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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                -----------------
                                   FORM 10-KSB

[X}      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 2000

[ ]      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

                                -----------------

                           REUTER MANUFACTURING, INC.
             (Exact name of registrant as specified in its charter)

                          MINNESOTA                       41-0780999
              (State or other jurisdiction of          (I.R.S. Employer
               incorporation or organization)         Identification No.)

                    410 11TH AVENUE SOUTH                   55343
                      HOPKINS, MINNESOTA                  (ZIP CODE)
        (Address of principal executive offices)


       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

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

                                 YES [X] NO [ ]

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

       The Registrant's revenues for the fiscal year ended December 31, 2000
were $10,769,298.

       As of March 23, 2001, 8,740,173 shares of Common Stock of the Registrant
were deemed outstanding, and the aggregate market value of the Common Stock of
the Registrant (based upon the average of the closing bid and asked prices of
the Common Stock at that date), excluding outstanding shares beneficially owned
by directors and executive officers, was approximately $3,078,330.

       Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X]

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                                     PART I

FORWARD LOOKING STATEMENTS

         THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS. ANY STATEMENTS NOT OF HISTORICAL FACT MAY
BE CONSIDERED FORWARD-LOOKING STATEMENTS. WRITTEN WORDS SUCH AS "MAY," "EXPECT,"
"BELIEVE," "ANTICIPATE" OR "ESTIMATE," OR OTHER VARIATIONS OF THESE OR SIMILAR
WORDS, IDENTIFY SUCH STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT ALSO
INCLUDE REFERENCES TO ANTICIPATED SALES VOLUME AND HIGHER PRODUCT MARGINS,
EFFORTS AIMED AT ESTABLISHING NEW OR IMPROVING EXISTING RELATIONSHIPS WITH
CUSTOMERS OF THE COMPANY, OTHER BUSINESS DEVELOPMENT ACTIVITIES, ANTICIPATED
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS AND SIMILAR MATTERS.

         IN ADDITION, THE COMPANY HAS HISTORICALLY HAD A HIGH CONCENTRATION OF
BUSINESS WITH ONE MAJOR CUSTOMER AND REDUCTIONS IN SCHEDULED SHIPMENTS TO THIS
CUSTOMER WERE PRIMARILY RESPONSIBLE FOR THE LOSSES FROM OPERATIONS DURING 1999
AND 2000. THERE CAN BE NO ASSURANCE THAT THIS CUSTOMER WILL RESUME SHIPMENTS TO
PRIOR OR EXPECTED LEVELS IN THE FUTURE. HOWEVER, THE COMPANY DID EXPERIENCE
IMPROVED SALES PERFORMANCE IN THE HIGH TECH SPINDLE SECTOR IN 2000. IN ADDITION,
TWO ACQUISITIONS, ONE IN NOVEMBER 2000 AND ONE IN FEBRUARY 2001 OFFER INCREASED
SALES PROSPECTS. 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

         Reuter Manufacturing, Inc. (Reuter) is a publicly owned company
headquartered in Hopkins, Minnesota that trades locally, over the counter, under
the symbol "RTMF". Reuter is a contract manufacturer of custom motion controlled
devices for factory automation and medical original equipment manufacturers
(OEM's). The Company's contract manufacturing business is concentrated in the
medical device field, which includes production of blood centrifuges, blood
pumps, blood analyzers, thrombectomy proximal motors, organic chemical
synthesizers and valves for medical oxygen delivery. The Company also contract
manufactures gas regulators, cryogenic parts and miscellaneous industrial parts.
Contract manufacturing accounted for approximately 92% of the Company's net
sales in 2000.

         The Company also manufactures products under its own trade names, which
accounted for approximately 8% of the Company's net sales in 2000. The Company's
trade name manufacturing business is concentrated in two principal areas. The
Company produces Envi-ro-fuge 2000(R) self-powered oil centrifuges for
stationary and mobile internal combustion engines. The Company also sells a
limited line of full flow oil filters as a complement to the oil centrifuges.
The Company's other principal trade name manufacturing products are
Reuter/Sollami(R) rotary vane actuators, hydraulic and pneumatic, which are used
to impart motion in diverse industrial and special applications. The Company's
trade name manufacturing business requires substantial design and development
engineering input.

         The Company was established fifty years ago as Reuter Manufacturing,
Inc. concentrating on precision machining and assembly, such as disk drives,
spindles and blood centrifuges. Over the past two years the company has focused
its efforts on selling its technical expertise in the areas of motion control,


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conveyor devices and magnetic assemblies. Reuter has become the "Go-To" company
for custom-engineered motion control packages, conveyor systems and magnets.

         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

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

         MOTION CONTROLLED DEVICES:

         These include high speed spindles for assemblies whose uses range from
         silicon wafer saws to PC board saws to routers. This group also
         includes precisely controlled spindles with electronically controlled
         feedback for visual inspection systems.

         BLOOD CENTRIFUGE ASSEMBLIES

         These allow for high speed separation of blood into various components.
         These centrifuges can be used in both operating rooms and in blood
         banks.

         CONVEYOR SYSTEMS FOR FACTORY AUTOMATION

         These can be used for factory automation for OEM's for edge belt
         conveyor systems for circuit board assembly. These systems also include
         end user products namely roller conveyors for custom factory
         automation.

         ROBOTIC COMPONENTS AND ASSEMBLY

         These are built for the leading suppliers (OEM's) of factory automation
         systems for semiconductor manufacturers.

         PRECISION MAGNET ASSEMBLIES

         The Company acquired in November 2000 another company, which has
         expertise in building precision magnet assemblies for aerospace,
         medical, and motion controlled applications.

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

TECHNOLOGY

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

         MOTION CONTROL DEVICES

         These devices are requiring smaller features, higher horsepower and
         minuscule vibration. To accomplish this, they will require Reuter's
         unique magnetic configurations, its heat dissipation techniques and its
         ability to meet ever-tightening machinery and assembly tolerances.


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         CONVEYOR/ROBOTIC MOVEMENT DEVICES

         These devices will require faster orientation and movement, minuscule
         surface contrast and high density boards and chips. Reuter will be able
         to meet these needs with its high tolerance machining and assembly
         skills, its edge belt handling technology, and its skills in servomotor
         control feedback.

         NEW GENERATION HIGH ENERGY MAGNETIC MATERIALS

         These materials require higher speed performance, improved torque
         transmission and improved holding power. Reuter's magnets have unique
         bonding capabilities that make them very attractive for customers in
         this market. In addition, the Company does a great deal of custom
         matching of materials to specific application to enhance the
         performance for its customers.

         Reuter has purposefully brought together this unique blend of enabling
         technologies to provide the "Go-To" source for motion control, factory
         automation and medical spinning devices.

MARKETS

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

      *     MOTION CONTROL

            Reuter is a rapidly growing supplier of custom spindle/electric
            motor assemblies for high technology applications. These are
            applications that require state of the art capabilities for large
            OEM market leaders. The company is securing a solid place in this
            rapidly changing market.

      *     FACTORY AUTOMATION

            Reuter is the supplier to the top three OEM's of factory automation
            equipment. These OEM's provide equipment to customers in the
            semiconductor manufacturing field.

      *     MEDICAL

            Reuter is a leading manufacturer of blood centrifuges, which are
            used in analysis and component isolation of whole blood. These
            centrifuges are used in many of the world's blood banks and in
            operating rooms. The recent worldwide shortage of blood and the
            increased testing requirements are two driving forces to make this a
            rapidly growing market.

      *     PROPRIETARY PRODUCT - OIL CENTRIFUGE

            Reuter manufactures an engine oil centrifuge used primarily on
            stationary engines of 200 hp and above. The Company markets the
            centrifuges to an overseas customer. In the United States, the
            Company has one major dealer who, in turn, markets to other
            distributors.

            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 three Directors of Sales, the Company has
Regional Representatives with significant experience selling our technical
applications. Each Director has the responsibility for sales to a strategic


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market on a worldwide basis. The sales force is supported by applications design
expertise within each of its market segments.

