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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, 2002                                               
|o                                                                                          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                            to            
                .

Commission File No.: 0-1561

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MAGSTAR TECHNOLOGIES, 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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Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
ý NO o

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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, 2002 were $8,358,149.

The
aggregate market value of the common stock of the Company held by non-affiliates as of March 14, 2003 was approximately $291,686 (based on the last sale price of
the common stock on that date).

The
total number of shares of the Company's common stock outstanding on March 14, 2003 was 8,740,673 shares.

Transitional
Small Business Disclosure Format (Check one): YES o NO ý

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PART I

Forward Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding the
Company's capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve
substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe,"
"estimate," "predict," "potential," or "continue", the negative of the terms or other comparable terminology. Forward-looking statements in this Report also include references to anticipated sales
volume and product margins, efforts aimed at establishing new or improving existing relationships with customers, other business development activities, anticipated financial performance, business
prospects and similar matters. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these
statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange
Commission. These factors may cause the Company's actual results to differ materially from any forward-looking statements. The Company disclaims any obligation to publicly update these statements, or
disclose any difference between actual results and those reflected in these statements. Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 which provides a safe harbor for forward looking statements.

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
partially responsible for the losses from operations during 1999, 2000, 2001, and 2002. 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 and manufacturing engineering capability and support providing engineering solutions and machining,
manufacturing, and assembly services. The Company also manufactures and sells under the Reuter[nc_cad,176] 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 brand, acquired in February 2001, the Company
manufactures and sells to OEM equipment manufacturers, integrators, and end users in the medical, semiconductor and factory automation markets. The Company acquired in November 2000 another
company that has expertise in building precision magnet assemblies for

2

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aerospace, medical, and motion controlled applications, from which it took the MagStar Technologies name.

The
Company's contract manufacturing business has some concentration 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 over 90% of sales in 2002.

The
Company was established in 1948 as Reuter Manufacturing, Inc., and specialized in precision machining and assemblies. In early 2001, the Company changed its name to MagStar
Technologies, Inc.

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.

3

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Technology

When technological evolutions and advances present themselves, they often require increased power and miniaturization. MagStar has the technical strengths to
accomplish these goals in the following areas:



Markets

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



4

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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.

Sales and Marketing

The Company's sales and marketing effort is focused on the strategic markets outlined above. In addition to the Company's in-house sales team, the
Company has Regional Representatives with experience selling its technical applications. The sales force is supported by an applications design and manufacturing engineering team.

The
proprietary products are sold on a direct basis to OEMs, integrators, end users, and Master Dealers, who market to other distributors.

Marketing
efforts focus on the Company's strengths, a reputation for high quality, precision assemblies with superior finish. Minimal paid advertising and some trade shows are also used.
The updated website for MagStar includes further detail and more in-depth descriptions of MagStar's sales and products.

Customers

Blood centrifuge orders from MagStar's largest customer were at lower levels in 2002 than in 2001. In 2002, sales to this customer were $2,898,000 compared to
$3,328,000, a decrease of $430,000 or 13%. Sales with this customer were down due to decreased demand and the customer's inventory management decisions. Sales with this customer are expected to remain
at current levels and possibly increase. The Company maintains a position with major factory automation OEM's in the semiconductor industry. These programs have experienced delays and cancellations
mainly to the slowed economy and reduced market demand during 2002. MagStar was selected to develop manufacturing for a new blood centrifuge application with a new customer. Production units were
delivered in third and fourth quarters of 2002, with further shipments in the first quarter of 2003.

Other
products for specific customer applications with magnet assemblies, slides, rotary tables, machine automation, and other precision assemblies are in a variety of prototyping and
delivery phases.

The
Company generally does not provide extended payment terms to customers.

Strategy

The Company's objective is to be a reliable partner of the customer, 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 enable 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.

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



Supplies

The raw materials used by the Company in its manufacturing operations 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 reasonably minimal amounts of inventory to meet rapid delivery requirements of
customers and to assure a continuous allotment of goods from suppliers.

Competition

The contract manufacturing, machining, and magnetic 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 and manufacturing capabilities give
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 also have the ability to engineer and
manufacture

6

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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.

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 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 will seek reimbursement for at least 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. In 2002 and 2001, the Company collected approximately $40,000 and $0 respectively, in Research and Development fees.

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, 2002, the Company's backlog of orders and releases was approximately $2.3 million, compared to approximately
$4.0 million on December 31, 2001. The decrease is due to reduced orders for biometric identification assemblies, a lower level of blood centrifuge orders, and depressed demand of new
motion control technology. 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 4 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 generally do not sign production contracts and the customers can reduce, reschedule, or cancel
orders without contractual penalty.

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Employees

As of December 31, 2002, the Company had 65 employees, which includes 62 full time employees and three part time employees. As of December 31, 2001,
the Company had 109 employees, which included 105 full time employees and four part time employees.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company's executive offices and manufacturing facilities are located at 410 Eleventh Avenue South, Hopkins, Minnesota. Until February 25, 2003, the
Company owned 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. 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. On February 25th, 2003, the Company sold the building to a related
party, Hopkins Eleventh Avenue, LLC., and entered into a sale-leaseback arrangement. The Company entered into a 6.5-year gross lease with Hopkins Eleventh Avenue, LLC. for the
building and property at an annual cost of $3.50 per square foot, aggregating $385,000 per year; after three years the lease escalates to $3.82 per square foot, aggregating $417,948 per year. As of
March 1, 2003, the Company also subleased approximately 30,000 square feet of its facility to an unrelated party for 18 months, leaving approximately 75% of the space being used by the
Company. The sublease provides an annual income of $4.55 per square foot, or $149,081 per year.

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 equipment is
computer controlled and networked, 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. 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, 2002, $15,000 has been accrued for the cost of additional environmental work. Ground water investigation
is expected to resume in the second quarter of 2003.

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.

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Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers of the Company and their respective ages and offices held as of March 14, 2003, are as follows:

|Name (age)             |  | Position(s) with the Company                     
|---------------------- |  | -------------------------------------------------
|James L. Reissner (63) |  | Chief Executive Officer, President, and Secretary
|Joseph A. Petrich (42) |  | Treasurer and Chief Financial Officer            

Mr. Reissner
was elected Chief Executive Officer in September 2001, President in October 2002, 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. 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.

Executive
officers are elected annually and serve at the discretion of the Board of Directors.

The
Company also believes that the following persons, who are not executive officers or employees of the Company but who are assisting the Company at the request of Activar, Inc.,
the largest shareholder of the Company, may make a significant contribution to the business of the Company.

Kirby
Bayerle (50) was appointed as Vice PresidentSales and Marketing of the Company in September 2002. Mr. Bayerle is the General Manager of JL
Industries, Hiawatha Inc., and Aztec Inc., all members of the Activar group. Mr. Bayerle has served in this capacity since 1996. He also serves as Vice President of Sales and
Marketing for Air Louvers Inc. and Samson Products, both of which are also members of the Activar Group. Mr. Bayerle has been with Activar Inc. since 1978 and is a graduate of the
University of Minnesota with a degree in Business Administration and Economics.

