**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-KSB

**x**               ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Fiscal Year Ended December 31, 2003**

**o**                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                                     to                                           .**

**CommissionFile No.: 0-1561**

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MAGSTAR TECHNOLOGIES, INC.

(Exact name of registrantas specified in its charter)

| **Minnesota**(State or other jurisdiction of  incorporation or organization)          | ** ** | **41-0780999**(I.R.S. Employer  Identification No.) |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| **410 11th Avenue South  Hopkins, Minnesota**(Address of principal executive offices) | ** ** | **55343**(Zip Code)                                 |

 

Registrant’s telephonenumber, including area code: **(952) 935-6921**

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, par value$0.1875 per share**

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Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. YES x  NO o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB orany amendment to this Form 10-KSB. o

The Registrant’s revenuesfor the fiscal year ended December 31, 2003 were $6,230,898.

The aggregate market valueof the common stock of the Company held by non-affiliates as of March 12,2004 was approximately $5,162,000 (based on the last sale price of the commonstock on that date).

The total number of sharesof the Company’s common stock outstanding on March 12, 2004 was 9,040,173shares.

TransitionalSmall Business Disclosure Format (Check one): YES o NO x

 

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**PART I**

**Forward Looking Statements**

*The information inthis discussion may contain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statementsinvolve risks and uncertainties, including statements regarding the Company’scapital needs, business strategy and expectations. Any statements that are notof historical fact may be deemed to be forward-looking statements. Theseforward-looking statements involve substantial risks and uncertainties. In somecases you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”“predict,” “potential,” or “continue”, the negative of such terms or othercomparable terminology. Forward-looking statements in this Report also includereferences to anticipated sales volume and product margins, efforts aimed atestablishing new or improving existing relationships with customers, otherbusiness development activities, anticipated financial performance, businessprospects and similar matters. Actual events or results may differ materiallyfrom the anticipated results or other expectations expressed in theforward-looking statements. In evaluating these statements, you should considervarious factors, including the risks included from time to time in otherreports or registration statements filed with the United States Securities andExchange Commission. These factors may cause the Company’s actual results todiffer materially from any forward-looking statements. The Company disclaimsany obligation to publicly update these statements, or disclose any differencebetween actual results and those reflected in these statements. Suchinformation constitutes forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 which provides a safe harborfor forward-looking statements.*

*In addition, the Company has historically had a highconcentration of business with one major customer and reductions in scheduledshipments to this customer were partially responsible for the losses fromoperations during 2002 and 2003. There can be no assurance that this customerwill resume shipments to prior or expected levels in the future. The risks anduncertainties the Company faces include, but are not limited to, the ability toexpand product offerings and to develop a reputation in manufacturing productsfor select industries such as medical industries, as well as the risks anduncertainties described in “Management’s Discussion and Analysis or Plan ofOperations” in this Report.*

**Item 1. DESCRIPTION OF BUSINESS.**

***Business Overview***

MagStar Technologies, Inc. (“MagStar” or the “Company”)is a publicly owned company headquartered in Hopkins, Minnesota that tradeslocally, over the counter, under the symbol “MGST”. MagStar Technologies is aprototype developer and manufacturer of centrifuges, conveyors, medicaldevices, spindles, and sub assemblies. MagStar’s technical abilities in design,process, and manufacturing specialize in the “concept-to-production” processdesigned to result in short manufacturing cycles, high performance, and costeffective products such as electro-mechanical assemblies and devices for overtwo dozen medical, magnetic, motion control, and industrial original equipmentmanufacturers (“OEMs”). The Company strives for a unique identity as itemphasizes its design and manufacturing engineering capabilities, partnering withcustomers, providing engineering solutions and machining, manufacturing, andassembly services for efficiently manufactured, long life assemblies.

See “Item 2. Description of Property” below forinformation regarding the sale and leaseback of the Company’s executive officeand manufacturing facilities in February 2003.