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

CUSTOMERS

         In the latter part of 1999, Reuter received notice from its then
largest customer that their inventories of blood centrifuges were extremely high
and they were planning to substantially reduce purchases from the Company. The
reduction from 1999 to 2000 was approximately $730,000. Management persuaded
this customer to postpone this reduction until 2001 and to provide Reuter the
time to replace the potential lost volume. The Company believes that this
customer will return to the increased volume purchasing in the last quarter of
2001.

         Any new automation systems business, in addition to the customers of
spindle products, may offset any potential losses from the declining blood
centrifuge business. Since that time Reuter has made significant strides toward
securing additional customers and programs, particularly in the factory
automation, magnetics and conveyor system markets.

STRATEGY

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

         In addition to continuing to build strong customer relationships, the
Company also plans to pursue the following strategies:

      *     Expand the volume of business in the factory automation segments of
            the market, most notably with their newly developed customer base -
            PRI Automation, Kollmorgan and MTI.

      *     Expand the volume of business in factory automation and motion
            control with their acquired business units - factory conveyor
            systems and rare earth magnetics.

      *     Reduce overhead by consolidating the operations of its acquired
            companies into the Company's facility located in Hopkins, Minnesota.

      *     Renegotiate the Company's debt structure to substantially reduce its
            interest rates.

      *     Control costs and expenses commensurate with the Company's current
            sales levels in an effort to generate cash flows from operations.


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SUPPLIES

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

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

COMPETITION

         The contract manufacturing business in which the Company engages is
highly competitive. Many of the competitors of the Company have greater sales
volume and resources than the Company. The principal elements of competition are
quality, service, delivery, price and meeting customer requirements. The Company
believes that it accounts for only a small portion of aggregate national sales
of the manufacturing service it provides. The Company believes, however, that
its strong engineering capability gives it a competitive advantage.
Approximately 8% of the Company's employees are engineers.

RESEARCH AND DEVELOPMENT

         The Company conducts limited research and development activities
primarily related to prototype development of customers' products and products
sold under its trade names. The Company also provides some engineering services
to support its customers in the development of new products including,
enhancements to current products.

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,
2000, the Company's backlog of orders and releases was approximately $2.3
million, compared to approximately $4.3 million on November 17, 1999. The
primary reason for this change is that Heamonetics, the Company's largest
customer, changed its purchasing method from annual blanket orders to quarterly
orders. Management expects that the backlog will be filled during the current
year, and that additional orders will be received during the current year. 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 and the first delivery of the product by the
Company is 2 to 6 months. The delivery period for subsequent orders generally is
shorter than the period for the initial order. The Company believes its backlog
is firm; however the Company's customers do not sign production contracts and
the customers can reduce, reschedule, or cancel orders without contractual
penalty.


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EMPLOYEES

         As of December 31, 1999, the Company had 100 employees, which includes
94 full time employees and six part time employees. As of December 31, 2000, the
Company had 115 employees, which includes 110 full time employees and 5 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. The Company owns these
facilities and the approximately 7.5 acres of land on which the facilities are
located. These facilities consist of approximately 110,000 square feet of which
approximately 13,000 square feet are devoted to office space, and 97,000 square
feet are devoted to manufacturing, and warehouse purposes. Approximately 80% of
the space is being utilized as of March 23, 2001. The Company considers these
facilities to be well maintained, and in good operating condition, and believes
that such manufacturing facilities can accommodate anticipated future growth.
The Company has a real estate mortgage on the building with U.S. Bank National
Association. The Company owed $2,745,960 on the loan at December 31, 2000. The
Company pays $27,020 in principal on the loan on the first of each month through
September 1, 2005 with a final payment on October 1, 2005 of the remaining
balance. Interest is paid each month on the loan and is in addition to the
principal payment.

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

ITEM 3. LEGAL PROCEEDINGS.

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

         A claim is pending against the Company in the Bankruptcy Court of
Minnesota. The claim seeks to recover approximately $64,000 paid to the Company
by Excelsior Henderson during the preference period preceding Excelsior
Henderson's bankruptcy case. The Company believes it has valid defenses to this
claim and intends to defend itself against the claim.

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 23, 2001, are as follows:

Name (age)                Position(s) with the Company
----------                ----------------------------

Michael J. Tate (61)      President, Chief Executive Officer and Chief Financial
                          Officer

Brian Kempski (45)        Vice President - Marketing and Sales

J.L. Reissner (60)        Secretary

Lou Matjasko (60)         Vice President - Operations

         Mr. Tate has served as Chief Executive Officer, President and Chief
Financial Officer of the Company, and has been an employee director of the
Company since April 20, 1998. During 1999, another individual was Chief
Financial Officer until he resigned that position in December 1999, at which
time Mr. Tate, again, became Chief Financial Officer. Previously, he served as
Vice President/Chief Operating Officer of Minnesota Valley Engineering from
August 1996 until joining the Company. Prior to 1996, Mr. Tate held other
positions at Minnesota Valley Engineering, including Vice President/General
Manager Industrial Business Unit from March 1993 to August 1996 and Vice
President Finance/Treasurer from September 1989 to March 1993.

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

         Mr. Reissner has served as Secretary of the Company and as a director
since October 2000. Mr. Reissner has been President of Activar, Inc., a holding
company which owns sixteen manufacturing companies, since January 1996 and
served as Chief Financial Officer of Activar from 1992 until becoming President.

         Mr. Matjasko joined the Company in December 2000 as Vice President -
Operations. Mr. Matjasko is a US Air Force Academy graduate, has two advanced
engineering degrees from MIT, and an MBA. For the last 10 years, he has been
Divisional General Manager for two manufacturing businesses in California owned
by Activar.


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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 "RTMF." The
following table sets forth, for each of the calendar periods indicated, the
quarterly high and low bid quotations for the Company's Common Stock quoted on
the OTC Bulletin Board. The prices in this table represent prices between
dealers, and do not include adjustments for retail mark-ups, mark-downs or
commissions and may not represent actual transactions.

             Year                             High          Low
             ----                             ----          ---

             2000:  First Quarter             $ .38        $ .16
                    Second Quarter            $ .25        $ .01
                    Third Quarter             $1.19        $ .01
                    Fourth Quarter            $1.63        $ .50

             1999:  First Quarter             $1.06        $ .34
                    Second Quarter            $1.05        $ .28
                    Third Quarter             $ .50        $ .34
                    Fourth Quarter            $ .56        $ .19


         Holders. As of December 31, 2000 there were approximately 1,146
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 2000 or 1999, 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.

         Unregistered sales. During the fiscal year ended December 31, 2000, the
Company issued the following securities without registration under the
Securities Act:

         In October 2000, the Company issued an aggregate of 3,500,000 shares of
Common Stock and an aggregate of 1,000,000 shares of Series A Convertible
Preferred Stock to 3 accredited investors pursuant to a private placement of the
Company's Common Stock and Series A Preferred Stock for an aggregate payment of
$800,000. Michael J. Tate, the Company's President and Chief Executive Officer
and Chief Financial Officer, purchased 437,500 shares of Common Stock and
125,000 shares of Series A Preferred Stock, Activar, Inc., purchased 2,187,500
shares of Common Stock and 625,000 shares of Series A Preferred stock, to which
R.F. McNamara, the Company's director, has sole voting power and shared
dispositive power with respect to the shares and J.L. Reissner, the Company's
director, purchased 875,000 shares of Common Stock and 250,000 shares of Series
A Preferred Stock.

         The Company's Common and Series A Preferred Stock issued under its
private placement in 2000 are limited under Rule 144 of the Securities Act of
1933. Under Rule 144, none of the issued stock is registered with the Securities
and Exchange Commission and, therefore, is not transferable or saleable without
(1) registration under the Securities Act and any applicable state securities
laws or (2) an exemption from the requirements of the Securities Act and
applicable state securities laws.


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

GENERAL

         The Company is principally a contract manufacturer of
precision-machined products and assemblies for medical and industrial original
equipment manufacturers ("OEM"). The Company manufactures on a contract basis,
among other items, close tolerance bearing-related assemblies for the medical
device industry. In order to differentiate itself from its competitors, the
Company emphasizes its design engineering and manufacturing engineering
capability and support. The Company also manufactures and sells, under the
Reuter name, self-powered oil centrifuges and laboratory centrifuges, which are
sold by the Company's sales force to the OEM or end user, and to distributors.