Duane
Bryngelson (41) was appointed Vice PresidentOperations of the Company in September 2002. Mr. Bryngelson is the General Manager of Bending
Technologies and Comfort Ride, members of the Activar group. Mr. Bryngelson joined Bending Technologies in 1995 as the Director of Operations and took over as Director of Sales as well in 1997,
before receiving his current and continuing role as General Manager in 1998. Mr. Bryngelson served as President of D & D Technical Design from 1991 to 1993 before joining Bending
Technologies. Prior to his tenure at D & D Technical Design, Mr. Bryngelson served as the Machine Shop Manager at Harmony Engineering from 1983 to 1991.

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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, markdowns or commissions and may not
represent actual transactions.

High

Low2002:

First Quarter

$
.50

$
.20Second Quarter

$
.75

$
.45Third Quarter

$
.50

$
.10Fourth Quarter

$
.45

$
.05


High

Low2001:

First Quarter

$
1.13

$
.63Second Quarter

$
1.00

$
.38Third Quarter

$
.70

$
.05Fourth Quarter

$
.65

$
.05


Holders.    As
of March 14, 2003 there were approximately 1,110 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 2002 or 2001, and the Company does not intend to pay dividends on its
Common Stock and Series A Preferred Stock in 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 2002, the Company experienced lower sales for its blood centrifuge models to the Company's largest customer compared to 2001. 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 allow the Company to achieve positive cash flow or
profitability. The Company's efforts to attract high-tech custom product customers contributed to some sales in 2002 but is not expected to be significant in
2003. 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 in 2001. The Company reduced
personnel, wages, and salaries in the second and third quarters of 2002. 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. 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.

Critical Accounting Policies

Note 2 of the Notes to the Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our
Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company.

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General

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires general management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and reported
amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to the valuation of inventory and the recognition of revenue. Actual amounts could
differ from these estimates.

Inventory Valuation

The Company considers recent historic usage and further demand in estimating its realizable value of its inventory. Inventory at December 31, 2002 reflects
write-downs of $144,028. Should it be determined that write downs are insufficient, then the Company would be required to record additional inventory write-downs, which would have a negative impact on
gross margin.

Revenue Recognition

The Company recognizes sales when products are shipped, collectability is probable and the fee is fixed or determined.

Results of Operations

Total revenues for 2002 were $8,358,149, compared to $9,721,461 for 2001. Net sales for 2002 from medical, industrial, magnetic, high tech / contract
manufacturing, and Quickdraw conveyors were, respectively, $4,071,330, $1,096,112, $1,064,122, $1,141,423, and $903,649. Net sales for 2001 from medical, industrial, magnetic, high tech / contract
manufacturing, and Quickdraw conveyors were, respectively, $4,895,846, $1,354,515, $1,254,023, $1,152,095, and $1,008,827. The Company's net sales decreased by 14% in 2002 from 2001, compared to a
decrease in net sales of 9.7% in 2001 from 2000. An element of the sales decrease for 2002 as compared to 2001 was due to less sales to the Company's significant customer, combined with reduced market
demand in magnets and conveyors.

Cost
of sales was $9,014,804 for 2002, compared to $10,603,509 in 2001, a decrease in the cost of sales of 15%. The decrease in the cost of sales is primarily due to better cost control,
and improved management of variable expenses, including labor and benefits, and process and productivity improvement. Also, a soft manufacturing economy reduced sales and profit margins in 2002. On
March 21, 2001, the Company entered into a sale-leaseback agreement on most of its equipment 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 and 2002.

Gross
profit was $(656,655), or -7.9% for 2002, compared to $(882,048) or -9.1% in 2001. This decrease in gross profit was due to the factors discussed above.

Selling,
general and administrative expenses were $1,411,426 or 16.9% of net sales in 2002, compared to $2,281,250 or 23.5% of net sales in 2001. The 38.1% decrease in selling, general
and administrative expenses is due primarily to the factors discussed above regarding cost control.

As
a consequence of the foregoing factors, the Company had an operating loss in 2002 of $2,068,081, compared to an operating loss of $3,163,298 in 2001, a decrease in operating loss of
34.6%.

Interest
expenses in 2002 were $725,504, compared to $592,740 in 2001. This increase is due to increased borrowings for 2002.

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The
Company had a net loss of $2,681,304 or $.28 per share in 2002, compared to a net loss of $3,550,033 or $.36 per share in 2001. The decrease in net loss resulted from the factors
discussed above.

The
Company recorded a net loss for 2002 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 carry forwards.

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

Liquidity
and Capital Resources.    At December 31, 2002, the Company had a working capital deficit of $10,674,308, compared to a working
capital deficit of $8,195,095 at December 31, 2001. The current ratio was .17 at December 31, 2002, compared to .28 at December 31, 2001. 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 October 2003, US Bancorp has the right to demand payment at any time. Because the credit facilities agreement also included a
subjective material adverse change clause under which the borrowings could become due and payable, the Company classified all of the amounts owing under the credit facilities at December 31,
2002 and 2001 as current liabilities. 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.

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 was 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.

On
February 25th, 2003, the Company paid off the loan to US Bancorp of $2,658,078, Term Loan A, by entering into a sale-leaseback arrangement with
a related party, Hopkins Eleventh Avenue, LLC.

The
Company had negative cash flows from operations of $1,232,074 for the year ended December 31, 2002, compared to negative cash flows from operations of $2,421,716 for the year
ended December 31, 2001. The increase in cash flows from operations for the year ended December 31, 2002 was due primarily to the net loss and a decrease in accrued expenses. 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.

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Net
cash provided by investing activities was $0 for the year ended December 31, 2002, compared to $1,875,886 for the year ended December 31, 2001. This decrease in 2002
was primarily due to proceeds generated from a sale and leaseback of most of the Company's equipment in 2001.

Net
cash provided by financing activities was $1,232,074 for the year ended December 31, 2002, compared to cash provided by financing activities of $545,830 for the year ended
December 31, 2001. The increase in net cash provided by financing activities in 2002 was due to increased borrowing.

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. On January 1, 2003, the Company amended its equipment lease reducing
the payments to $45,646 for a term of 60 months. 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.

Throughout
2001 and 2002, the Company borrowed monies from Activar, Inc. to fund operations. These loans are due on demand and accrued interest at 10% through
September 2002, at which time the interest rate was lowered to 6%. This lending arrangement was converted into a Revolving Credit Agreement with Richard F. McNamara and affiliates on
January 1, 2003 with interest remaining at 6%. As security against this credit agreement, Mr. McNamara and affiliates have taken a second lien position on the Company's eligible
receivables, eligible inventory, and a first lien position on all other assets held by the Company. 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.

