##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2006
 Commission File Number: 0-15637
 WINLAND ELECTRONICS, INC.
  Minnesota
    
    41-0992135(state or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 1950 Excel Drive, Mankato, Minnesota 56001
 (507) 625-7231
 
 þ o
 o þ
  o þ




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TABLE OF CONTENTS  PART I-FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 3. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSSIGNATURESEXHIBIT INDEX TO FORM 10-QSBCertification of Chief Executive Officer Pursuant to Section 302Certification of Chief Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906    Table of Contents  
 PART I-FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS
 WINLAND ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312006
    
    
    2005(UNAUDITED)ASSETSCurrent AssetsCash
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    865,181Accounts receivable, net
    
    
    
    
    
    
    5,238,521
    
    
    
    
    
    
    
    4,033,241Refundable Income taxes
    
    
    
    
    
    
    54,603
    
    
    
    
    
    
    
    48,298InventoriesRaw materials
    
    
    5,153,852
    
    
    
    
    
    
    
    2,339,314Work in process
    
    
    614,948
    
    
    
    
    
    
    
    163,778Finished goods
    
    
    1,628,392
    
    
    
    
    
    
    
    1,212,297Allowance for obsolete inventory
    
    
    (198,900
    )
    
    
    
    
    
    
    (191,900
    )Total inventories
    
    
    
    
    
    
    7,198,292
    
    
    
    
    
    
    
    3,523,489Prepaid expenses
    
    
    
    
    
    
    381,238
    
    
    
    
    
    
    
    311,240Deferred income taxes
    
    
    
    
    
    
    259,300
    
    
    
    
    
    
    
    236,500Total current assets
    
    
    
    
    
    
    13,131,954
    
    
    
    
    
    
    
    9,017,949Other Assets
    
    
    
    
    
    
    3,548
    
    
    
    
    
    
    
    1,408Property and Equipment, at cost:Land and land improvements
    
    
    382,901
    
    
    
    
    
    
    
    272,901Building
    
    
    3,047,908
    
    
    
    
    
    
    
    3,040,435Machinery and equipment
    
    
    6,797,856
    
    
    
    
    
    
    
    5,537,094Data processing equipment
    
    
    1,046,217
    
    
    
    
    
    
    
    1,205,585Office furniture and equipment
    
    
    418,109
    
    
    
    
    
    
    
    412,219Total property and equipment
    
    
    
    
    
    
    11,692,991
    
    
    
    
    
    
    
    10,468,234Less accumulated depreciation
    
    
    
    
    
    
    (5,846,053
    )
    
    
    
    
    
    
    (5,540,097
    )Net property and equipment
    
    
    
    
    
    
    5,846,938
    
    
    
    
    
    
    
    4,928,137Total assets
    
    
    
    
    
    $
    18,982,440
    
    
    
    
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312006
    
    
    2005(UNAUDITED)LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesRevolving line of credit agreement
    
    $
    1,526,000
    
    
    $
    Current maturities of long-term debt
    
    
    680,784
    
    
    
    537,537Accounts payable
    
    
    3,023,338
    
    
    
    1,486,998Accrued expenses:Compensation
    
    
    840,945
    
    
    
    801,116Allowance for rework and warranty costs
    
    
    302,032
    
    
    
    117,300Other
    
    
    157,806
    
    
    
    82,880Total current liabilities
    
    
    6,530,905
    
    
    
    3,025,831Long Term LiabilitiesLong-term debt, less current maturities
    
    
    1,819,436
    
    
    
    1,424,863Deferred income taxes
    
    
    261,900
    
    
    
    261,900Deferred revenue
    
    
    148,433
    
    
    
    154,539Total long-term liabilities
    
    
    2,229,769
    
    
    
    1,841,302Stockholders EquityCommon stock
    
    
    35,803
    
    
    
    35,279Additional paid-in capital
    
    
    4,318,640
    
    
    
    4,165,035Retained earnings
    
    
    5,867,323
    
    
    
    4,880,047Total stockholders equity
    
    
    10,221,766
    
    
    
    9,080,361Total liabilities and stockholders equity
    
    $
    18,982,440
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2006 and 2005
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months Ended2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    9,586,152
    
    
    $
    7,399,885
    
    
    $
    28,394,584
    
    
    $
    21,542,640Cost of sales
    
    
    7,827,719
    
    
    
    5,700,612
    
    
    
    23,373,382
    
    
    
    16,265,235Gross profit
    
    
    1,758,433
    
    
    
    1,699,273
    
    
    
    5,021,202
    
    
    
    5,277,405Operating expenses:General and administrative
    
    
    591,828
    
    
    
    432,673
    
    
    
    1,803,331
    
    
    
    1,390,657Sales and marketing
    
    
    392,570
    
    
    
    321,205
    
    
    
    1,196,447
    
    
    
    997,904Research and development
    
    
    142,773
    
    
    
    211,994
    
    
    
    409,925
    
    
    
    611,0621,127,171
    
    
    
    965,872
    
    
    
    3,409,703
    
    
    
    2,999,623Operating income
    
    
    631,262
    
    
    
