**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 ________________________
 **FORM
        10-Q**
 
 þ  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
                  the Quarter Ended:
              June
                  30, 2007
 
 OR
 
 o  TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
                  the transition period from _____________________ to
                  ____________________._________________
 
 Commission
        File No.:  1-15637
 
 **WINLAND
        ELECTRONICS, INC.**
 (Name
        of
        registratnt in its charter)
 
 Minnesota
              41-0992135(State
                  or other jurisdiction of incorporation or organization)
              (IRS
                  Employer Identification Number)
 
 1950
        Excel Drive, Mankato, Minnesota 56001
 (Address
        of principal executive offices)
 
 (507)
        625-7231
 (Issuer’s
        telephone number)
 ________________________
 
 Securities
        registered pursuant to Section 12(b) of the Exchange Act:
 
 Title
                  of Each Class
              Name
                  of ExchangeCommon
                  Stock, $.01 par value
              American
                  Stock ExchangePreferred
                  Stock Purchase Rights
              American
                  Stock Exchange
 
 Securities
        registered pursuant to Section 12(g) of the Exchange
        Act:  None
 ________________________
 
 Indicate
        by check mark  whether the registrant (1) has filed all reports
        required to be filed by Section 13 or 15(d) of the Exchange Act during the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports) and (2) has been subject to such filing requirements
        for
        the past 90 days.    Yes þ   No
o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act. (Check one):
 
 Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer þ
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
o                      No
        þ
 
 There
        were 3,615,126 shares of Common Stock, $.01 par value, outstanding as of
        August
        1, 2007.
  
  TABLE
        OF CONTENTS
 PART
                    I – FINANCIAL INFORMATIONITEM
                    1. FINANCIAL STATEMENTSBALANCE
                    SHEETSCONDENSED
                    STATEMENTS OF INCOME FOR THREE MONTHS ENDED JUNE
                    30, 2007CONDENSED
                    STATEMENTS OF INCOME FOR SIX MONTHS ENDED JUNE
                    30, 2007CONDENSED
                    STATEMENTS OF CASH
                    FLOWSITEM
                    2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONSITEM
                    3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                    MARKET RISKITEM
                    4. CONTROLS AND PROCEDURESPART
                    II – OTHER INFORMATIONITEM
                    1. LEGAL PROCEEDINGSITEM
                    1A. RISK FACTORSITEM
                    2. UNREGISTERED SALES OF EQUITY SECURITIES AND
                    USE OF PROCEEDSITEM
                    3. DEFAULTS UPON SENIOR
                    SECURITIESITEM
                    4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                    HOLDERSITEM
                    5. OTHER INFORMATIONITEM
                    6. EXHIBITSSIGNATURESEXHIBIT
                    INDEX
  2
 Table
              of Contents
  **PART
        I – FINANCIAL INFORMATION**
 
 
 **ITEM
        1.                  FINANCIAL
        STATEMENTS**
 
 **WINLAND
                  ELECTRONICS, INC.****CONDENSED
                  BALANCE SHEETS**(In
                  Thousands of Dollars)**ASSETS**
              
              **June
                  30, 2007**
              
              
              December
                  31, 2006**(Unaudited)**Current
                  AssetsCash
              
              
              
              
              **$**
              **265**
              
              
              
              
              
              $
              51Accounts
                  receivable, net
              
              
              
              
              ****
              **3,591**
              
              
              
              
              
              
              5,165Refundable
                  Income taxes
              
              
              
              
              ****
              **560**
              
              
              
              
              
              
              237InventoriesRaw
                  materials
              
              ****
              **5,164**
              
              
              
              
              
              
              
              4,881Work
                  in process
              
              ****
              **294**
              
              
              
              
              
              
              
              327Finished
                  goods
              
              ****
              **1,242**
              
              
              
              
              
              
              
              1,976Allowance
                  for obsolete inventory
              
              ****
              **(551**
              **)**
              
              
              
              
              
              
              (190
              )Total
                  inventories
              
              
              
              
              
              ****
              **6,149**
              
              
              
              
              
              
              
              6,994Prepaid
                  expenses
              
              
              
              
              
              ****
              **479**
              
              
              
              
              
              
              
              360Deferred
                  income taxes
              
              
              
              
              
              ****
              **296**
              
              
              
              
              
              
              
              278**Total
                  current assets**
              
              
              
              
              
              ****
              **11,340**
              
              
              
              
              
              
              
              13,085Other
                  Assets
              
              
              
              
              
              ****
              **3**
              
              
              
              
              
              
              
              3Property
                  and Equipment, at cost:Land
                  and land improvements
              
              ****
              **383**
              
              
              
              
              
              
              
              383Building
              
              ****
              **3,052**
              
              
              
              
              
              
              
              3,048Machinery
                  and equipment
              
              ****
              **6,997**
              
              
              
              
              
              
              
              6,863Data
                  processing equipment
              
              ****
              **1,235**
              
              
              
              
              
              
              
              1,003Office
                  furniture and equipment
              
              ****
              **481**
              
              
              
              
              
              
              
              457**Total
                  property and equipment**
              
              
              
              
              
              ****
              **12,148**
              
              
              
              
              
              
              
              11,754Less
                  accumulated depreciation
              
              
              
              
              
              ****
              **(6,414**
              **)**
              
              
              
              
              
              
              (5,975
              )**Net
                  property and equipment**
              
              
              
              
              
              ****
              **5,734**
              
              
              
              
              
              
              
              5,779**Total
                  assets**
              
              
              
              
              
              **$**
              **17,077**
              
              
              
              
              
              
              $
              18,867See
                  Notes to Condensed Financial Statements
 
 3
 Table
              of Contents
 
 **WINLAND
                  ELECTRONICS, INC.****CONDENSED
                  BALANCE SHEETS**(In
                  Thousands of Dollars)**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**
              
              **June
                  30, 2007**
              
              
              December
                  31, 2006**(Unaudited)**Current
                  LiabilitiesRevolving
                  line of credit agreement
              
              **$**
              **1,879**
              
              
              $
              1,924Current
                  maturities of long-term debt
              
              ****
              **602**
              
              
              
              627Accounts
                  payable
              
              ****
              **1,967**
              
              
              
              2,830Accrued
                  expenses:Compensation
              
              ****
              **466**
              
              
              
              673Allowance
                  for rework and warranty costs
              
              ****
              **240**
              
              
              
              126Other
              
              ****
              **171**
              
              
              
              197**Total
                  current liabilities**
              
              ****
              **5,325**
              
              
              
              6,377Long
                  Term LiabilitiesLong-term
                  debt, less current maturities
              
              ****
              **1,575**
              
              
              
              1,706Deferred
                  income taxes
              
              ****
              **255**
              
              
              
              255Deferred
                  revenue
              
              ****
              **142**
              
              
              
              146**Total
                  long-term liabilities**
              
              ****
              **1,972**
              
              
              
              2,107Stockholders'
                  EquityCommon
                  stock
              
              ****
              **36**
              
              
              