         Throughout 1999, the Company continued to experience a decrease in
sales for one of its blood centrifuge models to the Company's largest customer.
Until August 1997, this product was being produced and shipped in large
quantities to that customer. There can be no assurance that sales to the
Company's largest customer will return to previous levels or that sales of other
products will be sufficient to achieve positive cash flow or profitability. The
Company's largest customer continues to order and take delivery of other
products manufactured by the Company. The Company's efforts to attract high-tech
custom product customers resulted in some increased sales in that sector in
2000. The Company's ability to continue as a going-concern is dependent on its
ability to increase sales from current levels and maintain adequate margins on
sales. To achieve that goal, the Company has acquired two small companies, one
in November 2000 and one in February 2001, to increase 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. Due to the lower sales and the resulting impact on cash, the
Company is exploring additional cash conservation and generation strategies. One
strategy the Company is exploring is the sale and leaseback of its equipment and
Company headquarters.

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

RESULTS OF OPERATIONS

         The Company's net sales decreased by 6.4% in 2000 from 1999, compared
to a decrease in net sales of 6.2% in 1999 from 1998. Net sales for 2000 from
the medical, industrial, and trade name products were $7,445,254, $2,451,520 and
$892,254 respectively, compared to $8,242,061, $2,350,267 and $910,273,
respectively, for 1999. The majority of the sales decrease for 2000 as compared
to 1999 was due to a reduction in sales to the Company's largest customer.

          Gross profit was 7.4% in 2000, compared to 4.9% in 1999. This increase
in gross profit was partially due to better inventory management during 2000,
which resulted in no inventory reserve increase in 2000. The Company had a
$530,000 increase in its inventory reserve in 1999. In addition, the move to
cellular manufacturing philosophies began to show improvements in 2000.

         Selling, general and administrative expenses were $1,921,373 or 17.8%
of net sales in 2000, compared to $1,923,916 or 16.7% of net sales in 1999. The
decrease in selling, general and administrative expenses of 0.1% is due
primarily to increases in commission paid to independent sales


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representatives offset by decreases in bad debt expenses, which are a result of
more careful scrutiny and more timely follow-up with customers regarding
payments.

         In 2000, the Company had an operating loss of $1,123,856, compared to
an operating loss of $1,365,458 in 1999. The decrease in operating loss in 2000
as compared to 1999 was the lack of increases in the inventory reserve, the use
of cellular manufacturing philosophies and cost containment efforts.

         The Company had a net loss of $1,208,639 or $.21 per share in 2000,
compared to a net loss of $2,144,573 or $.44 per share in 1999. The decrease in
net loss resulted from the reasons stated above, in addition to the realization
of income from trade debt restructuring of approximately $602,000.

         The Company recorded a net loss for 2000 and consequently did not
record a provision for income taxes and, generally, does not pay regular income
taxes because of the availability of its net operating loss carryforwards. The
Company is, however, generally subject to alternative minimum tax under the
Internal Revenue Code of 1986, as amended (the "Code"), because only 90% of the
net operating loss carryforward is allowed as a deduction before arriving at the
alternative minimum taxable income. Therefore, 10% of the Company's taxable
income, of which there was none in 1999, is generally subject to the flat
alternative minimum tax rate of 21%.

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

         Liquidity and Capital Resources. At December 31, 2000, the Company had
a working capital deficit of $5,084,317, compared to a working capital
deficiency of $5,811,283 at December 31, 1999. The current ratio was .42 at
December 31, 2000, compared to .31 at December 31, 1999. The decrease in the
working capital deficit and the increase in the current ratio are primarily due
to an increase in accounts receivable and a decrease in accounts payable.

         The Company's credit facilities with U.S. Bank National Association
("US Bancorp") consist of a revolving line of credit and three term notes.
Although the line of credit is due December 1, 2002, US Bancorp had the right to
demand payment at any time. In addition, although the term notes have scheduled
repayment dates, the term notes may be due upon demand in the event that US
Bancorp requires demand repayment under the credit facilities. The credit
facilities agreement also includes a subjective material adverse change clause
under which the borrowings could become due and payable. Accordingly, the
Company has classified all of the amounts owing under the credit facilities at
December 31, 2000 and 1999, as current liabilities.

         On October 10, 2000, the Company and US Bancorp entered into an Amended
and Restated Credit Agreement, an Amended, Restated and Consolidated Mortgage,
Security Agreement, Assignment of Leases and Rents and Fixture Financing
Statement, a Security Agreement and an Amended and Restated Note in the
principal amount of $6,725,000 (collectively, the "Credit Instruments"). The
credit facilities available under the Credit Instruments consist of an
asset-based line of credit with availability of up to $1,500,000 and three term
notes of $2,800,000 ("Term Note A"), $1,100,000 ("Term Note B") and $1,325,000
("Term Note C"), respectively. The credit facilities are collateralized by
substantially all the assets of the Company.

         Beginning November 1, 2000, the Company shall pay principal in the
amount of $27,020 against Term Note A and on the first day of each month
thereafter through September 1, 2005, with a final payment on October 1, 2005 in
the amount of the entire remaining balance. Commencing on February 1, 2001, the
Company shall pay principal in the amount of $36,500 on Term Note B and on the
first day of each month thereafter through December 1, 2003 with a final payment
on January 1, 2004 in the amount


                                       11
<PAGE>


of the entire remaining balance. On November 1, 2000 and for each month
thereafter, interest will be paid monthly on Term Notes A and B, in addition to
the principal payments noted. Term Note C is due and payable in full on
September 30, 2003. However, in the event that the line of credit, Term Loan A
and Term Loan B 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.

         The Company had negative cash flow from operations of $1,649,382 for
the year ended December 31, 2000, compared to negative cash flow from operations
of $214,941 for the year ended December 31, 1999. The change in cash flow from
operations for the year ended December 31, 2000 was due primarily to increases
in accounts receivable, inventories and the non-cash gain realized on the trade
debt restructuring.

         Net cash provided by investing activities was $1,459 for the year ended
December 31, 2000 compared to net cash used in investing activities of $11,682
for the year ended December 31, 1999. The decrease in 2000 was due to a decrease
in capital expenditures during the year consistent with overall planned cost
containment efforts.

         Net cash provided by financing activities was $1,647,923 for the year
ended December 31, 2000, compared to cash provided by financing activities of
$47,248 for the year ended December 31, 1999. The increase in net cash provided
by financing activities in 2000 was primarily due to an increase in borrowings
under the Company's asset-based line of credit, completion of a private
placement of stock and issuance of a note payable in connection with an
acquisition of inventories and accounts receivable of another company. The
Company also made principal payments of approximately $190,000 on other
equipment debt.

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


                                       12
<PAGE>


         On December 22, 1998, the Company completed a $350,000 private
placement of debentures with warrants. The Company then received an additional
$50,000 under this placement in 1999. The proceeds were used to fund operating
activities.

         Management anticipates making capital expenditures to support
diversification and growth of the manufacturing operations. Near term, capital
commitments for new manufacturing equipment total approximately $30,000. The
Company anticipates obtaining sufficient amounts of capital for these
requirements through bank financing and deferred payment terms.

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

         Business Conditions. The Company incurred a net loss of $1,208,639 for
the year ended December 31, 2000, and has a working capital deficit and
stockholders' deficiency of $5,084,317 and $3,587,740, respectively, at December
31, 2000.

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

      *     Expand the volume of business in the factory automation segments of
            the market, most notably with their newly developed customer base -
            PRI Automation, Kollmorgan and MTI.

      *     Expand the volume of business in factory automation and motion
            control with their acquired business units - factory conveyor
            systems and rare earth magnetics.

      *     Reduce overhead by consolidating the operations of its acquired
            companies into the Company's facility located in Hopkins, Minnesota.

      *     Renegotiate the Company's debt structure to substantially reduce its
            interest rates.

      *     Control costs and expenses commensurate with the Company's current
            sales levels in an effort to generate cash flows from operations.

         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.


                                       13
<PAGE>


         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.

         Subsequent Event.

