputation of diluted earnings per share because the Company incurred ayear-to-date loss.  The inclusion ofpotential common shares in the calculation of diluted loss per share would havean antidilutive effect.  Therefore,basic and diluted loss per share amounts are the same in each period presentedfor 2001.

**Note 7.  AdditionalExpenditures**

Included in the general andadministrative expenses for the three months and six months ended June 30, 2001are expenses which management believes are non-recurring expenses.   In connection with the resignation ofWinland's former Chief Executive Officer, W. Kirk Hankins, and the terminationof his employment agreement, the company entered into a Separation Agreementand Release.  Under the terms of theagreement an obligation of $205,591 was accrued in its entirety on May 31,2001.  This executive severance packagewill be paid out in the form of compensation over the next year and insuranceover the next seventeen months.  Therewill be no future obligations in connection with W. Kirk Hankins' SeparationAgreement and Release.

In addition, the company has incurredlegal, proxy solicitor, director and other professional fees in the amount of$86,684 during the three months ended June 30, 2001, in connection with theSpecial Shareholders' Meeting requested by dissident shareholder, DynaTechnology, Inc.  The company estimatesadditional costs of $72,000 in the third quarter of 2001 in connection with theAugust 21, 2001 Special Shareholders' Meeting.

**Note 8.  AccountingStandards Issued Net Yet Adopted**

In July 2001, the Financial AccountingStandards Board issued two new statements. Statement No. 141, BusinessCombinations, eliminates the pooling method of accounting for businesscombinations. Statement No. 142, Goodwill and Other Intangible Assets,eliminates the amortization of goodwill and other intangibles that aredetermined to have an indefinite life and requires, at a minimum, annual impairmenttests of goodwill and other intangible assets that are determined to have anindefinite life. The Company has not yet completed its full assessment of theeffect of these new standards on its consolidated financial statements, butbelieves theirimpact will not besignificant. The standards generally are required to be implemented by theCompany in its 2002 financial statements.
**ITEM 2:            MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

**RESULTSOF OPERATIONSThree and six months ended June 30, 2001 v.Three and six months ended June 30, 2000**

NetSales:  The Company recorded net sales of $3,824,474for the three months ended June 30, 2001, a decline of $1,280,494 or 25.1% from$5,104,968 for the second quarter last year. For the first six months of 2001 the Company recorded net sales of$8,355,581, a $967,077 or 10.4% reduction from $9,322,658 for the same periodlast year.  The reduction in sales forboth the three and six months ended June 30, 2001 are attributed to the currentslowdown in the economy and resulting lower sales to original equipmentmanufacturing (OEM) customers.  Sales ofthe Winland’s security/industrial proprietary products increased modestly forboth the second quarter and first six months of this year.

TheCompany currently has orders and forecasts from its major OEM customers fordelivery during the remainder of 2001, having an aggregate value of $5million.  These purchase agreements areat various stages of completion.  TheCompany also has several smaller agreements with various OEM customers to befulfilled in 2001.

TheCompany has continued to position itself as a full service designer andmanufacturer of custom controls and assemblies for OEM customers.  The Company has begun to explore additionalgeographic regions to market its OEM services, primarily through networkingwith referral sources in the Chicago area. The loss of any significant OEMcustomer would likely have an adverse effect on the Company’s short-term, andpotentially long-term results.

TheCompany is negotiating the release of its agreement with PeopleNetCommunications Corporation for production of its base level product.  The Company will continue to supplymanufacturing services to PeopleNet, but in a reduced capacity.  The reduction of PeopleNet business maytemporarily adversely affect the company’s sales, however the effect onprofitability should be less significant due to the low margins on thePeopleNet business.

GrossProfits:  Gross profit was $643,403 or 16.8% of netsales for the three months ended June 30, 2001, compared to $1,022,954 or 20.0%of net sales for the same period in 2000. For the first six months of 2001 gross profit was $1,342,450 or 16.1% ofnet sales, a decline from $1,843,263 or 19.8% of net sales for the same periodin 2000.  The decline in gross profitsis primarily attributed to the impact that the reduction in sales had on theabsorption of fixed manufacturing costs for both the three and six months endedJune 30, 2001, compared to the same periods in 2000.  To a lesser degree, the reallocation of certain expenses into thecost of goods sold have also had an effect on gross profits for the quarter andsix months ended June 30, 2001, when compared to the same periods in 2000.