              36Additional
                  paid-in capital
              
              ****
              **4,583**
              
              
              
              4,429Retained
                  earnings
              
              ****
              **5,161**
              
              
              
              5,918**Total
                  stockholders' equity**
              
              ****
              **9,780**
              
              
              
              10,383**Total
                  liabilities and stockholders' equity**
              
              **$**
              **17,077**
              
              
              $
              18,867See
                  Notes to Condensed Financial Statements




4
 Table
            of Contents
  **WINLAND
                  ELECTRONICS, INC.****CONDENSED
                  STATEMENTS OF INCOME**(In
                  Thousands, Except Per Share Amounts)(Unaudited)For
                  the Three Months Ended June 30,**2007**
              
              
              2006Net
                  sales
              
              **$**
              **8,099**
              
              
              $
              10,725Cost
                  of sales
              
              ****
              **7,221**
              
              
              
              9,123**Gross
                  profit**
              
              ****
              **878**
              
              
              
              1,602Operating
                  expenses:General
                  and administrative
              
              ****
              **716**
              
              
              
              618Sales
                  and marketing
              
              ****
              **421**
              
              
              
              390Research
                  and development
              
              ****
              **432**
              
              
              
              120Total
                  Operating Expenses
              
              ****
              **1,569**
              
              
              
              1,128**Operating
                  income (loss)**
              
              ****
              **(691**
              **)**
              
              
              474Other
                  income (expenses):Interest
                  expense
              
              ****
              **(93**
              **)**
              
              
              (31
              )Other
                  income, net
              
              ****
              **2**
              
              
              
              (3
              )****
              **(91**
              **)**
              
              
              (34
              )**Income
                  (loss) before income taxes**
              
              ****
              **(782**
              **)**
              
              
              440Income
                  tax benefit (expense)
              
              ****
              **291**
              
              
              
              (149
              )**Net
                  income (loss)**
              
              **$**
              **(491**
              **)**
              
              $
              291Earnings
                  (loss) per common share:Basic
              
              **$**
              **(0.14**
              **)**
              
              $
              0.08Diluted
              
              **$**
              **(0.14**
              **)**
              
              $
              0.08Weighted-average
                  number of common shares outstanding:Basic
              
              ****
              **3,600,856**
              
              
              
              3,563,164Diluted
              
              ****
              **3,600,856**
              
              
              
              3,669,749See
                  Notes to Condensed Financial Statements
  5
 Table
            of Contents
  **WINLAND
                  ELECTRONICS, INC.****CONDENSED
                  STATEMENTS OF INCOME**(In
                  Thousands, Except Per Share Amounts)(Unaudited)For
                  the Six Months Ended June 30,**2007**
              
              
              2006Net
                  sales
              
              **$**
              **17,398**
              
              
              $
              18,924Cost
                  of sales
              
              ****
              **15,315**
              
              
              
              15,662**Gross
                  profit**
              
              ****
              **2,083**
              
              
              
              3,262Operating
                  expenses:General
                  and administrative
              
              ****
              **1,375**
              
              
              
              1,212Sales
                  and marketing
              
              ****
              **849**
              
              
              
              804Research
                  and development
              
              ****
              **893**
              
              
              
              267**Total
                  Operating Expenses**
              
              ****
              **3,117**
              
              
              
              2,283**Operating
                  income (loss)**
              
              ****
              **(1,034**
              **)**
              
              
              979Other
                  income (expenses):Interest
                  expense
              
              ****
              **(173**
              **)**
              
              
              (59
              )Other
                  income, net
              
              ****
              **15**
              
              
              
              6****
              **(158**
              **)**
              
              
              (53
              )**Income
                  (loss) before income taxes**
              
              ****
              **(1,192**
              **)**
              
              
              926Income
                  tax benefit (expense)
              
              ****
              **435**
              
              
              
              (324
              )**Net
                  income (loss)**
              
              **$**
              **(757**
              **)**
              
              $
              602Earnings
                  (loss) per common share:Basic
              
              **$**
              **(0.21**
              **)**
              
              $
              0.17Diluted
              
              **$**
              **(0.21**
              **)**
              
              $
              0.16Weighted-average
                  number of common shares outstanding:Basic
              
              ****
              **3,600,603**
              
              
              
              3,548,819Diluted
              
              ****
              **3,600,603**
              
              
              
              3,660,037See
                  Notes to Condensed Financial Statements
  6
 Table
            of Contents
  **WINLAND
                  ELECTRONICS, INC.****CONDENSED
                  STATEMENTS OF CASH FLOWS**(In
                  Thousands of Dollars)(Unaudited)For
                  the Six Months Ended June 30,**2007**
              
              
              2006Cash
                  Flows From Operating ActivitiesNet
                  income (loss)
              
              **$**
              **(757**
              **)**
              
              $
              602Adjustments
                  to reconcile net income to net cashprovided
                  by (used in) operating activities:Non-cash
                  stock based compensation
              
              ****
              **114**
              
              
              
              91Depreciation
                  and amortization
              
              ****
              **444**
              
              
              
              367Loss
                  on disposal of equipment
              
              ****
              **-**
              
              
              
              6Investor
                  relations expense, non-cash warrant expense
              
              ****
              **-**
              
              
              
              3Consulting
                  expense, non-cash warrant expense
              
              ****
              **22**
              
              
              
              -Deferred
                  tax assets
              
              ****
              **(18**
              **)**
              
              
              (23
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              ****
              **1,574**
              
              
              
              (424
              )Refundable
                  income taxes
              
              ****
              **(323**
              **)**
              
              
              (62
              )Inventories
              
              ****
              **845**
              
              
              
              (2,409
              )Prepaid
                  expenses
              
              ****
              **(119**
              **)**
              
              
              (29
              )Accounts
                  payable
              
              ****
              **(863**
              **)**
              
              
              1,487Accrued
                  expenses and deferred revenue
              
              ****
              **(123**
              **)**
              
              
              298**Net
                  cash provided by (used in) operating activities**
              
              ****
              **796**
              
              
              
              (93
              )Cash
                  Flows From Investing ActivitiesPurchases
                  of property and equipment
              
              ****
              **(235**
              **)**
              
              
              (1,003
              )Proceeds
                  from sale of property and equipment
              
              ****
              **4**
              
              
              
              -**Net
                  cash used in investing activities**
              
              ****
              **(231**
              **)**
              
              
              (1,003
              )Cash
                  flows From Financing ActivitiesNet
                  borrowings (payments) on revolving line of credit
              
              ****
              **(45**
              **)**
              
              
              800Payments
                  on long-term borrowings, including capital lease
                  obligations
              
              ****
              **(323**
              **)**
              
              
              (271
              )Proceeds
                  from issuance of common stock
              
              ****
              **17**
              
              
              
              39**Net
                  cash provided by (used in) financing activities**
              
              ****
              **(351**
              **)**
              
              
              568**Net
                  increase (decrease) in cash**
              
              ****
              **214**
              
              
              
              (528
              )CashBeginning
              
              ****
              **51**
              
              
              