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

         Summary. The Company had a disappointing year in that it lost money
again in 2000, but it did reduce its operating loss by $240,000 compared to
1999. This reduced operating loss in 2000 as compared to 1999 came on lower
sales, which points to the fact that the cellular manufacturing philosophies
started in 1999 are beginning to show results. The Company did begin to see that
its investment in the high-tech spindle business pay off with increased sales in
that area. Fiscal 2000 also saw the Company restructure its trade payables. This
restructuring resulted in a reduction of over $600,000 in amounts due to its
trade vendors. The Company's debt with US Bank National Association, its primary
lender, was also restructured at lower interest rates. In addition, there was an
equity investment through a private placement with certain investors. The
Company completed two acquisitions, one in November 2000 and one in February
2001, which should provide the Company with the potential for increased sales.
While none of these events by themselves assures the Company's return to
profitability, the Company believes it has positioned itself to move towards
profitability.

         Factors That May Affect Future Results.

         Dependence on Major Customer. The Company's largest customer accounted
for 43.5% and 51.6% of net sales in 2000 and 1999, respectively. The Company's
net sales in 2000 decreased $733,303, or 6.4%, from 1999, and sales were
primarily affected by a reduction in scheduled shipments of one high volume
product to this customer. The Company continues to sell and take orders of other
products from this customer. Sales of a previously high volume product from the
Company's largest customer began to increase again in mid-February 1999;
however, no assurance can be given that sales of this product will resume to
previous or expected levels. The Company has no production contracts with this
customer and believes that further reductions in orders from this customer would
have a material adverse effect on its future operating results.

         Dependence on New Products and Continued Growth in Sales Volume. The
Company's future success will depend on its ability to secure additional
contract manufacturing business, enhance the products it currently manufactures
under its own trade names, increase sales volume of oil centrifuges, obtain
production orders for prototype products including spindle assemblies, and
maintain a satisfactory volume of orders for industrial parts.

         Competition. The Company believes that the principal elements of
competition are quality, service, delivery, price and meeting customer
requirements. The contract manufacturing business in which the Company engages
is highly competitive and many of the competitors of the Company have greater
sales volume and resources than the Company. Although the Company believes its
engineering capability is a competitive advantage, customers may change to other
contract manufacturers. Company


                                       14
<PAGE>


management believes the Company represents only a small portion of the aggregate
national sales of contract manufacturing services.

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........................................     23

Balance Sheets as of December 31, 2000 and 1999..........................     24

Statements of Operations for the years
ended December 31, 2000 and 1999.........................................     25

Statements of Stockholders' Equity for the years
ended December 31, 2000 and 1999.........................................     26

Statements of Cash Flows for the years ended
December 31, 2000 and 1999...............................................     27

Notes to the Financial Statements........................................  28-37

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

         The information required by Item 304 of Regulation S-K 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.


                                       15
<PAGE>


                                    PART III

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

         (a)      DIRECTORS OF THE REGISTRANT.

         NAME                         AGE               POSITION
         ----                         ---               --------

         R.F. McNamara............    67    Chairman of the Board and Director

         Michael J. Tate..........    61    Director, President, Chief Executive
                                            Officer and Chief Financial Officer

         J.L. Reissner............    60    Director and Secretary

         MR. MCNAMARA has 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 holding company that owns sixteen manufacturing companies. Mr.
McNamara is a director of various other companies including Rimage Corporation
and Twin City Federal.

         MR. TATE has served as Chief Executive Officer, President and Chief
Financial Officer of the Company and has been an employee director of the
Company since April 20, 1998. During 1999, another individual was Chief
Financial Officer until he resigned that position in December 1999 at which time
Mr. Tate, again, became Chief Financial Officer. Previously, he served as Vice
President/Chief Operating Officer of Minnesota Valley Engineering from August
1996 until joining the Company. Prior to 1996, Mr. Tate held other positions at
Minnesota Valley Engineering, including Vice President/General Manager
Industrial Business Unit from March 1993 to August 1996 and Vice President
Finance/Treasurer from September 1989 to March 1993.

         MR. REISSNER has served as Secretary of the Company and as a director
since October 2000. Mr. Reissner has been President of Activar, Inc., a holding
company that owns sixteen manufacturing companies, 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.

         (b)      EXECUTIVE OFFICERS OF THE REGISTRANT.

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

         (c)      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

         Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and all persons who beneficially own more than
10% of the outstanding shares of our common stock to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock. Executive officers, directors and greater than
10% beneficial owners are also required to furnish us with copies of all Section
16(a) forms they file. To the Company's knowledge, based upon a review of the
copies of such reports furnished to the Company as of the date of this report
and written representations by such persons, none of the directors, executive
officers and beneficial owners of greater than 10% of the Company's common stock
failed to file on a timely basis the forms required by Section 16 of the
Securities Exchange Act of 1934.


                                       16
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION.

         (a)      SUMMARY OF CASH AND OTHER 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, all of whom received or earned cash and
non-cash salary and bonus of more than $100,000, for the fiscal year ended
December 31, 2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                  ANNUAL            LONG-TERM
                                               COMPENSATION       COMPENSATION
                                               ------------       ------------

                                                                   SECURITIES
                                                                   UNDERLYING          ALL OTHER
      NAME AND PRINCIPAL POSITION            YEAR    SALARY($)     OPTIONS(#)      COMPENSATION ($)
----------------------------------------     ----    ---------    ------------     ----------------
<S>                                          <C>     <C>          <C>              <C>
Michael J. Tate ........................     2000    $153,856              0               0
   PRESIDENT, CHIEF EXECUTIVE OFFICER AND    1999    $146,153         50,000               0
   CHIEF FINANCIAL OFFICE                    1998     123,854         56,058               0
                                             1997           0              0               0

Brian A. Kempski .......................     2000    $116,708              0               0
   VICE - PRESIDENT, MARKETING AND SALE      1999    $ 97,203         75,000               0
</TABLE>


                                       17
<PAGE>


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 us with respect to
the beneficial ownership of each class of the Company's capital stock as of
March 23, 2001 for (1) each person known by the Company to beneficially own more
than 5% of any class of the Company's voting securities, (2) each of the
executive officers named in the Summary Compensation Table under the heading
"Executive Compensation and Other Benefits," (3) each of the Company's directors
and (4) all of the Company's executive officers and directors as a group. Except
as otherwise indicated, the Company believes that each of the beneficial owners
of the Company's capital stock listed below, based on information provided by
these owners, has sole investment and voting power with respect to its shares,
subject to community property laws where applicable.

<TABLE>
<CAPTION>
                                                                                            COMMON
                                                                  SERIES A PREFERRED       STOCK AND      PERCENT
                                         COMMON STOCK                   STOCK               COMMON       OF TOTAL
                                  ---------------------------   ----------------------       STOCK        VOTING
                                                                                          EQUIVALENTS      POWER
NAME                                  NUMBER         PERCENT      NUMBER      PERCENT         (1)            (2)
------------------------------    --------------    ---------   ----------   ---------    -----------    ----------
<S>                                <C>       <C>      <C>      <C>            <C>          <C>              <C>
Perkins Capital Management
730 East Lake Street
Wayzata, MN  55391-1759            1,016,231 (3)      11.6%            0         --        1,016,231        10.4%

Activar, Inc.
7808 Creekridge Circle
Suite 200
Minneapolis, MN  55439             2,187,500 (4)      25.0%      625,000       62.5%       2,812,500        28.9%

R.F. McNamara
7808 Creekridge Circle
Suite 200
Minneapolis, MN  55439             2,187,500 (5)      25.0%      625,000       62.5%       2,812,500        28.9%

J.L. Reissner
7808 Creekridge Circle
Suite 200
Minneapolis, MN  55439             3,062,500 (6)      35.0%      875,000       87.5%       3,937,500        40.4%

Michael J. Tate
410 11th Avenue South
Hopkins, MN  55343                   677,345 (7)       7.6%      125,000       12.5%         802,345         8.1%

Brian A Kempski
410 11th Avenue South
Hopkins, MN  55343                    75,000 (8)       *               0        0.0%          75,000         *

All executive officers and
directors as a group
(4 persons)...................     3,814,845 (9)      42.5%    1,000,000      100.0%       4,814,845        48.3%
</TABLE>

-----------------------
* less than 1%.


