FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                   Quarterly Report under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

For Quarter Ended:  June 30, 1998
Commission File Number:  0-18393

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

         Yes  x                     No

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common  stock,  as of the latest  practicable  date:  As of July 29,  1998,  the
Registrant had 2,838,555 shares of Common Stock, $.01 par value, outstanding.

         Transitional Small Business Disclosure Format (check one):

         Yes                        No   x




                                        1

<PAGE>
                                      PART I-FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                            WINLAND ELECTRONICS, INC.
                                  BALANCE SHEET
                                   (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS                                                         June 30,         December 31,
                                                                 1998                1997
                                                             -----------        -----------
<S>                                                          <C>                <C>        
CURRENT ASSETS:
Cash ................................................        $    12,709        $    23,542
Accounts Receivable, Net ............................          1,863,785          1,581,368
Inventories .........................................          4,522,727          3,753,342
Prepaid Items .......................................            127,275            109,314
                                                             -----------        -----------
             Total Current Assets ...................          6,526,496          5,467,566

Property and Equipment, Net .........................          3,213,875          3,141,279
Property Under Capital Lease, Net ...................          1,945,380          1,715,500
OTHER ASSETS:
             Intangibles ............................              6,270              7,034
             Deferred Income Taxes ..................             17,741             17,741
                                                             -----------        -----------
                          TOTAL ASSETS ..............        $11,709,762        $10,349,120

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
             Notes Payable ..........................        $ 2,677,227        $ 1,733,227
             Accounts Payable .......................            853,847          1,200,177
             Payroll Taxes Payable ..................             29,230             24,690
             Wages and Commissions Payable ..........             61,592             61,150
             Other Accruals .........................            223,275            162,709
             Obligations Under Capital Lease ........            382,858            323,876
             Deferred Revenue .......................             27,001             27,001
             Income Taxes Payable ...................            196,796              4,414
             Current Maturities .....................            172,702            170,730
                                                             -----------        -----------
                          Total Current Liabilities .          4,624,528          3,707,974

LONG TERM LIABILITIES:
             Long Term Maturities ...................          2,202,183          2,289,193
             Obligations Under Capital Lease
             Less: Current Portion ..................          1,414,833          1,254,268
                                                             -----------        -----------
                          TOTAL LONG TERM LIABILITIES          3,617,016          3,543,461

OTHER LIABILITIES:
             Deferred Revenue
             Less: Current Portion ..................            175,506            189,006
                                                             -----------        -----------
                          TOTAL LIABILITIES .........          8,417,050          7,440,441

SHAREHOLDERS' EQUITY:
             Common Stock ...........................             28,386             28,080
             Additional Paid-In Capital .............          2,091,916          2,079,001
             Retained Earnings ......................          1,172,410            801,598
                                                             -----------        -----------
                          Total Shareholders' Equity           3,292,712          2,908,679
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............        $11,709,762        $10,349,120
</TABLE>


                                       2
<PAGE>
                            WINLAND ELECTRONICS, INC.
                             STATEMENT OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                  QUARTER ENDED
                                                                     JUNE 30,
                                                               1998                1997
                                                          -----------         -----------

<S>                                                       <C>                 <C>        
NET SALES: .......................................        $ 4,290,114         $ 2,983,529
             Less, Cost of Goods Sold ............          3,371,060           2,408,351
                                                          -----------         -----------
             Gross Profit on Sales ...............            919,054             575,178

OPERATING EXPENSES:
             General and Administrative ..........            349,245             288,144
             Marketing ...........................             70,755              58,115
             Research and Development ............            184,839             108,043
                                                          -----------         -----------
                          Total Operating Expenses            604,839             454,302

INCOME BEFORE OTHER INCOME
             AND EXPENSE .........................            314,215             120,876
                                                          -----------         -----------
MISCELLANEOUS INCOME .............................             55,430              15,976
MISCELLANEOUS EXPENSE ............................             (3,173)               --