              865Ending
              
              **$**
              **265**
              
              
              $
              337Supplemental
                  Disclosures of Cash Flow InformationCash
                  payments for:Interest
              
              **$**
              **178**
              
              
              $
              59Income
                  taxes
              
              ****
              **-**
              
              
              
              408Acquisition
                  of property under capital leases
              
              **$**
              **167**
              
              
              $
              -See
                  Notes to Condensed Financial Statements
  7
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
            to Condensed Financial Statements




**Note1. 
Basis
      of Presentation**





The
      accompanying unaudited condensed financial information has been prepared by
      Winland Electronics, Inc. (the “Company”) in accordance with accounting
      principles generally accepted in the United States of America for the
      preparation of interim financial information and the instructions to Form 10-Q
      and Article 10 of Regulation S-X of the Securities and Exchange
      Commission (SEC). Accordingly, it does not include all of the information and
      notes required by accounting principles generally accepted in the United States
      for complete financial statements. In the opinion of management, all adjustments
      (consisting of normal recurring adjustments) considered necessary for a fair
      representation have been included. Financial results for the three and six
      months ended June 30, 2007 are not necessarily indicative of the results that
      may be expected for the year ending December 31, 2007.





The
      condensed balance sheet at December 31, 2006 has been derived from the
      audited financial statements as of that date but does not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States for complete financial statement presentation.





This
      financial information should be read in conjunction with the financial
      statements and notes included in the Company’s Annual Report on Form 10-KSB for
      the year ended December 31, 2006.





Management
      is required to make certain estimates and assumptions which affect the amounts
      of assets, liabilities, revenue and expenses reported.  Actual results
      could differ materially from these estimates and assumptions.





**Reclassifications:**Certain
      income statement amounts for the three and six months ended June 30, 2006 have
      been reclassified to be consistent with the classifications adopted for the
      same
      periods ended June 30, 2007.




**Note
      2.  Earnings Per Common Share**





Basic
      earnings (loss) per common share are computed by dividing net earnings by the
      weighted-average number of common shares outstanding during the period. Diluted
      earnings (loss) per common share are computed by dividing net earnings by the
      weighted-average number of common shares outstanding during the period,
      including potentially dilutive shares such as options and warrants to purchase
      shares of common stock at various amounts per share. The dilutive effect of
      the
      additional shares for the three and six months ended June 30, 2006 was to
      increase weighted-average shares outstanding by 106,585 and 111,218,
      respectively.  For the three and six months ended June 30, 2007
      diluted loss per share was the same as basic loss per share since the affects
      of
      options and warrants would have been anti-dilutive.





**Note
      3.  Financing Arrangement**





The
      Company renewed its $4,000,000 revolving line of credit agreement with M&I
      Bank of Minneapolis, Minnesota with an expiration date of June 30,
      2008.  Advances are due on demand, secured by substantially all assets
      of the Company, and are subject to a defined borrowing base equal to 80% of
      qualified accounts receivable and 50% of qualified inventory. Interest on
      advances accrues at the LIBOR rate plus two and one-half percent (2.5%), which
      was 7.82% as of June 30, 2007. Advances outstanding on the revolving line of
      credit agreement as of June 30, 2007 and December 31, 2006 were $1,879,000
      and
      $1,924,000, respectively. At June 30, 2007, $2,121,000 was available for
      borrowing under the terms of this agreement.





During
      2006, the Company entered into a Master Lease of Personal Property with M&I
      Equipment Finance Company of Milwaukee, Wisconsin. Under the lease, the Company
      can acquire new capital equipment to be used in the Company’s manufacturing
      processes. Individual leases under the master agreement have a 60-month term
      bearing an interest rate equal to the 30-month LIBOR swap rate plus 225 basis
      points effective the date each individual lease is approved. As of June 30,
      2007, the Company had drawn funds under this lease agreement totaling
      $1,125,802, of which $981,206 remained outstanding.








8
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
            to Condensed Financial Statements


**Note
      4.  Major Customers and Enterprisewide Disclosures**





**Major
      Customers:**The Company has customers that accounted for 10 percent
      (10%) or more of net sales for the three and six months ended June 30, 2007
      and
      2006 as follows:





For
                  the Three Months Ended June 30,Sales
                  percentage:
              
              2007
              
              
              2006Customer
                  A
              
              
              22
              %
              
              
              37
              %Customer
                  B
              
              
              17
              %
              
              
              26
              %Customer
                  C
              
              
              19
              %
              
              
              7
              %For
                  the Six Months Ended June 30,Sales
                  percentage:
              
              2007
              
              
              2006Customer
                  A
              
              
              21
              %
              
              
              43
              %Customer
                  B
              
              
              18
              %
              
              
              19
              %Customer
                  C
              
              
              17
              %
              
              
              6
              %The
                  Company had net receivables from the above customers at June 30,
                  2007 and
                  2006 as follows:Accounts
                  receivable percentage:
              
              2007
              
              
              2006Customer
                  A
              
              
              11
              %
              
              
              24
              %Customer
                  B
              
              
              17
              %
              
              
              29
              %Customer
                  C
              
              
              26
              %
              
              
              4
              %





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


For
                  the Three Months Ended June 30,2007
              
              
              2006Proprietary
                    microprocessors and mechanically controlledsensors and
                    alarms
              
              $
              774,000
              
              
              $
              780,000Electronic
                  controls and assemblies for OEM customers
              
              
              7,116,000
              
              
              
              9,879,000Engineering
                  Design Services
              
              
              188,000
              
              
              
              47,000Freight
                  Out
              
              
              21,000
              
              
              
              19,000Total
              
              $
              8,099,000
              
              
              $
              10,725,000For
                  the Six Months Ended June 30,2007
              
              
              2006Proprietary
                    microprocessors and mechanically controlledsensors and
                    alarms
              
              $
              1,507,000
              
              
              $
              1,618,000Electronic
                  controls and assemblies for OEM customers
              
              
              15,561,000
              
              
              
              17,113,000Engineering
                  Design Services
              
              
              290,000
              
              
              
              153,000Miscellaneous
                  sales
              
              
              3,000
              
              
              
              -Freight
                  Out
              
              
              37,000
              
              
              
              40,000Total
              
              $
              17,398,000
              
              
              $
              18,924,000
  9
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
            to Condensed Financial Statements
  **Note
      5.  Allowance for Rework and Warranty Costs**





**Allowance
      for Rework and Warranty Costs:**The Company has a reserve for rework,
      product warranties and customer refunds. The Company provides a limited warranty
      to our OEM customers who require repair or replacement of product that is
      defective, due to Company workmanship issues, at no cost to the customer. In
      addition, the Company provides a limited warranty for proprietary products
      for a
      period of one year, which requires repair or replacement of defective product
      at
      no cost to the customer or a refund the purchase price. Reserves are established
      based on historical experience and analysis for specific known and potential
      warranty issues. The reserve which reflects historical experience and potential
      warranty issues is determined based on a percentage of sales for the prior
      twleve-month period. Any specific known warranty issues are reserved for
      individually. The total of these reserves is analyzed to determine the
      probability and the Company’s financial exposure. The product warranty liability
      reflects management’s best estimate of probable liability under our product
      warranties and may differ from actual results.





