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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-KSB

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2001

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 0-1561

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MAGSTAR TECHNOLOGIES, INC.

(Formerly Reuter Manufacturing, Inc.)(Exact name of registrant as specified in its charter)

Minnesota(State or other jurisdiction of
incorporation or organization)

41-0780999(I.R.S. Employer
Identification No.)410 11th Avenue South
Hopkins, Minnesota(Address of principal executive offices)

55343(Zip Code)


Registrant's
telephone number, including area code:(952) 935-6921

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act

Common Stock, par value $0.1875 per share

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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 ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. o

The
Registrant's revenues for the fiscal year ended December 31, 2001 were $9,721,461.

As
of March 15, 2002, 8,740,173 shares of Common Stock of the Registrant were deemed outstanding, and the aggregate market value of the Common Stock of the Registrant (based upon
the average of the closing bid and asked prices of the Common Stock at that date), excluding outstanding shares beneficially owned by directors and executive officers, was approximately $1,750,115.

Transitional
Small Business Disclosure Format (Check
one): Yes o    No ý

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PART I

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Any statements not of
historical fact may be considered forward-looking statements. Written words such as "may," "expect," "believe," "anticipate" or "estimate," or other variations of these or similar words, identify such
statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from the anticipated results or other expectations expressed in the
forward-looking statements. Forward-looking statements in this Report also include references to anticipated sales volume and higher product margins, efforts aimed at establishing new or improving
existing relationships with customers of the Company, other business development activities, anticipated financial performance, business prospects and similar matters.

In addition, the Company has historically had a high concentration of business with one major customer and reductions in scheduled shipments to this customer were
primarily responsible for the losses from operations during 1999, 2000 and 2001. However, the Company did experience improved sales performance with that customer late in the fourth quarter
respectively. There can be no assurance that this customer will resume shipments to prior or expected levels in the future. The acquisitions, in November 2000 and February 2001 of the
magnetic products and proprietary conveyor lines broadened sales prospects and offset some of the reduced sales from other customers. The risks and uncertainties the Company faces include, but are not
limited to, the ability to expand product offerings and to develop a reputation in manufacturing products for select industries such as medical industries, as well as the risks and uncertainties
described in "Management's Discussion and Analysis or Plan of Operations" in this Report.

ITEM 1. DESCRIPTION OF BUSINESS.

Business Overview

MagStar Technologies, Inc. ("MagStar" or the "Company") is a publicly owned company headquartered in Hopkins, Minnesota that trades locally, over the
counter, under the symbol "MGST". The company is principally a contract manufacturer of precision-machined components, used in electro-mechanical assemblies and devices for medical, magnetic, motion
control, and industrial original equipment manufacturers ("OEMs"). The company manufactures on a contract basis, among other items, close tolerance bearing-related assemblies for the medical device
industry. In order to differentiate itself from its competitors, the Company emphasizes its design engineering and manufacturing engineering capability and support. The Company also manufactures and
sells under the Reuter® name, self-powered oil centrifuges and hydraulic actuators, which are sold by the Company's sales force and distributor network to OEMs, end users and
distributors. Under the Quickdraw Conveyor Systems name, acquired in February 2001, the Company manufactures and sells to OEM equipment manufacturers and end users in the medical, semiconductor
and factory automation markets.

The
Company's contract manufacturing business has been concentrated in the medical device field, which includes production of blood centrifuges, blood analyzers, thrombectomy proximal
motors, organic chemical synthesizers, and valves for medical oxygen delivery. The Company also contract manufactures biometric identification assemblies, spindles, precision slides and complex
magnetic assemblies. Contract manufacturing accounted for approximately 90% of the Company's net sales in 2001.

The
Company was established fifty-four years ago as Reuter Manufacturing, Inc., concentrating on precision machining and assemblies. In early 2001, the Company changed
its name to MagStar Technologies, Inc.

2

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The
Company is a Minnesota corporation. The principal executive offices of the Company are located at 410 Eleventh Avenue South, Hopkins, Minnesota 55343. The Company's telephone number
is (952) 935-6921.

Products and Services

MagStar offers a full range of design, design for manufacture, machining and assembly services. However, it does specialize in the following areas:



MagStar's
customers require leading edge design capabilities, rapid prototyping and precision manufacturing execution for their competitive short product life cycle industries.

Technology

As the industrial world becomes more competitive and technology breakthroughs become more the normal course of business, increased power and miniaturization is
required. MagStar has the technological strengths to accomplish these goals in the following areas:



3

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Markets

MagStar supplies its products and services to OEMs in three principal markets: Motion Control, Factory Automation and Medical. MagStar also markets
proprietary products to the engine after market and industrial equipment market.



Within
each of these markets, the Company concentrates its marketing efforts on customers that rely on its ability to provide quick response design and prototyping services and versatile
manufacturing capabilities to solve the most complex and challenging requirements.

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Sales and Marketing

The Company's sales and marketing effort is focused on the strategic markets outlined above. In addition to a strong sales leadership team, the Company has
Regional Representatives with significant
experience selling its technical applications. The sales force is supported by a talented and multi-disciplined applications design and manufacturing engineering team.

The
proprietary products are sold on a direct basis to OEMs, integrators and end users, or in the case of oil centrifuges, to a Master Dealer, who markets to other distributors.

Marketing
efforts rely mainly on the Company's reputation for high quality, precision assemblies with superior finish. Minimal paid advertising and some trade shows are also used. The
websites for MagStar and Quickdraw conveyors are planned to be integrated and updated to describe the full capabilities of the new enterprise created in 2001.

Customers

Blood centrifuge orders from MagStar's largest customer were at lower levels for the first three quarters of 2001 than in 2000. A marked increase in centrifuge
business occurred in mid-September and continues at a steadier and higher flow into 2002. It is expected to remain at that level for the rest of 2002. Other medical device and lab
equipment customers slowed deliveries beginning in the third quarter due to high inventories and slower market demand. Some of that business has returned strongly in the fourth quarter, and the
remainder may not recover until late second quarter 2002. The Company maintains a strong position with major factory automation OEM's in the semiconductor industry. These programs have been delayed
due mainly to the slowed economy for most of 2001. This is expected to continue for the first two quarters of 2002.

MagStar
was selected to develop manufacturing for a new blood centrifuge application with a new customer. Production transfer units were delivered in mid-January 2002,
with initial production runs to be released in the second quarter. Another new venture for the Company is with a major supplier of biometric fingerprint recognition equipment for security use at
airports and police booking stations. Pre-production units were delivered in the fourth quarter.

Other
products for specific customer applications with magnet assemblies, slides, machine automation, and other precision assemblies are in prototyping and initial delivery phases.

Strategy

The Company's objective is to become indispensable to the customer, thereby ensuring that the Company will obtain subsequent production business. The Company
pursues this strategy by providing engineering input throughout the development and production processes of its customers' products. This requires the Company to maintain a strong design, application,
and manufacturing engineering
capability and capacity. In addition, the Company generally designs, manufactures and owns the tooling required to produce its customers' products. Essentially all fixtures and prototypes are produced
in the Company's tool and prototype department by highly trained and skilled toolmakers. These strategies improve the ability of the Company to create a long-term production relationship
with the customer. However, customers generally do not sign long-term production contracts with the Company.

In
addition to continuing to build strong customer relationships, the Company will continue to employ the following specific initiatives:



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Supplies

The raw materials used by the Company in its manufacturing operations generally are reasonably available. The Company seeks to maintain multiple sources of the
parts and materials it purchases from suppliers; however, certain significant customers limit and/or designate specific suppliers. The availability of such parts and materials could affect the
Company's ability to fill customers' orders on a timely basis. Management of the Company believes that the interruption of its relationships with suppliers would not have a material adverse effect
over the long-term, as parts and materials suitable for the production of the types of products the Company manufactures would be available from other suppliers.

The
Company generally manufactures products to a customer's specifications on a contract basis, and carries reasonable amounts of inventory to meet rapid delivery requirements of
customers and to assure a continuous allotment of goods from suppliers. The Company generally does not provide extended payment terms to customers.

Competition

The contract manufacturing business in which the Company engages is highly competitive. Many of the competitors of the Company have greater sales volume and
resources than the Company. The principal elements of competition are quality, service, delivery, price and meeting customer requirements. The Company believes that it accounts for only a small
portion of aggregate national sales of the manufacturing service it provides. The Company believes, however, that its strong engineering capability gives it a competitive advantage. Because the
Company sells products in many industries, it faces substantial competition on many fronts, although it believes it can compete effectively in the markets in which it operates.

There
are many OEM manufacturers of medical and industrial centrifuges. However, the Company is not aware of any other contract manufacturers that are making high speed, precision,
custom designed and highly cosmetic centrifuges for these markets. It believes that its high speed, high precision products give it the ability to compete effectively in the centrifuge market.

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The
Company also faces competition from several national manufacturers of precision magnets. These competitors are capable of supplying magnet assemblies, but management believes they
outsource significant portions of their manufacturing to sub-contractors. With its complete engineering and manufacturing capabilities, the Company can play a more significant role in its
customers' supply programs and benefit more directly from all of the value that is created in the manufacturing process.

With
regard to the Factory Automation/Vision System product group, there are many manufacturers of parts and components used in these systems. Where the Company makes discrete parts for
these customers, it faces competition from machine shops and contract manufacturers that actively pursue this business. However, the Company is not aware of other significant competitors that are able
to provide a completely outsourced manufacturing solution that includes all steps of production, including design, manufacturing, assembly and shipment of finished product assembly that require the
set of competencies that the Company possesses. The conveyor line has added breadth to the Company's ability to provide solutions in factory automation, vision and motion control.

The
Company believes that it competes with its customers' own in-house capabilities to manufacture and assemble products in conjunction with other suppliers. As customers'
own in-house capabilities increase, customers present a greater competitive pressure to the Company's business. However, the Company found that its customers' preference generally is to
outsource as much of their manufacturing as possible.

Research and Development

The Company conducts limited research and development activities primarily related to design and prototype development of customers' products and, to a lesser
extent, products sold under our trade names. The Company also provides some engineering services to support its customers in the development of new products, including enhancements to current
products. The Company may seek reimbursement for a portion of the research, development and engineering services expenditures it makes on behalf of a particular customer, depending on the nature of
the customers' needs and strategic significance of the account.