Operating Expenses:  General and administrative expense was$529,360 or 13.8% of net sales and $847,991 or 10.1% of net sales for the threeand six months ended June 30, 2001, compared to $417,167 or 8.2% of net salesand $747,510 or 8.0% for the same periods in 2000, respectively. The increasein general and administrative expenses is attributed to executive severancepackage expense, increased salaries and related expenses, and increasedprofessional fees.  The executiveseverance package expenses were incurred in connection with the resignation ofW. Kirk Hankins the Chief Executive Officer, as detailed in Note 7 of thefinancial statements.  In addition, theCompany has incurred additional legal, proxy solicitor, director and otherprofessional fees in connection with a special shareholders’ meeting set forAugust 21, 2001.  The increased salariesand related expenses incurred were associated with the addition of a ChiefFinancial Officer, who joined the Company in the third quarter of 2000.  The increase in general and administrativeexpense was offset in part by the reallocation of certain expenses, primarilyrelating to facility, information technology and leased vehicles, to bettermatch costs with departmental use.
Marketing and customer relations expense(including project management) was $182,221 or 4.8% of net sales and $351,548or 4.2% of net sales for the three and six months ended June 30, 2000, comparedto $160,365 or 3.1% of net sales and $305,189 or 3.3% of net sales for the sameperiods in 2000, respectively.  Duringboth the three and six months ended June 30, 2001, the increase in marketingand customer relations expense is primarily attributable to the allocation offacility, information technology, and marketing vehicle expenses to bettermatch departmental use, and to a lesser degree, increased employee costs fromthe reassignment of certain personnel to project management, offset in part bydecreased trade show and promotional expenses.

For the first six months of 2001,marketing and sales efforts have shifted slightly away from the generalexposure afforded by trade shows and towards building direct personal contactswith potential OEM customers and in developing an extensive referralnetwork.  Management believes thatbuilding these relationships will provide Winland an opportunity to capture alarger share of the Electronic Manufacturing Services market.   The amount of potential new businessresulting from these efforts has been very encouraging.

Researchand development expense (including documentation and engineering support for marketingand manufacturing) was $207,937 or 5.4% of net sales and $462,277 or 5.5% ofnet sales for the three and six months ended June 30, 2001, compared to$259,860 or 5.1% of net sales and $500,873 or 5.4% of net sales for the sameperiods in 2000.  The decline inresearch and development expense for both the three and six months ended June30, 2001 compared to 2000 is primarily attributable to reduced departmentalsalaries caused by employee attrition and reassignment without replacement.  Accordingly, total salaries and relatedexpenses decreased, but were offset in part by the allocation of facility,information technology and leased vehicle expenses to this department, in orderto properly reflect actual usage.

InterestExpense:  Interest expense was $126,459 or 3.3% of netsales and $282,400 or 3.4% of net sales for the three and six months ended June30, 2001 compared to $105,581 or 2.1% and $212,045 or 2.3% of net sales for thesame periods in 2000, respectively.  Theincrease in interest expense is attributed to increased levels of short-termdebt for the six months ended June 30, 2001 versus 2000, offset in part by thereduction of interest rates on the revolving line-of-credit.  The additional short-term borrowing, whichoccurred primarily in the third and fourth quarter of 2000, was needed to fund2000 operating activities and service long-term debt obligations.  The company has paid down its line-of-creditby $450,000 and long-term debt by over $407,000 during the first six months of2001, all of which was generated from operating activities.

NetEarnings:  The Company reported a net loss of  $253,955 or ($0.09) per diluted share and anet loss of $383,510 or ($0.13) per diluted share for the three and six monthsended June 30, 2001, compared to net income of $65,847 or $0.02 per diluted share and net income of $82,149 or $0.03per diluted share for the same periods in 2000, respectively.   The net loss for the second quarter andfirst six months of 2001 are primarily due to the lower sales volumes, theadditional expenses incurred in association with the resignation of theCompany’s former Chief Executive Officer, as well as additional fees andexpenses related to the special shareholders’ meeting.

TheCompany believes inflation has not significantly affected its results ofoperations.

TheCompany uses a 35% blended federal and state income tax rate and recognizes anestimated tax benefit from the potential carry back of 2001 losses generated todate to offset taxable income created in previous years.
**LIQUIDITY AND CAPITAL RESOURCES**

Cashprovided by operating activities was $873,486 for the first six months endedJune 30, 2001, compared to $117,241 for the same period in 2000.  Cash provided by operations was used to paydown $450,000 of the company’s revolving line-of-credit, to reduce long-termdebt and to a lesser degree, for the purchase of equipment.   $450,000 was paid down on the revolvingline-of-credit and $407,386 was paid down on long-term debt.  The Company has funded its current operationswith working capital provided by operations.

Thecurrent ratio at June 30, 2001 and December 31, 2000 was 1.3 to 1.  Working capital equaled $1,808,928 on June30, 2001, compared to $2,074,820 on December 31, 2000.  The decrease in working capital isattributed to reductions in accounts receivable and inventory, as well asincreases in other accrued expenses, offset, in part, by increased accruedincome tax receivable and prepaid expenses and decreased accounts payable andshort-term borrowings.

