<PAGE>
 
--------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the quarterly period ended July 5, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 000-22221

                            FIELDWORKS, INCORPORATED
             (Exact name of registrant as specified in its charter)

                Minnesota                                   41-1731723
(State or other jurisdiction of incorporation           (I.R.S. Employer
             or organization)                          Identification No.)


                               7631 Anagram Drive
                          Eden Prairie, Minnesota 55344
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (612) 974-7000
              (Registrant's telephone number, including area code)


         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   [ ]


The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of August 12, 1998 was 8,800,926.

--------------------------------------------------------------------------------
<PAGE>
 
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS

                     FIELDWORKS, INCORPORATED AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    JULY 5,        JANUARY 4,
                                                                                     1998            1998
                                                                                 ------------    ------------
                                  ASSETS                                          (UNAUDITED)
<S>                                                                              <C>             <C>         
CURRENT ASSETS:
   Cash and cash equivalents .................................................   $  3,406,118    $  3,218,759
   Accounts receivable, net of allowance for doubtful accounts of $371,500 and
     $384,600 ................................................................      2,333,218       6,402,023
   Inventories ...............................................................      4,238,016       5,009,137
   Prepaid expenses and other ................................................        124,783         186,298
                                                                                 ------------    ------------
         Total current assets ................................................     10,102,135      14,816,217
                                                                                 ------------    ------------
PROPERTY AND EQUIPMENT:
   Computers and equipment ...................................................      1,992,277       1,628,949
   Furniture and fixtures ....................................................        535,233         378,821
   Leasehold improvements ....................................................        458,216         184,446
   Less: Accumulated depreciation ............................................     (1,207,837)       (913,918)
                                                                                 ------------    ------------
         Property and equipment, net .........................................      1,777,889       1,278,298
DEPOSITS AND OTHER ASSETS, net ...............................................         23,231          25,555
                                                                                 ------------    ------------
                                                                                 $ 11,903,255    $ 16,120,070
                                                                                 ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable ..........................................................   $  1,097,663    $  1,489,982
   Accrued compensation and benefits .........................................        367,585         410,758
   Accrued warranty and other ................................................      2,453,052       1,350,610
   Current maturities of capitalized lease obligations .......................         26,947          47,409
                                                                                 ------------    ------------
         Total current liabilities ...........................................      3,945,247       3,298,759
CAPITALIZED LEASE OBLIGATIONS, less current maturities .......................         14,084          22,693
                                                                                 ------------    ------------
         Total liabilities ...................................................      3,959,331       3,321,452
                                                                                 ------------    ------------
SHAREHOLDERS' EQUITY:
   Common stock, $.001 par value, 30,000,000 shares authorized; 8,800,926 and
     8,725,426 issued and outstanding ........................................          8,801           8,725
   Common stock warrants .....................................................        150,640         150,640
   Additional paid-in capital ................................................     20,062,026      19,966,602
   Accumulated deficit .......................................................    (12,277,543)     (7,327,349)
                                                                                 ------------    ------------
         Total shareholders' equity ..........................................      7,943,924      12,798,618
                                                                                 ------------    ------------
                                                                                 $ 11,903,255    $ 16,120,070
                                                                                 ============    ============
</TABLE>

     The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
 
                     FIELDWORKS, INCORPORATED AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    FOR THE THREE MONTHS             FOR THE SIX MONTHS
                                                           ENDED                            ENDED
                                                ----------------------------    ----------------------------
                                                   JULY 5,         JULY 6,         JULY 5,         JULY 6,
                                                    1998            1997            1998            1997
                                                ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>
NET SALES ...................................   $  3,833,969    $  5,513,304    $  9,219,771    $ 10,630,472
COST OF SALES ...............................      3,761,768       3,325,888       6,975,289       6,384,011
                                                ------------    ------------    ------------    ------------
         Gross profit .......................         72,201       2,187,416       2,244,482       4,246,461
                                                ------------    ------------    ------------    ------------
OPERATING EXPENSES:
     Sales and marketing ....................      1,424,294       1,373,287       2,863,898       2,537,966
     General and administrative .............        746,093         709,057       1,582,528       1,483,317
     Research and development ...............        857,446         435,469       1,566,376         833,150
     Product upgrade and restructuring costs       1,284,810              --       1,284,810              --
                                                ------------    ------------    ------------    ------------
         Total operating expenses ...........      4,312,643       2,517,813       7,297,612       4,854,433
                                                ------------    ------------    ------------    ------------
         Operating loss .....................     (4,240,442)       (330,397)     (5,053,130)       (607,972)
INTEREST INCOME (EXPENSE) AND OTHER, net ....         46,429          25,113         102,936        (395,238)
                                                ------------    ------------    ------------    ------------
NET LOSS ....................................   $ (4,194,013)   $   (305,284)   $ (4,950,194)   $ (1,003,210)
                                                ============    ============    ============    ============

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
   Net loss per common share ................   $       (.48)   $       (.04)   $       (.56)   $       (.13)
                                                ============    ============    ============    ============

   Weighted average common shares outstanding      8,799,427       8,684,054       8,782,521       7,782,235
                                                ============    ============    ============    ============
</TABLE>

     The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                     FIELDWORKS, INCORPORATED AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           FOR THE SIX MONTHS
                                                                                  ENDED
                                                                      ----------------------------
                                                                         JULY 5,         JULY 6,
                                                                          1998            1997
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
OPERATING ACTIVITIES:
     Net loss .....................................................   $ (4,950,194)   $ (1,003,210)
     Adjustments to reconcile net loss to net cash provided by
        (used for) operating activities-
          Depreciation and amortization ...........................        295,211         539,588
          Product upgrade and restructuring costs .................      1,284,810            --
          Change in operating items:
               Accounts receivable ................................      4,068,805        (950,957)
               Inventories ........................................        771,121        (688,578)
               Prepaid expenses and other .........................         62,547         201,842
               Accounts payable ...................................       (392,319)        147,499
               Accrued expenses ...................................       (225,541)        (46,999)
                                                                      ------------    ------------
               Net cash provided by (used for) operating activities        914,440      (1,800,815)
                                                                      ------------    ------------
INVESTING ACTIVITIES:
     Purchase of property and equipment ...........................       (793,510)       (131,265)
     Collection of loan to related party ..........................           --            92,175
                                                                      ------------    ------------
          Net cash used for investing activities ..................       (793,510)        (39,090)
                                                                      ------------    ------------
FINANCING ACTIVITIES:
     Proceeds from issuance of common stock .......................         95,500      11,891,827
     Payment of notes payable to related parties ..................           --        (6,350,000)
     Payment of capitalized lease obligations .....................        (29,071)        (28,036)
                                                                      ------------    ------------
          Net cash provided by financing activities ...............         65,429       5,513,791
                                                                      ------------    ------------
INCREASE IN CASH AND CASH EQUIVALENTS .............................        187,359       3,673,886
CASH AND CASH EQUIVALENTS, beginning of period ....................      3,218,759       2,132,089
                                                                      ------------    ------------
CASH AND CASH EQUIVALENTS, end of period ..........................   $  3,406,118    $  5,805,975
                                                                      ============    ============


SUPPLEMENTAL CASH FLOW DISCLOSURE:
     Cash paid for interest .......................................   $      2,121    $    260,114
                                                                      ============    ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
     Property and equipment acquired under capital leases .........   $       --      $      7,154
                                                                      ============    ============
</TABLE>

     The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                     FIELDWORKS, INCORPORATED AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.   BASIS OF PRESENTATION:

     The accompanying unaudited consolidated financial statements of FieldWorks,
Incorporated (FieldWorks or the Company), should be read in conjunction with the
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Company's Annual Report on Form 10-K, for the
fiscal year ended January 4, 1998. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly the financial results for the interim periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the entire fiscal year.