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

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

***Products and Services***

MagStar offers a range ofdesign for manufacture, machining and assembly services and specializes in thefollowing areas:

**CentrifugalSeparation and Filtering.**

Centrifugal separation andfiltering is a method for separating and removing both mineral particulate andbiological material from a large variety of liquids. This technology is appliedto MagStar’s production of blood and industrial oil centrifuge assemblies.Blood centrifuge assemblies and devices allow for high-speed separation ofblood into various components. These centrifuges can be used in operatingrooms, laboratories and blood banks. Industrial oil centrifuges facilitateincreased drain intervals and oil purification for engine operation. Oilcentrifuges are used in marine engines, over the road trucking, power generation,and oil and gas production. Current centrifuge product projects include bloodcentrifuges, proprietary oil centrifuges, private label oil centrifuges, watercentrifuges, gaseous/vapor centrifuges, fuel line centrifuges, and industrialcentrifuges (coolants/lubrication).

**Conveyors**

MagStar’s QuickdrawConveyor product line is marketed to automation integrators, process upgrades,and OEMs, whose goal is to automate a process that was once accomplishedmanually. Typical processes include factory assembly, inspection, testing, andpackaging. Industries seeking these products include high-tech manufacturers,semi-conductor, microelectronics, biotech, and automotive. These industries arecontinually striving to increase productivity, decrease rejected products, andminimize workers exposure to strenuous and tedious operations or hazardousenvironments. MagStar makes four types of modular, low profile conveyorsystems, three with slip roller accumulation and one with a belt edge drive.All provide electrostatic discharge protection, low power consumption, and areclean room certified. MagStar’s patent pending clean room conveyor, the CRSeries, is a low profile, ultra clean design for high tech clean roommanufacturing.

**Spindles/MotionControlled Devices:**

Motion control devices arepredominantly high-speed spindles for assemblies whose uses range from siliconwafer saws to printed circuit board saws, routers, and optical inspectionsystems. The Company’s spindles positionvarious devices allowing for greater flexibility in the customer’s designatedprocesses. One customer’s spindle application includes electronicallycontrolled feedback devices and is used in optical inspection systems. Anotherspindle manufactured for a customer controls various medical nuclear imagingdevices on gantry-mounted systems. In another medical application, the Company’sspindles lift a patient table and position it through advanced optical imagingscanners.

**Precision MagnetAssemblies**

The Company buildsprecision magnet assemblies for aerospace, medical, and motion controlledapplications. These assemblies generally include high-energy permanent magneticmaterial that may be components of machined parts or sub assemblies of rotors,pumps, stators, motors, and directional control devices.

***Technology***

MagStar has technicalabilities in the following areas:

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**High TechCentrifugal Separation Design and Manufacturing.**

High tech centrifugalseparation design and manufacturing involve high-speed electrical motors,precision manufacturing, and precision assembly abilities. This knowledge isapplied to design and manufacture technological applications. Theseapplications generally involve high-speed rotation while generating minimalnoise, heat, and vibration.

**Conveyor Design andManufacturing**

Conveyor and roboticmovement devices tend to require fast orientation and movement, minimum surfacecontrast and high-density boards and chips. MagStar aims to meet these needswith its high tolerance machining and assembly skills, its edge belt handlingtechnology, and its skills in servomotor control feedback. Production ofunwanted particulate can be a side effect of using conveyor devices inmanufacturing. MagStar’s patent pending clean room conveyor technology isdesigned to solve customer’s problems in dealing with clean room requirements.

**Spindle Design andManufacturing**

Spindles are a technologythat MagStar delivers to the Motion Control market. Spindles are precisionelectrical motor-based devices. MagStar manufactures and designs spindles thatrotate from 1,000 up to 40,000 RPMs. Spindles are similar to motors usedto power its centrifugal devices and typically include a DC brushless electricmotor, bearings, and a feedback/control device all driving a shaft that engagessomething else. For example, in a centrifuge, the motor-driven shaft engagesthe container holding fluid which centrifugal force is being applied. MagStar’sspindles are especially well known for generating minimal noise, vibration, andheat. The skills and technology that this type of manufacturing requiresinclude strong engineering, precision, and specialized assembly.

**New Generation HighEnergy Magnetic Materials**

New generation high energymagnetic materials require higher speed performance, improved torquetransmission and improved holding power. MagStar’s magnet assemblies usebonding capabilities and custom matching of materials to specific applicationsenhancing performance for its customers.