Backlog

The Company makes product forecasts for future delivery based upon frequently updated information from customers; such forecasts are then adjusted or replaced by
actual purchase orders or production releases. On December 31, 2001, the Company's backlog of orders and releases was approximately $4.0 million, compared to approximately
$2.3 million on December 31, 2000. The increase is due to new orders for biometric identification assemblies and a significant increase in blood centrifuge orders received in the fourth
quarter of 2001. The Company's backlog often fluctuates because large orders or releases are placed by customers who schedule delivery of the product over future months. The usual period between
receipt of an order for a new assembly and the first delivery of the product by the Company is 2 to 6 months. The delivery period for subsequent orders generally is shorter than the period for
the initial order. The Company believes its backlog is firm; however the Company's customers do not sign production contracts and the customers can reduce, reschedule, or cancel orders without
contractual penalty.

Employees

As of December 31, 2001, the Company had 109 employees, which includes 105 full time employees and four part time employees. As of December 31,
2000, the Company had 115 employees, which includes 110 full time employees and five part time employees.

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ITEM 2. DESCRIPTION OF PROPERTY.

The Company's executive offices and manufacturing facilities are located at 410 Eleventh Avenue South, Hopkins, Minnesota. The Company owns these facilities and
the approximately 7.5 acres of land on which the facilities are located. These facilities consist of approximately 110,000 square feet of which approximately 13,000 square feet are devoted to office
space, and 97,000 square feet are devoted to manufacturing, and warehouse purposes. Approximately 80% of the space is being utilized as of March 15, 2002. The Company considers these facilities
to be well maintained, and in good operating condition, and believes that such manufacturing facilities can accommodate anticipated future growth. The Company has a real estate mortgage on the
building with U.S. Bank National Association. The Company owed $2,820,198 on the loan at December 31, 2001. The Company pays $27,020 in principal on the loan on the first of each month through
September 1, 2005 with a final payment on October 1, 2005 of the remaining balance. Interest is paid each month on the loan and is in addition to the principal payment.

The
Company owns or leases sufficient manufacturing equipment to generally enable it to meet its sales requirements. This equipment includes horizontal and vertical milling machines,
grinders, lathes, chucking machines, drilling machines, sawing equipment, testing and inspection equipment, clean room facilities, and other close tolerance CNC machines. The production machines are
computer controlled, which ensures that operations are repeatable.

ITEM 3. LEGAL PROCEEDINGS.

During December 1997, when the Company undertook a Phase I and Phase II environmental assessment of its manufacturing facility, soil boring and groundwater
work indicated the presence of potentially hazardous substances and petroleum products within the soil and groundwater located beneath the site. The Company notified the applicable regulatory agency
(the Minnesota Pollution Control Agency), and is working with that agency to resolve these issues. However, because the results are still preliminary, the Company is not able to assess whether it will
ultimately be held liable for the presence of these substances at the site nor is the Company able to assess its financial exposure if it is found liable. Because of financial conditions, no
environmental work was performed during fiscal 2000. During August 2001, additional investigation work to further define the extent of ground water impact
was completed. The results are generally consistent with previous site investigations. Further ground water investigation will be necessary to fully define the extent of ground water contamination. As
of December 31, 2001, $15,000 has been accrued for the cost of additional environmental work.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report on
Form 10-KSB, through the solicitation of proxies or otherwise.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers of the Company and their respective ages and offices held as of March 15, 2002, are as follows:

Name (age)

Position(s) with the CompanyJ. L. Reissner (61)

Chief Executive Officer and SecretaryLouis S. Matjasko (61)

President and Chief Operating OfficerJoseph A. Petrich (41)

Treasurer and Chief Financial OfficerBrian Kempski (46)

Vice PresidentMarketing and Sales


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Mr. Reissner was elected Chief Executive Officer in September 2001 and has served as Secretary of the Company and as a director since October 2000. He also served as
Chief Financial Officer from September 2001 to March 2002. Mr. Reissner has been President of Activar, Inc., a company that operates as sixteen manufacturing divisions,
since January 1996 and served as Chief Financial Officer of Activar from 1992 until becoming President.

Mr. Matjasko
joined the Company in December 2000 as Vice PresidentOperations and has been President and Chief Operating Officer of the Company since
September 2001. Prior to joining the Company, he had been Divisional General Manager for two manufacturing businesses in California owned by Activar. Mr. Matjasko is a US Air Force
Academy graduate, has two advanced engineering degrees from MIT, and an MBA.

Mr. Petrich
has served as Treasurer and Chief Financial Officer since March 2002. Mr. Petrich also serves as General Manager of Seelye Plastics, a member of the
Activar group. He joined Seelye as Operations Manager in 1997 and became General Manager in 1998. Prior to joining Seelye, Mr. Petrich was a controller for Frank W. Griswold and Companies from
1980 through 1994. He has served as General Manger/Vice President of Sentry Technologies and Sentry Metal Forming from 1994 through 1995, and served as Chief Financial Officer for Famous Dave's of
America from 1995 through 1996. Mr. Petrich is a graduate from Bethel College with a business management degree.

Mr. Kempski
joined the Company as Director of Sales in December of 1998 and has served as Vice President of Marketing and Sales since April 1999. Prior to joining the
Company, Mr. Kempski served as Director of Sales for Motion Control Group from 1993 to 1998 and from 1990 to 1993, he served as Director of Engineering for that firm. Prior to 1990,
Mr. Kempski served as Senior Product Engineer at Tonka Toys.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information.The Company's Common Stock is traded in the local over-the-counter market ("OTC
Bulletin Board") under the symbol "MGST." The following table sets forth, for each of the calendar periods indicated, the quarterly high and low bid quotations for the Company's Common Stock quoted on
the OTC Bulletin Board. The prices in this table represent prices between dealers, and do not include adjustments for retail mark-ups, mark-downs or commissions and may not
represent actual transactions.

Year



High

Low2001:

First Quarter

$
1.13

$
.63Second Quarter

$
1.00

$
.38Third Quarter

$
.70

$
.05Fourth Quarter

$
.65

$
.052000:

First Quarter

$
..38

$
..16Second Quarter

$
.25

$
.01Third Quarter

$
1.19

$
.01Fourth Quarter

$
1.63

$
.50


Holders.As of December 31, 2001 there were approximately 1,115 registered record holders of the Company's Common
Stock and 3 record holders of the Company's Series A Preferred Stock.

Dividends.No cash dividends were declared or paid by the Company during 2001 or 2000, and the Company does not intend to pay
dividends on its Common Stock and Series A Preferred Stock in

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the foreseeable future. The Company is prohibited from paying dividends on its Common Stock under agreements with its senior lender.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

Through most of 2001, the Company continued to experience lower sales for its blood centrifuge models to the Company's largest customer. This customer has ordered
and taken delivery of blood centrifuges at increased rates since the beginning of the fourth quarter. There can be no assurance that sales to the Company's largest customer will return to previous
levels or that sales of other products will be sufficient to achieve positive cash flow or profitability. The Company's efforts to attract high-tech custom product customers resulted in
further increased sales in that sector in 2001. The Company's ability to continue as a going-concern is dependent on its ability to increase sales from current levels and maintain adequate margins on
sales. To help achieve that goal, the Company acquired two small businesses, one in November 2000 and one in February 2001. These operations accounted for approximately $2,200,000 in
sales for 2001. If the Company is unable to increase sales from current levels and generate positive cash flows from operations, it would be unable to meet its debt service requirements and may be
forced to cease operations or may need to seek protection under U.S. bankruptcy laws. Due to the lower sales and the resulting impact on cash, the Company completed equipment lease restructuring and
the sale and leaseback of most of its equipment. The Company has reduced personnel, wages, and salaries in the second and third quarters, respectively.

Results of Operations

Total revenues for 2001 were $9,721,461, compared to $10,769,298 for 2000. Net sales for 2001 from medical and industrial products were $4,895,846 and $1,359,456,
respectively, compared to $7,437,222 and 2,630,803, respectively, for 2000. The Company's net sales decreased by 9.7% in 2001 from 2000, compared to a decrease in net sales of 6.4% in 2000 from 1999.
Two new product lines (from acquisitions) for 2001, magnets and high-tech factory conveyors contributed net sales of $1,254,903 and
$1,008,827, respectively. The majority of the sales decrease for 2001 as compared to 2000 was due to a reduction in sales to medical, laboratory, cryogenic and engine product customers.

Cost
of sales was $10,603,509 for 2001, compared to $9,971,781 in 2000. The increase in cost of sales of 6.3% was primarily due to a strategic investment in factory labor infrastructure
to support higher sales volumes expected in 2002. The soft manufacturing economy reduced sales and profit margins in 2001, with a noticeable recovery in the fourth quarter of 2001 that appears to be
continuing in the first quarter of 2002. On March 21, 2001, the Company entered into a sale leaseback agreement with Activar Properties, Inc. ("Lessor"), which is owned by a major
shareholder of the Company. The result of this agreement reduced depreciation expense and increased equipment lease expense for 2001.

Gross
profit was -9.1% for 2001, compared to 7.4% in 2000. This decrease in gross profit was due to the factors discussed above.

Selling,
general and administrative expenses were $2,281,250 or 23.5% of net sales in 2001, compared to $1,921,373 or 17.8% of net sales in 2000. The 18.7% increase in selling, general
and administrative expenses is due primarily to additional sales and administrative operating expenses associated with the acquisitions of MagStar Technologies in November of 2000 and Quickdraw
Conveyor Systems, Inc. on February 23, 2001. The Company incurred $100,984 in expenses associated with a private placement of debentures that was terminated. The gain on sale of
equipment for 2001 was $263,316.

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As
a consequence of the foregoing factors, the Company had an operating loss in 2001 of $3,163,298, compared to an operating loss of $1,123,856 in 2000, an increase in operating loss of
181.5%.

Interest
expenses in 2001 were $592,740, compared to $779,379 in 2000. This reduction is primarily from interest rate declines and restructuring of the trade debt begun in 2000. Realized
income from debt restructuring in 2001 compared to 2000 was $94,037 and $601,786, respectively.

The
Company had a net loss of $3,550,033 or $.36 per share in 2001, compared to a net loss of $1,208,639 or $.21 per share in 2000. The increase in net loss resulted from the factors
discussed above.

The
Company recorded a net loss for 2001 and consequently did not record a provision for income taxes and, generally, does not pay regular income taxes because of the availability of its
net operating loss carryforwards. The Company is, however, generally subject to alternative minimum tax under the Internal Revenue Code of 1986, as amended (the "Code"), because only 90% of the net
operating loss carryforward is allowed as a deduction before arriving at the alternative minimum taxable income.
Therefore, 10% of the Company's taxable income, of which there was none in 2001, is generally subject to the flat alternative minimum tax rate of 21%.

The
effect of inflation on the Company's results has not been significant.