2.   INVENTORIES:

     Inventories are stated at the lower of cost or market value, as determined
by the first-in, first-out cost method, and consisted of the following:

                                                      JULY 5,        JANUARY 4,
                                                        1998            1998
                                                     ----------      ----------
Raw materials...................................     $2,839,046      $3,268,558
Work in process.................................        614,968         859,172
Finished goods..................................        784,002         881,407
                                                     ----------      ----------
     Total......................................     $4,238,016      $5,009,137
                                                     ===========     ==========



3.   INITIAL PUBLIC OFFERING:

     In March 1997, the Company completed an initial public offering (IPO) of
2,125,000 shares of common stock with proceeds of approximately $11.8 million,
net of related offering costs. The Company used $6.4 million of the proceeds to
repay bridge financing arrangements and the remaining proceeds will be used to
fund capital expenditures and for working capital purposes. In connection with
the offering, the Company issued warrants to the underwriter to purchase 212,500
shares of common stock at an exercise price of $7.80 per share. At the
completion of the IPO, the Company's articles of incorporation were amended to
authorize 30 million shares of common stock, $.001 par value, and five million
shares of undesignated preferred stock, $.001 par value.



4.   EARNINGS (LOSS) PER SHARE:

     The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128) effective in the quarter and year ended
January 4, 1998. SFAS No. 128 establishes accounting standards for computing and
presenting earnings (loss) per share (EPS). Basic EPS is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. No dilution for potentially dilutive securities is included.
Diluted EPS is calculated using the treasury stock method and reflects the
dilutive effect of outstanding options, warrants and other securities. In the
Company's calculations, the impact of common stock equivalents has been excluded
from the computation of weighted average common shares outstanding as the effect
would be antidilutive. As a result, basic and diluted EPS are equal for all
periods presented in the accompanying Statements of Operations.
<PAGE>
 
5.   PRODUCT UPGRADE AND RESTRUCTURING COSTS:

     Product upgrade and restructuring costs relate to the discontinuation of
the 5000 Series I product line, as well as other internal reorganization efforts
The Company introduced the 5000 Series II product line during the second quarter
of 1998, which has expanded features and increased reliability. The Company has
established reserves to address any customer warranty or upgrade issues with the
5000 Series I product line. In addition, the Company incurred costs relating to
restructuring, which included the layoff of certain employees and associated
costs.



6.   RECLASSIFICATIONS:

     Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation, with no effect on previously reported net loss
or shareholders' equity.



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "estimates," "should," "may" or
similar expressions are intended to identify such forward-looking statements,
but are not the exclusive means of identifying such statements. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the following: risks associated with the development of
new products, market acceptance of new products, technological obsolescence,
dependence on third-party manufacturers and suppliers, risks associated with the
Company's dependence on proprietary technology, and the long customer sales
cycle. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. The Company's
forward-looking statements are qualified in their entirety by the cautions and
risk factors set forth under the "Cautionary Statement" filed as Exhibit 99.1 to
its Form 10-K for the year ended January 4, 1998.
<PAGE>
 
RESULTS OF OPERATIONS

     The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:

                                               FOR THE THREE      FOR THE SIX
                                                MONTHS ENDED      MONTHS ENDED
                                              ----------------  ----------------
                                              JULY 5,  JULY 6,  JULY 5,  JULY 6,
                                               1998     1997     1998     1997
                                               ----     ----     ----     ----
Net sales ..................................    100%     100%     100%     100%
Cost of sales ..............................     98       60       76       60
                                               ----     ----     ----     ----
     Gross profit ..........................      2       40       24       40
Operating expenses:
     Sales and marketing ...................     37       25       31       24
     General and administrative ............     19       13       17       14
     Research and development ..............     22        8       17        8
     Product upgrade and restructuring costs     34     --         14     --
                                               ----     ----     ----     ----
          Total operating expenses .........    112       46       79       46
                                               ----     ----     ----     ----
Operating loss .............................   (110)      (6)     (55)      (6)
Interest income (expense) and other, net ...      1     --          1       (3)
                                               ----     ----     ----     ----
Net loss ...................................   (109)%     (6)%    (54)%     (9)%
                                               ====     ====     ====     ====


     NET SALES. The Company's net sales decreased 30% from $5.5 million in the
second quarter of 1997 to $3.8 million for the comparable period in 1998 and
decreased 13% from $10.6 million in the first six months of 1997 to $9.2 million
for the comparable period in 1998. The decrease was primarily due to the
Company's increased focus on system sales in which the Company partners with the
customer to develop, test and deliver a total solution, including custom
hardware, software and service and support programs. Although these sales are
typically high volume, they tend to have long lead times. In addition, sales
were impacted by technology advances in the market place. In response, the
Company introduced the 5000 Series II and upgraded the standard features of the
7000 Series. The average selling prices of the 7000 Series and 5000 Series
products were comparable for the second quarter of 1998 and 1997 and increased
slightly for the first six months of 1998 as compared to the same period in
1997, as a result of customers purchasing more options and accessories. Unit
volumes decreased 34% from the second quarter of 1997 to the second quarter of
1998 and 18% from the first six months of 1997 to the same period in 1998. Sales
of the 5000 Series represented 38% and 39% of net sales for the six months ended
July 5, 1998 and July 6, 1997, respectively. The Company anticipates nominal
improvement in net sales for the third quarter of 1998 with a slightly more
favorable fourth quarter.

     International sales were comparable at $2.4 million or 23% of net sales and
$2.6 million or 28% of net sales for the first six months of 1997 and the first
six months of 1998, respectively. The majority of 1998 international sales,
approximately 58%, were in Europe. The Company believes that international sales
as a percentage of total net sales will be in the mid to upper 20% range for the
remainder of 1998, with little impact on the Company's results of operations or
liquidity.