(1)      As of March 23, 2001, unless otherwise noted, all of the shares shown
         are held by individuals or entities possessing sole voting and
         investment power with respect to such shares.


                                       18
<PAGE>


(2)      Shares not outstanding but deemed beneficially owned by virtue of the
         right of a person or member of a group to acquire them within 60 days
         are treated as outstanding only when determining the amount and percent
         owned by such person or group.

(3)      According to a Schedule 13G/A, dated February 28, 2001, as filed with
         the Securities and Exchange Commission, Perkins Capital Management,
         Inc. has sole voting power with respect to 457,500 of such shares, and
         sole dispositive power over all such shares. These shares include
         50,000 shares of common stock that Mr. Perkins has the right to acquire
         within 60 days upon the exercise of a warrant.

(4)      According to a Schedule 13D, dated October 10, 2000, as filed with the
         Securities and Exchange Commission, Activar Inc. has sole dispositive
         and voting power with respect to such shares.

(5)      According to a Schedule 13D, dated October 10, 2000, as filed with the
         Securities and Exchange Commission, Mr. McNamara has shared dispositive
         with respect to these shares and sole voting power over all such
         shares.

(6)      According to a Schedule 13D, dated October 10, 2000, as filed with the
         Securities and Exchange Commission, Mr. Reissner has shared dispositive
         power with respect to 2,812,500 shares and sole dispositive and voting
         power over 1,125,000 shares. Includes shares from footnote 4.

(7)      Includes 106,058 shares of common stock and 50,000 shares of common
         stock that Mr. Tate has the right to acquire within 60 days upon the
         exercise of options and warrants.

(8)      Consists of 75,000 shares of common stock that Mr. Kempski has the
         right to acquire within 60 days upon the exercise of options.

(9)      Includes an aggregate of 181,058 shares of common stock and 50,000
         shares of common stock that executive officers and directors have the
         right to acquire within 60 days upon the exercise of options and
         warrants.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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

           On December 1, 2000, the Company acquired certain of the assets of
           Magstar Technologies, Inc. To fund the purchase, the Company issued
           to Activar a three-year 8% promissory note in the principal amount of
           $363,587. Activar, Inc., one of the Company's shareholders, is also a


                                       19
<PAGE>


           Magstar shareholder, and Mr. McNamara is a director and officer of
           Activar, Magstar and the Company. The Company believes that the terms
           and conditions of the promissory note given to Activar, as well as
           the Asset Purchase agreement between the Company and Magstar, are
           substantially the same as the terms and conditions on which the
           Company could have obtained similar assets from an unaffiliated third
           party.

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

                                     PART IV

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

         (a)      EXHIBITS

         The exhibits to this Report are listed in the Exhibit Index on pages 38
to 41 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 23, 2001, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Reuter
Manufacturing, 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:

         (1)      Incentive Stock Option Plan of the Company, as amended
                  effective December 17, 1987

         (2)      Directors Stock Option Plan of the Company

         (3)      Summary of options granted under Directors Stock Option Plan

         (4)      1991 Non-Employee Director Stock Option Plan

         (5)      Summary of options granted under 1991 Non-Employee Director
                  Stock Option Plan

         (6)      1991 Stock Option Plan, as amended

         (7)      Summary of Options granted under 1991 Stock Option Plan

         (8)      Independent Contractor Agreement dated as of May 16, 1991,
                  between Taylor Consultants, Inc. and the Company

         (9)      Independent Contractor Agreement dated as of November 2, 1992,
                  between Taylor Consultants, Inc. and the Company

         (10)     1998 Non-Employee Director Stock Option Plan


                                       20
<PAGE>


         (b)      REPORTS ON FORM 8-K

         The Company filed a Report on Form 8-K on October 24, 2000, relating to
the financing and the restructuring of the Company's credit facilities.

         The Company filed a Report on Form 8-K on January 22, 2001, relating to
the Company's change in its certifying accountant.


                                       21
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 30, 2001                  REUTER MANUFACTURING, INC.


                                       By: /s/ Michael J. Tate
                                           -------------------------------------
                                           Michael J. Tate, President, Chief
                                           Executive Officer and Chief Financial
                                           Officer

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below on March 30, 2001by the following
persons on behalf of the Registrant and in the capacities indicated.


Signature                        Title
---------                        -----

/s/ R.F. McNamara                Chairman of the Board and Director
----------------------------
R.F. McNamara

/s/ Michael J. Tate              President, Chief Executive Officer and Director
----------------------------     (principal executive and financial officer)
Michael J. Tate

/s/ J.L. Reissner                Director and Secretary
----------------------------
J.L. Reissner


                                       22
<PAGE>


REUTER MANUFACTURING, INC.

REPORT ON AUDITS OF FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2000 AND 1999

<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Stockholders and Board of Directors
Reuter Manufacturing, Inc.
Hopkins, Minnesota

We have audited the accompanying balance sheet of Reuter Manufacturing, Inc. as
of December 31, 2000 and the related statements of operations and stockholders'
deficiency and cash flows for the year 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 audit. The
financial statements of Reuter Manufacturing, Inc. for the year ended December
31, 1999 were audited by other auditors whose report dated December 13, 2000
expressed an unqualified opinion on those statements with an explanatory
paragraph describing the Company's recurring net losses and significant working
capital deficit and stockholders' deficiency.

We conducted our audit 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 audit provides 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 Reuter Manufacturing, Inc. as
of December 31, 2000 and the results of its operations and cash flows for the
year 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.

                                        /s/ Virchow, Krause & Company, LLP

                                        Virchow, Krause & Company, LLP


March 7, 2001


                                       23
<PAGE>


REUTER MANUFACTURING, INC.
BALANCE SHEETS
AT DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------

                                    ASSETS                                          2000             1999
<S>                                                                             <C>              <C>
Current assets:
    Cash                                                                        $        500     $        500
    Accounts receivable, net                                                       1,814,791        1,288,036
    Inventories                                                                    1,898,086        1,287,951
    Other current assets                                                              38,414            9,500
                                                                                ------------     ------------

      Total current assets                                                         3,751,791        2,585,987

Property, plant and equipment, net                                                 2,820,048        3,402,734
                                                                                ------------     ------------

      Total assets                                                              $  6,571,839     $  5,988,721
                                                                                ============     ============

                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
    Current maturities of senior debt                                           $  6,643,960     $  5,136,094
    Current maturities of subordinated debt                                          405,270          644,216
    Payable to related party                                                          55,000               --
    Book overdraft                                                                   106,502          431,619
    Accounts payable                                                                 513,434        1,484,191
    Accrued expenses                                                               1,111,942          701,150
                                                                                ------------     ------------

      Total current liabilities                                                    8,836,108        8,397,270

Subordinated debt, less current maturities                                           675,426          789,155
Note payable - related party                                                         376,693               --
Long-term accounts payable                                                           242,972               --
Other liabilities                                                                     28,380           38,345
                                                                                ------------     ------------

      Total liabilities                                                           10,159,579        9,224,770
                                                                                ------------     ------------

Commitments and contingencies

Stockholders' deficiency:
    Series A preferred stock, par value $.01 per share, authorized 1,000,000
        shares, 1,000,000 issued                                                      10,000               --
    Common stock, par value $.1875 per share, authorized 9,000,000
        shares, issued and outstanding 8,740,173 and 4,999,385
        shares in 2000 and 1999, respectively                                      1,638,782          937,385
    Additional paid-in capital                                                    17,996,479       17,871,759
    Unearned compensation                                                                 --          (20,831)
    Accumulated deficit                                                          (23,233,001)     (22,024,362)
                                                                                ------------     ------------

      Total stockholders' deficiency                                              (3,587,740)      (3,236,049)
                                                                                ------------     ------------

      Total liabilities and stockholders' deficiency                            $  6,571,839     $  5,988,721
                                                                                ============     ============
</TABLE>


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

                                       24
<PAGE>


REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------

                                                                    2000             1999
<S>                                                             <C>              <C>
Net sales                                                       $ 10,769,298     $ 11,502,601
Cost of sales                                                      9,971,781       10,944,143
                                                                ------------     ------------

      Gross profit                                                   797,517          558,458