Liquidity and Capital Resources.At December 31, 2001, the Company had a working capital deficit of $8,195,095,
compared to a working capital deficiency of $5,461,010 at December 31, 2000. The current ratio was .28 at December 31, 2001, compared to .41 at December 31, 2000. The increase in
the working capital deficit and the decrease in the current ratio are primarily due to an increase in notes payable-related parties and a decrease in accounts receivable.

On
October 10, 2000, the Company and US Bancorp entered into an amended and restated senior credit agreement consisting of an asset-based line of credit with availability of up to
$1,500,000, subject to a borrowing base limitation of 80% of the Company's eligible accounts receivable plus $250,000, and three term notes of $2,800,000, ("Term Note A"), $1,100,000 ("Term Note B")
and $1,325,000 ("Term Note C"). Although the line of credit is due December 1, 2002, US Bancorp has the right to demand payment at any time. In addition, although the term notes have scheduled
repayment dates, the term notes may be due upon demand in the event that US Bancorp requires demand repayment under the credit facilities. The credit facilities agreement also includes a subjective
material adverse change clause under which the borrowings could become due and payable. Accordingly, the Company has classified all of the amounts owing under the credit facilities at
December 31, 2001 and 2000, as current liabilities.

On
March 21, 2001, the Company paid Term Loan B in full, using proceeds from the sale-leaseback of fixed assets to a related party. On November 30, 2001 the
Company borrowed $398,478 against Term Note A, using the funds to pay property taxes. On November 30, 2001, the Company and US Bancorp amended the credit agreement to availability of up
to $1,750,000, subject to a borrowing base limitation of 80% of the Company's eligible accounts receivable plus 40% of raw materials and 30% of finished goods. The credit facilities are collateralized
by substantially all the assets of the Company.

The
Company is obligated to make monthly payments of principal in the amount of $27,020 plus interest against Term Note A through September 1, 2005, with a final payment of
$1,604,298 on October 1, 2005. Term Note C is due and payable in full on September 30, 2003. However, in the event that the line of credit and Term Loan A are paid in full on or
before September 30, 2003 or on October 1, 2003 the Company has fully complied with the terms of the Credit Instruments and no Default or Event of Default (as defined in the Credit
Instruments) exists, Term Note C shall be forgiven.

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The
Company had negative cash flows from operations of $2,421,716 for the year ended December 31, 2001, compared to negative cash flows from operations of $1,649,382 for the year
ended December 31, 2000. The decrease in cash flows from operations for the year ended December 31, 2001 was due primarily to the net loss, a decrease in accrued expenses and the
non-cash gain realized on the trade debt restructuring. The Company's ability to meet its continuing cash requirements in the future is dependent on achieving adequate sales and margins
from its manufacturing operations.

Net
cash provided by investing activities was $1,875,886 for the year ended December 31, 2001, compared to $1,459 for the year ended December 31, 2000. This increase in
2001 was primarily due to proceeds generated from a sale and leaseback of most of the Company's equipment.

Net
cash provided by financing activities was $545,830 for the year ended December 31, 2001, compared to cash provided by financing activities of $1,647,923 for the year ended
December 31, 2000. The decrease in net cash provided by financing activities in 2001 was due to payoffs of some capital lease obligations and cash generated through a private placement of stock
in 2000. The Company made principal payments of approximately $384,141 on equipment debt.

On
March 21, 2001, the Company entered into two Master Equipment Lease Agreements with Activar Properties, Inc. ("Lessor"), which is owned by a major shareholder of the
Company. Under these agreements, the Company has leased two sets of equipment for terms of 61 months and 25 months, respectively, for monthly payments of $30,279 and $17,399,
respectively. The Lessor has assigned its rights under these leases to its bank. The Company believes that the terms and conditions of these agreements are substantially the same as the terms and
conditions on which it could have leased similar equipment from an unaffiliated third party. Proceeds from the sale were used to pay off Term Note B in the principal amount of $1,027,000 plus
accrued interest due to the bank (Note 3) and pay off $540,034 owed to Activar, Inc. for equipment purchases.

Throughout
2001, the Company borrowed monies from Activar, Inc. to fund operations. These loans are supported by promissory notes that are due on demand and bear interest at 10%.
The Company believes that the terms and conditions of the promissory notes given to Activar are at least as favorable as the terms and conditions on which the Company could have obtained credit from
an unaffiliated third party.

In
2001, the Company initiated a private placement offer of debentures that was ultimately terminated. Proceeds from the debentures would have been used to pay off certain debt and
provide additional operating cash. During the fourth quarter of 2001, the Company achieved a break-even cash flow reducing the need for additional operating cash. The Company believes it
will achieve a positive cash flow from operations in 2002. The Company does not anticipate a need for significant capital expenditures in 2002. Cash will be required to meet existing obligations.

On
October 10, 2000, the Company completed a private financing (the "Financing") pursuant to the terms of a Securities Purchase Agreement dated October 10, 2000 (the
"Securities Purchase
Agreement") by and among the Company, Activar, Inc., J.L. Reissner and M.J. Tate (Activar, Reissner and Tate, collectively, the "Investors"). Pursuant to the Securities Purchase Agreement, the
Company sold to the Investors, and the Investors purchased from the Company, an aggregate of 3,500,000 shares of the Company's common stock, par value $.1875 per share ("Common Stock"), and an
aggregate of 1,000,000 shares of the Company's Series A convertible Preferred Stock, par value $.1875 per share ("Series A Preferred"), all at a purchase price of $.1777778 per share,
for an aggregate purchase price of $800,000 (the Series A Preferred and Common Stock sold to the Investors, collectively, the "Shares"). Of the $800,000 total, Activar and Reissner purchased
$700,000. The Shares were sold in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and are "restricted securities" within the
meaning of Securities Act.

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The
Series A Preferred is convertible at any time, without the payment of any additional consideration, into such number of fully paid and nonassessable shares of Common Stock as
is determined by dividing $.1777778 by the conversion price in effect at the time of any conversion and then multiplying such quotient by each share of Series A Preferred to be converted. The
conversion price, initially $.1777778, is subject to adjustment for stock splits and other actions affecting the capital structure of the Company. The Series A Preferred generally votes with
the Common Stock on matters submitted to the shareholders, with each share of Series A Preferred having that number of votes that is equal to the number of whole shares of Common Stock into
which such share of Series A Preferred is then convertible. The Series A Preferred is entitled to 9% dividends in preference to any dividends paid on the Common Stock, but such 9%
dividends are payable only if, as and when declared by the Company's board of directors.

On
February 23, 2001, the Company acquired certain assets of Quickdraw Conveyor Systems, Inc. To fund the purchase, the Company borrowed $150,000 from Activar, Inc.,
which is a major shareholder of the Company, pursuant to a promissory note that is due on demand and bears interest at 10%. The Company believes that the terms and conditions of the promissory note
given to Activar are substantially the same as the terms and conditions on which the Company could have obtained credit from an unaffiliated third party.

During
December 1997, when the Company undertook a Phase I and Phase II environmental assessment of its manufacturing facility, soil boring and groundwater work indicated the
presence of potentially hazardous substances and petroleum products within the soil and groundwater located beneath the site. The Company notified the applicable regulatory agency (the Minnesota
Pollution Control Agency), and is working with that agency to resolve these issues. However, because the results are still preliminary, the Company is not able to assess whether it will ultimately be
held liable for the presence of these substances at the site nor is the Company able to assess its financial exposure if it is found liable. Because of financial conditions, no environmental work was
performed during fiscal 2000. During August 2001, additional investigation work to further define the extent of ground water impact was completed. The results are generally consistent with
previous site investigations. Further ground water investigation will be necessary to fully define the extent of ground water contamination. As of December 31, 2001, $15,000 has been accrued
for the cost of additional environmental work.

Subsequent Event.On January 21, 2002, the Company borrowed $500,000 from Richard F. McNamara on a term note that
bears interest at 12%. Interest is payable monthly, with the principal balance due and payable on January 10, 2005. Mr. McNamara received warrants for the purchase of
250,000 shares of common stock of the Company and holds a mortgage on the real property. Proceeds from this note were used to pay off $400,000 in debentures issued in 1998 and 1999 and accrued
interest thereon.

Business Conditions.The Company incurred a net loss of $3,550,033 for the year ended December 31, 2001, and has a
working capital deficit and stockholders' deficiency of $8,195,095 and $7,116,773, respectively, at December 31, 2001.

Management's
plans and objectives to improve the financial condition of the Company include the following:



13

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There
can be no assurance that management will be able to accomplish all of the above plans and objectives or achieve the necessary improvements in its cash flows and financial position
to meet its obligations as they become due.

The
Company's ability to continue operations is dependent on its ability to increase sales and maintain adequate margins on sales, as well as its ability to maintain its credit
facilities with U.S. Bancorp. In addition, if the Company is unable to increase sales from current levels and generate positive cash flows from operations, it would be unable to meet its debt service
requirements and may be forced to cease operations or seek protection under U.S. bankruptcy laws.

Accordingly,
there can be no assurance that the Company will continue as a going concern in its current form. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

Summary.The Company had a disappointing year in that it incurred losses again in 2001. The integration of two acquired
businesses resulted in additional expenses through most of the year and the general economic slow down since the first quarter significantly delayed and reduced planned business. The Company did
continue to see its investment in the high-tech spindle business pay off with increased sales in that area, and the two acquisitions provide the Company with further potential for
increased sales. Increased fourth quarter business from the Company's largest customer and new centrifuge and biometrics business continue strongly into 2002. While none of these events by themselves
assures the Company's return to profitability, the Company believes it has positioned itself to move towards profitability.



Dependence on Major Customers.Sales were primarily affected by a significant reduction in orders from medical and laboratory
products customers of approximately $2,600,000, and cryogenic engine products customers of approximately $900,000. These reductions were driven by lower demand and excess inventories of their
customers. Lower demand in other medical, semi-conductor and automation markets limited growth in motion control, magnets, and factory and OEM equipment applications for the spindle,
electro magnet and conveyor lines. Sales in these areas offset the above reductions by approximately $2,500,000.

Demand
from the Company's major medical customer has increased since the fourth quarter, while laboratory products sales were minimal at year-end. The Company continues to
take orders from this major medical customer and expects overall business with that customer to remain steady for 2002. However, no assurance can be given that sales to this customer will reach or
exceed the previous levels of 2000. Laboratory product markets are still depressed and continue to be supplied from excess customer inventory. The Company has no production contracts with its major
medical customer and believes that reductions in orders from this customer would have a material adverse effect on its future operating results.