TheCompany has a $4,500,000 revolving line-of-credit agreement with Wells FargoBank that is renewable.  For the currentyear, the Company’s revolving line-of-credit is renewable on August 31, 2001.  Management is in the process ofrenegotiating the Company’s lending agreement and continues to have a strongrelationship with Wells Fargo Bank. Management is confident of its ability to satisfy the company’s creditneeds for the foreseeable future. Interest on advances is at the bank’s reference rate (7 percent at June30, 2001) and is due monthly. Advances outstanding on the revolvingline-of-credit at June 30, 2001 and December 31, 2000 were $3,474,501 and$3,924,501, respectively.  Advances aredue on demand, are secured by substantially all assets of the Company, and aresubject to a defined borrowing base equal to 80 percent of qualified accountsreceivable and 60 percent of eligible inventory plus 25 percent of work inprocess.  In addition, the agreementcontains certain reporting and operating covenants.

**ADDITIONAL INFORMATION**

Duringthe second quarter of 2001, the Company has engaged the Value EnhancementSolutions team of RSM McGladrey, Inc. to facilitate continuing efforts incomprehensive corporate strategic planning with the management team of Winland Electronics,Inc.  This is especially crucial duringthis current economic downturn.

**CAUTIONARY STATEMENTS**

Certain statements contained in thisQuarterly Report on Form 10-QSB and other written and oral statements made fromtime to time by the Company do not relate strictly to historical or currentfacts.  As such, they are considered“forward-looking statements” which provide current expectations or forecasts offuture events.  Such statements can beidentified 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 statementsgenerally relate to the Company’s growth strategies, financial results, productdevelopment and sales efforts.  One mustcarefully consider forward-looking statements and understand that suchstatements involve a variety of risks and uncertainties, known and unknown, andmay be affected by inaccurate assumptions, including, among others, thosediscussed below.  Consequently, noforward-looking statement can be guaranteed and actual results may varymaterially.  As provided for under thePrivate Securities Litigation Reform Act of 1995, the Company wishes to cautioninvestors that the following important factors, among others, in some caseshave affected and in the future could affect the Company’s actual results ofoperations and cause such results to differ materially from those anticipatedin forward-looking statements made in this document and elsewhere by or onbehalf of the Company.
The Company derives a significant portionof its revenues from a small number of major OEM customers that are not subjectto any long-term contracts with the Company. If any major customer should for any reason decrease the volume of theirbusiness or stop doing business with the Company, the Company’s business wouldbe adversely affected.   Some of theCompany’s key customers are not large, well-established companies, and the businessof each customer is subject to various risks such as market acceptance of newproducts and continuing availability of financing.  To the extent that the Company’s customers encounterdifficulties, or the Company is unable to meet the demands of its OEMcustomers, the Company could be adversely affected.

The Company’s ability to increaserevenues and profits is dependent upon its ability to retain existing customersand obtain new customers.  The Companycompetes for new customers with numerous independent contract design andmanufacturing firms in the United States and abroad, many of whom have greaterfinancial resources and more established reputations.  The Company’s ability to compete successfully in this industrydepends, in part, upon the price at which the Company is willing to manufacturea proposed product and the quality of the Company’s design and manufacturingservices.  There is no assurance thatthe Company will be able to continue to obtain contracts from existing and newcustomers on financially advantageous terms, and the failure to do so couldprevent the Company from achieving the growth it anticipates.

**PART II – OTHER INFORMATION**

**ITEM 6.            EXHIBITSAND REPORTS ON 8-K**
 (a)Exhibits.  The exhibit to this report is:  10.1  Separation Agreement and Release  dated May 12, 2001 between the Company and W. Kirk Hankins.    (b)Reports  on Form 8-K.  The Company filed a Form  8-K dated May 14, 2001 to report the retirement of W. Kirk Hankins, Chief  Financial Officer and Chairman, and the appointment of Lorin E. Krueger,  President and Chief Operating Officer, as Chief Executive Officer.
 

**SIGNATURES**

             Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934, theCompany has caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.
 WINLAND ELECTRONICS,  INC. (“Company”)    Dated:  August 9, 2001/s/ Lorin E. Krueger Lorin  E. Krueger, President and Chief Executive Officer (Principal Executive  Officer)       /s/ Jennifer A. Thompson Jennifer A. Thompson,  Chief Financial Officer (Principal   Financial  and Accounting  Officer)
 

**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

**EXHIBITINDEX TO FORM 10-QSB**
**For the fiscal quarter ended****Commission File No. 0-18393****June 30, 2001** ****
**WINLAND ELECTRONICS, INC.**
****Exhibit  No.Description  10.1Separation  Agreement and Release dated May 12, 2001 between the Company and W. Kirk  Hankins