Selling, general and administrative expenses                       1,921,373        1,923,916
                                                                ------------     ------------

      Operating loss                                              (1,123,856)      (1,365,458)
                                                                ------------     ------------

Other income (expense)
    Interest expense                                                (779,379)        (780,239)
    Other, net                                                        92,810            1,124
                                                                ------------     ------------

      Total other expense, net                                      (686,569)        (779,115)
                                                                ------------     ------------

Loss before extraordinary item                                    (1,810,425)      (2,144,573)
    Extraordinary item, income from trade debt restructuring         601,786               --
                                                                ------------     ------------
Net loss                                                        $ (1,208,639)    $ (2,144,573)
                                                                ============     ============

Loss per share - basic and diluted:
    Loss before extraordinary item                                     (0.31)           (0.44)
    Extraordinary item                                                  0.10               --
    Net loss                                                           (0.21)           (0.44)
                                                                ============     ============

Weighted average shares outstanding                                5,847,706        4,899,147
                                                                ============     ============
</TABLE>


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

                                       25
<PAGE>


REUTER MANUFACTURING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------

                           SERIES APREFERRED STOCK       COMMON STOCK        ADDITIONAL
                                          PAR                       PAR        PAID-IN       UNEARNED    ACCUMULATED
                             SHARES      VALUE        SHARES       VALUE       CAPITAL     COMPENSATION     DEFICIT        TOTAL
<S>                        <C>        <C>           <C>          <C>         <C>           <C>           <C>            <C>
Balances, December 31,
  1998                            --  $        --    4,898,885  $   918,541  $17,832,113   $        --   $(19,879,789)  $(1,129,135)

Exercise of stock options                                  500           94          116                                        210

Issuance of warrants                                                               8,280                                      8,280

Issuance of restricted
  stock                                                100,000       18,750       31,250       (50,000)                          --

Amortization of deferred
  compensation                                                                                  29,169                       29,169

Net loss                                                                                                   (2,144,573)   (2,144,573)
                         -----------  -----------   ----------  -----------  -----------   -----------   ------------   -----------

Balances, December 31,
  1999                            --           --    4,999,385      937,385   17,871,759       (20,831)   (22,024,362)   (3,236,049)

Private placement of
  preferred and common
  stock                    1,000,000       10,000    3,500,000      656,250      133,750                                    800,000

Issuance of common stock                               240,788       45,147       (9,030)                                    36,117

Amortization of deferred
  compensation                                                                                  20,831                       20,831

Net loss                                                                                                   (1,208,639)   (1,208,639)
                         -----------  -----------   ----------  -----------  -----------   -----------   ------------   -----------

Balances, December 31,
  2000                     1,000,000  $    10,000    8,740,173  $ 1,638,782  $17,996,479   $        --   $(23,233,001)  $(3,587,740)
                         ===========  ===========    =========  ===========  ===========   ===========   ============   ===========
</TABLE>


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

                                       26
<PAGE>


REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------

                                                                        2000            1999
<S>                                                                <C>              <C>
Cash flows from operating activities:
    Net loss                                                       $ (1,208,639)    $ (2,144,573)
    Adjustments to reconcile net loss to net cash used in
        operating activities:
      Depreciation and amortization                                     600,408          776,625
      Gain from trade debt restructuring                               (601,786)              --
      Gain on sale of fixed assets                                       (4,110)              --
      Amortization of debt discount                                      22,080           22,080
      Deferred compensation                                              20,831           29,169
      Provision for uncollectible accounts receivable                        --          235,275
      Provision for writedown of inventories                                 --          530,000
      Changes in operating assets and liabilities:
        Accounts receivable                                            (325,208)         (90,588)
        Inventories                                                    (434,989)         209,089
        Other current assets                                            (28,914)          35,185
        Accounts payable                                                (89,882)         285,722
        Accrued expenses                                                410,792          (91,110)
        Other liabilities                                                (9,965)         (11,815)
                                                                   ------------     ------------

      Net cash used in operating activities                          (1,649,382)        (214,941)
                                                                   ------------     ------------

Cash flows from investing activities:
    Capital expenditures                                                 (2,651)         (11,682)
    Proceeds from the sale of fixed assets                                4,110               --
                                                                   ------------     ------------

      Net cash used in investing activities                               1,459          (11,682)
                                                                   ------------     ------------

Cash flows from financing activities:
    Proceeds from line of credit and senior debt                     12,877,439       11,442,058
    Repayments of line of credit and senior debt                    (11,569,573)     (11,916,369)
    Proceeds from private placement of stock                            800,000               --
    Proceeds of note payable - related party                             55,000               --
    Proceeds from subordinated debt                                          --          250,000
    Payments of subordinated debt                                      (189,826)        (160,270)
    Proceeds from exercise of stock options                                  --              210
    Increase (decrease) in book overdraft                              (325,117)         431,619
                                                                   ------------     ------------

      Net cash provided by financing activities                       1,647,923           47,248
                                                                   ------------     ------------

Net change in cash                                                           --         (179,375)

Cash, beginning of year                                                     500          179,875
                                                                   ------------     ------------

Cash, end of year                                                  $        500     $        500
                                                                   ============     ============

Supplemental disclosures of cash flow information:
    Cash paid for interest                                         $    657,333     $    781,490
    Noncash investing and financing activities:
      Purchase of equipment in exchange for notes payable                15,071          140,273

      Purchase of accounts receivable and inventories for notes
        payable                                                         376,693               --
</TABLE>


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

                                       27
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.     BUSINESS DESCRIPTION AND CONDITIONS

       BUSINESS DESCRIPTION
       Reuter Manufacturing, Inc. (the Company) is principally a contract
       manufacturer of precision-machined components, assemblies and devices for
       medical and industrial original equipment manufacturers (OEM). The
       Company manufactures close tolerance bearing-related assemblies for the
       medical device industry. The Company also manufactures self-powered oil
       centrifuges and laboratory centrifuges, which are sold by the Company's
       sales force to the OEM or end user, as well as to distributors.

       TROUBLED FINANCIAL CONDITION AND MANAGEMENT'S PLANS
       The Company has experienced a net loss of $1,208,639 for the year ended
       December 31, 2000, has a working capital deficit of $5,084,317 and
       stockholders' deficiency of $3,587,740 at December 31, 2000.

       As of March 7, 2001, management's plans and objectives to improve the
       financial condition of the Company are as follows:

       *      Expand the volume of business in the factory automation segments
              of the market, most notably with their newly developed customer
              base - PRI Automation, Kollmorgan and MTI.

       *      Expand the volume of business in factory automation and motion
              control with their acquired business units - factory conveyor
              systems and rare earth magnetics.

       *      Reduce overhead by consolidating the operations of its acquired
              companies into the Company's facility located in Hopkins,
              Minnesota.

       *      Renegotiate the Company's debt structure to substantially reduce
              their interest rates.

       *      Control costs and expenses commensurate with the Company's current
              sales levels in an effort to generate cash flows from operations.

       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 (Note 4). 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.


                                       28
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

2.     SIGNIFICANT ACCOUNTING POLICIES

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

       PROPERTY, PLANT AND EQUIPMENT
       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.

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

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

       CARRYING VALUE OF FINANCIAL INSTRUMENTS
       The carrying value of the Company's financial instruments approximates
       fair value at December 31, 2000 and 1999.

       NET LOSS PER SHARE
       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 year ended December 31, 2000 and 1999
       were excluded from the computation of diluted earnings per share as their
       effect would be anti-dilutive.

       STOCK-BASED COMPENSATION
       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.

       USE OF ESTIMATES
       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


                                       29
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

       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.

       SELF-FUNDED EMPLOYEE MEDICAL BENEFITS
       The Company participates in a self-insured employee health insurance plan
       administered by an outside party. The Company is required to pay up to
       $25,000 of annual medical claims per participant. At December 31, 2000,
       the Company is required to pay up to approximately $337,000 in annual
       plan medical claims before its stop-loss insurance begins. The annual
       plan medical claims will vary depending upon the number of employees and
       their level of participation.