Dependence on New Products and Continued Growth in Sales Volume.The Company's future success will depend on its ability to
secure additional contract manufacturing business, develop new customers for products it currently manufactures under its own trade names, Quickdraw conveyors, oil centrifuges, and actuators, obtain
production orders for prototype products including motion control, magnetic, and centrifuge assemblies, and maintain a satisfactory volume of orders for current customers. Efforts in this direction
are initially promising. Shipments to a new blood centrifuge

14

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customer and biometrics equipment manufacturer are expected to begin to add revenue early in the second quarter of 2002.

Competition.The Company believes that the principal elements of competition are quality, service, delivery, price and
meeting customer requirements. Some aspects of the contract manufacturing business in which the Company engages are highly price competitive. This is true particularly for machining and discrete
components. Although the Company believes its engineering capability is a competitive advantage, and that it offers the increased value add of assistance and solutions for improved design,
manufacturability and reliability of higher level assemblies, customers may not change from suppliers of discrete components. Company management believes the Company represents only a small portion of
the aggregate national sales of contract manufacturing services.



The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards (SFAS) 141 "Business Combinations." This Statement
addresses financial accounting and reporting for business combinations. It eliminates the pooling-of-interests method and requires all business combinations be accounted for
using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001, and to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001 or later. Adoption of the new standard will have no initial effect on the Company's financial statements.

The
FASB also recently issued SFAS 142 "Goodwill and Other Intangible Assets." This Statement addresses how intangible assets that are acquired individually or with a group of
other assets should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially
recognized in the financial statements. Under the new standard amortization of existing goodwill ceases upon adoption of SFAS 142 and is replaced by periodic evaluation for impairment using
specific methodology. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company will apply SFAS 142 beginning with the first quarter of its fiscal year
ending December 31, 2002. The effects of adoption of SFAS 142 on the Company's financial statements are not determinable currently or for any future periods.

In
June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement Obligations." SFAS 143 is effective for fiscal year beginning after June 15, 2002. The
Company is currently evaluating the impact of SFAS 143.

In
August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121 and is
effective for financial statements issued for fiscal years beginning after December 31, 2001. The provisions of SFAS 144 generally are to be applied prospectively. The Company is
currently evaluating the impact of SFAS 144.

15

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ITEM 7. FINANCIAL STATEMENTS.

The following Financial Statements and Report of Independent Accountants thereon are included herein (page numbers refer to pages in this Report):

|                                                                                      |  | Page
|------------------------------------------------------------------------------------- |  | ----
|Report of Independent Accountants                                                     |  | 25  
|Balance Sheets as of December 31, 2001 and 2000                                       |  | 26  
|Statements of Operations for the years ended December 31, 2001 and 2000               |  | 27  
|Statements of Stockholders' Deficiency for the years ended December 31, 2001 and 2000 |  | 28  
|Statements of Cash Flows for the years ended December 31, 2001 and 2000               |  | 29  
|Notes to the Financial Statements                                                     |  | 30  

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The information required by Item 304 of Regulation S-B regarding the change in the Company's accountants was previously filed as part of the
Company's Current Report on Form 8-K filed on January 22, 2001.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.



Name

Age

PositionR.F. McNamara

68

Chairman of the Board and DirectorMichael J. Tate

62

Director, former President, Chief Executive Officer and Chief Financial OfficerJ.L. Reissner

61

Director, Chief Executive Officer and Secretary


Mr. McNamarahas served as Chairman of the Board and as a director of the Company since October 2000. Since 1978,
Mr. McNamara has been the owner of Activar, Inc., a company that operates as sixteen manufacturing divisions. Mr. McNamara is a director of various other companies including
Rimage Corporation and TCF Financial Corporation.

Mr. Tateretired as Chief Executive Officer, President and Chief Financial Officer of the Company in September 2001. He had
been an employee director of the Company since April 1998. During 1999, another individual was Chief Financial Officer until he resigned that position in December 1999 at which time
Mr. Tate, again, became Chief Financial Officer. Previously, he served as Vice President/Chief Operating Officer of Minnesota Valley Engineering from August 1996 until joining the
Company. Prior to 1996, Mr. Tate held other positions at Minnesota Valley Engineering, including Vice President/General Manager Industrial Business Unit from March 1993 to
August 1996 and Vice President Finance/Treasurer from September 1989 to March 1993.

16

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Mr. Reissnerwas elected CEO in September 2001 and has served as Secretary of the Company and as a director since
October 2000. He also served as Chief Financial Officer from September 2001 to March 2002. Mr. Reissner has been President of Activar, Inc. since January 1996
and served as Chief Financial Officer of Activar from 1992 until becoming President. Mr. Reissner is a director of several other companies, including Rimage Corporation.



The
information concerning Executive Officers of the Company is included in this Report under Item 4A, Executive Officers of the Registrant.



Section 16(a)
of the Securities Exchange Act of 1934 requires the directors and executive officers of the Company and all persons who beneficially own more than 10% of the
outstanding shares of common stock of the Company to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of the common stock. Executive
officers, directors and greater than 10% beneficial owners are also required to furnish the Company with copies of all Section 16(a) forms they file. Based upon a review of the copies of such
reports furnished to the Company and upon other information known to the Company, the Company believes that all filing requirements applicable to its directors, executive officers and beneficial
owners of more than 10% of the Company's outstanding shares of common stock were complied with during the fiscal year ended December 31,
2001 except that Louis S. Matjasko, President of the Company, failed to make a required filing on Form 3 upon being appointed to such office.

ITEM 10. EXECUTIVE COMPENSATION.



The following table provides summary information concerning cash and non-cash compensation paid to or earned by the Company's Chief Executive Officer
and executive officers of the Company who received or earned cash and non-cash salary and bonus of more than $100,000, for the fiscal year ended December 31, 2001.

Summary Compensation Table

|                                                                                         |  |                |  |     |                         | Long-TermCompensation
Securities
Underlying
Options (#) |                               | 
|---------------------------------------------------------------------------------------- |  | -------------- |  | --- | ----------------------- | ------------------------------------------------------- | ----------------------------- | 
|
|
|
|Michael J. Tate(1) Former President, Chief Executive Officer
and Chief Financial Officer |  | 2001
2000
1999 |  | $$$ | 126,805
153,856
146,153 |                                                         | 0
            0
  50,000      | 
|J. L. Reissner(2) Chief Executive Officer and Chief
Financial Officer                    |  | 2001
2000      |  |     | 0
0                     |                                                         | 0
            0               | 
|Louis S. Matjasko(3) President and Chief Operating Officer                               |  | 2001           |  | $   | 131,318                 |                                                         | 50,000                        | 
|Brian A. Kempski Vice President, Marketing and Sales                                     |  | 2001
2000
1999 |  | $$$ | 124,527
116,708
97,203  |                                                         | 50,000
            0
  75,000 | 

---

17

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The following table sets forth information regarding options to purchase Common Stock of the Company granted to the named executive officers of the Company during
the fiscal year ended December 31, 2001.

Option Grants During Fiscal Year Ended December 31, 2001

|Name               |  | Number of
Securities
Underlying
Options
Granted (#) |  | Percent of
Total Options
Granted to
Employees in
Fiscal Year |  | Exercise
Price ($/Sh) |      | Expiration Date
|------------------ |  | --------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------------- | ---- | ---------------
|Michael J. Tate(1) |  | 0                                                   |  |                                                             |  |                       |     |                
|J. L. Reissner     |  | 0                                                   |  |                                                             |  |                       |     |                
|Louis S. Matjasko  |  | 50,000(2)                                           |  | 18.1%                                                        |  | $                     | 0.50 |                
|Brian A. Kempski   |  | 50,000(2)                                           |  | 18.1%                                                        |  | $                     | 0.50 |                

---

18

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The following table sets forth information regarding options to purchase Common Stock of the Company exercised by the named executive officers of the Company
during the fiscal year ended December 31, 2001 and the number and value of unexercised options held by them at that date.

Option Exercises During Fiscal Year Ended December 31, 2001
and Fiscal Year End Option Values

|Name              |  | Shares
Acquired on
Exercise (#) |  | Value
Realized ($) |  | Number of
Unexercised
Options
at FY-end (#)
Exercisable/
Unexercisable |  | Value of Unexercised
in-the-Money Options
at FY- end ($)
Exercisable/
Unexercisable(1)
|----------------- |  | ------------------------------- |  | ------------------ |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------
|Michael J. Tate   |  | 0                               |  | 0                  |  | 106,058/0                                                              |  | /                                                                                   
|J. L. Reissner    |  | 0                               |  | 0                  |  | 0/0                                                                    |  | /                                                                                   
|Louis S. Matjasko |  | 0                               |  | 0                  |  | 16,667/ 33,333                                                         |  | /                                                                                   
|Brian A. Kempski  |  | 0                               |  | 0                  |  | 91,667/ 33,333                                                         |  | /                                                                                   

---

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

PRINCIPAL SHAREHOLDERS AND BENEFICIAL
OWNERSHIP OF MANAGEMENT

The following table sets forth information known to the Company with respect to the beneficial ownership of each class of the Company's capital stock as of
March 15, 2002 for (1) each person known by the Company to beneficially own more than 5% of any class of the Company's voting securities, (2) each of the executive officers named
in the Summary Compensation Table under the heading "Executive Compensation and Other Benefits," (3) each of the Company's directors and (4) all of the Company's executive officers and
directors as a group. Except as otherwise indicated, the Company believes that each of the beneficial owners of the Company's capital stock listed below, based on

19

---

information provided by these owners, has sole investment and voting power with respect to its shares, subject to community property laws where applicable.

|                                                                       |  |               |  |       |  |           |  |        |  | Common
Stock and
Common Stock
Equivalents
(1) |  | Percent of
Total
Voting
Power
(2)
|---------------------------------------------------------------------- |  | ------------- |  | ----- |  | --------- |  | ------ |  | --------------------------------------------- |  | ---------------------------------
|
|
|
|Perkins Capital Management
730 East Lake Street
Wayzata, MN 55391-1769 |  | 931,565(3)    |  | 10.7% |  | 0         |  |       |  | 931,565                                       |  | 9.6%                             
|Activar, Inc.
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439   |  | 2,187,500(4)  |  | 25.0% |  | 625,000   |  | 62.5%  |  | 2,812,500                                     |  | 28.9%                            
|R.F. McNamara
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439   |  | 2,454,167(5)  |  | 27.2% |  | 625,000   |  | 62.5%  |  | 3,079,167                                     |  | 31.6%                            
|J.L. Reissner
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439   |  | 3,079,167(6)  |  | 35.2% |  | 875,000   |  | 87.5%  |  | 3,954,167                                     |  | 40.6%                            
|Michael J. Tate
410 11th Avenue South
Hopkins, MN 55343                |  | 833,403(7)    |  | 9.4%  |  | 125,000   |  | 12.5%  |  | 958,403                                       |  | 9.8%                             
|Louis S. Matjasko
410 11th Avenue South
Hopkins, MN 55343              |  | 50,001(8)     |  | *     |  | 0         |  |       |  | 50,001                                        |  | *                                
|Brian A. Kempski
410 11th Avenue South
Hopkins, MN 55343               |  | 111,668(9)    |  | 1.3   |  | 0         |  | 0.0%   |  | 111,668                                       |  | 1.1                              
|All executive officers and directors as a group (5 persons)            |  | 4,340,906(10) |  | 46.5% |  | 1,000,000 |  | 100.0% |  | 5,340,906                                     |  | 51.6%                            

---

20

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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Michael J. Tate, former President, Chief Executive Officer and Director, received 100,000 shares of restricted stock in lieu of $50,000 in salary compensation per
a one year agreement ended May 31, 2000.