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


For
                  the Three Months Ended June 30,2007
              
              
              2006Balance,
                  Beginning
              
              $
              191,000
              
              
              $
              118,000Accruals
                  for products sold
              
              
              160,000
              
              
              
              456,000Expensing
                  of specific warranty items
              
              
              (111,000
              )
              
              
              -Charges
                  in accruals for pre-existing warranties
              
              
              -
              
              
              
              (78,000
              )Balance,
                  Ending
              
              $
              240,000
              
              
              $
              496,000For
                  the Six Months Ended June 30,2007
              
              
              2006Balance,
                  Beginning
              
              $
              126,000
              
              
              $
              117,000Accruals
                  for products sold
              
              
              590,000
              
              
              
              457,000Expensing
                  of specific warranty items
              
              
              (456,000
              )
              
              
              -Charges
                  in accruals for pre-existing warranties
              
              
              (20,000
              )
              
              
              (78,000
              )Balance,
                  Ending
              
              $
              240,000
              
              
              $
              496,000




**Note
      6.  Warrants and Stock-Based Compensation Plans**





**Warrants:**
      On February 1, 2005, the Company granted to Hayden Communications, Inc. warrants
      to purchase 20,000 shares of common stock that vested to the extent of 10,000
      shares on August 1, 2005 and 10,000 shares on February 1, 2006.  The
      term of each 10,000 share increment will extend three years from the date of
      vesting.  As of June 30, 2007, warrants to purchase 20,000 shares of
      common stock at $3.96 were exercisable and outstanding.  The warrants
      were valued using the Black-Scholes pricing model and were amortized as investor
      relations expense over the term of the service agreement.  Investor
      relations expense from the amortization of warrants was $0 and $3,123 for the
      six months ended June 30, 2007 and 2006, respectively.  The total
      estimated fair value of the outstanding warrants at date of grant, $37,477,
      is
      reflected in additional paid in capital in the stockholders’ equity section at
      June 30, 2007 and December 31, 2006.




10
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
            to Condensed Financial Statements





**Note
      6.  Warrants and Stock-Based Compensation Plans
      (Continued)**





On
      February 16, 2006, the Company granted to Board Assets, Inc., a strategic
      planning consultant, warrants to purchase 5,000 shares of common stock at an
      exercise price of $4.01 per share.  The Company scheduled two board
      strategy meetings with Board Assets, Inc., one in July 2006 and the other in
      January 2007.  Upon completion of Board Assets, Inc.’s services as
      facilitator for each of those meetings, 2,500 shares were scheduled to
      vest.  Warrants expire on February 16, 2016, if not
      exercised.  As of June 30, 2007, the first 2,500 shares were valued
      using the Black-Scholes pricing model at a fair value of $3.26 and
      vested.  No consulting expense was recognized in either of the six
      months ended June 30, 2007 or 2006.  The agreement between the Company
      and Board Assets, Inc. was terminated in October 2006.  Based on this
      termination, the second 2,500 shares will not vest and the Company will not
      incur additional expense for these shares.





On
      September 9, 2006, the Company granted to Steven P. Friswold and Bruce H.
      Senske, principals of Genoa Business Advisors, LLC (“Genoa”), warrants for each
      to purchase 10,000 shares of common stock at an exercise price of $3.40 per
      share.  The Company and Genoa have developed two strategic business
      initiatives which Genoa must execute in order for the warrants to
      vest.  These warrants shall vest and become exercisable to the extent
      of 5,000 shares each upon completion of Initiative 1 by Genoa and 5,000 shares
      each upon completion of Initiative 2 by Genoa.  The warrants terminate
      on September 6, 2011, if not exercised.  As of June 30, 2007,
      Initiative 1 was complete and 5,000 shares each vested.  The shares
      were valued using the Black-Scholes pricing method at a fair value of $2.26
      amounting to $22,581 of consulting expense for the six months ended June 30,
      2007.  The Company will incur consulting expense of approximately
      $25,000 based on using the Black-Scholes pricing model upon completion of
      Initiative 2 and vesting of the remaining options.





**Stock
      option and employee stock purchase plans:** As of June 30, 2007, the
      Company had one equity-based compensation plan, the 2005 Equity Incentive Plan,
      from which stock-based compensation awards can be granted to eligible employees,
      officers or directors.  Previous to this plan, stock-based
      compensation awards were granted from the 1997 Stock Option Plan.  The
      plans are as follows:





2005
      Equity Incentive Plan – This plan provides awards in the form of incentive stock
      options, nonqualified stock options, and restricted stock.  Currently,
      this is the only plan under which awards are authorized for grant.  As
      approved by the shareholders in May 2005, the plan authorized issuance of up
      to
      400,000 shares.  Awards issued under the plan to date include 114,000
      shares of incentive stock options and 66,000 nonqualified stock options of
      which
      all 180,000 were outstanding and 58,600 of which were vested at June 30,
      2007.  The exercise price is equal to the fair market value of the
      Company’s common stock at the date of grant. Options generally vest over five
      years and have a contractual life up to 10 years.  Option awards
      provide for accelerated vesting if substantially all of the Company’s assets are
      transferred through an acquisition, merger or reorganization.





1997
      Stock Option Plan – This plan provided for grants in both the form of incentive
      stock options and nonqualified stock options.  The plan was terminated
      as to future grants in May 2005.  At June 30, 2007, there were 155,400
      options outstanding of which 129,120 were vested.





1997
      Employee Stock Purchase Plan – The Employee Stock Purchase Plan (ESPP) has
      provided employees of the Company the opportunity to purchase common stock
      through payroll deductions.  The purchase price is set at the lower of
      85% of the fair market value of common stock at the beginning of the
      participation period or 85% of the fair market value on the purchase
      date.  The participation periods have a six-month duration beginning
      in January and July of each year.  A total of 100,000 shares of common
      stock were authorized for issuance under the ESPP since its inception of which
      84,896 shares have been issued and 15,104 shares remain available for
      grant.  The ESPP expires December 31, 2007.




11
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
            to Condensed Financial Statements





**Note
      6.  Warrants and Stock-Based Compensation Plans
      (Continued)**





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment” (SFAS 123R), using the modified-prospective-transition
      method.  Under this transition method, compensation cost recognized
      after December 31, 2005 includes compensation costs for all share-based payments
      granted prior to January 1, 2006, but not yet vested as of January 1, 2006,
      based on the grant-date fair value estimated in accordance with the original
      disclosure only provisions of SFAS 123, and compensation cost for all
      share-based payments granted subsequent to December 31, 2005 based on the grant
      date fair value estimated in accordance with the provisions of SFAS
      123R.  As a result of adopting SFAS 123R, our net income for the three
      months ended June 30, 2007 and 2006 was $83,000 and $78,000 lower than if we
      had
      continued to account for stock-based compensation under APB Opinion No. 25
      for
      our stock option grants to employees.  In addition, net income for the
      six months ended June 30, 2007 and 2006 was $136,000 and $91,000 lower due
      to
      adopting SFAS 123R





The
      Company uses the Black-Scholes option pricing model to estimate the fair value
      of stock-based awards with the following weighted-average assumptions for the
      indicated periods.