     GROSS PROFIT. Gross profit decreased from $2.2 million or 39.7% of net
sales for the second quarter of 1997 to $72,000 or 1.9% of net sales for the
second quarter of 1998. Gross profit decreased from $4.2 million or 39.9% of net
sales for the first six months of 1997 to $2.2 million or 24.3% of net sales for
the first six months of 1998. Gross profit was negatively impacted by a write
down of inventory of $1.0 million during the second quarter of 1998. These
charges were due to discontinuation of the 5000 Series I product line and other
product changes in response to technological and market developments. The
Company is taking steps to strengthen its materials management as well as taking
other actions in order to reduce the risk of future large write downs of
inventory. In addition, gross profit was negatively impacted by fixed
manufacturing overhead costs as a result of the reduced production volume.
<PAGE>
 
     The Company has also enhanced its standard features on the 5000 and 7000
Series platforms as well as reduced pricing on the highest performance standard
configuration. These actions were taken to upgrade its platforms with current
technology, improve performance and reliability and increase sales. The pricing
actions have not and are not anticipated to have a significant impact on gross
profit margins in the future as the Company expects customers to purchase more
options and accessories. In addition, with improvements in manufacturing
efficiencies, specifically due to enhanced manufacturing processes at the
Company's new manufacturing facility, outsourcing of several key assembly
components, and anticipated unit volume increases, the Company believes gross
profit margins will return to the mid to high 30% range by the end of 1998.

     Gross profit, for all periods presented, also reflects the Company's
reclassification of certain warranty related costs from cost of goods sold to
sales and marketing expense. The impact of this reclassification was to decrease
cost of goods sold and increase gross profit by $155,000 and 4.0% for the
quarter ended July 5, 1998 and by $245,000 and 4.4% for the quarter ended July
6, 1997. The impact for the six months ended July 5, 1998 and July 6, 1997 was
$369,000 and 4.0% and $421,000 and 4.0%, respectively.

     SALES AND MARKETING. Sales and marketing expenses include salaries, sales
commissions, travel and related expenses for the Company's marketing, sales and
technical support personnel, as well as programs aimed at increasing revenues,
such as advertising and trade shows. In addition, these expenses include the
costs related to maintaining the Company's standard one year warranty on its
products. Sales and marketing expenses remained constant at $1.4 million for the
second quarter of 1998 and 1997 and represented 37% and 25% of net sales,
respectively. Sales and marketing expenses increased from $2.5 million or 24% of
net sales to $2.9 million or 31% of net sales from the first six months of 1997
to the first six months of 1998. An increase, due primarily to increased
staffing and travel as the Company continued to expand its direct sales force,
was offset by a decrease in warranty expenses due to efficiencies gained in the
repair of units under warranty and reduced advertising and promotion expenses as
the Company focused these expenses on specific markets. The Company expects to
continue to invest in the promotion and marketing of its products in order to
develop its vertical marketing strategy and enhance its competitive position.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
Company's finance, human resources, contracts and other administrative
management operations. These expenses were comparable at $0.7 million for the
second quarter of 1997 and 1998 and 13% and 19% of net sales, respectively. In
the first six months of 1997, general and administrative expenses were $1.5
million and 14% of net sales as compared to $1.6 million and 17% of net sales in
the first six months for 1998. Additional compensation expenses as the Company
added to its general and administrative infrastructure and expenses incurred for
moving into a larger facility during the fourth quarter of 1997 and the first
quarter of 1998 were offset by reduced bad debt allowances, as the Company
continued to have favorable collection results. The Company anticipates holding
the growth of general and administrative expenses to a level less than the
growth of sales in the future.

     RESEARCH AND DEVELOPMENT. Research and development expenses are incurred in
the development and testing of new or enhanced products and customized computing
platforms for customer specific applications. These costs are expensed as
incurred. Research and development expenses increased from $0.4 million or 8% of
net sales during the second quarter of 1997 to $0.9 million or 22% of net sales
for the second quarter of 1998. Research and development expenses increased from
$0.8 million or 8% of net sales for the first six months of 1997 to $1.6 million
or 17% of net sales for the first six months of 1998. The increase was primarily
due to salaries and supplies and services used in the product development
process. The Company's development effort during the first six months of 1998
was primarily attributed to enhancements of the 5000 and 7000 Series. The
Company has introduced the 5000 Series II, which has increased processor speed,
memory and other standard feature enhancements. Additionally, the 5000 Series II
has a new technology module designed to improve reliability of the platform.
Standard features on the 7000 Series have also been upgraded. The Company
continues its development effort on the 2000 Series, with introduction
anticipated in the first half of 1999. The Company expects research and
development expenses to increase for the foreseeable future as it continues to
expand its technical resources for systems support, to develop new platforms and
enhance existing product lines. As a percentage of net sales, research and
development expenses are expected to decrease as sales increase.
<PAGE>
 
     PRODUCT UPGRADE AND RESTRUCTURING COSTS. Product upgrade and restructuring
costs were $1.3 million or 34% of net sales for the second quarter of 1998.
These costs relate to the discontinuation of the 5000 Series I product line, as
well as other internal reorganization efforts. The Company introduced the 5000
Series II product line, which has expanded features and increased reliability,
during the second quarter of 1998. The Company has established reserves to
address any customer warranty or upgrade issues with the 5000 Series I product
line. In addition, the Company incurred costs relating to restructuring, which
included the layoff of certain employees and associated costs. The Company will
incur additional severance costs in the third quarter of 1998, expected to be
approximately $150,000.

     INTEREST INCOME (EXPENSE) AND OTHER, NET. Net interest income was
approximately $25,000 for the second quarter of 1997 compared to $46,000 for the
comparable period in 1998. Net interest expense was $395,000 for the first six
months of 1997 compared to net interest income of $103,000 for the comparable
period in 1998. This was primarily due to the repayment of debt in March and
April of 1997 using initial public offering proceeds and the subsequent
investment of the remaining proceeds. The Company expects to continue reporting
net interest income for the remainder of 1998.



LIQUIDITY AND CAPITAL RESOURCES

     From inception to March 1997, the Company primarily financed its operations
and capital expenditures through the private sale of equity and debt securities,
loans and bank lines of credit. In the first quarter of 1997, the Company
completed an initial public offering of common stock and received net proceeds
of $11.8 million from the sale of 2,125,000 shares. From the proceeds, the
Company repaid $1.4 million of $6.4 million of loans outstanding during the
first quarter of 1997. The Company repaid the remaining $5.0 million in the
second quarter of 1997. There were no loans outstanding or bank credit
facilities open as of July 5, 1998.