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., James L. Reissner and Michael 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.

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

13

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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.

On
January 21, 2002, the Company borrowed $500,000 from Richard F. McNamara on a term note bearing interest at 12%. The interest rate was lowered to 8% in October 2002.
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.

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. 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, 2002, $15,000 has been accrued for the cost of additional environmental work. Ground water investigation is expected to
resume in the second quarter of 2003.

Subsequent
Event

On
February 25, 2003, MagStar Technologies, Inc. sold and leased back its headquarters and manufacturing facility in Hopkins, Minnesota. The purchaser was Hopkins Eleventh
Avenue LLC ("Eleventh Avenue"), an affiliate of the Company's largest shareholder.

The
purchase price for the building and property was $3,700,000, consisting of $3,189,148 in cash and a Promissory Note for $510,852. The Company entered into a 6.5-year
gross lease with Hopkins Eleventh Avenue, LLC. for the building and property at an annual cost of $3.50 per square foot, aggregating $385,000 per year, after three years the lease escalates to $3.82
per square foot, aggregating $417,948 per year.

In
the transaction, the Company paid in full its mortgage on the property with US Bancorp in the amount of $2,675,798, including accrued interest. The mortgage had originally been
entered into as security for Term Loan A under the provisions of the Company's Credit Agreement with US Bancorp dated October 20, 2000.

As
a result of the sale of the property, the Company will recognize a gain on its balance sheet of $2,136,810, which will be realized over the life of the lease from Eleventh Avenue. The
Company realized proceeds of $1,024,202, which will be applied to the Company's debt to Activar Properties, Inc.

14

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and affiliates. Eleventh Avenue will not make any payments on the Promissory Note as it will be offset against debt held by the Company and owed to Activar Properties, LLC.

Business
Conditions.    The Company incurred a net loss of $2,681,304 for the year ended December 31, 2002, and has a working capital
deficit and stockholders' deficiency of $10,674,308, and $9,699,077, respectively, at December 31, 2002.

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



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.

2002
sales were down from sales in 2001. However, the Company feels that 2002 showed improvements over 2001 due to better management of variable expenses, including labor, employee
benefits, and process and productivity improvements despite the inventory adjustments in 3rd and 4thquarters of 2002. Productivity improvements, cost, expense control
measures, and profitability remain the highest priority for the Company. While the results of 2002 were below management's expectations, the Company feels that it has established a trend in
productivity improvement and cost control. There can be no assurance that these achievements, actions, and future actions, if necessary, will be sufficient for the Company to meet its continuing cash
flow requirements in the future or return to profitability.

Except
for the historical financial information reported above, this report contains forward-looking statements that involve risk and uncertainties, including references to anticipated
and projected sales volume, the risk associated with 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 a high concentration of business with one major customer and any reduction in sales to this customer may affect net
income. Because of these and other uncertainties, actual results could differ materially from those reflected in the forward-looking statements.

Factors
That May Affect Future Results.

Dependence
on Major Customers.    Sales were primarily affected by a significant reduction in orders from medical and laboratory products customers
of approximately $2,000,000. These reductions

15

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were driven by lower demand and excess inventories of their customers. Demand from the Company's major medical customer has decreased from 2001. The Company continues to take orders from this major
medical customer and expects overall business with that customer to remain steady for 2003 or increase. However, no assurance can be given that sales to this customer will reach or exceed the previous
levels of 2001. 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 retain current and
add new customers. While the Company puts a great deal of attention on contract manufacturing business, it also looks to develop new customers for products manufactured under its own trade names,
Quickdraw conveyors, oil centrifuges, and actuators. The Company looks to obtain production orders for prototype products including motion control, magnetic, and centrifuge assemblies, and maintain a
satisfactory volume of orders for current customers. Shipments to a new blood centrifuge customer and biometrics equipment manufacturer began in 2002.

Competition.    While
the Company believes its engineering capability is a competitive advantage, and that it offers value added assistance and
solutions for improved design, manufacturability and reliability of higher-level assemblies, customers with existing products 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.

Impact
of Recent Accounting Pronouncements.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. SFAS
No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of. In addition, the standard eliminates the requirement to accrue for losses through the estimated date of disposal of a business. The adoption of SFAS No. 144 is not
expected to have a significant impact on the Company's financial statements.

In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections."SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications have economic effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. The adoption of SFAS No. 145 is not expected to have a significant impact on the Company's financial statements.

In
July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective
January 1, 2003. SFAS No. 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit or disposal activities, including
restructuring activities, when a liability is incurred rather than at the date of a commitment to an exit or disposal plan and nullifies the guidance in Emerging Issue Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The adoption of SFAS No. 146 is not expected to have a significant impact on the Company's financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation,"to provide alternative methods of
transition to a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used
on reported results. The adoption of SFAS No. 148 is not expected to have a significant impact on the Company's financial statements.

16

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In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statement Nos. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5,
"Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with the guarantees issued. The disclosure requirements are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company provides for estimated warranty costs at the time of product sale, and such costs are considered to be immaterial to these financial statements. The recognition
and measurement provisions are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a significant impact on
the Company's financial statements.

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                                                     |  | 29   
|Balance Sheets as of December 31, 2002 and 2001                                       |  | 30   
|Statements of Operations for the years ended December 31, 2002 and 2001               |  | 31   
|Statements of Stockholders' Deficiency for the years ended December 31, 2002 and 2001 |  | 32   
|Statements of Cash Flows for the years ended December 31, 2002 and 2001               |  | 33   
|Notes to the Financial Statements                                                     |  | 34-46

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 |  | Position                                                                       
|------------------- |  | --- |  | -------------------------------------------------------------------------------
|Richard F. McNamara |  | 70  |  | Chairman of the Board and Director                                             
|James L. Reissner   |  | 63  |  | Director, Chief Executive Officer, President, and Secretary                    
|Michael J. Tate     |  | 64  |  | Director, former President, Chief Executive Officer and Chief Financial Officer

17

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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. 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 became President of the Company in October 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.

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.



The information concerning Executive Officers of the Company is included in this Report under Item 4A, Executive Officers of the Registrant. Information regarding
other personnel who may make a significant contribution to the business of the Company is also included in that section.



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, 2002 except that Joseph A. Petrich, Treasurer
and Chief Financial Officer of the Company, Kirby Bayerle, Vice PresidentSales and Marketing of the Company, and Duane Bryngelson, Vice PresidentOperations of the Company
were delinquent in filing Form 3's upon being appointed to such offices and were delinquent in filing Form 4's to report a receipt of options, Dianne E. Schmiess, Controller of
the Company was delinquent in filing Form 3 upon being appointed to such office, and Brian A. Kempski, former Vice President of the Company, was delinquent in filing a Form 5 to report a
receipt of options.

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, 2002.