***Markets***

MagStar supplies itsproducts and services to OEMs in the following markets:

**Medical**

MagStar is a manufacturerof blood separation devices used in analysis and component isolation of wholeblood. The primary customer is a leading supplier of automated blood processingsystems which provides readily available blood components for pharmaceuticaluse or patient transfusions. The products are used in many of the world’s bloodbanks, laboratories, and in operating rooms. Other blood centrifugeapplications include the market for thrombin-based orthobiologics.

**Combustion Engines**

MagStar manufactures anengine oil centrifuge used primarily by OEMs on both stationary andnon-stationary engines of 150 hp and above. The centrifuges are also an aftermarket addition to oil field engines and power generators. The centrifuge isdesigned to provide filtration to .5 micron, the ability to recover and analyzeparticulate for preventive maintenance, and the Company is developing thecentrifuge’s efficiency for soot removal. The oil centrifuge also uses MagStar’scentrifuge technology. Markets that use this technology include powergeneration, gas and oil production, marine engines, over the road trucking, andoff road and construction equipment.

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**Filtration/HighTech Separation**

MagStar is a manufacturerof centrifugal separation and filtering devices used with a variety of liquidsincluding water and gaseous streams. These devices are used to remove a varietyof mineral particulate and biological material.

**High TechManufacturing**

MagStar’s conveyor lineprovides solutions for a variety of markets, usually integrated into largermanufacturing solutions for markets such as semiconductors, wafer boards, flatscreen monitor components, pharmaceuticals, and medical devices.

**Motion Control**

MagStar is a supplier ofcustom spindle/electric motor assemblies for high technology applications.These applications require state of the art capabilities for large OEM marketleaders. Precision magnet assemblies and magnetizing capabilities along withprecision movement and placement systems from Quickdraw technology contributeto and broaden the Company’s capabilities.

***Sales and Marketing***

The Company’s sales and marketing effort is focused onthe strategic markets outlined above. The Company uses both an outside salesteam and regional representatives. The sales force is supported by anapplications design and manufacturing engineering team.

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

Marketing efforts focus ona reputation for high quality, precision assemblies that include blood andindustrial centrifuges, conveyor systems, spindles, and magnetic assemblies.Paid advertising and some trade shows are also used. MagStar’s website (*www.magstar.com*) provides in-depth descriptions of MagStar’ssales and products.

***Customers***

Blood centrifuge sales to MagStar’s largest customerwere at lower levels in 2003 than in 2002. In 2003, sales to this customer were$1,999,980 compared to $2,898,000, a decrease of $898,020 or 31%. Sales withthis customer were down due to decreased demand from their end users. Saleswith this customer are expected to remain at current levels and possiblyincrease in 2004. Sales to the Company’s second largest customer, and largestconveyor customer, were $671,000 in 2003, compared to $559,000 in 2002. Theincrease of $112,000 or 20% is due to greater demand from this customeroriginating in the semiconductor industry.

The Company generally doesnot provide extended payment terms to customers.

***Strategy***

MagStar seeks to become a technology leader incentrifuge, spindle, and conveyor design and production through steady growth,and demonstrating niche manufacturing abilities. The Company intends to achievesteady growth by identifying the Company’s core business, (centrifuges, spindles,and conveyors), seeking relationships that move beyond the manufacturing ofspecific parts and into the preparation of sub-assemblies and completedassemblies for its customers, developing a focus towards proprietary productsand away from contract manufacturing, and building long term, sustainablecomparative advantages over the Company’s competitors. The Company seeks tobecome involved with its customers early in their development and designprocess. This allows the Company to participate in the earlier, higher valueadded stage of product development and to establish a closer workingrelationship 

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with its customers. Thisalso is intended to lead to a stronger relationship with customers based on theCompany’s engineering and prototyping expertise.

The Company intends toachieve diversity in growth by adding new customers who wish to applycentrifuge technology to a variety of filtering and separating applications,and by growing and nurturing the conveyor business. The Company seeks to pursuea course investing in research and development that will lead to innovation andnew value propositions in the future, establishing a reputation and expertisefor product development.

***Supplies***

The raw materials used by the Company in itsmanufacturing operations are reasonably available. The Company seeks tomaintain multiple sources of the parts and materials it purchases fromsuppliers; however, certain significant customers limit and/or designatespecific suppliers. The availability of such parts and materials could affectthe Company’s ability to fill customers’ orders on a timely basis. Managementof the Company believes that the interruption of its relationships withsuppliers would not have a material adverse effect over the long-term, asparts and materials suitable for the production of the types of products theCompany manufactures would be available from other suppliers.