     The Company's cash balance as of July 5, 1998 was $3.4 million as compared
to the January 4, 1998 balance of $3.2 million. Cash provided by operating
activities totaled $0.9 million for the first six months of 1998. The Company's
accounts receivable decreased $4.1 million from $6.4 million at January 4, 1998
to $2.3 million at July 5, 1998, primarily due to collections from increased
sales in the fourth quarter of 1997 and reduced sales for the first six months
of 1998. Net inventories decreased $0.8 million to $4.2 million at July 5, 1998
from January 4, 1998. Gross inventories increased $0.4 million due to purchases
of long lead time items for anticipated sales in the first six months, which
were not realized, offset by increases in inventory reserves. These reserves
were established due to the discontinuation of the 5000 Series I product line
and other product changes in response to technological and market developments.
Accrued expenses increased from $1.8 million at January 4, 1998 to $2.8 million
at July 5, 1998. The increase was mainly due to reserves established for product
upgrade costs relating to the 5000 Series I and deferred revenue related to the
sale of extended warranties.

     During the first six months of 1998, the Company purchased $0.8 million of
property, plant and equipment. The expenditures related primarily to leasehold
improvements, equipment, operating system software and furniture and fixtures
for the new facility as well as manufacturing tooling expenditures. The Company
anticipates property, plant and equipment expenditures relating to tooling to
increase in the foreseeable future as it expands its product line offerings and
enhances existing platforms.

     The Company is in the process of setting up a line of credit to supplement
cash availability and expects to have a facility in place during the third
quarter of 1998. The Company believes that this planned line of credit, together
with existing cash, interest expected to be earned thereon, anticipated
operating cash flows, and potential financing to be sought through borrowings or
other arrangements, will be sufficient to fund its operations at least through
the next twelve months. Cash requirements for periods during and beyond the next
twelve months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth, among other factors.
<PAGE>
 
YEAR 2000

     The year 2000 issue is the result of computer programs using only the last
two digits to identify the year. These programs may not be able to interpret
dates beyond the year 1999, which could cause computer system failure or other
errors disrupting operations. The Company has identified certain individuals
internally to address all aspects of the year 2000 issue, including internal
computer systems, products sold and supplier capabilities.

     The Company's major internal information systems software was upgraded
during the first quarter of 1998 to ensure year 2000 compliance. The total cost
of the implementation was not significant. The Company plans to perform other
minor upgrades to its internal software and hardware by the end of 1998.

     Management believes its current products are year 2000 compliant and is
offering updated configuration software for products shipped in prior periods.
Associated costs are not expected to be material.

     The Company's operations with respect to the year 2000 may also be affected
by other entities with which the Company transacts business. The Company has
requested documentation from its vendors and other key third parties regarding
their year 2000 compliance and will evaluate alternative courses of action
relating to any who are not, or will not be, year 2000 compliant. Until that
time, the Company is unable to determine the potential consequences, if any,
that could result from such entities' failure to effectively address this issue.

     Although the Company does not believe that the year 2000 issue will have a
material impact on its business, financial position, results of operations or
liquidity, it is uncertain as to what extent the Company may be affected by such
matters.



PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS

     The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS

         The Company's registration statement on Form S-1, file number
333-18335, was declared effective on March 19, 1997. The Company registered an
aggregate of 2,443,750 shares of common stock, $.001 par value (including
316,250 shares covered by a registration statement filed pursuant to Rule 462(m)
on March 20, 1997, file number 333-23637) with R.J. Steichen & Company as the
managing underwriter. The offering commenced on March 20, 1997, and on March 25,
1997, the Company closed on aggregate proceeds of $13,812,500 from the sale of
2,125,000 of these shares. The remainder of the shares registered were subject
to an underwriters' over-allotment option that subsequently expired unexercised.
<PAGE>
 
     The following expenses were incurred in connection with the issuance and
distribution of the securities:


          Underwriters discount and commission               $    967,000
          Expenses paid to underwriters                           276,000
          Other expenses                                          809,000
                                                             ------------
             Total expenses                                  $  2,052,000
                                                             ============

          Net offering proceeds                              $ 11,760,000
                                                             ============

     The net offering proceeds have been used as follows as of July 5, 1998:


          Construction of plant, building and facilities     $    348,000
          Purchase of machinery and equipment                   1,207,000
          Repayment of indebtedness                             6,597,000
          Working capital                                       1,183,000
          Temporary investment in Norwest
              Advantage Cash Investment Account                 2,425,000
                                                             ------------
                                                             $ 11,760,000
                                                             ============


     All such amounts were direct payments to third parties. The Company has
spent $1.6 million on capital expenditures since its initial public offering as
compared to $1.0 million estimated at the time of the offering. This difference
is mainly due to the level of expenditures for leaseholds and other costs
related to the Company's move into its new facility.


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

     An Annual Meeting of Shareholders was held on May 20, 1998. The
shareholders voted on two matters: (1) to elect five directors, each of whom
will serve until such director's successor shall have been elected and shall
qualify, or until such director's earlier death, resignation, removal or
disqualification, and (2) to amend the Company's 1994 Long-Term Incentive and
Stock Option Plan (the Plan) increasing the number of shares subject to the Plan
from 1,500,000 to 2,000,000. The shareholders voted in favor of all matters by
the following votes:

                                                          Votes         Votes
                                                           For         Withheld
                                                           ---         --------
     Election of Board of Directors
       Gary J. Beeman...............................    7,067,869      130,780
       Robert W. Heller.............................    7,093,469      105,180
       George E. Kline..............................    7,044,769      153,880
       David C. Malmberg............................    7,086,169      112,480
       Robert C. Szymborski.........................    7,073,869      124,780



                                          Votes     Votes     Votes      Broker
                                           For     Against  Abstained  Non Vote
                                        ---------  -------  ---------  --------
   Amend the 1994 Long-Term Incentive
     and Stock Option Plan............. 4,444,108  366,017    32,287   2,356,237
<PAGE>
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         Exhibit 3.1    Second Amended and Restated Articles of Incorporation
                        of the Company (incorporated by reference to Exhibit
                        3.2 to the Company's Registration Statement filed on
                        Form S-1, File No. 333-18335)

         Exhibit 3.2    Second Amended and Restated Bylaws of the Company
                        (incorporated by reference to Exhibit 3.4 to the
                        Company's Registration Statement filed on Form S-1,
                        File No. 333-18335)

         Exhibit 11.1   Statement Re Computation of Per Share Earnings (filed
                        herewith)

         Exhibit 27.1   Financial Data Schedule (filed herewith)

         Exhibit 27.2   Restated Financial Data Schedule for the six month
                        period ended July 6, 1997 (filed herewith)



(b)      Reports on Form 8-K

         None.



                                    SIGNATURE

         Pursuant to the requirements 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.