18

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Summary Compensation Table

|                                                                                           |  | Annual
Compensation |  | Long-Term
Compensation |                         | 
|------------------------------------------------------------------------------------------ |  | ------------------- |  | ---------------------- | ----------------------- | 
|
|James L. Reissner(1) Chief Executive Officer, President and former Chief Financial Officer |  | 2002
2001
2000      |  |                        | 0
0
0                   | 
|Louis S. Matjasko(2) Former President and former Chief Operating Officer                   |  | 2002
2001           |  | $$                     | 112,605
131,318         | 
|Brian A. Kempski Former Vice President, Marketing And Sales                                |  | 2002
2001
2000      |  | $$$                    | 111,560
124,527
116,708 | 

---



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, 2002.

Option Grants During Fiscal Year Ended December 31, 2002

|Name              |  | Number of
Securities
Underlying
Options
Granted (#) |     | Percent of
Total Options
Granted to
Employees in
Fiscal Year |   | Exercise
Price ($/Sh) |      | Expiration Date
|----------------- |  | --------------------------------------------------- | --- | ------------------------------------------------------------ | - | --------------------- | ---- | ---------------
|James L. Reissner |  | 50,000                                              | (1) | 11                                                           | % | $                     | 0.25 |                
|Louis S. Matjasko |  | 50,000                                              | (1) | 11                                                           | % | $                     | 0.25 |                
|Brian A. Kempski  |  | 10,000                                              | (2) | 2                                                            | % | $                     | 0.25 |                

---



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, 2002 and the number and value of unexercised options held by them at that date.

19

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Option Exercises During Fiscal Year Ended December 31, 2002  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)
|----------------- |  | ------------------------------- |  | ------------------ |  | ---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|James L. Reissner |  | 0                               |  | 0                  |  | 16,666 / 33,334                                                        |  | $                                                                                    
|Louis S. Matjasko |  | 0                               |  | 0                  |  | 49,999 / 33,334                                                        |  | $                                                                                    
|Brian A. Kempski  |  | 0                               |  | 0                  |  | 0                                                                      |  |                                                                                      

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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 14, 2003 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," (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 information provided by these

20

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

|                                                                           |  |           |      |      |   | Series A Preferred
Stock |     | Commom
Stock and
Common
Stock and
Equivalents |   |           | 
|-------------------------------------------------------------------------- |  | --------- | ---- | ---- | - | ------------------------ | --- | --------------------------------------------- | - | --------- | 
|
|
|
|Perkins Capital Management
730 East Lake Street
Wayzata, MN 55391-1769     |  | 1,140,465 | (3)  | 13.0 | % |                         |     | 0.0                                           | % | 1,140,465 | 
|Activar, Inc.
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439       |  | 2,187,500 | (4)  | 25.0 | % | 625,000                  | (4) | 62.5                                          | % | 2,812,500 | 
|Richard F. McNamara
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439 |  | 2,470,833 | (5)  | 27.4 | % | 625,000                  | (5) | 62.5                                          | % | 3,095,833 | 
|James L. Reissner
7808 Creekridge Circle
Suite 200
Minneapolis, MN 55439   |  | 3,095,833 | (6)  | 35.3 | % | 875,000                  | (6) | 87.5                                          | % | 3,970,833 | 
|Michael J. Tate
410 11th Avenue South
Hopkins, MN 55343                    |  | 833,403   | (7)  | 9.4  | % | 125,000                  |     | 12.5                                          | % | 958,403   | 
|Louis S. Matjasko
410 11th Avenue South
Hopkins, MN 55343                  |  | 83,333    | (8)  | 0.9  | % |                         |     | 0.0                                           | % | 83,333    | 
|Brian A. Kempski
410 11th Avenue South
Hopkins, MN 55343                   |  |          | (9)  | 0.0  | % |                         |     | 0.0                                           | % |          | 
|All executive officers and directors as a group (6 persons)                |  | 4,332,568 | (10) | 46.4 | % | 1,000,000                |     | 100.0                                         | % | 5,332,568 | 

---

21

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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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. ("Activar"), one of the Company's shareholders, pursuant to a promissory note that is due on demand and bears interest at 10%. Richard F. McNamara and James L.
Reissner are directors and officers of Activar, as well as directors and officers of the Company. Mr. McNamara is also the sole owner of Activar, Inc. 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. 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. On January 1, 2003, the Company amended its equipment lease reducing the payments to $45,646 for a term
of 60 months. 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.

Throughout
2001 and 2002, the Company borrowed monies from Activar, Inc. to fund operations. These loans are due on demand and accrued interest at 10% through
September 2002, at which time the interest rate was lowered to 6%. This lending arrangement was converted into a Revolving Credit Agreement with Richard F. McNamara and affiliates on
January 1, 2003 with interest remaining at 6%. As security against this credit agreement, Mr. McNamara and affiliates have taken a second lien position on the Company's eligible
receivables, eligible inventory, and a first lien position on all other assets held by the Company. 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 bearing interest at 12%. The
interest rate was lowered to 8% in October 2002. Interest is payable monthly, with the principal balance due

22

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and payable on January 10, 2005. Mr. McNamara received warrants for the purchase of 250,000 shares of Common Stock 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.

On
February 25, 2003, MagStar Technologies, Inc. sold and leased back its headquarters and manufacturing facility in Hopkins, Minnesota. The purchaser was Hopkins Eleventh
Avenue LLC ("Eleventh Avenue"), a wholly owned subsidiary of Activar Properties, Inc., which in turn is wholly
owned by Mr. McNamara. The purchase price for the building and property was $3,700,000, consisting of $3,189,148.03 in cash and a Promissory Note for $510,851.97. The Company entered into a
6.5-year gross lease with Eleventh Avenue for the building and property at an annual cost of $3.50 per square foot, aggregating $385,000.00 per year; after three years the lease escalates
to $3.82 per square foot, aggregating $417,948 per year. The proceeds of $1,024,201.92 realized by the Company in the transaction, including the Promissory Note, were applied to reduce the Company's
debt to Activar Properties, Inc. and affiliates. The Company's outstanding balance to Activar Properties, Inc. and other affiliates of Mr. McNamara was approximately $5,512,918 as
of February 28, 2003. James L. Reissner, the President of Activar Properties, Inc., is also a director and shareholder of the Company. The Board of Directors of the Company authorized
the transaction in order to reduce the indebtedness of the Company, provide working capital and improve cash flow. The transaction with Eleventh Avenue was determined to be on better terms than could
be obtained by the Company directly from unaffiliated financing sources. The purchase price was based upon an independent appraisal of the value of the property and building obtained by the bank which
provided financing to Eleventh Avenue in connection with the transaction.

23

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PART IV

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



The exhibits to this Report are listed in the Exhibit Index on pages 47-50 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 14, 2003, 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:



No reports on Form 8-K were filed during the last quarter of the period covered by this report.