For
                  the Six Months Ended June 30,2007
              
              
              2006Expected
                  life, in years
              
              
              4.86
              
              
              
              5.62Expected
                  volatility
              
              
              68.21
              %
              
              
              80.18
              %Risk-free
                  interest rate
              
              
              4.71
              %
              
              
              4.70
              %Dividend
                  yield
              
              
              0.00
              %
              
              
              0.00
              %




The
      Company calculates the expected life of awards using historical data to estimate
      option exercises and employee terminations.  Expected volatility is
      based on daily historical fluctuations of the Company’s common stock using the
      closing market value for the number of days of the expected term immediately
      preceding the grant.  The risk-free interest rate is based on the U.S.
      Treasury yield curve in effect at the time of the grant for a bond with a
      similar term.





The
      Company receives a tax deduction for certain stock option exercises and
      disqualifying stock dispositions during the period the options are exercised
      or
      the stock is sold, generally for the excess of the price at which the options
      are sold over the exercise prices of the options.  In accordance with
      SFAS 123R, the Company reports any tax benefit from the exercise of stock
      options as financing cash flows.  For the three and six months ended
      June 30, 2007 and 2006, there were no stock option exercises or disqualifying
      stock dispositions which triggered tax benefits, therefore net cash provided
      by
      financing activities was not affected as a result of the adoption of SFAS
      123R.





Net
      cash
      proceeds from the exercise of stock options were $3,000 for the six months
      ended
      June 30, 2007.





The
      following table represents stock option activity for the period ended June
      30,
      2007:


Weighted-AverageNumber
                  of
              
              
              Weighted-Average
              
              
              Remaining
                  ContractualShares
              
              
              Exercise
                  Price
              
              
              Life
                  (Years)Outstanding
                  options at January 1, 2007
              
              
              286,040
              
              
              $
              2.95Granted
              
              
              58,000
              
              
              
              3.46Exercised
              
              
              (1,000
              )
              
              
              2.93Forfeited
              
              
              (18,640
              )
              
              
              3.50Outstanding
                  options at June 30, 2007
              
              
              324,400
              
              
              $
              3.01
              
              
              
              4.5Exercisable
                  at June 30, 2007
              
              
              187,720
              
              
              $
              2.83
              
              
              
              3.7
  12
 Table
            of Contents
 Winland
              Electronics, Inc.
 Notes
              to Condensed Financial Statements
  **Note
      6.  Warrants and Stock-Based Compensation Plans
      (Continued)**





The
      aggregate intrinsic value of options outstanding at June 30, 2007 and 2006
      was
      $146,000 and $279,000, respectively.  The aggregate intrinsic value of
      options exercisable at June 30, 2007 and 2006 was $123,000 and $179,000,
      respectively.  Total intrinsic value of options exercised year-to-date
      ended June 30, 2007 and 2006 was $1,000 and $173,000, respectively.





In
      each
      quarter ended June 30, 2007 and 2006, the Company granted 22,000 options which
      had weighted average grant date fair values of $3.27 and $4.48 per share,
      respectively.





The
      following table summarizes information about stock options outstanding at June
      30, 2007:




Options
                  Outstanding
              
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              
              Number
                  of Shares
              
              
              Weighted-Average
                  Remaining Contractual Life (Years)
              
              
              Weighted-Average
                  Exercise Price
              
              
              Number
                  of Shares
              
              
              Weighted-Average
                  Exercise Price$
              0.45
                  - $0.90
              
              
              
              19,800
              
              
              
              0.4
              
              
              $
              0.64
              
              
              
              19,800
              
              
              $
              0.64$
              0.91
                  - $1.34
              
              
              
              11,000
              
              
              
              1.3
              
              
              
              1.27
              
              
              
              8,800
              
              
              
              1.27$
              1.35
                  - $1.79
              
              
              
              8,800
              
              
              
              1.4
              
              
              
              1.45
              
              
              
              4,840
              
              
              
              1.45$
              2.24
                  - $2.69
              
              
              
              41,300
              
              
              
              1.5
              
              
              
              2.37
              
              
              
              30,380
              
              
              
              2.35$
              2.70
                  - $3.14
              
              
              
              63,500
              
              
              
              1.9
              
              
              
              2.90
              
              
              
              54,300
              
              
              
              2.89$
              3.15
                  - $3.58
              
              
              
              112,000
              
              
              
              7.4
              
              
              
              3.40
              
              
              
              25,600
              
              
              
              3.28$
              3.58
                  - $4.03
              
              
              
              24,000
              
              
              
              5.2
              
              
              
              3.62$
              4.04
                  - $4.48
              
              
              
              44,000
              
              
              
              6.9
              
              
              
              4.26
              
              
              
              44,000
              
              
              
              4.26324,400
              
              
              
              4.5
              
              
              $
              3.01
              
              
              
              187,720
              
              
              $
              2.83
  At
      June
      30, 2007, there was $157,000 of unrecognized compensation cost related to
      share-based payments which is expected to be recognized over a weighted-average
      period of 1.1 years.





**Note
      7.  Emerging Accounting Standards**





Effective
      January 1, 2007, Winland Electronics Inc. adopted FASB Interpretation No. 48
      (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of
      FASB
      Statement 109, which prescribes a recognition threshold and a measurement
      attribute for financial statement recognition of tax positions taken or expected
      to be taken in a tax return.  It is management’s responsibility to
      determine whether it is “more-likely-than-not” that a tax position will be
      sustained upon examination, including resolution of any related appeals or
      litigation processes, based on the technical merits of the position.  At
      the adoption date of January 1, 2007, the Company had no unrecognized tax
      benefits which needed to be adjusted for.  As of June 30, 2007, management
      reviewed all income tax positions taken or expected to be taken for all open
      tax
      years and determined that our income tax positions are appropriately stated
      and
      supported for all open years and that the adoption of FIN 48 did not have a
      material effect on the Company’s financial statements for the six months ended
      June 30, 2007.





The
      Company would recognize interest and penalties accrued on unrecognized tax
      benefits as well as interest received from favorable tax settlements within
      income tax expense.  At the adoption date of January 1, 2007, the Company
      recognized no interest or penalties related to uncertain tax positions.  As
      of June 30, 2007, the Company recorded no accrued interest or penalties related
      to uncertain tax positions.





The
      tax
      years 2004 through 2006 remain open to examination by the major taxing
      jurisdictions to which the Company is subject.





Management
      expects no significant change in the amount of unrecognized tax benefit, accrued
      interest or penalties within the next 12 months.