The Company generallymanufactures products to a customer’s specifications on a contract basis, andcarries minimal amounts of inventory to meet rapid delivery requirements ofcustomers.

***Competition***

The contract manufacturing, machining, and magneticbusiness in which the Company engages is highly competitive. Many competitorsof the Company have greater sales volume and resources than the Company. Theprincipal elements of competition are quality, service, delivery, price andmeeting customer requirements. The Company believes that it accounts for only asmall portion of aggregate national sales of the manufacturing service itprovides. The Company believes, however, that its strong engineering andmanufacturing capabilities give it a competitive advantage.

There are many OEM manufacturers of medical andindustrial centrifuges. However, the Company is not aware of any other contractmanufacturers that also have the ability to engineer and manufacture highspeed, precision, custom designed and highly cosmetic centrifuges for thesemarkets to the satisfaction of its customers. It believes that its high speed,high precision products give it the ability to compete effectively in thecentrifuge market.

The Company facescompetition from several national manufacturers of precision magnets, many ofwhich are capable of supplying magnet assemblies. With its complete engineeringand manufacturing capabilities, the Company can play a more significant role inits customers’ supply programs and benefit more directly from all of the valuethat is created in the manufacturing process. With regard to the Conveyorproduct group, there are many manufacturers of parts and components used inthese systems.

***Research and Development***

The Company conductscustomer funded research and development activities primarily related to designand prototype development of customers’ products and, to a lesser extent,products sold under the Company’s trade names. The Company also provides someengineering services to support its customers in the development of newproducts, including enhancements to current products. In 2003 and 2002, theCompany collected approximately $47,000 and $40,000 respectively, in researchand development fees. There were no significant expenses that were not customerfunded in 2003 or 2002, nor does the Company anticipate any such expenses in2004.

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***Intellectual Property***

The Company has two patents and one patent pending onits conveyor products. The Company has trademarks on its oil centrifuge productand conveyor products.

The Company has itsemployees sign confidentiality and nondisclosure agreements at the time ofhiring. The Company also requires certain vendors to sign such agreements.

***Backlog***

The Company makes productforecasts for future delivery based upon frequently updated information fromcustomers; such forecasts are then adjusted or replaced by actual purchaseorders or production releases. On December 31, 2003, the Company’s backlogof orders and releases was approximately $2.7 million, compared toapproximately $2.3 million on December 31, 2002. The Company’s backlogoften fluctuates because of blanket orders placed by customers who scheduledelivery of the product over future months. The usual period between receipt ofan order for a new assembly and the first delivery of the product by theCompany is 2 to 4 months. The delivery period for subsequent orders generallyis shorter. The Company believes its backlog is firm.

***Environmental Matters***

See “Item 3. LegalProceedings” below for information regarding environmental matters affectingthe Company.

***Employees***

As of December 31,2003, the Company had 58 employees, which includes 56 full time employees and 2part time employees. As of December 31, 2002, the Company had 65employees, which included 62 full time employees and 3 part time employees. Theexecutive officers and two other officers who may make significantcontributions to the business of the Company are not employees of the Company.See “Item 4A. Executive Officers of the Registrant.”

**ITEM 2. DESCRIPTION OF PROPERTY.**

The Company’s executiveoffices and manufacturing facilities are located at 410 Eleventh Avenue South,Hopkins, Minnesota. Until February 25, 2003, the Company owned thesefacilities and the approximately 7.5 acres of land on which the facilities arelocated. These facilities consist of approximately 110,000 square feet of whichapproximately 13,000 square feet are devoted to office space, and 97,000 squarefeet are devoted to manufacturing and warehousing. The Company considers thesefacilities to be well maintained, and in good operating condition, and believesthat such manufacturing facilities can accommodate anticipated future growth.On February 25, 2003, the Company sold the building to a related party,Hopkins Eleventh Avenue, LLC., and entered into a sale-leaseback arrangement.The Company entered into a 6.5-year gross lease with Hopkins EleventhAvenue, LLC. for the building and property at a monthly cost of $34,000increasing to $44,436 per month. On March 1, 2003, the Company alsosubleased approximately 30,000 square feet of its facility to an unrelatedparty for 18 months. The sublease provides an annual income of $4.55 per squarefoot, or $149,081 per year. See “Item 12. Certain Relationships and RelatedTransactions.”