On
October 10, 2000, the Company completed a private financing (the "Financing") pursuant to the terms of a Securities Purchase Agreement dated October 10, 2000 (the
"Securities Purchase Agreement") by and among the Company, Activar, Inc., J.L. Reissner and M.J. Tate (Activar, Reissner and Tate, collectively the "Investors"). Pursuant to the Securities
Purchase Agreement, the Company
sold to the Investors, and the Investors purchased from the Company, an aggregate of 3,500,000 shares of the Company's common stock, par value $.1875 per share, and an aggregate of 1,000,000 shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share, all at a purchase price of $.1777778 per share, for an aggregate purchase price of $800,000. Of the $800,000 total,
Activar and Reissner purchased $700,000.

On
December 1, 2000, the Company acquired certain of the assets of Magstar Technologies, Inc. To fund the purchase, the Company issued to Activar a three-year
8% promissory note in the principal amount of $363,587. Activar, Inc., one of the Company's shareholders, is also a Magstar shareholder, and Mr. McNamara is a director and officer of
Activar, Magstar and the Company. The Company believes that the terms and conditions of the promissory note given to Activar, as well as the Asset Purchase agreement between the Company and Magstar,
are substantially the same as the terms and conditions on which the Company could have obtained similar assets from an unaffiliated third party.

On
February 23, 2001, the Company acquired certain of the assets of Quickdraw Conveyor Systems, Inc. To fund the purchase, the Company borrowed $150,000 from
Activar, Inc., one of the Company's shareholders, pursuant to a promissory note that is due on demand and bears interest at 10%.    Mr. McNamara and Mr. Reissner are
directors and officers of Activar, as well as directors and officers of the Company. The Company believes that the terms and conditions of the promissory note given to Activar are substantially the
same as the terms and conditions on which the Company could have obtained credit from an unaffiliated third party.

On
March 21, 2001, the Company entered into two Master Equipment Lease Agreements with Activar Properties, Inc. ("Lessor"), an affiliate of Activar, Inc. Under these
agreements, the Company leased two sets of equipment for terms of 61 months and 25 months, respectively, for monthly payments of $30,279 and $17,399, respectively. The Lessor assigned
its rights under these leases to its bank. The Company believes that the terms and conditions of these agreements are substantially the same as the terms and conditions on which it could have leased
similar equipment from an unaffiliated

21

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third party. Proceeds from the sale were used to pay off a promissory note in the principal amount of $1,027,000 plus accrued interest due under the Company's bank credit agreement and to pay off
$540,034 owed to Activar, Inc. for equipment purchases.

Throughout
2001, the Company borrowed monies from Activar, Inc. to fund operations. These loans are supported by promissory notes that are due on demand and bear interest at 10%.
The Company believes that the terms and conditions of the promissory notes given to Activar are at least as favorable as the terms and conditions on which the Company could have obtained credit from
an unaffiliated third party.

On
January 21, 2002, the Company borrowed $500,000 from Richard F. McNamara, a director, Chairman and major shareholder of the Company, on a term note that bears interest at 12%.
Interest is payable monthly, with the principal balance due and payable on January 10, 2005. Mr. McNamara
received warrants for the purchase of 250,000 shares of Common Stock of the Company and holds a mortgage on the real property of the Company. Proceeds from this note were used to pay off $400,000 in
debentures which had been issued in 1998 and 1999 and accrued interest thereon. The Company believes that the terms and conditions of this financing are substantially the same as the terms and
conditions on which the Company could have obtained similar credit from an unaffiliated third party.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a)Exhibits

The
exhibits to this Report are listed in the Exhibit Index on pages 40 to 42 of this Report.

A
copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of the Company as of March 15, 2002, upon
receipt from any such person of a written request for any such exhibit. Such request should be sent to MagStar Technologies, Inc., 410 Eleventh Avenue South, Hopkins, Minnesota 55343,
Attention: Investor Relations.

The
following is a list of each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Report, the location of which is indicated in the
Exhibit Index of this Report:

(b)Reports on Form 8-K

None

22

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|Dated: March 29, 2002 |  | MAGSTAR TECHNOLOGIES, INC.
|--------------------- |  | --------------------------
|                      |  | By:                       

Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below on March 29, 2002 by the following persons on behalf of the Registrant
and in the capacities indicated.

|Signature                             |  | Title                                                              
|------------------------------------- |  | -------------------------------------------------------------------
|                                      |  |                                                                    
|/s/R.F. MCNAMARAR.F. McNamara         |  | Chairman of the Board and Director                                 
|/s/J.L. REISSNERJ.L. Reissner         |  | Chief Executive Officer and Director (Principal Executive Officer) 
|/s/MICHAEL J. TATEMichael J. Tate     |  | Director                                                           
|/s/JOSEPH A. PETRICHJoseph A. Petrich |  | Treasurer and Chief Financial Officer (Principal Financial Officer)
|/s/DIANNE SCHMIESSDianne Schmiess     |  | Controller (Principal Accounting Officer)                          

23

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MagStar Technologies, Inc.(formerly Reuter Manufacturing, Inc.)
Report on Audits of Financial Statements for the
Years Ended December 31, 2001 and 2000

24

---



INDEPENDENT AUDITORS' REPORT

Stockholders and Board of Directors
MagStar Technologies, Inc.
(formerly Reuter Manufacturing, Inc.)
Hopkins, Minnesota

We
have audited the accompanying balance sheets of MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.), as of December 31, 2001 and 2000 and the related
statements of operations and stockholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MagStar Technologies, Inc. as of December 31,
2001 and 2000, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations and its total liabilities exceed its total assets. This raises substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to
these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Minneapolis,
MN
March 1, 2002

25

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MagStar Technologies, Inc.        (formerly Reuter Manufacturing, Inc.)        Balance Sheets        At December 31, 2001 and 2000

|                                                   |                                                                                                                     | 2001                                           |           | 2000        |           
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------- | ----------- | ----------
|ASSETS                                             |                                                                                                                     |                                                |           |            
|Current assets:                                    |                                                                                                                     |                                                |           |             |           
|                                                   | Cash                                                                                                                |                                                | $         | 500         |           
|                                                   | Accounts receivable, net                                                                                            |                                                |           | 1,200,782   |           
|                                                   | Inventories                                                                                                         |                                                |           | 1,855,104   |           
|                                                   | Other current assets                                                                                                |                                                |           | 90,110      |           
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total current assets                           |           |             | 3,146,496 
|Property, plant and equipment, net                 |                                                                                                                     |                                                | 2,003,960 |             |           
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total assets                                   |           | $           | 5,150,456 
|                                                   |                                                                                                                     |                                                |           |             |           
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY           |                                                                                                                     |                                                |           |            
|Current liabilities:                               |                                                                                                                     |                                                |           |             |           
|                                                   | Senior debt                                                                                                         |                                                | $         | 5,504,966   |           
|                                                   | Current maturities of capital lease obligations                                                                     |                                                |           | 186,542     |           
|                                                   | Debentures payable, related parties                                                                                 |                                                |           | 375,000     |           
|                                                   | Payable to related parties                                                                                          |                                                |           | 738,310     |           
|                                                   | Checks issued in excess of cash in bank                                                                             |                                                |           | 134,247     |           
|                                                   | Accounts payable                                                                                                    |                                                |           | 779,933     |           
|                                                   | Accounts payable, settlement                                                                                        |                                                |           | 188,103     |           
|                                                   | Deferred gain on sale-leaseback                                                                                     |                                                |           | 353,448     |           
|                                                   | Accrued expenses                                                                                                    |                                                |           | 638,129     |           
|                                                   | Note payablerelated parties                                                                                        |                                                |           | 2,442,913   |           
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total current liabilities                      |           |             | 11,341,591
|Debentures payable, related parties                |                                                                                                                     |                                                |          |             |           
|Capital lease obligations, less current maturities |                                                                                                                     |                                                | 132,093   |             |           
|Accounts payable, settlement                       |                                                                                                                     |                                                |          |             |           
|Deferred gain on sale-leaseback                    |                                                                                                                     |                                                | 777,881   |             |           
|Other liabilities                                  |                                                                                                                     |                                                | 15,664    |             |           
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total liabilities                              |           |             | 12,267,229
|                                                   |                                                                                                                     |                                                |           |             |           
|Stockholders' deficiency:                          |                                                                                                                     |                                                |           |             |           
|                                                   | Series A preferred stock, par value $.1875 per share, authorized 2,500,000 shares                                   |                                                |           | 187,500     |           
|                                                   | Preferred stock, undesignated, par value $.1875 per share, authorized 7,500,000 shares, none issued and outstanding |                                                |           |            |           
|                                                   | Common stock, par value $.1875 per share, authorized 30,000,000 shares                                              |                                                |           | 1,638,782   |           
|                                                   | Additional paid-in capital                                                                                          |                                                |           | 17,839,979  |           
|                                                   | Accumulated deficit                                                                                                 |                                                |           | (26,783,034 | )         
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total stockholders' deficiency                 |           |             | (7,116,773
|                                                   |                                                                                                                     |                                                |           |             |           
|                                                   |                                                                                                                     | Total liabilities and stockholders' deficiency |           | $           | 5,150,456 
|                                                   |                                                                                                                     |                                                |           |             |           

The
accompanying notes are an integral part of the financial statements.