    733,401
    
    
    
    1,611,499
    
    
    
    2,277,782Other income (expenses):Interest expense
    
    
    (50,079
    )
    
    
    (32,564
    )
    
    
    (109,457
    )
    
    
    (92,537
    )Other income, net
    
    
    6,573
    
    
    
    15,195
    
    
    
    11,535
    
    
    
    74,040(43,506
    )
    
    
    (17,369
    )
    
    
    (97,922
    )
    
    
    (18,497
    )Income before
income taxes
    
    
    587,756
    
    
    
    716,032
    
    
    
    1,513,577
    
    
    
    2,259,285Income tax expense
    
    
    (202,300
    )
    
    
    (279,200
    )
    
    
    (526,300
    )
    
    
    (881,100
    )Net income
    
    $
    385,456
    
    
    $
    436,832
    
    
    $
    987,277
    
    
    $
    1,378,185Earnings per common share:Basic
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.28
    
    
    $
    0.39Diluted
    
    
    0.11
    
    
    
    0.12
    
    
    
    0.27
    
    
    
    0.38Weighted-average number of common shares outstanding:Basic
    
    
    3,578,415
    
    
    
    3,519,476
    
    
    
    3,558,793
    
    
    
    3,493,663Diluted
    
    
    3,645,336
    
    
    
    3,690,430
    
    
    
    3,655,078
    
    
    
    3,649,174
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WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Cash Flows From Operating ActivitiesNet income
    
    $
    987,277
    
    
    $
    1,378,185Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Non-cash stock based compensation
    
    
    107,514
    
    
    
    Depreciation and amortization
    
    
    565,644
    
    
    
    419,529Loss on disposal of equipment
    
    
    6,005
    
    
    
    1,202Investor relations expense, non-cash warrant expense
    
    
    3,123
    
    
    
    27,957Consulting expense, non-cash warrant expense
    
    
    8,142
    
    
    
    Deferred tax assets
    
    
    (22,800
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,205,280
    )
    
    
    (767,319
    )Refundable Income taxes
    
    
    (6,305
    )
    
    
    30,293Inventories
    
    
    (3,674,803
    )
    
    
    (1,599,671
    )Prepaid expenses
    
    
    (73,121
    )
    
    
    (210,275
    )Accounts payable
    
    
    1,536,340
    
    
    
    1,575,891Accrued expenses, deferred
revenue and income taxes payable
    
    
    292,825
    
    
    
    157,340Net cash provided by (used in) operating activities
    
    
    (1,475,439
    )
    
    
    1,013,132Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    (535,273
    )
    
    
    (429,148
    )Cash flows From Financing ActivitiesNet borrowings (payments) on revolving line of credit
    
    
    1,526,000
    
    
    
    (270,000
    )Proceeds from notes payable to bank
    
    
    
    
    
    
    500,000Payments on long-term borrowings, including capital
lease obligations
    
    
    (418,942
    )
    
    
    (378,848
    )Proceeds from issuance of common stock
    
    
    38,473
    
    
    
    123,346Net cash provided by (used in) financing activities
    
    
    1,145,531
    
    
    
    (25,502
    )Net increase (decrease) in cash
    
    
    (865,181
    )
    
    
    558,482CashBeginning
    
    
    865,181
    
    
    
    457,576Ending
    
    $
    
    
    
    $
    1,016,058Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    123,321
    
    
    
    84,104Income taxes
    
    
    555,402
    
    
    
    857,425Supplemental Schedule of Noncash Financing ActivitiesWarrants Issued in Connection with Investor Relations
Services to be Provided
    
    $
    
    
    
    $
    37,477Acquisition of property in exchange for capital leases
    
    $
    957,317
    
    
    $
    
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WINLAND ELECTRONICS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
 Note 1. Basis of Presentation
    Note 2. Earnings Per Common Share
  Note 3. Financing Arrangement
  ,
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Note 4. Major Customers and Enterprise-wide Disclosures
 Major Customers:
 Three Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    September 30, 2005Sales percentage:Customer A
    
    
    38
    %
    
    
    54
    %Customer B
    
    
    23
    %
    
    
    2
    %
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2005Sales percentage:Customer A
    
    
    42
    %
    
    
    55
    %Customer B
    
    
    20
    %
    
    
    1
    %
  September 30, 2006
    
    September 30, 2005Accounts receivable percentage:Customer A
    
    
    25
    %
    
    
    39
    %Customer B
    
    
    15
    %
    
    
    5
    %
 Enterprisewide Disclosures:
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    859,381
    
    
    
    714,801Electronic controls and assemblies for
OEM customers
    
    
    8,679,220
    
    
    
    6,611,794Engineering Design Services
    
    
    26,597
    
    
    
    58,041Freight Out
    
    
    20,954
    
    
    
    15,250$
    9,586,152
    
    
    $
    7,399,885
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    2,477,373
    
    
    
    2,157,576Electronic controls and assemblies for
OEM customers
    
    
    25,676,196
    
    
    
    19,077,407Engineering Design Services
    
    
    180,108
    
    
    
    260,253Freight Out
    
    
    60,907
    
    
    