13
 Table
          of Contents
  Winland
          Electronics, Inc.
 Notes
          to Condensed Financial Statements




**Note
      7.  Emerging Accounting Standards (Continued)**





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      No. 157). SFAS No. 157 establishes a common definition for fair value to be
      applied to US GAAP guidance requiring use of fair value, establishes a framework
      for measuring fair value, and expands disclosure about such fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007. The Company is currently assessing the impact of SFAS No.
      157
      but it does not believe the adoption will have a significant impact on its
      financial position and results of operations.





On
      February 15, 2007, the Financial Accounting Standards Board, or FASB, issued
      SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities”.  Under SFAS No. 159, the Company may elect to report
      financial instruments and certain other items at fair value on a
      contract-by-contract basis with changes in value reported in
      earnings.  This election is irrevocable.  SFAS No. 159
      provides an opportunity to mitigate volatility in reported earnings that is
      caused by measuring hedged assets and liabilities that were previously required
      to use a different accounting method than the related hedging contracts when
      the
      complex hedge accounting provisions of SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities”, are not met.  SFAS No. 159 is
      effective for years beginning after November 15, 2007.  If the Company
      adopts this standard, it does not expect to have a material effect on its
      financial statements.





14
 Table
            of Contents





**ITEM
      2:                   MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**Overview**





The
      Company designs and manufactures circuit board assemblies and higher level
      assemblies for many OEM customers.  The Company is positioned to offer
      complete solutions to OEM customer needs by providing value-added services
      that
      complement the Company’s contract manufacturing capabilities.  The
      services provided may include product concept studies, product design, printed
      circuit board design, design for manufacturing, higher level assembly and box
      build, and legacy support.  These services differentiate the Company
      from the competition and increase customer satisfaction, confidence, and
      loyalty.  The Company views OEM customers as strategic partners and
      works to provide these partners with high level customer care and technical
      services.





The
      Company also develops and markets proprietary products which include an
      established family of environmental security products that can monitor critical
      environments.  The Company’s security/industrial products include
      simple and sophisticated microprocessor and mechanically controlled sensors
      and
      alarms.  These products monitor and detect critical environmental
      changes, such as changes in temperature or humidity, water leakage and power
      failures.  The Company’s “ALERT” series of products may be connected
      to many burglar or fire alarm panels to monitor and report unfavorable
      environmental conditions.





**Executive
      Summary**





***Net
      sales*** for the three months ended June 30, 2007 were $8,099,000,
      down 24.5% compared to the same period last year, which was the highest sales
      quarter in our Company’s history.  The Company has been successful in
      adding new customers, causing a favorable change in the sales blend and
      reduction of dependence on one customer, compared to the same period one year
      ago. However management’s expectations for overall sales for the quarter and
      year to date have fallen short as several key customers delayed releasing orders
      due to various product demand and customer-initiated product design
      issues.  During the last three months, we continued to be awarded new
      orders from our customers introducing 25 new or revised products to
      manufacturing as well as adding additional orders for our engineering services.
      This displays our customer’s confidence in our manufacturing and engineering
      capabilities and the ability to attract new business within our markets. 
***Gross profit*** for the three months ended June 30, 2007
      was $878,000 or 10.8% of net sales, down from $1,602,000 or 14.9% of net sales
      from a year ago.  The Company continued to be challenged by the changing
      nature of our customer base as well as product introductions which added to
      increases in obsolete inventory write offs and reserves and also caused the
      Company to increase warranty reserves due to increased warranty
      risks.  In addition, our overhead absorption declined due to sales
      falling below optimal plant utilization. Changes in our reserves and expenses
      incurred are further explained below.  ***Total operating
      expenses*** were $1,569,000 or 19.4% of net sales compared to
      $1,128,000 or 10.5% of net sales a year ago.  A significant component
      of the increase in operating expenses was increased research and development
      expense, including new product development for Winland’s proprietary
      products.  The Company incurred a net loss for the quarter due to
      increases in rework and warranty reserves, inventory obsolescence reserve,
      an
      obsolete inventory expense for excess inventory of $205,000 and expenses related
      to strategic initiatives to build our business in proprietary products. 
The net loss was $491,000 or $0.14 per basic and diluted share compared to
      net
      income of $291,000 or $0.08 per basic and diluted share for the same period
      a
      year ago.  We utilized 3.6 million shares in the calculation for the three
      months ended June 30, 2007 and 3.7 million diluted shares for the same period
      a
      year ago.





**RESULTS
      OF OPERATIONS**





Three
      months and six months ended June 30, 2007 vs.


Three
      months and six months ended June 30, 2006





Net
      Sales: Net sales for the three months ended June 30, 2007 were $8,099,000,
      down $2,626,000 or 24.5% compared to the same period in 2006.  Net
      sales for original equipment manufacture (OEM) customers were $7,116,000, down
      $2,763,000 or 28.0% compared to 2006.  Net sales of the Company’s
      proprietary products, primarily for the security/industrial markets were
      $774,000, down $6,000 compared to a year ago.  Net sales for
      engineering design services tripled to $188,000, up $142,000 compared to a
      year
      ago.  Net sales for the six months end June 30, 2007 were $17,398,000,
      down $1,525,000 or 8.1% compared to the first six months of 2006.  Net
      sales for OEM customers were $15,561,000, down $1,551,000 or 9.1% compared
      to
      2006.  Net sales of the Company’s proprietary products were
      $1,507,000, down $111,000 or 6.9% compared to a year ago.  Net sales
      for engineering design services were $290,000, up $137,000 compared to a year
      ago.  The significant decrease in sales for the three and six months
      ended June 30, 2007 compared to same period in 2006 was directly related to
      decreased sales to Select Comfort.  Sales to Select Comfort were down
      56.1% and 54.2%, respectively for the three and six months ended June 30,
      2007.  This drop in sales was expected due to the contract signed in
      2006 and Select Comfort’s successful transition to their second source
      supplier.  Decreased sales to Select Comfort were partially offset by
      sales from existing customers for new and existing products in addition to
      sales
      to new customers.  Even though the Company was successful in adding
      new customers and products, actual sales to these customers fell short of
      management’s expectations due to customers delaying the release of orders
      because of product demand and customer-initiated design related
      issues.





15
 Table
          of Contents




As
      of
      June 30, 2007, the Company’s OEM customers have given the Company purchase
      orders with an aggregate value of $16.8 million for delivery during the
      remainder of 2007 and early 2008.  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 scheduled to be fulfilled, these customers may
      terminate their relationship with the Company at any time pursuant to certain
      cancellation provisions.





Cost
      of Sales: Cost of sales was $7,221,000 for the three months ended June 30,
      2007, $1,902,000 or 20.8% lower compared to the three months ended June 30,
      2006.  Cost of sales was $15,315,000 for the six months ended June 30,
      2007, $347,000 or 2.2% lower compared to the six months ended June 30, 2006.
      The
      Company includes material and supplies, direct labor and other manufacturing
      expenses in its computation of cost of sales.  Other manufacturing
      expenses, some of which are included in overhead, include, but are not limited
      to, indirect manufacturing labor and related benefits and expenses, depreciation
      and maintenance of manufacturing equipment and software, freight expense,
      purchasing expenses, warehousing expenses, warranty expense, inventory scrap
      and
      write-offs, an allocation for facility and information technology usage and
      product liability insurance.