FIELDWORKS, INCORPORATED


Date:  August 18, 1998                    /s/ Karen L. Engebretson
                                      ------------------------------------------
                                      Karen L. Engebretson, Vice President of
                                      Finance and CFO (as authorized officer and
                                      principal financial officer)
[{"type": "10-Q", "sequence": "1", "description": "FORM 10-Q", "secsgml_size_bytes": 44208}]
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--------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the quarterly period ended July 5, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 000-22221

                            FIELDWORKS, INCORPORATED
             (Exact name of registrant as specified in its charter)

                Minnesota                                   41-1731723
(State or other jurisdiction of incorporation           (I.R.S. Employer
             or organization)                          Identification No.)

                               7631 Anagram Drive
                          Eden Prairie, Minnesota 55344
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (612) 974-7000
              (Registrant's telephone number, including area code)

         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   [ ]

The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of August 12, 1998 was 8,800,926.

--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS

                     FIELDWORKS, INCORPORATED AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
JULY 5,        JANUARY 4,
                                                                                     1998            1998
                                                                                 ------------    ------------
                                  ASSETS                                          (UNAUDITED)
CURRENT ASSETS:
   Cash and cash equivalents .................................................   $  3,406,118    $  3,218,759
   Accounts receivable, net of allowance for doubtful accounts of $371,500 and
     $384,600 ................................................................      2,333,218       6,402,023
   Inventories ...............................................................      4,238,016       5,009,137
   Prepaid expenses and other ................................................        124,783         186,298
                                                                                 ------------    ------------
         Total current assets ................................................     10,102,135      14,816,217
                                                                                 ------------    ------------
PROPERTY AND EQUIPMENT:
   Computers and equipment ...................................................      1,992,277       1,628,949
   Furniture and fixtures ....................................................        535,233         378,821
   Leasehold improvements ....................................................        458,216         184,446
   Less: Accumulated depreciation ............................................     (1,207,837)       (913,918)
                                                                                 ------------    ------------
         Property and equipment, net .........................................      1,777,889       1,278,298
DEPOSITS AND OTHER ASSETS, net ...............................................         23,231          25,555
                                                                                 ------------    ------------
                                                                                 $ 11,903,255    $ 16,120,070
                                                                                 ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable ..........................................................   $  1,097,663    $  1,489,982
   Accrued compensation and benefits .........................................        367,585         410,758
   Accrued warranty and other ................................................      2,453,052       1,350,610
   Current maturities of capitalized lease obligations .......................         26,947          47,409
                                                                                 ------------    ------------
         Total current liabilities ...........................................      3,945,247       3,298,759
CAPITALIZED LEASE OBLIGATIONS, less current maturities .......................         14,084          22,693
                                                                                 ------------    ------------
         Total liabilities ...................................................      3,959,331       3,321,452
                                                                                 ------------    ------------
SHAREHOLDERS' EQUITY:
   Common stock, $.001 par value, 30,000,000 shares authorized; 8,800,926 and
     8,725,426 issued and outstanding ........................................          8,801           8,725
   Common stock warrants .....................................................        150,640         150,640
   Additional paid-in capital ................................................     20,062,026      19,966,602
   Accumulated deficit .......................................................    (12,277,543)     (7,327,349)
                                                                                 ------------    ------------
         Total shareholders' equity ..........................................      7,943,924      12,798,618
                                                                                 ------------    ------------
                                                                                 $ 11,903,255    $ 16,120,070
                                                                                 ============    ============
The accompanying notes are an integral part of these consolidated balance
sheets.
FIELDWORKS, INCORPORATED AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
FOR THE THREE MONTHS             FOR THE SIX MONTHS
                                                           ENDED                            ENDED
                                                ----------------------------    ----------------------------
                                                   JULY 5,         JULY 6,         JULY 5,         JULY 6,
                                                    1998            1997            1998            1997
                                                ------------    ------------    ------------    ------------
NET SALES ...................................   $  3,833,969    $  5,513,304    $  9,219,771    $ 10,630,472
COST OF SALES ...............................      3,761,768       3,325,888       6,975,289       6,384,011
                                                ------------    ------------    ------------    ------------
         Gross profit .......................         72,201       2,187,416       2,244,482       4,246,461
                                                ------------    ------------    ------------    ------------
OPERATING EXPENSES:
     Sales and marketing ....................      1,424,294       1,373,287       2,863,898       2,537,966
     General and administrative .............        746,093         709,057       1,582,528       1,483,317
     Research and development ...............        857,446         435,469       1,566,376         833,150
     Product upgrade and restructuring costs       1,284,810              --       1,284,810              --
                                                ------------    ------------    ------------    ------------
         Total operating expenses ...........      4,312,643       2,517,813       7,297,612       4,854,433
                                                ------------    ------------    ------------    ------------
         Operating loss .....................     (4,240,442)       (330,397)     (5,053,130)       (607,972)
INTEREST INCOME (EXPENSE) AND OTHER, net ....         46,429          25,113         102,936        (395,238)
                                                ------------    ------------    ------------    ------------
NET LOSS ....................................   $ (4,194,013)   $   (305,284)   $ (4,950,194)   $ (1,003,210)
                                                ============    ============    ============    ============

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
   Net loss per common share ................   $       (.48)   $       (.04)   $       (.56)   $       (.13)
                                                ============    ============    ============    ============

   Weighted average common shares outstanding      8,799,427       8,684,054       8,782,521       7,782,235
                                                ============    ============    ============    ============
The accompanying notes are an integral part of these consolidated financial
statements.
FIELDWORKS, INCORPORATED AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
FOR THE SIX MONTHS
                                                                                  ENDED
                                                                      ----------------------------
                                                                         JULY 5,         JULY 6,
                                                                          1998            1997
                                                                      ------------    ------------
OPERATING ACTIVITIES:
     Net loss .....................................................   $ (4,950,194)   $ (1,003,210)
     Adjustments to reconcile net loss to net cash provided by
        (used for) operating activities-
          Depreciation and amortization ...........................        295,211         539,588
          Product upgrade and restructuring costs .................      1,284,810            --
          Change in operating items:
               Accounts receivable ................................      4,068,805        (950,957)
               Inventories ........................................        771,121        (688,578)
               Prepaid expenses and other .........................         62,547         201,842
               Accounts payable ...................................       (392,319)        147,499
               Accrued expenses ...................................       (225,541)        (46,999)
                                                                      ------------    ------------
               Net cash provided by (used for) operating activities        914,440      (1,800,815)
                                                                      ------------    ------------
INVESTING ACTIVITIES:
     Purchase of property and equipment ...........................       (793,510)       (131,265)
     Collection of loan to related party ..........................           --            92,175
                                                                      ------------    ------------
          Net cash used for investing activities ..................       (793,510)        (39,090)
                                                                      ------------    ------------
FINANCING ACTIVITIES:
     Proceeds from issuance of common stock .......................         95,500      11,891,827
     Payment of notes payable to related parties ..................           --        (6,350,000)
     Payment of capitalized lease obligations .....................        (29,071)        (28,036)
                                                                      ------------    ------------
          Net cash provided by financing activities ...............         65,429       5,513,791
                                                                      ------------    ------------
INCREASE IN CASH AND CASH EQUIVALENTS .............................        187,359       3,673,886
CASH AND CASH EQUIVALENTS, beginning of period ....................      3,218,759       2,132,089
                                                                      ------------    ------------
CASH AND CASH EQUIVALENTS, end of period ..........................   $  3,406,118    $  5,805,975
                                                                      ============    ============