26

---

MagStar Technologies, Inc.        (formerly Reuter Manufacturing, Inc.)        Statements of Operations        At December 31, 2001 and 2000

|                                             |                                                          | 2001                     |            | 2000     |           
|-------------------------------------------- | -------------------------------------------------------- | ------------------------ | ---------- | -------- | ----------
|Net sales                                    |                                                          | $                        | 9,721,461  |          | $         
|Cost of sales                                |                                                          |                          | 10,603,509 |          |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Gross profit (loss)      |            |          | (882,048  
|Selling, general and administrative expenses |                                                          |                          | 2,281,250  |          |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Operating loss           |            |          | (3,163,298
|                                             |                                                          |                          |            |          |           
|Other income (expense)                       |                                                          |                          |            |          |           
|                                             | Interest expense                                         |                          |            | (592,740 | )         
|                                             | Other, net                                               |                          |            | 111,968  |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Total other expense, net |            |          | (480,772  
|                                             |                                                          |                          |            |          |           
|Loss before extraordinary item               |                                                          |                          | (3,644,070 | )        |           
|                                             | Extraordinary item, income from trade debt restructuring |                          |            | 94,037   |           
|                                             |                                                          |                          |            |          |           
|Net loss                                     |                                                          | $                        | (3,550,033 | )        | $         
|                                             |                                                          |                          |            |          |           
|Loss per sharebasic and diluted:            |                                                          |                          |            |          |           
|                                             | Loss before extraordinary items                          |                          | $          | (0.37    | )         
|                                             | Extraordinary item                                       |                          |            | 0.01     |           
|                                             |                                                          |                          |            |          |           
|                                             | Net loss                                                 |                          | $          | (0.36    | )         
|                                             |                                                          |                          |            |          |           
|Weighted average shares outstanding          |                                                          |                          | 9,740,173  |          |           
|                                             |                                                          |                          |            |          |           

The
accompanying notes are an integral part of the financial statements.

27

---



MagStar Technologies, Inc.        (formerly Reuter Manufacturing, Inc.)        Statements of Stockholders' Deficiency        For the years ended December 31, 2001
and 2000

|                                                |  | Series A Preferred Stock |  | Common Stock |         |  |           |  |   |           |  |   |           
|----------------------------------------------- |  | ------------------------ |  | ------------ | ------- |  | --------- |  | - | --------- |  | - | ----------
|
|Balances, December 31, 1999                     |  |                         |  | $            |        |  | 4,999,385 |  | $ | 937,385   |  | $ | 17,871,759
|Private placement of preferred and common stock |  | 1,000,000                |  |              | 187,500 |  | 3,500,000 |  |   | 656,250   |  |   | (43,750   
|Issuance of common stock                        |  |                          |  |              |         |  | 240,788   |  |   | 45,147    |  |   | (9,030    
|Amortization of deferred compensation           |  |                          |  |              |         |  |           |  |   |           |  |   |           
|Net loss                                        |  |                          |  |              |         |  |           |  |   |           |  |   |           
|                                                |  |                          |  |              |         |  |           |  |   |           |  |   |           
|Balances, December 31, 2000                     |  | 1,000,000                |  |              | 187,500 |  | 8,740,173 |  |   | 1,638,782 |  |   | 17,818,979
|Compensation expense                            |  |                          |  |              |         |  |           |  |   |           |  |   | 21,000    
|Net loss                                        |  |                          |  |              |         |  |           |  |   |           |  |   |           
|                                                |  |                          |  |              |         |  |           |  |   |           |  |   |           
|Balances, December 31, 2001                     |  | 1,000,000                |  | $            | 187,500 |  | 8,740,173 |  | $ | 1,638,782 |  | $ | 17,839,979
|                                                |  |                          |  |              |         |  |           |  |   |           |  |   |           

The accompanying notes are an integral part of the financial statements.

28

---

MagStar Technologies, Inc.        (formerly Reuter Manufacturing, Inc.)        Statements of Cash Flows        For the years ended December 31, 2001 and 2000

|                                                   |                                                                             | 2001                                                              |                            | 2000        |           
|-------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------- | ----------- | ----------
|Cash flows from operating activities:              |                                                                             |                                                                   |                            |             |           
|                                                   | Net loss                                                                    |                                                                   | $                          | (3,550,033  | )         
|                                                   | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                   |                            |             |           
|                                                   |                                                                             | Depreciation and amortization                                     |                            |             | 369,168   
|                                                   |                                                                             | Gain from trade debt restructuring                                |                            |             | (94,037   
|                                                   |                                                                             | Gain on sale of fixed assets                                      |                            |             | (34,321   
|                                                   |                                                                             | Amortization of debt discount                                     |                            |             | 22,080    
|                                                   |                                                                             | Deferred compensation                                             |                            |             |          
|                                                   |                                                                             | Stock options as compensation                                     |                            |             | 21,000    
|                                                   |                                                                             | Gain on sale/leaseback                                            |                            |             | (263,316  
|                                                   |                                                                             | Changes in operating assets and liabilities:                      |                            |             |           
|                                                   |                                                                             |                                                                   | Accounts receivable        |             |           
|                                                   |                                                                             |                                                                   | Inventories                |             |           
|                                                   |                                                                             |                                                                   | Other current assets       |             |           
|                                                   |                                                                             |                                                                   | Accounts payable           |             |           
|                                                   |                                                                             |                                                                   | Accrued expenses           |             |           
|                                                   |                                                                             |                                                                   | Payable to related parties |             |           
|                                                   |                                                                             |                                                                   | Other liabilities          |             |           
|                                                   |                                                                             |                                                                   |                            |             |           
|                                                   |                                                                             | Net cash used in operating activities                             |                            |             | (2,421,716
|                                                   |                                                                             |                                                                   |                            |             |           
|Cash flows from investing activities:              |                                                                             |                                                                   |                            |             |           
|                                                   | Capital expenditures                                                        |                                                                   |                            | (391,255    | )         
|                                                   | Proceeds from sale/leaseback                                                |                                                                   |                            | 1,987,141   |           
|                                                   | Proceeds from the sale of fixed assets                                      |                                                                   |                            | 280,000     |           
|                                                   |                                                                             |                                                                   |                            |             |           
|                                                   |                                                                             | Net cash provided by investing activities                         |                            |             | 1,875,886 
|                                                   |                                                                             |                                                                   |                            |             |           
|Cash flows from financing activities:              |                                                                             |                                                                   |                            |             |           
|                                                   | Proceeds from line of credit and senior debt                                |                                                                   |                            | 11,535,643  |           
|                                                   | Repayments of line of credit and senior debt                                |                                                                   |                            | (12,674,637 | )         
|                                                   | Proceeds from private placement of stock                                    |                                                                   |                            |            |           
|                                                   | Proceeds from notes payablerelated parties                                 |                                                                   |                            | 2,066,220   |           
|                                                   | Repayments of notes payablerelated parties                                 |                                                                   |                            | (25,000     | )         
|                                                   | Payments of capital lease obligations                                       |                                                                   |                            | (384,141    | )         
|                                                   | Increase (decrease) in checks issued in excess of cash in bank              |                                                                   |                            | 27,745      |           
|                                                   |                                                                             |                                                                   |                            |             |           
|                                                   |                                                                             | Net cash provided by financing activities                         |                            |             | 545,830   
|                                                   |                                                                             |                                                                   |                            |             |           
|Net change in cash                                 |                                                                             |                                                                   |                           |             |           
|Cash, beginning of year                            |                                                                             |                                                                   | 500                        |             |           
|                                                   |                                                                             |                                                                   |                            |             |           
|Cash, end of year                                  |                                                                             | $                                                                 | 500                        |             | $         
|                                                   |                                                                             |                                                                   |                            |             |           
|Supplemental disclosures of cash flow information: |                                                                             |                                                                   |                            |             |           
|                                                   | Cash paid for interest                                                      |                                                                   | $                          | 561,601     |           
|                                                   | Noncash investing and financing activities:                                 |                                                                   |                            |             |           
|                                                   |                                                                             | Purchase of equipment in exchange for notes payable               |                            |             |          
|                                                   |                                                                             | Purchase of accounts receivable and inventories for notes payable |                            |             |          

The accompanying notes are an integral part of the financial statements.

29

---



MagStar Technologies, Inc.        (formerly Reuter Manufacturing, Inc.)        Notes to Financial Statements

1.    Business Description and Conditions



MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.), (the Company), is principally a contract manufacturer of precision-machined
components, used in electro-mechanical assemblies and devices for medical, magnetic, motion control, and industrial original equipment manufacturers ("OEM"). The Company manufactures on a contract
basis, among other items, close tolerance bearing-related assemblies for the medical device industry. In order to differentiate itself from its competitors, the Company emphasizes its design
engineering and manufacturing engineering capability and support. The Company also manufactures and sells under the Reuter ® name; self-powered oil centrifuges and hydraulic
actuators, which are sold by the Company's sales force and distributor network to OEM's, end users and distributors. Under the Quickdraw Conveyor Systems name, acquired in February 2001, the
Company manufactures and sells to OEM equipment manufacturers and end users in the medical, semiconductor and factory automation markets.



The Company has experienced a net loss of $3,550,033 for the year ended December 31, 2001, has a working capital deficit of $8,195,095 and stockholders'
deficiency of $7,116,773 at December 31, 2001.

Management's
plans and objectives to improve the financial condition of the Company are as follows:



There
can be no assurance that management will be able to accomplish all of the above plans and objectives or achieve the necessary improvements in its cash flows and financial position
to meet its obligations as they become due.

The
Company's ability to continue operations is dependent on its ability to increase sales and maintain adequate margins on sales, as well as its ability to maintain its credit
facilities. In addition, if the Company is unable to increase sales from current levels and generate positive cash flows from operations, it would be unable to meet its debt service requirements and
may be forced to cease operations or seek protection under U.S. bankruptcy laws.

30

---

Accordingly,
there can be no assurance that the Company will continue as a going concern in its current form. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

2.    Significant Accounting Policies



The Company extends unsecured credit to customers in the normal course of business and believes all accounts receivable in excess of the allowance for doubtful
accounts to be fully collectible. If accounts receivable in excess of the provided allowance are determined uncollectible, they are charged to expense in the year that determination is made.



Inventories are valued at the lower of cost or market with cost determined on a first-in, first-out basis.



Property, plant and equipment are recorded at cost. Depreciation and amortization is provided for by the straight-line method based on the estimated
useful lives of the related assets. Useful lives range from 15 to 40 for buildings and building improvements and 5 to 7 for machinery and equipment. Expenditures for major renewals and betterments are
capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. Upon retirement or other disposition of property, plant or equipment, the applicable cost and
accumulated depreciation and amortization are eliminated from the accounts, and the resulting gain or loss is included in operations.



The Company recognizes sales of precision manufacturing products when these products are shipped.



The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary difference between
the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of the tax currently payable and the change in the deferred tax assets and liabilities
during the period.



The carrying value of the Company's financial instruments approximates fair value at December 31, 2001 and 2000.