Costs
      that are capitalized in work-in-process and finished goods inventory include
      all
      of the above, except certain expenses such as warranty expense, inventory scrap
      and write-offs and some freight.





Gross
      Profits: Gross profits can fluctuate from period to period due to a
      variety of factors, including, but not limited to, sales volume, product mix,
      and plant efficiency.  ***For the three months ended June 30,
      2007***, gross profits were $878,000, $724,000 or 45.2% lower
      compared to the three months ended June 30, 2006.  Lower gross profits
      were the result of a decline in net sales as well as increases in inventory
      obsolescence expense of $387,000 offset in part by decreased warranty expense
      of
      $345,000, direct personnel costs of $173,000 and raw component cost savings
      of
      $82,000.*******For the six months ended June 30,
      2007***,****gross profits were $2,083,000**,**$1,180,000 or 36.2% lower
      compared to the six months ended June 30,
      2006.   Lower gross profits were the result of a decline in net
      sales as well as increases in inventory obsolescence expense of $621,000 and
      depreciation expense of $54,000; offset in part by raw component cost savings
      of
      $196,000 and decreased direct personnel costs of $127,000.





For
      the
      three months ended June 30, 2007, the Company disposed of $205,000 of obsolete
      inventory while increasing the obsolescence reserve by $280,000 recognizing
      a
      total of $485,000 obsolete inventory expense compared to an expense of $98,000
      for the same period in 2006.  For the six months ended June 30, 2007,
      the Company has disposed of $398,000 of obsolete inventory and increased the
      obsolescence reserve by $362,000 recognizing a total of $760,000 obsolete
      inventory expense compared to $139,000 for the same period in
      2006.  These expenses were incurred as a result of the Company
      discontinuing its DC Motor Controller line of products, customer disengagements,
      the shift to a broader base of customers which has increased number of
      components procured and increased exposure to restrictive terms from vendors
      for
      unique, custom components.  As of June 30, 2007, the Company had
      $551,000 in its reserve for obsolete inventory.  This reserve for
      obsolete inventory reflects management’s best estimate, as of June 30, 2007, to
      account for excess inventory which may not be consumed by its customers or
      have
      the ability to be returned to its vendors.





For
      the
      three months ended June 30, 2007, the Company incurred $111,000 of rework and
      warranty expense compared to $456,000 for the three months ended June 30,
      2006. The decrease in rework and warranty expense was due to warranty
      expense of $415,000 for the Company’s Enviro-Alert Enhancement Program during
      the second quarter a year ago.  For the six months ended June 30, 2007, the
      Company incurred $456,000 of rework and warranty expense compared to $484,000
      for the six months ended June 30, 2006. The allowance for rework and
      warranty balance increased by $49,000 to $240,000 due to $45,000 of potential
      component concerns.  The balance is shown on the June 30, 2007 balance
      sheet as part of Other Accruals.  The $240,000 reserve for rework and
      warranty expense reflects management’s best estimate as to future rework and
      warranty obligations as of June 30, 2007.





16
 Table
          of Contents




Operating
      Expenses:Operating expenses include: 1) general and administrative expenses
      such as administrative salaries and related benefits and expenses, professional
      and legal fees, investor relations expenses, board of directors fees, directors
      and officers insurance and other general office supplies and expenses; 2) sales
      and marketing expenses including salaries and related benefits and expenses
      for
      direct outside salesmen, customer service and the senior vice president of
      sales
      and marketing, sales commissions, trade show expenses, web site development
      and
      maintenance, promotional materials, advertising expense and an allocation for
      facility and information technology usage; and 3) research and development
      expense such as salaries and related benefits and expenses, labor and material
      associated with new product development, depreciation and maintenance of
      research and development equipment and software and an allocation of facility
      and information technology usage.  ***Total operating
      expenses*** were $1,569,000 for the three months ended June 30, 2007,
      $441,000 or 39.1% higher compared to the same period in 2006.  For the
      six months ended June 30, 2007, total operating expenses were $3,117,000,
      $834,000 or 36.5% higher than for the same period in 2006.  A
      significant portion of the increase in operating expenses during the three
      and
      six month periods ended June 30, 2007 was due to increased research and
      development expenditures related, in part, to new product development for
      Winland’s proprietary products.





General
      and administrative expenses were $716,000, $98,000 or 15.9% higher for the
      three
      months ended June 30, 2007 compared to the same period in 2006.  The
      increase in general and administrative expenses for the three months was
      attributed to increased Board of Directors expenses of $31,000, bad debt expense
      of $26,000, Sarbanes-Oxley compliance fees of $23,000, fees associated with
      the
      Company’s Lean Enterprise of $14,000 offset in part by a reduction of personnel
      expenses of $23,000.  For the six months ended June 30, 2007, general
      and administrative expenses were $1,375,000, $163,000 or 13.5% higher compared
      to the same period in 2006.  This increase was due to Sarbanes-Oxley
      compliance fees of $48,000, bad debt expense of $26,000, personnel expenses
      of
      $21,000 offset in part by decreased professional fees of $30,000.





Sales
      and
      marketing expenses (including project management) for the three months ended
      June 30, 2007 were $421,000, $31,000 or 7.9% higher compared to the same period
      in 2006.  The increased sales and marketing expenses were due to
      increased professional fees of $29,000, legal fees of $13,000 offset by
      decreased personnel expenses of $33,000.  For the six months ended
      June 30, 2007, sales and marketing expenses were $849,000, $45,000 or 5.6%
      higher than the same period a year ago.  The increase was due to
      increased professional fees of $41,000, legal fees of $13,000 offset by reduced
      personnel expenses of $16,000.





Research
      and development expenses (including the development of new Company products
      as
      well as design services and support to the OEM customer base) were $432,000
      for
      the three months ended June 30, 2007, $312,000 or 259.3% higher compared to
      the
      same period in 2006.  The significant increase in research and
      development expenses were attributed to increased new product development costs
      of $144,000, personnel expenses of $92,000, and a reduction of labor and
      overhead expenses transferred to Engineering Cost of Goods Sold of
      $86,000.  For the six months ended June 30, 2007, research and
      development expenses were $893,000, $626,000 or 234.2% higher compared to the
      same period in 2006.  The increase in research and development
      expenses were attributed to increased new product development costs of $252,000,
      personnel expenses of $167,000, and a reduction of labor and overhead expenses
      transferred to Engineering Cost of Goods Sold of $195,000.





Interest
      Expense: Interest expense was $93,000 and $173,000 for the three and six
      months ended June 30, 2007 compared to $31,000 and $59,000 for the same periods
      in 2006.  During the first six months of 2007, the Company paid down
      $323,000 of long-term debt.





Net
      Income (Loss): The Company reported a net loss of $491,000 or $0.14 per
      basic share and diluted share and a net loss of $ $757,000 or $0.21 per basic
      share and diluted share for the three and six months ended June 30, 2007,
      respectively, compared to net income of $291,000 or $0.08 per basic share and
      $0.08 per diluted share and $602,000 or $0.17 per basic share and $0.16 per
      diluted share for the same periods in 2006.