SUPPLEMENTAL CASH FLOW DISCLOSURE:
     Cash paid for interest .......................................   $      2,121    $    260,114
                                                                      ============    ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
     Property and equipment acquired under capital leases .........   $       --      $      7,154
                                                                      ============    ============
The accompanying notes are an integral part of these consolidated financial
statements.
FIELDWORKS, INCORPORATED AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   BASIS OF PRESENTATION:

     The accompanying unaudited consolidated financial statements of FieldWorks,
Incorporated (FieldWorks or the Company), should be read in conjunction with the
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Company's Annual Report on Form 10-K, for the
fiscal year ended January 4, 1998. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly the financial results for the interim periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the entire fiscal year.

2.   INVENTORIES:

     Inventories are stated at the lower of cost or market value, as determined
by the first-in, first-out cost method, and consisted of the following:

                                                      JULY 5,        JANUARY 4,
                                                        1998            1998
                                                     ----------      ----------
Raw materials...................................     $2,839,046      $3,268,558
Work in process.................................        614,968         859,172
Finished goods..................................        784,002         881,407
                                                     ----------      ----------
     Total......................................     $4,238,016      $5,009,137
                                                     ===========     ==========

3.   INITIAL PUBLIC OFFERING:

     In March 1997, the Company completed an initial public offering (IPO) of
2,125,000 shares of common stock with proceeds of approximately $11.8 million,
net of related offering costs. The Company used $6.4 million of the proceeds to
repay bridge financing arrangements and the remaining proceeds will be used to
fund capital expenditures and for working capital purposes. In connection with
the offering, the Company issued warrants to the underwriter to purchase 212,500
shares of common stock at an exercise price of $7.80 per share. At the
completion of the IPO, the Company's articles of incorporation were amended to
authorize 30 million shares of common stock, $.001 par value, and five million
shares of undesignated preferred stock, $.001 par value.

4.   EARNINGS (LOSS) PER SHARE:

     The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128) effective in the quarter and year ended
January 4, 1998. SFAS No. 128 establishes accounting standards for computing and
presenting earnings (loss) per share (EPS). Basic EPS is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. No dilution for potentially dilutive securities is included.
Diluted EPS is calculated using the treasury stock method and reflects the
dilutive effect of outstanding options, warrants and other securities. In the
Company's calculations, the impact of common stock equivalents has been excluded
from the computation of weighted average common shares outstanding as the effect
would be antidilutive. As a result, basic and diluted EPS are equal for all
periods presented in the accompanying Statements of Operations.
5.   PRODUCT UPGRADE AND RESTRUCTURING COSTS:

     Product upgrade and restructuring costs relate to the discontinuation of
the 5000 Series I product line, as well as other internal reorganization efforts
The Company introduced the 5000 Series II product line during the second quarter
of 1998, which has expanded features and increased reliability. The Company has
established reserves to address any customer warranty or upgrade issues with the
5000 Series I product line. In addition, the Company incurred costs relating to
restructuring, which included the layoff of certain employees and associated
costs.

6.   RECLASSIFICATIONS:

     Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation, with no effect on previously reported net loss
or shareholders' equity.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "estimates," "should," "may" or
similar expressions are intended to identify such forward-looking statements,
but are not the exclusive means of identifying such statements. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the following: risks associated with the development of
new products, market acceptance of new products, technological obsolescence,
dependence on third-party manufacturers and suppliers, risks associated with the
Company's dependence on proprietary technology, and the long customer sales
cycle. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. The Company's
forward-looking statements are qualified in their entirety by the cautions and
risk factors set forth under the "Cautionary Statement" filed as Exhibit 99.1 to
its Form 10-K for the year ended January 4, 1998.
RESULTS OF OPERATIONS

     The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:

                                               FOR THE THREE      FOR THE SIX
                                                MONTHS ENDED      MONTHS ENDED
                                              ----------------  ----------------
                                              JULY 5,  JULY 6,  JULY 5,  JULY 6,
                                               1998     1997     1998     1997
                                               ----     ----     ----     ----
Net sales ..................................    100%     100%     100%     100%
Cost of sales ..............................     98       60       76       60
                                               ----     ----     ----     ----
     Gross profit ..........................      2       40       24       40
Operating expenses:
     Sales and marketing ...................     37       25       31       24
     General and administrative ............     19       13       17       14
     Research and development ..............     22        8       17        8
     Product upgrade and restructuring costs     34     --         14     --
                                               ----     ----     ----     ----
          Total operating expenses .........    112       46       79       46
                                               ----     ----     ----     ----
Operating loss .............................   (110)      (6)     (55)      (6)
Interest income (expense) and other, net ...      1     --          1       (3)
                                               ----     ----     ----     ----
Net loss ...................................   (109)%     (6)%    (54)%     (9)%
                                               ====     ====     ====     ====

     NET SALES. The Company's net sales decreased 30% from $5.5 million in the
second quarter of 1997 to $3.8 million for the comparable period in 1998 and
decreased 13% from $10.6 million in the first six months of 1997 to $9.2 million
for the comparable period in 1998. The decrease was primarily due to the
Company's increased focus on system sales in which the Company partners with the
customer to develop, test and deliver a total solution, including custom
hardware, software and service and support programs. Although these sales are
typically high volume, they tend to have long lead times. In addition, sales
were impacted by technology advances in the market place. In response, the
Company introduced the 5000 Series II and upgraded the standard features of the
7000 Series. The average selling prices of the 7000 Series and 5000 Series
products were comparable for the second quarter of 1998 and 1997 and increased
slightly for the first six months of 1998 as compared to the same period in
1997, as a result of customers purchasing more options and accessories. Unit
volumes decreased 34% from the second quarter of 1997 to the second quarter of
1998 and 18% from the first six months of 1997 to the same period in 1998. Sales
of the 5000 Series represented 38% and 39% of net sales for the six months ended
July 5, 1998 and July 6, 1997, respectively. The Company anticipates nominal
improvement in net sales for the third quarter of 1998 with a slightly more
favorable fourth quarter.

     International sales were comparable at $2.4 million or 23% of net sales and
$2.6 million or 28% of net sales for the first six months of 1997 and the first
six months of 1998, respectively. The majority of 1998 international sales,
approximately 58%, were in Europe. The Company believes that international sales
as a percentage of total net sales will be in the mid to upper 20% range for the
remainder of 1998, with little impact on the Company's results of operations or
liquidity.