INTEREST EXPENSE .................................            (65,632)            (57,034)
                                                          -----------         -----------
             TOTAL OTHER INCOME & EXPENSE ........            (13,375)            (41,058)
                                                          -----------         -----------

NET INCOME BEFORE TAXES ..........................            300,840              79,818
                                                          -----------         -----------

PROVISION FOR INCOME TAXES .......................            105,303                 584
                                                          -----------         -----------
NET INCOME .......................................        $   195,537         $    79,234

BASIC EARNINGS PER SHARE .........................        $     0.069         $     0.028
WEIGHTED AVERAGE NUMBER OF SHARES
             OUTSTANDING .........................          2,834,878           2,798,634

DILUTED EARNINGS PER SHARE .......................        $     0.068         $     0.028
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, INCLUDING DILUTIVE SHARES ...........          2,875,712           2,860,449
</TABLE>


<PAGE>
                            WINLAND ELECTRONICS, INC.
                             STATEMENT OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>



                                                                  SIX MONTHS ENDED
                                                                       JUNE 30,

                                                              1997                1996
                                                          -----------         -----------

<S>                                                       <C>                 <C>        
NET SALES: .......................................        $ 8,693,075         $ 5,805,624
             Less, Cost of Goods Sold ............          6,943,135           4,564,503
                                                          -----------         -----------
             Gross Profit on Sales ...............          1,749,940           1,241,121

OPERATING EXPENSES:
             General and Administrative ..........            661,819             552,149
             Marketing ...........................            137,545             124,921
             Research and Development ............            351,571             208,216
                                                          -----------         -----------
                          Total Operating Expenses          1,150,935             885,286

INCOME BEFORE OTHER INCOME
             AND EXPENSE .........................            599,005             355,835
                                                          -----------         -----------
MISCELLANEOUS INCOME .............................             95,651              24,839
MISCELLANEOUS EXPENSE & PROVISION
             FOR BAD DEBT ........................             (3,633)            (43,000)
INTEREST EXPENSE .................................           (120,543)           (106,519)
                                                          -----------         -----------
             TOTAL OTHER INCOME & EXPENSE ........            (28,525)           (124,680)
                                                          -----------         -----------

NET INCOME BEFORE TAXES ..........................            570,480             231,155
                                                          -----------         -----------

PROVISION FOR INCOME TAXES .......................            199,668              23,584
                                                          -----------         -----------

NET INCOME .......................................        $   370,812         $   207,571

BASIC EARNINGS PER SHARE .........................        $     0.131         $     0.074

WEIGHTED AVERAGE NUMBER OF SHARES
           OUTSTANDING ...........................          2,833,958           2,788,343

DILUTED EARNINGS PER SHARE .......................        $     0.129         $     0.073

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING INCLUDING DILUTIVE SHARES ............          2,874,792           2,850,158

</TABLE>


<PAGE>
                            WINLAND ELECTRONICS, INC.
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                           SIX MONTHS ENDED   SIX MONTHS ENDED
                                                                            JUNE 30, 1998       JUNE 30, 1997
                                                                             -----------        -----------

<S>                                                                          <C>                <C>
CASH FLOW FROM OPERATING ACTIVITIES:
             Cash Received from Customers .............................      $ 8,410,658        $ 5,561,568
             Interest Received ........................................           75,033             11,323
             Other Miscellaneous Operating Receipts ...................            7,118               --
             Cash Paid to Suppliers and Employees .....................       (8,728,423)        (5,427,642)
             Interest Paid ............................................         (249,376)          (198,523)
             Income Taxes Paid ........................................           (7,286)            (1,168)
                                                                             -----------        -----------
                 Net Cash Provided (Used) by Operating Activities .....         (492,276)           (54,442)
                                                                             -----------        -----------
CASH FLOW FROM INVESTING ACTIVITIES:
             Purchases of Property and Equipment ......................         (205,724)           (97,804)
             Cash Proceeds From Sales of Equipment ....................              484               --
                                                                             -----------        -----------
                 Net Cash Provided  (Used) by Investing Activities ....         (205,240)           (97,804)
                                                                             -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
             Net Advances on Credit Line ..............................          944,000            350,000
             Proceeds from Debt .......................................             --                 --
             Payments on Debt .........................................          (85,039)           (77,284)
             Payments on Capital Lease Obligations ....................         (185,500)          (117,011)
             Sale of Common Stock .....................................           13,222             21,654
                                                                             -----------        -----------
                 Net Cash Provided by Financing Activities ............          686,683            177,359
                                                                             -----------        -----------
NET INCREASE IN CASH ..................................................          (10,833)            25,113
CASH - BEGINNING OF YEAR ..............................................           23,542             19,499
                                                                             -----------        -----------
CASH - END OF PERIOD ..................................................      $    12,709        $    44,612
                                                                             -----------        -----------