    47,404$
    28,394,584
    
    
    $
    21,542,640
 Note 5. Allowance for Rework and Warranty Costs
 Allowance for Rework and Warranty Costs:
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Three Months Ended September 30,2006
    
    
    2005Balance, Beginning
    
    $
    496,242
    
    
    $
    119,725Accruals for products Sold
    
    
    20,398
    
    
    
    40,093Charges in accruals for pre-existing warranties
    
    
    (214,607
    )
    
    
    (37,893
    )Balance, Ending
    
    $
    302,032
    
    
    $
    121,925
 Nine Months Ended September 30,2006
    
    
    2005Balance, Beginning
    
    $
    117,300
    
    
    $
    128,000Accruals for products Sold
    
    
    477,071
    
    
    
    103,339Charges in accruals for pre-existing warranties
    
    
    (292,339
    )
    
    
    (109,414
    )Balance, Ending
    
    $
    302,032
    
    
    $
    121,925
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Note 6. Warrants and Stock-Based Compensation Plans
 Warrants:
    Stock option and employee stock purchase plans:
    9




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Nine Months Ended September 30,2006
    
    2005Expected life, in years
    
    
    5.69
    
    
    
    7.46Expected volatility
    
    
    81.20
    %
    
    
    92.81
    %Risk-free interest rate
    
    
    4.74
    %
    
    
    3.98
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    10




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For the Nine Months EndedSeptember 30, 2005Net income, as reported
    
    $
    1,378,185Deduct: Total stock-based compensation expense
Determined under fair value based method for all
Awards, net of related tax effects
    
    
    (65,283
    )Pro forma net income
    
    $
    1,312,902Earnings per share:Basic, as reported
    
    $
    .39Basic, pro forma
    
    $
    .38Diluted, as reported
    
    $
    .38Diluted, pro forma
    
    $
    .36
   Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contract LifeOutstanding options at
January 1, 2006
    
    
    265,571
    
    
    $
    2.25Granted
    
    
    86,500
    
    
    
    3.74Exercised
    
    
    (55,535
    )
    
    
    1.67Forfeited
    
    
    (     496
    )
    
    
    2.87Outstanding options at September 30, 2006
    
    
    296,040
    
    
    $
    2.79
    
    
    3.93 YrsOutstanding exercisable at
September 30, 2006
    
    
    182,480
    
    
    $
    2.83
    
    
    3.83 Yrs
  Note 7. New Accounting Standards
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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
   Executive Summary
   RESULTS OF OPERATIONS
Three months and nine months ended September 30, 2006 vs.
Three months and nine months ended September 30, 2005
 Net Sales
  13




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Cost of Sales
 Gross Profits
 Operating Expenses
 14




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Interest Expense
 Net Income
 15




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LIQUIDITY AND CAPITAL RESOURCES
      2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010+
    
    
    TotalTerm Loans (including interest)
    
    $
    137,830
    
    
    $
    538,491
    
    
    $
    353,601
    
    
    $
    189,419
    
    
    $
    652,098
    
    
    $
    1,871,439Capital Leases (including interest)
    
    
    73,635
    
    
    
    232,274
    
    
    
    232,274
    
    
    
    232,274
    
    
    
    391,499
    
    
    
    1,161,955Total
    
    $
    211,465
    
    
    $
    770,764
    
    
    $
    585,875
    
    
    $
    421,693
    
    
    $
    1,043,597
    
    
    $
    3,033,394
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition.
     Inventory Valuation.
  17




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Allowance for Doubtful Accounts.
 Allowance for Rework and Warranty Costs.
 Allowance for EnviroAlert Product Enhancement.
 Deferred Taxes.
 Stock Based Compensation.
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CAUTIONARY STATEMENTS
     19




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ITEM 3. CONTROLS AND PROCEDURES
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   (d) Maximum Number (or(c) Total Number of
    
    Approximate DollarShares (or Units)
    
    Value) of Shares (or(a) Total Number
    
    
    
    
    
    Purchased as Part of
    
    Units) that May Yet Beof Shares (or Units)
    
    (b) Average Price Paid
    
    Publicly Announced Plans
    
    Purchased Under thePeriod
    
    Repurchased(1)
    
    per Share (or Unit)
    
    or Programs
    
    Plans or ProgramsJul. 1 - Jul. 31, 2006
    
    
    8,156
    
    
    $
    3.70
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    8,156
    
    
    $
    3.70
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    All of the shares were repurchased by the Company in connection with a stock-for-stock option
exercises by one former employee. ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5. OTHER INFORMATION
  ITEM 6. EXHIBITS
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SIGNATURES
  WINLAND ELECTRONICS, INC.(Company)Dated: November 6,  2006
    /s/ Lorin E. KruegerLorin E. Krueger, President and ChiefExecutive Officer (Principal Executive
Officer) /s/ Glenn A. KermesGlenn A. Kermes, Chief Financial Officer(Principal Financial and Accounting Officer) 
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 EXHIBIT INDEX TO FORM 10-QSB
 For the fiscal quarter ended
    
    Commission File No. 0-15637September 30, 2006
 
 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
 24