     GROSS PROFIT. Gross profit decreased from $2.2 million or 39.7% of net
sales for the second quarter of 1997 to $72,000 or 1.9% of net sales for the
second quarter of 1998. Gross profit decreased from $4.2 million or 39.9% of net
sales for the first six months of 1997 to $2.2 million or 24.3% of net sales for
the first six months of 1998. Gross profit was negatively impacted by a write
down of inventory of $1.0 million during the second quarter of 1998. These
charges were due to discontinuation of the 5000 Series I product line and other
product changes in response to technological and market developments. The
Company is taking steps to strengthen its materials management as well as taking
other actions in order to reduce the risk of future large write downs of
inventory. In addition, gross profit was negatively impacted by fixed
manufacturing overhead costs as a result of the reduced production volume.
The Company has also enhanced its standard features on the 5000 and 7000
Series platforms as well as reduced pricing on the highest performance standard
configuration. These actions were taken to upgrade its platforms with current
technology, improve performance and reliability and increase sales. The pricing
actions have not and are not anticipated to have a significant impact on gross
profit margins in the future as the Company expects customers to purchase more
options and accessories. In addition, with improvements in manufacturing
efficiencies, specifically due to enhanced manufacturing processes at the
Company's new manufacturing facility, outsourcing of several key assembly
components, and anticipated unit volume increases, the Company believes gross
profit margins will return to the mid to high 30% range by the end of 1998.

     Gross profit, for all periods presented, also reflects the Company's
reclassification of certain warranty related costs from cost of goods sold to
sales and marketing expense. The impact of this reclassification was to decrease
cost of goods sold and increase gross profit by $155,000 and 4.0% for the
quarter ended July 5, 1998 and by $245,000 and 4.4% for the quarter ended July
6, 1997. The impact for the six months ended July 5, 1998 and July 6, 1997 was
$369,000 and 4.0% and $421,000 and 4.0%, respectively.

     SALES AND MARKETING. Sales and marketing expenses include salaries, sales
commissions, travel and related expenses for the Company's marketing, sales and
technical support personnel, as well as programs aimed at increasing revenues,
such as advertising and trade shows. In addition, these expenses include the
costs related to maintaining the Company's standard one year warranty on its
products. Sales and marketing expenses remained constant at $1.4 million for the
second quarter of 1998 and 1997 and represented 37% and 25% of net sales,
respectively. Sales and marketing expenses increased from $2.5 million or 24% of
net sales to $2.9 million or 31% of net sales from the first six months of 1997
to the first six months of 1998. An increase, due primarily to increased
staffing and travel as the Company continued to expand its direct sales force,
was offset by a decrease in warranty expenses due to efficiencies gained in the
repair of units under warranty and reduced advertising and promotion expenses as
the Company focused these expenses on specific markets. The Company expects to
continue to invest in the promotion and marketing of its products in order to
develop its vertical marketing strategy and enhance its competitive position.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
Company's finance, human resources, contracts and other administrative
management operations. These expenses were comparable at $0.7 million for the
second quarter of 1997 and 1998 and 13% and 19% of net sales, respectively. In
the first six months of 1997, general and administrative expenses were $1.5
million and 14% of net sales as compared to $1.6 million and 17% of net sales in
the first six months for 1998. Additional compensation expenses as the Company
added to its general and administrative infrastructure and expenses incurred for
moving into a larger facility during the fourth quarter of 1997 and the first
quarter of 1998 were offset by reduced bad debt allowances, as the Company
continued to have favorable collection results. The Company anticipates holding
the growth of general and administrative expenses to a level less than the
growth of sales in the future.

     RESEARCH AND DEVELOPMENT. Research and development expenses are incurred in
the development and testing of new or enhanced products and customized computing
platforms for customer specific applications. These costs are expensed as
incurred. Research and development expenses increased from $0.4 million or 8% of
net sales during the second quarter of 1997 to $0.9 million or 22% of net sales
for the second quarter of 1998. Research and development expenses increased from
$0.8 million or 8% of net sales for the first six months of 1997 to $1.6 million
or 17% of net sales for the first six months of 1998. The increase was primarily
due to salaries and supplies and services used in the product development
process. The Company's development effort during the first six months of 1998
was primarily attributed to enhancements of the 5000 and 7000 Series. The
Company has introduced the 5000 Series II, which has increased processor speed,
memory and other standard feature enhancements. Additionally, the 5000 Series II
has a new technology module designed to improve reliability of the platform.
Standard features on the 7000 Series have also been upgraded. The Company
continues its development effort on the 2000 Series, with introduction
anticipated in the first half of 1999. The Company expects research and
development expenses to increase for the foreseeable future as it continues to
expand its technical resources for systems support, to develop new platforms and
enhance existing product lines. As a percentage of net sales, research and
development expenses are expected to decrease as sales increase.
PRODUCT UPGRADE AND RESTRUCTURING COSTS. Product upgrade and restructuring
costs were $1.3 million or 34% of net sales for the second quarter of 1998.
These costs relate to the discontinuation of the 5000 Series I product line, as
well as other internal reorganization efforts. The Company introduced the 5000
Series II product line, which has expanded features and increased reliability,
during the second quarter of 1998. The Company has established reserves to
address any customer warranty or upgrade issues with the 5000 Series I product
line. In addition, the Company incurred costs relating to restructuring, which
included the layoff of certain employees and associated costs. The Company will
incur additional severance costs in the third quarter of 1998, expected to be
approximately $150,000.

     INTEREST INCOME (EXPENSE) AND OTHER, NET. Net interest income was
approximately $25,000 for the second quarter of 1997 compared to $46,000 for the
comparable period in 1998. Net interest expense was $395,000 for the first six
months of 1997 compared to net interest income of $103,000 for the comparable
period in 1998. This was primarily due to the repayment of debt in March and
April of 1997 using initial public offering proceeds and the subsequent
investment of the remaining proceeds. The Company expects to continue reporting
net interest income for the remainder of 1998.

LIQUIDITY AND CAPITAL RESOURCES

     From inception to March 1997, the Company primarily financed its operations
and capital expenditures through the private sale of equity and debt securities,
loans and bank lines of credit. In the first quarter of 1997, the Company
completed an initial public offering of common stock and received net proceeds
of $11.8 million from the sale of 2,125,000 shares. From the proceeds, the
Company repaid $1.4 million of $6.4 million of loans outstanding during the
first quarter of 1997. The Company repaid the remaining $5.0 million in the
second quarter of 1997. There were no loans outstanding or bank credit
facilities open as of July 5, 1998.