                 RECONCILIATION OF NET INCOME TO NET CASH (USED)
                             BY OPERATING ACTIVITIES


Net Income (Loss) .....................................................      $   370,812        $   207,571
Adjustments:
Disposition of Assets .................................................            3,633                 15
Depreciation & Amortization ...........................................          304,942            202,904
(Increase) Decrease in Accounts Receivable ............................         (282,417)          (201,056)
(Increase) Decrease in Inventory ......................................         (769,385)          (444,533)
(Increase) Decrease in Prepaid Items ..................................          (17,961)           (62,116)
(Decrease) Increase in Accounts Payable ...............................         (346,330)           271,602
(Decrease) Increase in Wages Payable ..................................              442               (760)
(Decrease) Increase in Accrued Payroll Taxes ..........................            4,540            (14,967)
(Decrease) Increase in Other Accruals .................................           60,566            (21,652)
(Decrease) Increase in Deferred Revenue ...............................          (13,500)           (13,530)
(Decrease) Increase in Income Taxes Payable ...........................          192,382             22,080
                                                                             -----------        -----------
Net Cash Provided (Used) by Operating Activities ......................      $  (492,276)        $  (54,442)
                                                                             -----------        -----------
</TABLE>

<PAGE>
                            WINLAND ELECTRONICS, INC.
                    NOTES TO THE INTERIM FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (UNAUDITED)

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

NOTE B - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company  maintains an allowance for doubtful  accounts based on the aging of
accounts  receivable.  The balance of the  allowance  for  doubtful  accounts is
$5,002 at June 30, 1998 and $5,074 at December 31, 1997.

NOTE C - INVENTORY
Major  Components  of  inventory  at June 30, 1998 and  December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
                                                                  June 30,        December 31,
                                                                    1998              1997
<S>                                                             <C>               <C>       
Raw Materials ...........................................       $3,475,136        $2,775,668
Work In Process .........................................          548,112           490,428
Finished Goods ..........................................          485,739           479,900
Manufacturing, Shipping, and Office Supplies ............           13,740             7,346
                                                                ----------        ----------
                        Total ...........................       $4,522,727        $3,753,342
                                                                ----------        ----------
</TABLE>

A significant  component of the raw materials  inventory are materials  procured
for Peoplenet  Communications,  Inc., which is not yet in full scale production,
monthly interest is being paid on this inventory.

NOTE D - PROPERTY AND EQUIPMENT
Property and  Equipment not under  capital  leases  consists of the following at
June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
                                                                 June 30,          December 31,
                                                                   1998                1997
                                                               -----------         -----------
<S>                                                            <C>                 <C>        
Building ...............................................       $ 2,387,171         $ 2,376,511
Land ...................................................           192,640             192,640
Office Equipment .......................................           192,215             167,528
Computer & Telephone Equipment .........................           503,044             402,444
Research & Development .................................           128,966             110,608
Marketing and Display Equipment ........................            18,152              18,152
Factory Equipment ......................................           600,923             562,026
Land Improvements ......................................            77,369              77,369
Accumulated Deprecation ................................          (886,605)           (765,999)
                                                               -----------         -----------
                        Net Book Value .................       $ 3,213,875         $ 3,141,279
                                                               -----------         -----------
</TABLE>