ITEM 14. CONTROLS AND PROCEDURES.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|Dated: March 27, 2003 |  | MAGSTAR TECHNOLOGIES, INC.                                                  
|--------------------- |  | ----------------------------------------------------------------------------
|                      |  | /s/JAMES L. REISSNERJames L. Reissner
President and Chief Executive Officer.

In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|Signature                                 |  | Title                                                                         
|----------------------------------------- |  | ------------------------------------------------------------------------------
|/s/RICHARD F. MCNAMARARichard F. McNamara |  | Chairman of the Board and Director                                            
|/s/JAMES L. REISSNERJames L. Reissner     |  | Chief Executive Officer, President, 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 E. SCHMIESSDianne E. Schmiess   |  | Controller                                                                    

25

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CERTIFICATIONS

I, James L. Reissner, President and Chief Executive Officer of MagStar Technologies, Inc., certify that:



Date: March 27, 2003/s/JAMES L. REISSNERJames L. Reissner
President and Chief Executive Officer


26

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I,
Joseph A. Petrich, Treasurer and Chief Financial Officer of MagStar Technologies, Inc., certify that:



Date: March 27, 2003/s/JOSEPH A. PETRICHJoseph A. Petrich
Treasurer and Chief Financial Officer


27

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MagStar Technologies, Inc.  Years Ended December 31, 2002 and 2001

28

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INDEPENDENT AUDITORS' REPORT

Audit
Committee, Stockholders and Board of Directors
MagStar Technologies, Inc.
Hopkins, Minnesota

We
have audited the accompanying balance sheets of MagStar Technologies, Inc., as of December 31, 2002 and 2001 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,
2002 and 2001, 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,
Minnesota
March 7, 2003

29

---



MagStar Technologies, Inc.        Balance Sheets        At December 31, 2002 and 2001

|                                                                                                                                                            |                                                | 2002                           |                                                | 2001      |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------ | ---------------------------------------------- | --------- | ----------
|ASSETS                                                                                                                                                      |                                                |                                |                                                |           |           
|Current Assets:                                                                                                                                             |                                                |                                |                                                |           |           
|                                                                                                                                                            | Cash                                           |                                | $                                              | 500       |           
|                                                                                                                                                            | Accounts receivable, net                       |                                |                                                | 831,820   |           
|                                                                                                                                                            | Inventories                                    |                                |                                                | 1,296,252 |           
|                                                                                                                                                            | Other current assets                           |                                |                                                | 41,497    |           
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                | Total current assets           |                                                |           | 2,170,069 
|                                                                                                                                                            | Property, plant and equipment, net             |                                |                                                | 1,723,182 |           
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                | Total assets                   |                                                | $         | 3,893,251 
|                                                                                                                                                            |                                                |                                |                                                |           |           
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                                    |                                                |                                |                                                |           |           
|Current Liabilities:                                                                                                                                        |                                                |                                |                                                |           |           
|                                                                                                                                                            | Senior debt                                    |                                | $                                              | 5,086,475 |           
|                                                                                                                                                            | Current maturities of capital lease obligation |                                |                                                | 140,875   |           
|                                                                                                                                                            | Debentures payable, related parties            |                                |                                                |          |           
|                                                                                                                                                            | Payable to related parties                     |                                |                                                | 1,532,169 |           
|                                                                                                                                                            | Notes payable to related parties               |                                |                                                | 4,507,509 |           
|                                                                                                                                                            | Checks issued in excess of cash in bank        |                                |                                                | 90,949    |           
|                                                                                                                                                            | Accounts payable                               |                                |                                                | 635,327   |           
|                                                                                                                                                            | Accounts payable, settlement                   |                                |                                                |          |           
|                                                                                                                                                            | Accrued expenses                               |                                |                                                | 695,497   |           
|                                                                                                                                                            | Deferred gain on saleleaseback                |                                |                                                | 155,576   |           
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                | Total current liabilities      |                                                |           | 12,844,377
|Capital lease obligations, less current maturities                                                                                                          |                                                |                                | 116,028                                        |           |           
|Deferred gain on saleleaseback                                                                                                                             |                                                |                                | 622,305                                        |           |           
|Other liabilities                                                                                                                                           |                                                |                                | 9,619                                          |           |           
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                | Total Liabilities              |                                                |           | 13,592,328
|                                                                                                                                                            |                                                |                                |                                                |           |           
|Stockholders' deficiency                                                                                                                                    |                                                |                                |                                                |           |           
|Preferred stock, par value $.1875 per share, authorized 2,500,000 shares; 1,000,000 issued                                                                  |                                                |                                | 187,500                                        |           |           
|Common stock, par value $.1875 per share, authorized 30,000,000 shares; issued and outstanding 8,740,673 shares at December 31, 2002 and 2001, respectively |                                                |                                | 1,638,782                                      |           |           
|Additional paid-in capital                                                                                                                                  |                                                |                                | 17,938,979                                     |           |           
|Accumulated deficit                                                                                                                                         |                                                |                                | (29,464,338                                    | )         |           
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                | Total stockholders' deficiency |                                                |           | (9,699,077
|                                                                                                                                                            |                                                |                                |                                                |           |           
|                                                                                                                                                            |                                                |                                | Total liabilities and stockholders' deficiency |           | $         
|                                                                                                                                                            |                                                |                                |                                                |           |           

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

30

---

MagStar Technologies, Inc.        Statements of Operations        For the years ended December 31, 2002 and 2001

|                                             |                                                          | 2002                     |            | 2001     |           
|-------------------------------------------- | -------------------------------------------------------- | ------------------------ | ---------- | -------- | ----------
|Net Sales                                    |                                                          | $                        | 8,358,149  |          | $         
|Cost of sales                                |                                                          |                          | 9,014,804  |          |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Gross loss               |            |          | (656,655  
|Selling, general and administrative expenses |                                                          |                          | 1,411,426  |          |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Operating loss           |            |          | (2,068,081
|                                             |                                                          |                          |            |          |           
|Other (expense) income:                      |                                                          |                          |            |          |           
|                                             | Interest expense                                         |                          |            | (725,504 | )         
|                                             | Other, net                                               |                          |            | 112,281  |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Total other expense, net |            |          | (613,223  
|                                             |                                                          |                          |            |          |           
|Loss before extraordinary item               |                                                          |                          | (2,681,304 | )        |           
|                                             | Extraordinary item, income from trade debt restructuring |                          |            |         |           
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Net loss                 |            | $        | (2,681,304
|                                             |                                                          |                          |            |          |           
|Net loss per share (basic and diluted)       |                                                          |                          |            |          |           
|                                             | Loss before extraordinary items                          |                          | $          | (0.28    | )         
|                                             |                                                          | Extraordinary item       |            |          |          
|                                             |                                                          |                          |            |          |           
|                                             |                                                          | Net loss                 |            | $        | (0.28     
|                                             |                                                          |                          |            |          |           
|Weighted average common shares outstanding   |                                                          |                          | 9,740,173  |          |           
|                                             |                                                          |                          |            |          |           