3.     SELECTED BALANCE SHEET INFORMATION

       ACCOUNTS RECEIVABLE, NET                       2000            1999

       Accounts receivable                       $  1,992,291    $  1,550,036
       Less allowance for doubtful accounts
         and sales returns                           (177,500)       (262,000)
                                                 ------------    ------------

                                                 $  1,814,791    $  1,288,036
                                                 ============    ============


       INVENTORIES, NET

       Raw materials and supplies                $  1,146,315    $    619,622
       Work-in-process                                909,771       1,403,329
       Less allowance for obsolete inventories       (158,000)       (735,000)
                                                 ------------    ------------

                                                 $  1,898,086    $  1,287,951
                                                 ============    ============


       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                      8,029,482       8,026,821
       Equipment under capital leases               1,515,944       1,500,883
                                                 ------------    ------------

                                                   13,127,619      13,109,897
       Less accumulated depreciation               (9,514,588)     (9,131,346)
       Less accumulated amortization                 (792,983)       (575,817)
                                                 ------------    ------------

                                                 $  2,820,048    $  3,402,734
                                                 ============    ============


       ACCOUNTS PAYABLE
       In July 2000, the Company presented a settlement offer to its trade
       creditors. The settlement plan required certain 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.

       Approximately 62.4% of the trade creditors responded to the settlement
       offer and approximately $602,000 of trade creditor balances has been
       settled under the offer. Of the total settlement amount


                                       30
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

       of $602,000, approximately $331,000 relates to amounts outstanding at
       December 31, 1999. The Company recorded a gain of approximately $602,000
       as a result of these trade creditor settlements in the fourth quarter of
       fiscal 2000. The Company is continuing to pursue additional settlements
       with the non-responding trade creditors.

4.     FINANCING ARRANGEMENTS

       Financing arrangements at December 31, 2000 and 1999, consisted of the
       following:

<TABLE>
<CAPTION>

                                                                         2000          1999
<S>                                                                  <C>            <C>
Senior debt:
    Asset-based line of credit, payable to bank, due on demand
        The weighted average interest rate of asset-based line
        of credit borrowings was 10.13% and 10.56% for the years
        ended December 31, 2000 and 1999, respectively. (a)          $ 1,223,000    $ 2,764,927

    Term note, payable to bank. (a)                                           --      2,186,667
    Term note, payable to bank. (a)                                           --        184,500
    Term loan A, payable to bank. (a)                                  2,745,960             --
    Term loan B, payable to bank. (a)                                  1,100,000             --
    Term loan C, payable to bank. (a)                                  1,325,000             --
    Term note, payable to bank. (a)                                      250,000             --

Subordinated debt:
    Debentures payable (primarily due to the Company's
        key management and members of the Board of Directors),
        interest at 13%, payable monthly beginning March 1999;
        principal due December 2001                                      377,920        355,840

    Note payable due to an individual with interest at 12% per
        annum, due on January 19, 2000                                        --        200,000

    Note payable due to a related party for the purchase of
        inventories and accounts receivable of a company owned
        by a major shareholder of the Company. This note bears
        interest at 8% with all principal and interest payable
        in December 2003                                                 376,693             --

    Notes payable in monthly principal and interest installments,
        with interest ranging from 5.9% to 15.03%. Notes mature
        from March 2000 to December 2003, and are collateralized
        by equipment with an aggregate carrying value of
        approximately $725,000 at December 31, 2000. Certain of
        these notes payable agreements contain subjective material
        adverse change clauses under which the notes could become
        currently due and payable. Collateralized by certain
        equipment                                                        702,776        877,531
                                                                     -----------    -----------
Total debt                                                             8,101,349      6,569,465

Less senior debt                                                      (6,643,960)    (5,136,094)
Less current maturities of subordinated debt                            (405,270)      (644,216)
                                                                     -----------    -----------

Subordinated debt, less current maturities                           $ 1,052,119    $   789,155
                                                                     ===========    ===========
</TABLE>


                                       31
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(a)    In October 2000, the Company entered into an amended and restated senior
       credit agreement. The credit facilities under the credit agreement
       consist of an asset-based line of credit with availability of up to
       $1,500,000, 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 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 and is payable in full in October 2002. Term Loan A bears interest
       at a fixed rate of 10% per year and is payable in monthly principal
       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 through
       January 2001. Effective February 2001, Term Loan B is payable in monthly
       principal installments of $36,500 with a final balloon payment due in
       January 2004. On November 1, 2000 and for each month thereafter, interest
       will be paid monthly on Term Notes A and B, in addition to the principal
       payments noted. 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.

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

       The senior debt obligations have scheduled maturity dates; however, their
       borrowings are due on demand; accordingly, they have been classified as
       current in the Company's December 31, 2000 and 1999, balance sheets.



The aggregate maturities of the subordinated debt at December 31, 2000 are as
follows:

       2001                                                $ 404,963
       2002                                                  230,146
       2003                                                   67,667
       2004                                                       --
                                                           ---------

                                                           $ 702,776
                                                           =========


                                       32
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

5.     STOCKHOLDERS' EQUITY (DEFICIENCY)

       PRIVATE PLACEMENT
       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
       approximately $800,000.

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

       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.

       STOCK OPTION PLANS
       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 625,000 at December 31, 2000 and
       1999, 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:


                                       33
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      WEIGHTED
                                                                       AVERAGE
                                                         OPTIONS      EXERCISE
                                                       OUTSTANDING      PRICE
<S>                                                       <C>          <C>
Balances, December 31, 1998                               407,917      $1.96

Cancelled                                                (187,214)     $1.71
Granted                                                    47,000      $0.46
Exercised                                                    (500)     $0.42
                                                       ----------

Balances, December 31, 1999                               267,203      $1.83

Cancelled                                                 (27,562)     $2.48
Granted                                                    10,000      $0.25
Exercised                                                      --
                                                       ----------

Balances, December 31, 2000                               249,641      $1.35
                                                       ==========

Options exercisable at December 31, 2000                  198,141      $1.43
                                                       ==========
</TABLE>

       The following table summarizes information about fixed price stock
       options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                      ---------------------------    ----------------------------
                                        WEIGHTED
                                         AVERAGE
                        OPTIONS         REMAINING       WEIGHTED          NUMBER        WEIGHTED
                      OUTSTANDING      CONTRACTUAL      AVERAGE       EXERCISABLE AT     AVERAGE
     RANGE OF         DECEMBER 31,        LIFE          EXERCISE       DECEMBER 31,      EXERCISE
 EXERCISE PRICES         2000           (MONTHS)         PRICE             2000           PRICE
<S>                     <C>                <C>           <C>             <C>              <C>
$0.25 - $0.515625       174,000            94            $0.46           174,000          $0.46
$0.6250 - $0.9375        99,641            72            $0.81            49,641          $0.80
  $2.25 - $3.375         18,500            70            $2.44            17,000          $2.45
 $4.25 - $4.4375         30,000            44            $4.38            30,000          $4.38
$4.875 - $5.1875         27,500            60            $4.89            27,500          $4.89
</TABLE>


       STOCK-BASED COMPENSATION
       Had compensation cost for the Plans been determined based on the fair
       value of options at the grant date for awards in 2000 and 1999, the
       Company's pro forma loss and net loss per share would have been as
       follows:

<TABLE>
<CAPTION>
                                                      2000              1999
<S>                                              <C>               <C>
Net loss                                         $ (1,238,639)     $ (2,197,135)
                                                 ============      ============

Net loss per share                               $      (0.21)     $      (0.45)
                                                 ============      ============
</TABLE>


                                       34
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

       The weighted average grant-date fair value of options granted during 2000
       and 1999 was $.10 and $.49, respectively, which was determined using the
       Black-Scholes option pricing model with the following key assumptions:

<TABLE>
<CAPTION>
             ASSUMPTIONS                                2000              1999

<S>                                                     <C>            <C>
Risk free interest rates                                5.5%           4.9% - 5.9%
Volatility                                              600%              135%
Expected lives (months)                                  72                72
</TABLE>

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

       WARRANTS
       In connection with the private placement of debentures (Note 4) 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.