                                       6
<PAGE>
                                  
                            WINLAND ELECTRONICS, INC.
                    NOTES TO THE INTERIM FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (UNAUDITED)
NOTE D - CONTINUED
Property and Equipment  under capital  leases  consists of the following at June
30, 1998 and at December 31, 1997:
<TABLE>
<CAPTION>

                                                                                    June 30,          December 31,
                                                                                      1998                1997
                                                                                  -----------         -----------
<S>                                                                               <C>                 <C>        
Factory Equipment ........................................................        $ 2,268,793         $ 1,982,281
Office Equipment .........................................................             41,623              60,408
Computer & Telephone Equipment ...........................................            166,030             120,415
Research & Development ...................................................             42,335               9,396
Accumulated Amortization .................................................           (573,401)           (457,000)
                                                                                  -----------         -----------
            Total Leased Property and Equipment, Net of
                        Accumulated Amortization .........................        $ 1,945,380         $ 1,715,500
                                                                                  -----------         -----------
Capital Leases are summarized as follows:
Lease on factory equipment with lease period expiring
May of 2002, at an interest rate of 10.04% ...............................        $    53,529         $    58,564
Lease on factory equipment with lease period expiring
June of 2002, at an interest rate of 10.04% ..............................             66,947              73,093
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 9.94% ..............................             50,841              56,005
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 8.88% ..............................            170,824             188,113
Lease on computer and telephone equipment with lease
period expiring February of 2000, at an interest rate of 9.01% ...........             24,775              31,019
Lease on factory equipment with lease period expiring
August of 2001, at an interest rate of 9.49% .............................            178,840             200,999
Lease on factory equipment with lease period expiring
July of 2001, at an interest rate of 9.96% ...............................             85,416              95,354
Lease on factory and office equipment with lease period
expiring January of 2000, at interest  of 1% over prime ..................            121,689             157,905
Lease on factory equipment with lease period expiring
October of 1998 at an interest rate of 9.23% .............................              3,921              11,496
Lease on office equipment with lease period expiring
March of 2000 at an interest rate of 9% ..................................             11,146              13,882
Lease on factory and office equipment with lease period
expiring March of 2001 at an interest rate of 8.5% .......................             71,575                --
Lease on factory and R&D equipment with lease period
expiring April of 2003 at an interest rate of 8.68% ......................             45,240                --
Lease on factory equipment with lease period expiring
November of 2004 at an interest rate of 8.97% ............................            578,711             607,456
Lease on factory equipment with lease period expiring
October of 2002 at an interest rate of 9.5% ..............................             38,870              18,910
Lease on factory equipment with lease period expiring
October of 2000 at an interest rate of 8.95% .............................             23,481              27,908
Lease on factory equipment with lease period expiring
January of 2001 at an interest rate of 9.02% .............................             61,578              37,440
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 8.5% ................................             86,766                --
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 9.3% ................................            123,542                --
                                                                                  -----------         -----------
Total ....................................................................        $ 1,797,691         $ 1,578,144
Less Current Portion .....................................................           (382,858)           (323,876)
                                                                                  -----------         -----------
Long Term Obligation Under Capital Leases ................................        $ 1,414,833         $ 1,254,268
                                                                                  -----------         -----------
</TABLE>

                                        7

<PAGE>

                            WINLAND ELECTRONICS, INC.
                    NOTES TO THE INTERIM FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (UNAUDITED)

NOTE E - SHORT TERM BORROWING
Short term borrowing consists of the following at June 30, 1998 and December 31,
1997 balance sheet:
<TABLE>
<CAPTION>

                                                                     June 30,           December 31,
                                                                       1998                1997
                                                                    ----------          ----------
<S>                                                                 <C>                 <C>       
Norwest Bank - Revolving Credit Line
Balance ......................................................      $2,677,227          $1,733,227
Stated Interest Rate per Annum ...............................             9.0%*               9.0%*
Maximum Amount Outstanding During the Quarter ................      $2,677,227          $2,050,227
Average Amount Outstanding During the Quarter ................      $2,429,060          $1,842,073
Unused Credit Available ......................................      $  822,773          $1,400,121
</TABLE>