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

31

---



MagStar Technologies, Inc.        Statements of Stockholders' Deficiency        For the years ended December 31, 2002 and 2001

|                            |  | Series A Preferred Stock |  | Common Stock |         |  |           |  |   |           | 
|--------------------------- |  | ------------------------ |  | ------------ | ------- |  | --------- |  | - | --------- | 
|
|Balances, December 31, 2000 |  | 1,000,000                |  | $            | 187,500 |  | 8,740,173 |  | $ | 1,638,782 | 
|Compensation expense        |  |                          |  |              |         |  |           |  |   |           | 
|Net loss                    |  |                          |  |              |         |  |           |  |   |           | 
|                            |  |                          |  |              |         |  |           |  |   |           | 
|Balances, December 31, 2001 |  | 1,000,000                |  |              | 187,500 |  | 8,740,173 |  |   | 1,638,782 | 
|Warrants issued             |  |                          |  |              |         |  |           |  |   |           | 
|Net loss                    |  |                          |  |              |         |  |           |  |   |           | 
|                            |  |                          |  |              |         |  |           |  |   |           | 
|Balances, December 31, 2002 |  | 1,000,000                |  | $            | 187,500 |  | 8,740,173 |  | $ | 1,638,782 | 
|                            |  |                          |  |              |         |  |           |  |   |           | 

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

32

---

MagStar Technologies, Inc.        Statements of Cash Flows        For the years ended December 31, 2002 and 2001

|                                                    |                                                                                           | 2002                                         |                            | 2001       |         
|--------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------- | ---------- | --------
|Cash flows from operating activities:               |                                                                                           |                                              |                            |            |         
|                                                    | Net loss                                                                                  |                                              | $                          | (2,681,304 | )       
|                                                    | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                              |                            |            |         
|                                                    |                                                                                           | Depreciation and amortization                |                            |            | 280,777 
|                                                    |                                                                                           | Gain from trade debt restructuring           |                            |            |        
|                                                    |                                                                                           | Gain on sale of fixed assets                 |                            |            |        
|                                                    |                                                                                           | Amortization of debt discount                |                            |            |        
|                                                    |                                                                                           | Stock options as compensation                |                            |            |        
|                                                    |                                                                                           | Gain on sale-leaseback                       |                            |            | (353,448
|                                                    |                                                                                           | Accretion of interest on notes payable       |                            |            | 33,000  
|                                                    |                                                                                           | Changes in operating assets and liabilities: |                            |            |         
|                                                    |                                                                                           |                                              | Receivables                |            |         
|                                                    |                                                                                           |                                              | Inventories                |            |         
|                                                    |                                                                                           |                                              | Other current assets       |            |         
|                                                    |                                                                                           |                                              | Accounts payable, trade    |            |         
|                                                    |                                                                                           |                                              | Accrued expenses           |            |         
|                                                    |                                                                                           |                                              | Payable to related parties |            |         
|                                                    |                                                                                           |                                              | Other liabilities          |            |         
|                                                    |                                                                                           |                                              |                            |            |         
|Net cash provided by (used in) operating activities |                                                                                           |                                              | (1,232,074                 | )          |         
|                                                    |                                                                                           |                                              |                            |            |         
|Cash flows from investing activities:               |                                                                                           |                                              |                            |            |         
|                                                    | Capital expenditures                                                                      |                                              |                            |           |         
|                                                    | Proceeds from Equipment sale / leaseback                                                  |                                              |                            |           |         
|                                                    | Proceeds from sale of fixed assets                                                        |                                              |                            |           |         
|                                                    |                                                                                           |                                              |                            |            |         
|Net cash provided by (used in) investing activities |                                                                                           |                                              |                           |            |         
|                                                    |                                                                                           |                                              |                            |            |         
|Cash flows from financing activities:               |                                                                                           |                                              |                            |            |         
|                                                    | Repayment of term note, bank                                                              |                                              |                            | (162,120   | )       
|                                                    | Proceeds from asset-based line of credit and term obligations, bank                       |                                              |                            |           |         
|                                                    | Repayment of asset-based line of credit                                                   |                                              |                            | (256,371   | )       
|                                                    | Payments on bank overdraft                                                                |                                              |                            | (43,299    | )       
|                                                    | Proceeds from bank overdraft                                                              |                                              |                            |           |         
|                                                    | Proceeds from note-payablerelated party                                                  |                                              |                            | 1,630,596  |         
|                                                    | Repayments of notes payablerelated party                                                 |                                              |                            |           |         
|                                                    | Repayment of debentures                                                                   |                                              |                            | (375,000   | )       
|                                                    | Net proceeds on term noterelated parties                                                 |                                              |                            | 500,000    |         
|                                                    | Payments of capital lease obligations                                                     |                                              |                            | (61,732    | )       
|                                                    |                                                                                           |                                              |                            |            |         
|Net cash provided by (used in) financing activities |                                                                                           |                                              | 1,232,074                  |            |         
|Net (decrease) increase in cash                     |                                                                                           |                                              |                           |            |         
|Cash, beginning of year                             |                                                                                           |                                              | 500                        |            |         
|                                                    |                                                                                           |                                              |                            |            |         
|Cash, end of year                                   |                                                                                           | $                                            | 500                        |            | $       
|                                                    |                                                                                           |                                              |                            |            |         
|Supplemental disclosures of cash flow information:  |                                                                                           |                                              |                            |            |         
|                                                    | Cash paid for interest                                                                    |                                              | $                          | 547,855    |         
|                                                    |                                                                                           |                                              |                            |            |         

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

33

---



MagStar Technologies, Inc.        Notes to Financial Statements

1. Business Description and Conditions



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 and manufacturing engineering capability and support providing engineering solutions and machining,
manufacturing, and assembly services. 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 brand, acquired in February 2001, the Company manufactures and sells
to OEM equipment manufacturers, integrators, and end users in the medical, semiconductor and factory automation markets. The Company acquired in November 2000 another company, which has
expertise in building precision magnet assemblies for aerospace, medical, and motion controlled applications, from which it took the MagStar Technologies name. The Company's contract manufacturing
business has some concentration 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 over 90% of sales in 2002. The Company was established in 1948 as Reuter Manufacturing, Inc., and specialized in precision machining and assemblies. In early 2001, the Company changed its
name to MagStar Technologies, Inc. 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.



The Company has experienced a net loss of $2,681,304 for the year ended December 31, 2002, has a working capital deficit of $10,674,308 and stockholders'
deficiency of $9,699,077 at December 31, 2002.

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



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

34

---

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.

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. The
Company does not accrue interest on trade accounts receivable.



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.



Advertising costs are charged to operations when incurred. Advertising expense was $87,388 and $68,250 for the years ended December 31, 2002 and 2001,
respectively.



Shipping and handling costs charged to customers have been included in net sales. Shipping and handling costs incurred by the Company have been included in the
cost of sales.