31

---



Basic loss per share is computed using the weighted average number of shares outstanding for the period. Diluted loss per share is computed using the weighted
average number of shares outstanding per share adjusted for the incremental shares attributed to outstanding stock options under the Company's stock option plans and stock purchase warrants.

Incremental
shares attributable to the assumed exercise of stock options and stock purchase warrants for the years ended December 31, 2001 and 2000 were excluded from the
computation of diluted earnings per share as their effect would be anti-dilutive.



In accordance with APB 25, the Company accounts for stock based compensation using the intrinsic value method. Accordingly, compensation costs for stock options
granted to employees is measured at the excess, if any, of the fair value of the Company's stock at the measurement date over the amount the employee must pay to acquire the stock.



The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.



The Company participates in a self-insured employee health insurance plan administered by an outside party. The Company is required to pay up to
$30,000 of annual medical claims per participant. The annual plan medical claims will vary depending upon the number of employees and their level of participation.



The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards (SFAS) 141 "Business Combinations." This Statement
addresses financial accounting and reporting for business combinations. It eliminates the pooling-of-interests method and requires all business combinations be accounted for
using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001, and to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001 or later. Adoption of the new standard will have no initial effect on the Company's financial statements.

The
FASB also recently issued SFAS 142 "Goodwill and Other Intangible Assets." This Statement addresses how intangible assets that are acquired individually or with a group of
other assets should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially
recognized in the financial statements. Under the new standard, amortization of existing goodwill ceases upon adoption of SFAS 142 and is replaced by periodic evaluation for impairment using
specific methodology. SFAS 142

32

---

is effective for fiscal years beginning after December 15, 2001. The Company will apply SFAS 142 beginning with the first quarter of its fiscal year ending December 31, 2002. The
effects of adoption of SFAS 142 on the Company's financial statements are not determinable currently or for any future periods.

In
June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement Obligations." SFAS 143 is effective for fiscal year beginning after June 15, 2002. The
Company is currently evaluating the impact of SFAS 143.

In
August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121 and is
effective for financial statements issued for fiscal years beginning after December 31, 2001. The provisions of SFAS 144 generally are to be applied prospectively. The Company is
currently evaluating the impact of SFAS 144.

3.    Selected Balance Sheet Information

2001

2000Accounts Receivable, NetAccounts receivable

$
1,300,782

$
1,992,291Less allowance for doubtful accounts and sales returns


(100,000
)

(177,500
)$
1,200,782

$
1,814,791Inventories, NetRaw materials and supplies

$
781,812

$
1,146,315Work-in-process


523,255


909,771Finished goods


663,037


Less allowance for obsolete inventories


(113,000
)

(158,000
)$
1,855,104

$
1,898,086Property, Plant and Equipment, NetLand and related improvements

$
206,995

$
206,995Buildings and building improvements


3,375,198


3,375,198Machinery and equipment


72,167


8,029,482Equipment under capital lease obligations


770,443


1,515,9444,424,803


13,127,619Less accumulated depreciation


(1,850,987
)

(9,514,588
)Less accumulated amortization


(569,856
)

(792,983
)$
2,003,960

$
2,820,048




In July 2000, the Company presented a settlement offer to certain trade creditors. The settlement plan required the trade creditors to reduce their amounts
outstanding above $200 by 47% of the total amount owed to the creditor. The remaining 53% of their trade creditor balance above $200 would then be paid by the Company in 12 equal
bi-monthly installments, which commenced on October 30, 2000. Trade creditors with balances less than or equal to $200 were paid in full.

33

---

Approximately
62.4% of the trade creditors responded to the settlement offer and approximately $602,000 of trade creditor balances has been settled under the offer. Of the total
settlement amount of $602,000, approximately $331,000 relates to amounts outstanding at December 31, 1999. The Company recorded a gain of approximately $602,000 as a result of these trade
creditor settlements in the fourth quarter of fiscal 2000 and approximately $94,000 during the year ended December 31, 2001. The Company is continuing to pursue additional settlements with the
non-responding trade creditors.

4.    Senior Debt

Senior debt at December 31, 2001 and 2000, consisted of the following:

|                                                            |                                                                                                                                                               | 2001 |           | 2000     
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | ---------
|Asset-based line of credit, payable to bank, due on demand. |                                                                                                                                                               |      |           |          
|                                                            | The weighted average interest rate of asset-based line of credit borrowings was 7.5% and 10.13% for the years ended December 31, 2001 and 2000, respectively. |      | $         | 1,359,768
|Term loan A, payable to bank.                               |                                                                                                                                                               |      | 2,820,198 |          
|Term loan B, payable to bank.                               |                                                                                                                                                               |      |          |          
|Term loan C, payable to bank.                               |                                                                                                                                                               |      | 1,325,000 |          
|Term note, payable to bank.                                 |                                                                                                                                                               |      |          |          
|                                                            |                                                                                                                                                               |      |           |          
|                                                            |                                                                                                                                                               | $    | 5,504,966 |          
|                                                            |                                                                                                                                                               |      |           |          

The
Company has entered into an amended and restated senior credit agreement.

The
credit facilities under the credit agreement consist of an asset-based line of credit with availability of up to $1,750,000, subject to a borrowing base limitation of 80% of the
Company's eligible accounts receivable plus eligible inventories, and three term notes of $2,847,218 (Term Loan A), $1,100,000 (Term Loan B), and $1,325,000 (Term Loan C).

The
asset-based line of credit bears interest at the bank's reference rate (4.75% at December 31, 2001) and is payable in full in October 2002. Term Loan A bears interest
at a fixed rate of 10% per year and is payable in monthly principal and interest installments of $27,020 commencing November 2000, with a final balloon payment due in October 2005. Term
Loan B bears interest at a fixed rate of 12%, with interest payable monthly commencing November 2000 and was paid off in 2001. Effective February 2001, Term Loan B is payable in monthly
principal and interest installments of $36,500 with a final balloon payment due in January 2004. Term Loan C is non-interest bearing and is due and payable in full on
September 2003. If the line of credit and Term Loan A and B are paid in full on or before September 2003, or if no event of default exists at October 1, 2003, then Term Loan C
shall be forgiven.

34

---

The credit facilities restrict the payment of dividends and the Company's ability to incur other indebtedness. The credit agreement also contains a covenant that requires the Company to
meet certain net income targets for 2002. The Bank may at any time apply the funds available in any Company bank account against the outstanding loan balances. In addition, the credit facilities are
collateralized by all of the Company's assets, except for certain equipment purchased with notes payable.

The
senior debt obligations have scheduled maturity dates; however, their borrowings are due on demand; accordingly, they have been classified as current in the Company's
December 31, 2001 and 2000, balance sheets.

5.    Debentures Payable, Related Parties

The Company has debentures payable primarily to stockholders and members of the Board of Directors with interest at 13%, payable monthly beginning
March 1999 with the principal due December 2001. The balance outstanding at December 31, 2001 and 2000 was $375,000 and $377,920, respectively and accrued interest was $101,259
and $57,128, respectively. These balances were paid off in January 2002, and the Company entered into a note payable to a stockholder for $500,000 including interest that is payable monthly at
12%. The note is collateralized by real property and is due on January 10, 2005.

6.    Notes Payable, Related Parties

Notes payable, related parties at December 31, 2001 and 2000, consisted of the following:

2001

2000Note payable, stockholder, due upon demand with interest at 10%, subordinated to senior debt

$
1,962,000

$
Note payable, stockholder, due upon demand with interest at 8%, subordinated to senior debt


363,587


363,587Note payable, stockholder, due upon demand with interest at 8%, subordinated to senior debt


67,326


13,106Note payable, related entity, due upon demand with interest at 10%, subordinated to senior debt


50,000


$
2,442,913

$
376,693


Accrued
interest and interest expense on these notes at December 31, 2001 and 2000 was $130,000 and $0, respectively.

35

---

7.    Capital Lease Obligations

The Company leases equipment under noncancelable leases classified as capital leases. The following is a schedule of future minimum lease payments for capital
leases together with the present value of the net minimum lease payments:

Year Ending December 31:2002

$
355,0002003


20,000Total minimum lease payments


375,000Less: interest


(56,365
)Present value of lease payments


318,635Less: current portion


(186,542
)Non-current portion obligation with interest rates of 5% to 7%

$
132,093


8.    Sale/Leaseback and Related Party Lease Obligations

The Company sold various equipment during 2001 to an entity owned by a stockholder for $1,987,141 and concurrently entered into agreements to lease the equipment
under various leases that expire through 2006. In addition, the Company leases additional equipment from this entity under operating leases that expire through 2007.

Future
minimum payments required under these leases as of December 31, 2001 are due as follows:

Year Ending December 31:2002

$
898,0002003


753,0002004


679,0002005


733,0002006


546,000Thereafter


9,000Total minimum lease payments

$
3,618,000


Rent
expense under these leases for the year ended December 31, 2001 was $525,000.

9.    Stockholders' Deficiency



In 2000, the Company completed a private placement with certain investors under which the Company sold 3,500,000 shares of the Company's common stock and
1,000,000 shares of the Company's Series A Convertible Preferred Stock valued at $.1777778 per share, for proceeds of $800,000.

The
Series A Preferred is convertible at any time into shares of common stock as is determined by dividing $.1777778 by the conversion price in effect at the time of any
conversion and multiplying such quotient by each share of Series A Preferred to be converted. At all meetings of the shareholders of the Company or in the case of any actions of shareholders in
lieu of a meeting, each holder of Series A Preferred stock shall have that number of votes equal to the number of whole shares of Common Stock into which such holder's shares are then
convertible. In the event of any liquidation, whether voluntary or involuntary, the assets of the Company available for distribution to its shareholders shall be distributed equally among the holders
of the Common Stock and the Series A Preferred stock.

36

---

In
connection with the private placement, the Company, the investors and certain of the Company's existing stockholders (collectively, the control group) entered into a voting agreement.
Among other provisions, the voting agreement requires that the control group vote their shares to designate the investors as members of the Company's Board of Directors. The voting agreement further
requires the control group to vote as directed by the investors on all matters, which are presented for a vote to the Company's stockholders.



The Company's Stock Option Plans (the Plans) provide for grants of stock options to employees and directors. The number of common shares available for grant
pursuant to the Plans was 1,723,000 and 625,000 at December 31, 2001 and 2000, respectively. Options become exercisable over periods of up to four years from the date of grant and expire
10 years from the date of grant.