* The stated  interest rate per annum is an adjustable rate based on the current
leverage  ratio,  and was equal to 1/2 of a percent  over prime rate at June 30,
1998.  The interest on the revolving loan was $65,632 and $120,543 for the three
and six months ended June 30, 1998.  Additional interest was reported related to
the leased capital  equipment and other term borrowing.  The interest expense on
leased equipment was $41,942 and $81,961 for the three and six months ended June
30, 1998.  Interest expense on other long term borrowing was $32,465 and $65,416
for the three and six months ended June 30, 1998.

NOTE F - STOCK OPTIONS AND WARRANTS
As of June 30, 1998,  options to purchase an aggregate of 278,000  shares of the
Company's  common stock were granted and  outstanding  under the Company's  1989
Stock Option  Plan(the  "1989 Plan").  As of June 30, 1998,  options to purchase
174,550 shares granted under the 1989 Plan were exercisable. The exercise prices
of all  outstanding  options under the 1989 Plan range from  $0.125to  $3.64 per
share.  Options to purchase 72,000 shares were granted and outstanding under the
1997 Stock Option  Plan(the  "1997  Plan") as of June 30, 1998,  of which 18,000
shares  were  exercisable.  The  exercise  price of options  under the 1997 Plan
ranges+A25 from $2.375 to $3.125.

As of June 30, 1998,  warrants to purchase an aggregate of 37,000  shares of the
Company's Common Stock at $2.20 per share were granted and  outstanding,  all of
which warrants are exercisable.



                                        8


<PAGE>


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

Results of Operations
Three and six months ended June 30, 1998 v.
Three and six months ended June 30, 1997

Net Sales:
The Company recorded net sales of $4,290,114 for the three months ended June 30,
1998, an increase of 44% from  $2,983,529 for the same period in 1997. Net sales
of  $8,693,075  were  recorded  for the first six  months of 1998,  compared  to
$5,805,624  for the same period in 1997, a 50%  increase.  The increase in sales
for the  second  quarter  and  first  six  months  of 1998  compared  to 1997 is
primarily attributed to increases in sales to several OEM customers,  with sales
to Select Comfort representing the largest increase over 1997 revenues. Sales of
the Company's  security products  experienced  moderate increases for the second
quarter and first six months of 1998. The Company has in place several  purchase
orders and manufacturing agreements with its OEM customers. The current purchase
orders with Select Comfort Corporation are in excess of $9 million dollars,  and
are expected to be fulfilled  in 1998 and early 1999.  In addition,  the Company
has a $5.5 million dollar manufacturing agreement with PeopleNet Communications,
Inc. to be fulfilled in 1998 and 1999. The Company also has purchase  agreements
with Keyless  Door Lock Company for  $325,000,  and a $2 million  dollar,  three
year, manufacturing agreement with CIC Systems (NZ), Inc.

The Company has  continued  to position  itself as a full  service  designer and
manufacturer  of custom  controls and assemblies for OEM customers.  The loss of
any OEM  customer  could  have an  adverse  effect on the  Company's  short-term
results.  The  Company's  marketing  research  indicates  that  there is a large
potential market for electronic design and manufacturing  services and that this
market is growing rapidly.

Gross Profits:
Gross  profit was $919,054 or 21.4% of net sales for the three months ended June
30,  1998,  compared  to  $575,178  or 19.3% of net sales for the same period in
1997.  For the first six months of 1998 the gross profit was $1,749,940 or 20.1%
of net sales,  compared to  $1,241,121 or 21.2% of net sales for the same period
in 1997.  The increased  gross profits,  as a percentage  net of sales,  for the
second  quarter of 1998 is primarily  attributed to the steady sales growth with
the Company's OEM customers, as well as increases in sales of security products.
The slight decline in gross profits, as a percentage of net sales, for the first
six months of 1998,  was due in part to the sales mix during the first  quarter,
as well as expected lower margins associated with the production start up of the
new PeopleNet Communications product line.