35

---



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.



The carrying value of the Company's financial instruments approximates fair value at December 31, 2002 and 2001.



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, 2002 and 2001 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.

Had
compensation cost for the Plans been determined based on the fair value of options at the grant date for awards in 2002 and 2001, the Company's pro forma loss and net loss per share
would have been as follows:

2002

2001Net Loss, as reported

$
(2,681,304
)
$
(3,550,033
)Stock based compensation, pro forma


98,417


35,750Pro forma net loss


(2,779,721
)

(3,585,783
)Net loss per share, as reported

$
(0.28
)
$
(0.36
)Net loss per share, pro forma

$
(0.29
)
$
(0.37
)


36

---

The
weighted average grant-date fair value of options granted during 2002 and 2001 was $0.30 and $.75, respectively, which was determined using the Black-Scholes option
pricing model with the following key assumptions:

Assumptions

2002

2001Risk free interest rates

4
%
5
%Volatility

255
%
200
%Expected lives (months)

72

72


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



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.



In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective
January 1, 2002. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and provides a single accounting model
for long-lived assets to be disposed of. In addition, the standard eliminates the requirement to accrue for losses through the estimated date of disposal of a business. The adoption of
SFAS No. 144 is not expected to have a significant impact on the Company's financial statements.

In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections."SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications have economic effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. The adoption of SFAS No. 145 is not expected to have a significant impact on the Company's financial statements.

In
July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective
January 1, 2003. SFAS No. 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit or disposal activities, including
restructuring activities, when a liability is incurred rather than at the date of a commitment to an exit or disposal plan and nullifies the guidance in Emerging Issue Task Force Issue
No. 94-3, "Liability

37

---

Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The adoption of SFAS
No. 146 is not expected to have a significant impact on the Company's financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation,"to provide alternative methods of
transition to a voluntary change to the fair vale based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 is not expected to have a
significant impact on the Company's financial statements.

In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statement Nos. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5,
"Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with the guarantees issued. The disclosure requirements are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company provides for estimated warranty costs at the time of product sale, and such costs are considered to be immaterial to these financial statements. The recognition
and measurement provisions are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a significant impact on
the Company's financial statements.

38

---

3. Selected Balance Sheet Information

|                                                       |  | 2002       |   | 2001       |  
|------------------------------------------------------ |  | ---------- | - | ---------- | -
|Accounts Receivable, Net                               |  |            |   |            |  
|Accounts Receivable                                    |  | 925,001    |   | 1,300,782  |  
|Less Allowance for doubtful accounts and sales returns |  | (93,191    | ) | (100,000   | )
|                                                       |  |            |   |            |  
|                                                       |  | 831,810    |   | 1,200,782  |  
|                                                       |  |            |   |            |  
|Inventories, Net                                       |  |            |   |            |  
|Raw materials and supplies                             |  | 526,058    |   | 781,812    |  
|Work-in-process                                        |  | 191,291    |   | 523,255    |  
|Finished goods                                         |  | 722,931    |   | 663,037    |  
|Less allowance for obsolete inventories                |  | (144,028   | ) | (113,000   | )
|                                                       |  |            |   |            |  
|                                                       |  | 1,296,252  |   | 1,855,104  |  
|                                                       |  |            |   |            |  
|Property, Plant, and Equipment, Net                    |  |            |   |            |  
|Land and related improvements                          |  | 206,995    |   | 206,995    |  
|Buildings and building improvements                    |  | 3,375,198  |   | 3,375,198  |  
|Machinery and equipment                                |  | 72,167     |   | 72,167     |  
|Equipment under capital lease obligations              |  | 770,443    |   | 770,443    |  
|                                                       |  |            |   |            |  
|                                                       |  | 4,424,803  |   | 4,424,803  |  
|Less accumulated depreciation                          |  | (2,017,110 | ) | (1,850,987 | )
|Less accumulated amortization                          |  | (684,511   | ) | (569,856   | )
|                                                       |  |            |   |            |  
|                                                       |  | 1,723,182  |   | 2,003,960  |  
|                                                       |  |            |   |            |  



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.

The
Company recorded a gain of approximately $94,000 during the year ended December 31, 2001. As of December 31, 2001 the amounts had been settled.



Accounts Payable, Related Parties are due to Activar, Inc. and affiliates and consist of equipment lease payments and accrued interest.



The Company warrants its products for one or two years. The reserve for warranty is computed by averaging the last four years warranty costs incurred and
multiplying by two, which provides a full

39

---

two-year warranty on all products. The Company has reserved an additional $50,000 to cover any unanticipated or unusual product warranty problems. The following summarizes the warranty
transactions:

2002

2001Balance at Beginning of Year



Claims Paid

(96,000
)
(79,900
)Expense Provision

200,000

79,900Balance at End of Year

104,000




4. Senior Debt

Senior debt at December 31, 2002 and 2001, consisted of the following:

|                                                                                                                                                                                                                           |  | 2002      |  | 2001     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | ---------
|Asset-based line of credit, payable to bank, due upon demand. The weighted average interest rate os asset-based line of credit borrowings was 4.38% and 7.5% for the years ended December 31, 2002 and 2001,
respectively. |  | 1,103,397 |  | 1,359,768
|Term loan A, payable to bank                                                                                                                                                                                               |  | 2,658,078 |  | 2,820,198
|Term loan B, payable to bank                                                                                                                                                                                               |  |          |  |         
|Term loan C, payable to bank                                                                                                                                                                                               |  | 1,325,000 |  | 1,325,000
|Term loan, payable to bank                                                                                                                                                                                                 |  |          |  |         
|                                                                                                                                                                                                                           |  |           |  |          
|                                                                                                                                                                                                                           |  | 5,086,475 |  | 5,504,966
|                                                                                                                                                                                                                           |  |           |  |          

The
Company has entered into an amended and restated senior credit agreement. The credit facilities under the new 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 (4.25% at December 31, 2002) and is payable in full in October 2003. This line of credit is
eligible to two additional one-year renewals. 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. 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.

40

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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 finds 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, 2002 and 2001, balance sheets.

5. Debentures Payable, Related Parties

The Company had 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, 2002 and 2001 was $0 and $375,000, respectively and accrued interest was $0 and $101,259,
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, 2002 and 2001, consisted of the following:

|                                                                                               |  | 2002 |           | 2001
|---------------------------------------------------------------------------------------------- |  | ---- | --------- | ----
|Note payable; stockholder, due upon demand with interest at 6% subordinated to senior debt     |  | $    | 3,092,596 |     
|Note payable; stockholder, due upon demand with interest at 8% subordinated to senior debt     |  |      | 430,913   |     
|Note payable; stockholder, due upon demand with interest at 8% subordinated to senior debt     |  |      | 434,000   |     
|Note payable; stockholder, due upon demand with interest at 6% subordinated to senior debt     |  |      | 500,000   |     
|Note payable; stockholder, due upon demand with interest at 8% subordinated to senior debt     |  |      |          |     
|Note payable; related entity, due upon demand with interest at 10% subordinated to senior debt |  |      | 50,000    |     
|                                                                                               |  |      |           |     
|                                                                                               |  | $    | 4,507,509 |     
|                                                                                               |  |      |           |     

Accrued
interest on these notes at December 31, 2002 and 2001 was $384,000 and $130,000 respectively and interest expense for the years ended December 31, 2002 and 2001 was
$335,000 and $130,000, respectively.