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





The
      Company uses a blended federal and state income tax rate which was 35% for
      the
      three and six months ended June 30, 2007 and 2006.  The Company
      recognized an income tax benefit of $435,000 based on its $1,192,000 pre-tax
      loss for the six months ended June 30, 2007.  For the six months ended
      June 30, 2006, the Company had pre-tax income of $926,000 resulting in income
      tax expense of $324,000.





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 Table
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**LIQUIDITY
      AND CAPITAL RESOURCES**





Operating
      activities provided cash of $797,000 for the six months ended June 30, 2007
      compared to cash used of $93,000 for the six months ended June 30,
      2006.  Cash was provided by the reduction of accounts receivable and
      inventory balances offset by increases in accounts payable and refundable income
      taxes compared to increases in accounts receivable and inventories during the
      same period in 2006.  Cash used in investing activities was used to
      acquire capital equipment with a book cost of $235,000 and $1,003,000 for the
      six months ended June 30, 2007 and 2006, respectively.  Cash provided
      by sale of capital assets was $4,000 for the six months ended June 30,
      2007.  Cash used in financing activities was $348,000 for the six
      months ended June 30, 2007 compared to cash provided of $568,000 during the
      same
      period in 2006.  Cash provided from the exercise of stock options and
      issuance of common stock was $17,000 and $39,000 for the six months ended June
      30, 2007 and 2006.  The Company used cash of $323,000 and $271,000 for
      the six months ended June 30, 2007 and 2006, respectively to pay down its
      long-term debt.





The
      current ratio was 2.1 to 1 at June 30, 2007 and at December 31,
      2006.  Working capital equaled $6.0 million at June 30, 2007, compared
      to $6.7 million at December 31, 2006.





On
      June
      29, 2007, the Company renewed its revolving credit agreement with the M&I
      Bank of Minneapolis, Minnesota to June 30, 2008, if not renewed.  The
      terms and covenants contained in the renewal did not
      change.   The Company had $1,879,000 outstanding on the revolving
      line-of-credit agreement at June 30, 2007 and $1,924,000 outstanding as of
      December 31, 2006.





We
      believe that our cash balance, funds available under the line of credit
      agreement and anticipated cash flows from operations will be adequate to fund
      our cash requirements for at least the next twelve months.





A
      summary
      of our contractual cash obligations as of June 30, 2007 is as
      follows:




2007
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
                  and thereafter
              
              
              TotalTerm
                  Loans (including interest)
              
              $
              267,000
              
              
              $
              353,000
              
              
              $
              189,000
              
              
              $
              137,000
              
              
              $
              516,000
              
              
              $
              1,462,000Capital
                  Leases (including interest)
              
              
              139,000
              
              
              
              273,000
              
              
              
              273,000
              
              
              
              272,000
              
              
              
              201,000
              
              
              
              1,158,000Total
              
              $
              406,000
              
              
              $
              626,000
              
              
              $
              462,000
              
              
              $
              409,000
              
              
              $
              717,000
              
              
              $
              2,620,000




There
      are
      no off balance sheet contractual cash obligations.





**FORWARD-LOOKING
      STATEMENTS**





Certain
      statements contained in this Quarterly Report on Form 10-Q 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” that 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








18
 Table
            of Contents





**ITEM
      3.                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Winland’s
      earnings are affected by changes in interest rates as its revolving credit
      agreement has a variable interest rates based on LIBOR.  If the
      interest rates had averaged 2% more for the quarter ended June 30, 2007,
      Winland’s interest expense would have increased by approximately
      $13,000.  There have not been any material changes in interest rates
      over the first six months of 2007.





**ITEM
      4.                      CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls Procedures.**





Winland’s
      Chief Executive Officer, Lorin E. Krueger, and Chief Financial Officer, Glenn
      A.
      Kermes, have reviewed Winland’s disclosure controls and procedures as of the end
      of the period covered by this report.  Based upon this review, these
      officers believe that Winland’s disclosure controls and procedures are effective
      in ensuring that information that is required to be disclosed by Winland 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.





**Changes
      in Internal Control.**





There
      was
      no change in Winland’s internal control over financial reporting during
      Winland’s most recently completed fiscal quarter that has materially affected,
      or is reasonably likely to materially affect, Winland’s internal control over
      financial reporting.








19
 Table
            of Contents





**PART
      II – OTHER INFORMATION**





**ITEM
      1.                      LEGAL
      PROCEEDINGS**





None.





**ITEM
      1A.                      RISK
      FACTORS**





Information
      regarding risk factors appear in Part 1 Item 2 of this Form
      10-Q.  There have not been any material changes from the risk factors
      previously disclosed in our report on Form 10-KSB for fiscal year ended December
      31, 2006 or Form 10-Q for the quarter ended March 31, 2007.








**ITEM
      2.                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





None.





**ITEM
      3.                      DEFAULTS
      UPON SENIOR SECURITIES**





None.





**ITEM
      4.                      SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





The
      Company held its Annual Meeting on May 8, 2007.





Proxies
      for the annual meeting were solicited pursuant Regulation 14A under the
      Securities and Exchange Act of 1394. There was no solicitation in opposition
      to
      management’s nominees as listed in the proxy statement, and all nominees were
      elected.





The
      shareholders set the number of directors at four (4) by a vote of 3,218,235
      shares in favor, 58,008 shares against and 7,542 shares abstaining. The
      following persons were elected to serve as directors of the Company until the
      next annual meeting of shareholders with the following votes:





Number
                of
            
            Number
                ofNominee
            
            Votes
                For
            
            Votes
                WithheldLorin
                E. Krueger
            
            
            3,263,211
            
            
            
            20,574Thomas
                J. de Petra
            
            
            3,261,951
            
            
            
            21,834James
                L. Reissner
            
            
            3,244,316
            
            
            
            39,469Richard
                T. Speckman
            
            
            3,221,988
            
            
            
            61,797





**ITEM
      5.                      OTHER
      INFORMATION**





None.





**ITEM
      6.                      EXHIBITS**





See
      Exhibit Index following the signature page.





20
 Table
            of Contents





**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.**Date: 
                August 2, 2007
            By:
            /s/ Lorin
              E. KruegerLorin
              E. Krueger, President and Chief Executive Officer(Principal
              Executive Officer)





By:
            /s/ Glenn
              A. KermesGlenn
              A. Kermes, Chief Financial Officer(Principal
              Financial and Accounting Officer)




21
 Table
            of Contents





**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C.  20549**








**EXHIBIT
      INDEX TO FORM10-Q**














For
                the fiscal quarter ended June 30, 2007
            Commission
                File No. 0-15637





__________________________





**WINLAND
      ELECTRONICS, INC.**


**__________________________**





Exhibit
                No.
            Description31.1
            Certification
                of Chief Executive Officer
                Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer
                Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
            Certification
                of Chief Financial Officer
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





22