Operating Expenses:
General and  administrative  expense  was  $349,245 or 8.1% of net sales for the
three months ended June 30, 1998,  compared to $288,144 or 9.7% of net sales for
the same period in 1997. General and  administrative  expenses for the first six
months of 1998 were $661,819 or 7.6% of net sales,  compared to $552,149 or 9.5%
of net sales for the same period in 1997.  As a percentage  of sales general and
administrative expense declined for both the second quarter and first six months
of 1998.  The increases in the actual  general and  administrative  expenses are
attributed to increased  costs  associated  with the Company's  expanded  public
relations  efforts,  as well as additional costs necessary to support the higher
levels of sales during the second quarter and first six months of 1998.

Marketing  and customer  relations  expense was $70,755 or 1.6% of net sales for
the three months  ended June 30, 1998,  compared to $58,115 or 1.9% of net sales
for the same period in 1997.  Marketing and customer  relations  expense for the
first six months of 1998 was $137,545 or 1.6% of net sales, compared to $124,921
or 2.2% of net sales  for the same  period in 1997.  As a  percentage  of sales,
marketing and customer  relations  expense  declined for both the second quarter
and first six months of 1998. The Company has continued to expand its efforts to
secure new,  long-term  OEM  customer  relationships  to design and  manufacture
custom  controls and  assemblies.  The Company also continues to actively market
its security/industrial products.


                                        9
<PAGE>

Research and development expense was $184,839 or 4.3% of net sales for the three
months ended June 30, 1998,  compared to $108,043 or 3.6% for the same period in
1997.  For the first six months of 1998,  research and  development  expense was
$351,571 or 4.0% of net sales  compared to $208,216 or 3.6% of net sales for the
same period in 1997.  The increase in research and  development  expense in both
actual  dollars and as a percentage of sales for the three and six month periods
is primarily  attributed to the addition of technical staff and equipment needed
to better service our  customers'  growing  requirements  for design and support
services.

Interest Expense:
Interest expense, including interest on the revolving line of credit, other long
and short-term borrowing, and interest on capital leases was $140,039 or 3.3% of
net sales for the three months ended June 30, 1998, compared to $104,603 or 3.5%
of net sales for the same  period in 1997.  Interest  expense  for the first six
months of 1998 was  $267,920 or 3.1% of net sales,  compared to $211,153 or 3.6%
of net sales for the same  period in 1997.  The  increase  in  interest  expense
reflected  additional  short-term borrowing and borrowing through capital leases
needed to support increased sales volumes.

Net Earnings:
The Company  reported  net income of  $195,537  or $0.068 per diluted  share and
$370,812 or $0.129 per diluted share for the three and six months ended June 30,
1998, compared to net income of $79,234 or $0.028 per diluted share and $207,571
or $0.073 per  diluted  share for the same  periods in 1997.  Net income  before
taxes rose 178% to $300,840 from $79,818 for the second quarter 1998 compared to
the same  period in 1997.  Year to date net  income  before  taxes  rose 147% to
$570,480  from  $231,155 for the same period in 1997.  The  provision for income
taxes for 1997 included tax loss carry-forwards,  which will be used up in 1998.
As a result  of this net  income  after  tax  rose  147% and 79% for the  second
quarter and first six months of 1998 compared to 1997.

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

Liquidity and Capital Resources

The  current  ratio on June 30,  1998  was 1.41 to 1,  compared  to 1.47 to 1 on
December 31, 1997.  Working capital on June 30, 1998 was $1,901,968  compared to
$1,759,592  on December 31, 1997.  The increase in working  capital is primarily
attributed to increases in accounts  receivable and inventory that are offset by
additional short-term borrowing needed to support the increased sales levels for
the first six months of 1998. The increased  inventory  levels are attributed to
higher levels of raw materials held for PeopleNet Communications, Inc., which is
not yet in  full  scale  production,  monthly  interest  is  being  paid on this
inventory.