6.     INCOME TAXES

       The following table sets forth the components of the tax-effected
       deferred tax assets and liabilities at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                           2000            1999
<S>                                                   <C>              <C>
Net operating losses available for carryforward
      (expire 2004 to 2020)                           $ 13,500,000     $ 12,340,000
Accelerated depreciation for tax reporting purposes        (80,000)        (101,000)
Other future deductible temporary differences, net         100,000          335,000
                                                      ------------     ------------

Net deferred tax asset before valuation allowance       13,520,000       12,574,000

Valuation allowance                                    (13,520,000)     (12,574,000)
                                                      ------------     ------------

                                                      $         --     $         --
                                                      ============     ============
</TABLE>

       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, 2000 and 1999, respectively.

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


                                       35
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                                    2000             1999
<S>                                                            <C>              <C>
Benefit at federal statutory rate                              $  (380,000)     $  (729,000)

Limitation of net operating loss carryforward benefit              380,000          729,000
                                                               -----------      -----------

      Income tax provision                                     $        --      $        --
                                                               ===========      ===========
</TABLE>

7.     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 did not provide for any 401(k) matching contributions and
       profit sharing contributions for the years ended December 31, 2000 and
       1999.

8.     SIGNIFICANT CUSTOMER INFORMATION

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

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

<TABLE>
<CAPTION>
                                                   2000                        1999
                                          ---------------------       ---------------------
                                             Amount         %           Amount          %
<S>                                       <C>             <C>         <C>             <C>
Customer A                                $4,687,025      43.5%       $5,929,098      51.6%

Customer B                                 1,045,691       9.7%        1,113,807       9.7%

Customer C                                 1,082,097      10.0%
</TABLE>


       Accounts receivable with these customers at December 31, 2000 and 1999
       totaled $822,442 and $594,329, respectively. Inventories related to
       production in process according to these customers' specifications at
       December 31, 2000 and 1999, were $762,373 and $655,368, respectively.

9.     ENVIRONMENTAL CONTINGENCY

       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


                                       36
<PAGE>


REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

       liable for the presence of these substances at the site nor is the
       Company able to assess its financial exposure if it is found liable.
       Because of financial conditions, no environmental work was performed
       during fiscal 2000. As of December 31, 2000, $15,000 has been accrued for
       the cost of additional environmental work.

10.    FOURTH QUARTER OPERATING RESULTS

       As a result of the Company analyzing their inventories and performing the
       annual physical inventory, the Company identified several inventory items
       that were either slow moving or obsolete. Accordingly, the Company
       recorded a charge of $530,000 to operations in the fourth quarter of
       1999.

11.    SUBSEQUENT EVENT

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


                                       37
<PAGE>


                           REUTER MANUFACTURING, INC.

                         EXHIBIT INDEX TO ANNUAL REPORT

                                 ON FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000


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, 1995 (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)

3.3    Certificate of Designation filed
       on October 12, 2000 by Reuter
       Manufacturing, Inc................... Incorporated by reference to
                                             Exhibit 10.3 to the Company's
                                             Current Report on Form 8-K, dated
                                             October 24, 2000 (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 Reuter
       Manufacturing, Inc., 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
       Reuter, Inc., 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
       Reuter, Inc.........................  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   Summary of options granted under
       Directors Stock Option Plan.........  Incorporated by reference to
                                             Exhibit 10.4 to the Company's
                                             Annual Report on Form 10-KSB for
                                             the year ended December 31, 1994
                                             (File No. 0-1561)


                                       38
<PAGE>


Item No.   Item                              Method of Filing
--------   ----                              ----------------

10.4    1991 Non-Employee Director Stock
        Option Plan......................... Incorporated by reference to
                                             Exhibit 10.4 to the Company's
                                             Annual Report on Form 10-K for the
                                             year ended December 31, 1993 (File
                                             No. 0-1561)

10.5    Summary of options granted under
        1991 Non-Employee Director Stock
        Option Plan......................... Incorporated by reference to
                                             Exhibit 10.5 to the Company's
                                             Annual Report on Form 10-K for the
                                             year ended December 31, 1993 (File
                                             No. 0-1561)

10.6    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)

10.7    Summary of Options granted Under
        1991 Stock Option Plan.............. Incorporated by reference to
                                             Exhibit 10.9 to the Company's
                                             Annual Report on Form 10-KSB for
                                             the year ended December 31, 1994
                                             (File No. 0-1561)

10.8    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)

10.9    Option Agreement between Edward E.
        Strickland and the Company.......... Incorporated by reference to
                                             Exhibit 10.10 to the Company's
                                             Annual Report on Form 10-K for the
                                             year ended December 31, 1991 (File
                                             No. 0-1561)

10.10   Consulting Agreement with Edward
        E. Strickland....................... Incorporated by reference to
                                             Exhibit 10.6 to the Company's
                                             Annual Report on Form 10-K for the
                                             year ended December 31, 1990 (File
                                             No. 0-1561)

10.11   Independent Contractor Agreement
        Dated as of November 2, 1992,
        Between Taylor Consultants, Inc.
        and the Company..................... Incorporated by reference to
                                             Exhibit 10.30 to the Company's
                                             Annual Report on Form 10-K for the
                                             year ended December 31, 1992 (File
                                             No. 0-1561)


                                       39
<PAGE>


Item No.   Item                              Method of Filing
--------   ----                              ----------------

10.12   Release and Termination Agreement,
        dated April 18, 1997, among Edward
        E. Strickland, James W. Taylor and
        the Company......................... Incorporated by reference to
                                             Exhibit 10.5 to the Company's
                                             Quarterly Report on Form 10-QSB,
                                             for the quarter ended March 31,
                                             1997 (File No. 0-1561)

10.13   Environmental and ADA
        Indemnification Agreement, dated
        December 3, 1997, between Reuter
        Manufacturing, Inc. and U.S. Bank
        National Association................ Incorporated by reference to
                                             Exhibit 10.7 to the Company's
                                             Current Report on Form 8-K, dated
                                             December 18, 1997 (File No. 0-1561)

10.14   Environmental Letter of
        Undertaking, dated December 3,
        1997, between Reuter
        Manufacturing, Inc. and U.S. Bank
        National Association................ Incorporated by reference to
                                             Exhibit 10.8 to the Company's
                                             Current Report on Form 8-K, dated
                                             December 18, 1997 (File No. 0-1561)

10.15   Securities Purchase Agreement,
        dated October 10, 2000, by and
        among Reuter Manufacturing, Inc.
        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)

10.16   Amended and Restated Credit
        Agreement, dated October 10, 2000,
        by and between Reuter
        Manufacturing, Inc. and U.S. Bank
        National Association................ Incorporated by referenced to
                                             Exhibit 10.4 to the Company's
                                             Current Report on Form 8-K, dated
                                             October 24, 2000 (File No. 0-1561)

10.17   Amended, Restated and Consolidated
        Mortgage, Security Agreement,
        Assignment of Leases and Rents and
        Fixture Financing Statement, dated
        October 10, 2000 by and between
        Reuter Manufacturing, Inc. and
        U.S. Bank National Association...... Incorporated by reference to
                                             Exhibit 10.5 to the Company's
                                             Current Report on Form 8-K, dated
                                             October 24, 2000 (File No. 0-1561)

10.18   Security Agreement, dated October
        10, 2000, by and between Reuter
        Manufacturing, Inc. and U.S. Bank
        National Association................ Incorporated by reference to
                                             Exhibit 10.6 to the Company's
                                             Current Report on Form 8-K, dated
                                             October 24, 2000 (File No. 0-1561)


                                       40
<PAGE>


Item No.   Item                              Method of Filing
--------   ----                              ----------------

10.19   $6,800,000 Amended and Restated
        Note, dated October 10, 2000,
        given by Reuter Manufacturing,
        Inc. to U.S. Bank National
        Association......................... Incorporated by reference to
                                             Exhibit 10.7 to the Company's
                                             Current Report on Form 8-K, dated
                                             October 24, 2000 (File No. 0-1561)

10.20   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.................... Filed herewith electronically

21.1    Subsidiaries of the Company......... Incorporated by reference to
                                             Exhibit 21.1 to the Company's
                                             Annual Report on Form 10-KSB, for
                                             the year ended December 31, 1996
                                             (File No. 0-1561)

23.1    Consent of Virchow, Krause &
        Company, LLP........................ Filed herewith electronically


                                       41