41

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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 31:2003

$
155,9032004


131,000Total minimum lease payments


286,903Less: interest


(30,000
)Present value of lease payments


256,903Less: current portion


(140,875
)Non-current portion obligation with interest rates of 5% to 7%

$
116,028


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 an amended agreement on
January 1, 2003 to lease the equipment under a lease that expires in 2007.

Future
minimum payments required under these leases as of December 31, 2002 are due as follows:

Year ending December 31:2003

$
547,7482004


547,7482005


547,7482006


547,7482007


547,748Total minimum lease payments

$
2,738,742


Rent
expense under these leases for the years ended December 31, 2002 and 2001 was $919,000 and $525,000 respectively.

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

42

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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.

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 at December 31, 2002 and 2001, 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
PriceBalances, December 31, 2000

349,641

$
1.35Cancelled

(100,240
)
$
2.00Granted

277,000

$
0.50Balances, December 31, 2001

526,401

$
0.78Cancelled

(190,236
)
$
0.20Granted

459,500

$
0.13Balances, December 31, 2002

795,665

$
0.50Options exercisable at December 31, 2002

526,045

$
0.63


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The
following table summarizes information about fixed price stock options outstanding at December 31, 2002:

|                |  |         |  | Options Outstanding |  | Options Exercisable
|--------------- |  | ------- |  | ------------------- |  | -------------------
|
|$0.05           |  | 175,000 |  | 122                 |  | $                  
|$0.25-$0.515625 |  | 509,900 |  | 69                  |  | $                  
|$0.625-$0.9375  |  | 77,265  |  | 51                  |  | $                  
|$2.25-$3.375    |  | 13,500  |  | 68                  |  | $                  
|$4.25-$4.4375   |  | 15,000  |  | 53                  |  | $                  
|$4.875-$5.1875  |  | 5,000   |  | 42                  |  | $                  
|Total           |  | 795,665 |  | 70                  |  | $                  



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, 2002 and 2001:

2002

2001Net operating losses available for carry forward (expire 2004 to 2022)

$
13,400,000

$
12,500,000Other future deductable temporary differences, net


650,000


625,000Net deferred tax asset before valuation allowance


14,050,000


13,125,000Valuation allowance


(14,050,000
)

(13,125,000
)$


$



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" 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, 2002 and
2001, respectively. The

44

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Company has net operating loss carryforwards for federal income tax purposes of approximately $36,000,000. 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 carry forwards 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:

2002

2001Benefit at federal statutory rate

$
(925,000
)
$
(1,065,000
)Increase in valuation allowance


925,000


1,065,000Income 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, 2002 and 2001 were $23,000 and $41,000, respectively.

12. Significant Customer Information

The Company's major customer accounted for the following percentage of net sales:

2002

2001Amount

%

Amount

%2,898,000

35
%
3,328,000

34
%


Accounts
receivable with this customer at December 31, 2002 and 2001 totaled $190,112 and $358,847, 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, 2002, $15,000 has been accrued for the
cost of additional environmental work. Groundwater work is expected to continue in the second quarter of 2003.

45

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14. Subsequent Event

On February 25, 2003, MagStar Technologies, Inc. sold and leased back its headquarters and manufacturing facility in Hopkins, Minnesota. The
purchaser was Hopkins Eleventh Avenue LLC ("Eleventh Avenue"), an affiliate of the Company's largest shareholder.

The
purchase price for the building and property was $3,700,000, consisting of $3,189,148 in cash and a Promissory Note for $510,852. The Company entered into a 6.5-year
gross lease with Eleventh Avenue
for the building and property at an annual cost of $3.50 per square foot, aggregating $385,000 per year; after three years the lease escalates to $3.82 per square foot, aggregating $417,948 per year.

In
the transaction, the Company paid in full its mortgage on the property with US Bancorp in the amount of $2,675,798, including accrued interest. The mortgage had originally been
entered into as security for Term Loan A under the provisions of the Company's Credit Agreement with US Bancorp dated October 20, 2000.

As
a result of the sale of the property, the Company will recognize a gain on its balance sheet of $2,136,810, which will be realized over the life of the lease from Hopkins Eleventh
Avenue, LLC. The Company realized proceeds of $1,024,202, which will be applied to the Company's debt to Activar Properties, Inc. and affiliates. Eleventh Avenue will not make any payments on
the Promissory Note, as it will be offset against debt held by the Company and owed to Activar Properties, LLC.

46

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MAGSTAR TECHNOLOGIES, INC.        EXHIBIT INDEX TO ANNUAL REPORT  ON FORM 10-KSB        For the Fiscal Year Ended December 31, 2002

|Item No. |  | Item                                                                                                     |  | Method of Filing                                                                                                                             
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|3.1      |  | Restated Articles of Incorporation, As amended                                                           |  | Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)
|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) 
|         |  |                                                                                                          |  |                                                                                                                                              

47

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|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                                                                                                           |  | Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)
|10.7  |  | 2001 Stock Purchase Plan                                                                                                         |  | Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)
|10.8  |  | Environmental and ADA Indemnification Agreement, dated December 3, 1997, between the Company and US Bancorp 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 US Bancorp 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 US Bancorp National Association     |  | Incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)               
|      |  |                                                                                                                                  |  |                                                                                                                                               

48

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|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 US Bancorp 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 US Bancorp 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 US Bancorp 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 US Bancorp National Association                                                                      |  | Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)  
|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)
|      |  |                                                                                                                                                                                                                        |  |                                                                                                                                                  

49

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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                                                     |  | Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)  
|10.20 |  | 12% Promissory Note dated January 21, 2002 issued to Richard F. McNamara                                                                             |  | Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)  
|10.21 |  | Warrant for Purchase of Shares of Common Stock of the Company dated January 21, 2002 issued to Richard F. McNamara                                   |  | Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001 (File No. 0-1561)  
|10.22 |  | Lease from Eleventh Avenue to the Company dated February 21, 2003                                                                                    |  | Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated March 11, 2003 (File No. 0-1561)                    
|10.23 |  | Promissory Note from Eleventh Ave dated February 21, 2003                                                                                            |  | Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated March 11, 2003 (File No. 0-1561)                    
|99(a) |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                     |  | Filed herewith electronically                                                                                                                    
|99(b) |  | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                     |  | Filed herewith electronically                                                                                                                    

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