The Company has a revolving  credit  agreement  with the Norwest Bank  Minnesota
South  N.A.("Norwest"),  with a maximum  loan  limit of  $3,500,000,  subject to
additional limitations set forth in the credit agreement.  The interest rate per
annum is an adjustable rate based on the current  leverage ratio,  and was equal
to 1/2% over the prime  interest  rate at June 30, 1998.  At June 30, 1998,  the
principle  outstanding  balance on the revolving line of credit was  $2,677,227.
The Company's  management  believes that capital  available  through the current
credit agreement, together with cash flows from operations will be sufficient to
meet the Company's capital needs in the near future.

Cautionary Statements

As provided for under the Private Securities  Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors,  among
others, in some cases have affected and in the future could affect the Company's
actual  results of operations and cause such results to differ  materially  from
those  anticipated  in  forward-looking  statements  made in this  document  and
elsewhere by or on behalf of the Company.

The Company derives a significant portion of its revenues from a small number of
major OEM  customers  who are not  subject to any long term  contracts  with the
Company.

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<PAGE>

If any major  customer  should  for any  reason  stop  doing  business  with the
Company, the Company's business would be significantly  adversely affected.  The
Company's  key  customers  are not large,  well--established  companies  and the
business of each customer is subject to various risks such as market  acceptance
of new products and  continuing  availability  of financing . To the extent that
the Company's customers encounter  difficulties,  the Company could be adversely
affected.

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

The  operations  and  success of the  Company  depend  upon the  experience  and
knowledge  of W. Kirk  Hankins,  the  Company's  President  and Chief  Executive
Officer,   and  Lorin  E.  Krueger,  the  Company's  Senior  Vice  President  of
Operations.  The loss of either Mr. Hankins or Mr. Krueger would have a material
adverse effect on the Company.









                                       11
<PAGE>

                            PART II-OTHER INFORMATION



ITEM 1: LEGAL PROCEEDINGS


The  Company  is one of 18  defendants  in a  products  liability  case filed by
Debmar, Inc. and St. Paul Fire and Marine Insurance Company, as plaintiffs.  The
Company  reported this proceeding in its Form 10-KSB for the year ended December
31, 1997 and Form 10-QSB for the quarter ended March 31, 1998.


ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         (a)   The Company held its Annual Meeting on May 14, 1998


         (b)  Proxies for the Annual Meeting were solicited pursuant  Regulation
              14A  under  the  Securities  Exchange  Act of 1934.  There  was no
              solicitation in opposition to  management's  nominees as Listed in
              the proxy statement, and all of such nominees were elected.

              The  shareholders  set the number of  directors  at seven (7) by a
              vote of  2,389,599  shares  in favor,  with  15,486  shares  voted
              against and 12,650 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 of
              Nominee                  Votes For             Votes Withheld

               W.Kirk Hankins          2,393,243                  24,492
               Lorin E. Krueger        2,399,643                  18,092
               Kirk P. Hankins         2,398,743                  18,992
               S. Robert Dessalet      2,395,348                  22,387
               Thomas J. de Petra      2,400,348                  17,387
               David L. Ewert          2,398,868                  18,867
               Peter D. Jones          2,398,064                  19,671


ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

        (a)   The exhibit to this report is:

              27.1 Financial Data Schedule (included in electronic version only)

        (b)   A Form 8-K dated May 1,  1998 was  filed to report  the  change of
              audit firms.



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<PAGE>



                                   SIGNATURES



Pursuant  to the  requirement  of the  Securities  Exchange  Act  of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                       WINLAND ELECTRONICS, INC.


Dated: August 12, 1998                 By: /s/ W. K. Hankins
                                       William K. Hankins, President,
                                       Chief Executive Officer and
                                       Chief Financial Officer
                                       (Principal Executive Officer
                                       and Principal Financial and
                                       Accounting Officer)


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