     The Company's cash balance as of July 5, 1998 was $3.4 million as compared
to the January 4, 1998 balance of $3.2 million. Cash provided by operating
activities totaled $0.9 million for the first six months of 1998. The Company's
accounts receivable decreased $4.1 million from $6.4 million at January 4, 1998
to $2.3 million at July 5, 1998, primarily due to collections from increased
sales in the fourth quarter of 1997 and reduced sales for the first six months
of 1998. Net inventories decreased $0.8 million to $4.2 million at July 5, 1998
from January 4, 1998. Gross inventories increased $0.4 million due to purchases
of long lead time items for anticipated sales in the first six months, which
were not realized, offset by increases in inventory reserves. These reserves
were established due to the discontinuation of the 5000 Series I product line
and other product changes in response to technological and market developments.
Accrued expenses increased from $1.8 million at January 4, 1998 to $2.8 million
at July 5, 1998. The increase was mainly due to reserves established for product
upgrade costs relating to the 5000 Series I and deferred revenue related to the
sale of extended warranties.

     During the first six months of 1998, the Company purchased $0.8 million of
property, plant and equipment. The expenditures related primarily to leasehold
improvements, equipment, operating system software and furniture and fixtures
for the new facility as well as manufacturing tooling expenditures. The Company
anticipates property, plant and equipment expenditures relating to tooling to
increase in the foreseeable future as it expands its product line offerings and
enhances existing platforms.

     The Company is in the process of setting up a line of credit to supplement
cash availability and expects to have a facility in place during the third
quarter of 1998. The Company believes that this planned line of credit, together
with existing cash, interest expected to be earned thereon, anticipated
operating cash flows, and potential financing to be sought through borrowings or
other arrangements, will be sufficient to fund its operations at least through
the next twelve months. Cash requirements for periods during and beyond the next
twelve months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth, among other factors.
YEAR 2000

     The year 2000 issue is the result of computer programs using only the last
two digits to identify the year. These programs may not be able to interpret
dates beyond the year 1999, which could cause computer system failure or other
errors disrupting operations. The Company has identified certain individuals
internally to address all aspects of the year 2000 issue, including internal
computer systems, products sold and supplier capabilities.

     The Company's major internal information systems software was upgraded
during the first quarter of 1998 to ensure year 2000 compliance. The total cost
of the implementation was not significant. The Company plans to perform other
minor upgrades to its internal software and hardware by the end of 1998.

     Management believes its current products are year 2000 compliant and is
offering updated configuration software for products shipped in prior periods.
Associated costs are not expected to be material.

     The Company's operations with respect to the year 2000 may also be affected
by other entities with which the Company transacts business. The Company has
requested documentation from its vendors and other key third parties regarding
their year 2000 compliance and will evaluate alternative courses of action
relating to any who are not, or will not be, year 2000 compliant. Until that
time, the Company is unable to determine the potential consequences, if any,
that could result from such entities' failure to effectively address this issue.

     Although the Company does not believe that the year 2000 issue will have a
material impact on its business, financial position, results of operations or
liquidity, it is uncertain as to what extent the Company may be affected by such
matters.

PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS

     The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS

         The Company's registration statement on Form S-1, file number
333-18335, was declared effective on March 19, 1997. The Company registered an
aggregate of 2,443,750 shares of common stock, $.001 par value (including
316,250 shares covered by a registration statement filed pursuant to Rule 462(m)
on March 20, 1997, file number 333-23637) with R.J. Steichen & Company as the
managing underwriter. The offering commenced on March 20, 1997, and on March 25,
1997, the Company closed on aggregate proceeds of $13,812,500 from the sale of
2,125,000 of these shares. The remainder of the shares registered were subject
to an underwriters' over-allotment option that subsequently expired unexercised.
The following expenses were incurred in connection with the issuance and
distribution of the securities:

          Underwriters discount and commission               $    967,000
          Expenses paid to underwriters                           276,000
          Other expenses                                          809,000
                                                             ------------
             Total expenses                                  $  2,052,000
                                                             ============

          Net offering proceeds                              $ 11,760,000
                                                             ============

     The net offering proceeds have been used as follows as of July 5, 1998:

          Construction of plant, building and facilities     $    348,000
          Purchase of machinery and equipment                   1,207,000
          Repayment of indebtedness                             6,597,000
          Working capital                                       1,183,000
          Temporary investment in Norwest
              Advantage Cash Investment Account                 2,425,000
                                                             ------------
                                                             $ 11,760,000
                                                             ============

     All such amounts were direct payments to third parties. The Company has
spent $1.6 million on capital expenditures since its initial public offering as
compared to $1.0 million estimated at the time of the offering. This difference
is mainly due to the level of expenditures for leaseholds and other costs
related to the Company's move into its new facility.

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

     An Annual Meeting of Shareholders was held on May 20, 1998. The
shareholders voted on two matters: (1) to elect five directors, each of whom
will serve until such director's successor shall have been elected and shall
qualify, or until such director's earlier death, resignation, removal or
disqualification, and (2) to amend the Company's 1994 Long-Term Incentive and
Stock Option Plan (the Plan) increasing the number of shares subject to the Plan
from 1,500,000 to 2,000,000. The shareholders voted in favor of all matters by
the following votes:

                                                          Votes         Votes
                                                           For         Withheld
                                                           ---         --------
     Election of Board of Directors
       Gary J. Beeman...............................    7,067,869      130,780
       Robert W. Heller.............................    7,093,469      105,180
       George E. Kline..............................    7,044,769      153,880
       David C. Malmberg............................    7,086,169      112,480
       Robert C. Szymborski.........................    7,073,869      124,780

                                          Votes     Votes     Votes      Broker
                                           For     Against  Abstained  Non Vote
                                        ---------  -------  ---------  --------
   Amend the 1994 Long-Term Incentive
     and Stock Option Plan............. 4,444,108  366,017    32,287   2,356,237
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         Exhibit 3.1    Second Amended and Restated Articles of Incorporation
                        of the Company (incorporated by reference to Exhibit
                        3.2 to the Company's Registration Statement filed on
                        Form S-1, File No. 333-18335)

         Exhibit 3.2    Second Amended and Restated Bylaws of the Company
                        (incorporated by reference to Exhibit 3.4 to the
                        Company's Registration Statement filed on Form S-1,
                        File No. 333-18335)

         Exhibit 11.1   Statement Re Computation of Per Share Earnings (filed
                        herewith)

         Exhibit 27.1   Financial Data Schedule (filed herewith)

         Exhibit 27.2   Restated Financial Data Schedule for the six month
                        period ended July 6, 1997 (filed herewith)

(b)      Reports on Form 8-K

         None.

                                    SIGNATURE

         Pursuant to the requirements 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.

FIELDWORKS, INCORPORATED

Date:  August 18, 1998                    /s/ Karen L. Engebretson
                                      ------------------------------------------
                                      Karen L. Engebretson, Vice President of
                                      Finance and CFO (as authorized officer and
                                      principal financial officer)