The
following summarizes all option activity under the Plans:

|                                         |  | Options
Outstanding |   | Weighted
Average
Exercise
Price
|---------------------------------------- |  | ------------------- | - | -------------------------------
|Balances, December 31, 1999              |  | 367,203             |   | $                              
|Cancelled                                |  | (27,562             | ) | $                              
|Granted                                  |  | 10,000              |   | $                              
|                                         |  |                     |   |                                
|Balances, December 31, 2000              |  | 349,641             |   | $                              
|Cancelled                                |  | (100,240            | ) | $                              
|Granted                                  |  | 277,000             |   | $                              
|                                         |  |                     |   |                                
|Balances, December 31, 2001              |  | 526,401             |   | $                              
|                                         |  |                     |   |                                
|Options exercisable at December 31, 2001 |  | 375,068             |   | $                              
|                                         |  |                     |   |                                

The
following table summarizes information about fixed price stock options outstanding at December 31, 2001:

|  |                  |  |         | Options Outstanding |     |  |   |     
|- | ---------------- |  | ------- | ------------------- | --- |  | - | ----
|
|
|$ | .50              |  | 227,000 |                     | 110 |  | $ | 0.50
|$ | 0.25 - $0.515625 |  | 171,500 |                     | 84  |  | $ | 0.46
|$ | 0.6250 - $0.9375 |  | 88,401  |                     | 60  |  | $ | 0.81
|$ | 2.25 - $3.375    |  | 16,500  |                     | 60  |  | $ | 2.42
|$ | 4.25 - $4.4375   |  | 16,000  |                     | 38  |  | $ | 4.44
|$ | 4.875 - $5.1875  |  | 7,000   |                     | 48  |  | $ | 4.92

37

---



Had compensation cost for the Plans been determined based on the fair value of options at the grant date for awards in 2001 and 2000, the Company's pro forma loss
and net loss per share would have been as follows:

2001

2000Net loss

$
(3,585,783
)
$
(1,238,639
)Net loss per share

$
(0.37
)
$
(0.21
)


The
weighted average grant-date fair value of options granted during 2001 and 2000 was $.75 and $.10, respectively, which was determined using the Black-Scholes option
pricing model with the following key assumptions:

Assumptions

2001

2000Risk free interest rates

5
%
5.5
%Volatility

200
%
600
%Expected lives (months)

72

72


The
Company does not anticipate paying dividends in the near future.

In
January 2002, the Company granted 252,000 options to employees and directors of which 84,000 were immediately exercisable and the remaining became exercisable over two years.
These options are exercisable at $0.25 and expire 10 years from the date of grant.



In connection with the private placement of debentures in December 1998, the Company granted five-year warrants to purchase 350,000 shares of
the Company's common stock at an exercise price of $.6625 per share, exercisable immediately. In February 1999, the Company granted five-year warrants to purchase an additional
50,000 shares of the Company's common stock at an exercise price of $.6625 per share, exercisable immediately. No warrants have been exercised.

In
connection with the issuance of debt to a stockholder in January 2002, the Company granted five-year warrants to purchase 250,000 shares of the Company's common
stock at an exercise price of $0.25 per share, exercisable immediately.

10.  Income Taxes

The following table sets forth the components of the tax-effected deferred tax assets and liabilities at December 31, 2001 and 2000:

|                                                                      |  | 2001 |             | 2000 |  
|--------------------------------------------------------------------- |  | ---- | ----------- | ---- | -
|Net operating losses available for carryforward (expire 2004 to 2020) |  | $    | 14,535,000  |      | $
|Accelerated depreciation for tax reporting purposes                   |  |      |            |      |  
|Other future deductible temporary differences, net                    |  |      | 50,000      |      |  
|                                                                      |  |      |             |      |  
|Net deferred tax asset before valuation allowance                     |  |      | 14,585,000  |      |  
|Valuation allowance                                                   |  |      | (14,585,000 | )    |  
|                                                                      |  |      |             |      |  
|                                                                      |  | $    | -           |      | $
|                                                                      |  |      |             |      |  

The
Company has established a valuation allowance for any tax benefits for which management believes, based on the relative weight of currently available evidence, that it is "more
likely than not"

38

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that the related net deferred tax asset will not be realized. As a result, no tax benefit has been provided for the net loss incurred for the years ended December 31, 2001 and 2000,
respectively.

Under
the Internal Revenue Code, certain stock transactions, including sales of stock and the granting of warrants to purchase stock, may limit the amount of net operating loss
carryforwards that may be utilized on an annual basis to offset taxable income in future periods.

Reconciliation
of the income tax computed at the federal statutory rate to the actual income tax provision is as follows:

2001

2000Benefit at federal statutory rate

$
(1,065,000
)
$
(380,000
)Limitation of net operating loss carryforward benefit


1,065,000


380,000Income tax provision

$


$



11.  Employee Benefit Plans

All employees who are at least 21 years of age and have completed six months of service and have worked at least 1,000 hours are eligible to
participate in the Company's 401(k) Retirement Savings Plan and Profit Sharing Plan. The Company may make 401(k) matching contributions and profit sharing contributions at the discretion of the Board
of Directors. The Company's 401(k) matching contributions and profit sharing contributions for the years ended December 31, 2001 and 2000 were $41,000 and $0, respectively.

12.  Significant Customer Information



The Company performs ongoing credit evaluations of its customers and generally does not require collateral for the outstanding receivable balances.

Three
of the Company's customers accounted for the following percentage of net sales:

|           |  | 2001 |           | 2000 |   
|---------- |  | ---- | --------- | ---- | --
|
|Customer A |  | $    | 3,328,000 |      | 34
|Customer B |  |      | *         |      |   
|Customer C |  |      | *         |      |   

---

Accounts
receivable with these customers at December 31, 2001 and 2000 totaled $385,847 and $822,442, respectively.

13.  Environmental Contingency

The Company has undertaken a Phase I and Phase II environmental assessment of its manufacturing facility. Soil boring and groundwater work indicated the presence
of potentially hazardous substances and petroleum products within the soil and groundwater located beneath the site. The Company notified the applicable regulatory agency (the Minnesota Pollution
Control Agency), and is working with that agency to resolve these issues. However, because the results are still preliminary, the Company is not able to assess whether it will ultimately be held
liable for the presence of these substances at the site nor is the Company able to assess its financial exposure if it is found liable. As of December 31, 2001, $15,000 has been accrued for the
cost of additional environmental work.

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MAGSTAR TECHNOLOGIES, INC.  EXHIBIT INDEX TO ANNUAL REPORT  ON FORM 10-KSB        For the Fiscal Year Ended December 31, 2001

|Item No. |  | Item                                                                                                     |  | Method of Filing                                                                                                                              
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|3.1      |  | Restated Articles of Incorporation, As amended                                                           |  | Filed herewith electronically                                                                                                                 
|3.2      |  | Amended Bylaws                                                                                           |  | Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0- 1561)  
|4.1      |  | Form of the Company's Common Stock Certificate                                                           |  | Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0-1561)   
|4.2      |  | Voting Agreement, dated September 12, 2000, by and among the Company, certain shareholders and investors |  | Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)               
|10.1     |  | Incentive Stock Option Plan of the Company, as amended effective December 17, 1987                       |  | Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-1561) 
|10.2     |  | Directors Stock Option Plan of the Company                                                               |  | Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-1561) 
|10.3     |  | 1991 Non-Employee Director Stock Option Plan                                                             |  | Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-1561)  
|10.4     |  | 1991 Stock Option Plan, as amended                                                                       |  | Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 (File No. 0-1561)
|10.5     |  | 1997 Non-Employee Director Stock Option Plan                                                             |  | Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 (File No. 0-1561)
|10.6     |  | 2001 Stock Option Plan                                                                                   |  | Filed herewith electronically                                                                                                                 
|10.7     |  | 2001 Employee Stock Purchase Plan                                                                        |  | Filed herewith electronically                                                                                                                 
|         |  |                                                                                                          |  |                                                                                                                                               

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|10.8  |  | Environmental and ADA Indemnification Agreement, dated December 3, 1997, between the Company and U.S. Bank National Association                                                                                       |  | Incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K, dated December 18, 1997 (File No. 0-1561)                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|10.9  |  | Environmental Letter of Undertaking, dated December 3, 1997, between the Company and U.S. Bank National Association                                                                                                   |  | Incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K, dated December 18, 1997 (File No. 0-1561)                 
|10.10 |  | Securities Purchase Agreement, dated October 10, 2000, by and among the Company and certain Investors                                                                                                                 |  | Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                  
|10.11 |  | Amended and Restated Credit Agreement dated October 10, 2000, by and between the Company and U.S. Bank National Association                                                                                           |  | Incorporated by referenced to Exhibit 10.4 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                 
|10.12 |  | Amended, Restated and Consolidated Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated October 10, 2000 by and between the Company and U.S. Bank National Association |  | Incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                  
|10.13 |  | Security Agreement, dated October 10, 2000, by and between the Company and U.S. Bank National Association                                                                                                             |  | Incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                  
|10.14 |  | $6,800,000 Amended and Restated Note, dated October 10, 2000, given by the Company to U.S. Bank National Association                                                                                                  |  | Incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                  
|10.15 |  | First Amendment to Amended and Restated Credit Agreement, dated November 30, 2001, by and between the Company and U.S. Bank National Association                                                                      |  | Filed herewith electronically                                                                                                                    
|10.16 |  | Asset Purchase Agreement, Promissory Note and Equipment Lease by and between Reuter Manufacturing, Inc. and Magstar Technologies, Inc. for the acquisition of certain assets at December 1, 2000                      |  | Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-KSB, for the year ended December 31, 2000 (File No. 0-1561) 
|10.17 |  | Bill of Sale and two Master Equipment Leases, with attached exhibits and assignments, dated March 21, 2001 related to the sale-leaseback of equipment between the Company and Activar Properties, Inc.                |  | Incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q, for the quarter ended March 31, 2001 (File No. 0-1561)
|      |  |                                                                                                                                                                                                                       |  |                                                                                                                                                  

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|10.18 |  | Promissory Note between the Company and Activar Properties, Inc. related to the purchase of Quickdraw Conveyor Systems, Inc. dated February 23, 2001 |  | Incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q, for the quarter ended March 31, 2001 (File No. 0-1561)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|10.19 |  | Option Amendment Agreement, dated October 1, 2001 by and between Michael J. Tate and the Company                                                     |  | Filed herewith electronically                                                                                                                    
|10.20 |  | 12% Promissory Note dated January 21, 2002 issued to Richard F. McNamara                                                                             |  | Filed herewith electronically                                                                                                                    
|10.21 |  | Warrant for Purchase of Shares of Common Stock of the Company dated January 21, 2002 issued to Richard F. McNamara                                   |  | Filed herewith electronically                                                                                                                    
|23.1  |  | Consent of Virchow, Krause & Company, LLP                                                                                                            |  | Filed herewith electronically                                                                                                                    

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