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**ITEM 3. LEGAL PROCEEDINGS.**

During December 1997,when the Company undertook a Phase I and Phase II environmental assessment ofits manufacturing facility, soil boring and groundwater work indicated thepresence of potentially hazardous substances and petroleum products within thesoil and groundwater located beneath the site. The Company notified theapplicable regulatory agency (the Minnesota Pollution Control Agency), and isworking with that agency to resolve these issues. However, because the results arestill preliminary, the Company is not able to assess whether it will ultimatelybe held liable for the presence of these substances at the site nor is theCompany able to assess its financial exposure if it is found liable. During August 2001,additional investigation work to further define the extent of ground waterimpact was completed. The results are generally consistent with previous siteinvestigations. Further ground water investigation will be necessary to fullydefine the extent of ground water contamination. As of December 31, 2003,$15,000 has been accrued for the cost of additional environmental work. Groundwater investigation occurred quarterly during 2003 and is expected to concludein 2004 resulting in acceptable contaminate levels as determined by theMinnesota Pollution Control Agency.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

No matter was submitted toa vote of security holders during the fourth quarter of the fiscal year coveredby this Annual Report on Form 10-KSB, through the solicitation of proxiesor otherwise.

**ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.**

Theexecutive officers of the Company and their respective ages and offices held asof March 14, 2004, are as follows:
| **Name (age)**          | ** ** | ** **                                         | ** ** | **Position(s) with the Company** |
|-------------------------|------------|----------------------------------------------------|------------|----------------------------------|
| James L. Reissner  (64) |       | Chief Executive Officer,  President, and Secretary |
| Joseph A. Petrich (43)  |       | Treasurer and Chief  Financial Officer             |

 

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

Mr. Petrich has served asTreasurer and Chief Financial Officer since March 2002. Mr. Petrichalso serves as General Manager of the Activar Plastics Group, a subdivision ofActivar, Inc. The Activar Plastics Group includes Seelye Plastics, EilerPlastics, Circuit Chemistry, and Afton Plastics. He joined Seelye Plastics asOperations Manager in 1997 and became General Manager in 1998. Prior to joiningSeelye, Mr. Petrich was a controller for Frank W. Griswold and Companiesfrom 1980 through 1994. He has served as General Manger/Vice President ofSentry Technologies and Sentry Metal Forming from 1994 through 1995, and servedas Chief Financial Officer for Famous Dave’s of America from 1995 through 1996.Mr. Petrich is a graduate from Bethel College with a business managementdegree.

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

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

Kirby Bayerle (51) was appointedas Vice President—Sales and Marketing of the Company in September 2002. Mr. Bayerleis the General Manager of the Activar Construction Products Group, a 

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subdivisionof Activar, Inc. The Activar Construction Products Group includes JLIndustries, Hiawatha Inc., Samson Products, Air Louvers, Inc., ThomasIndustries, and Aztec Inc. Mr. Bayerle has served in this capacity since2003. Mr. Bayerle had served as General Manager of JL Industries,Hiawatha, and Aztec and Vice President of Sales and Marketing for Air LouversInc. and Samson Products since 1996. Mr. Bayerle has been with ActivarInc. since 1978 and is a graduate of the University of Minnesota with a degreein Business Administration and Economics.

Duane Bryngelson (42) wasappointed Vice President—Operationsof the Company in September 2002. Mr. Bryngelson is the GeneralManager of Bending Technologies and Comfort Ride, members of the Activar group.Mr. Bryngelson joined Bending Technologies in 1995 as the Director ofOperations and took over as Director of Sales as well in 1997, before receivinghis current and continuing role as General Manager in 1998. Mr. Bryngelsonserved as President of D & D Technical Design from 1991 to 1993 beforejoining Bending Technologies. Prior to his tenure at D & D TechnicalDesign, Mr. Bryngelson served as the Machine Shop Manager at HarmonyEngineering from 1983 to 1991.

**PART II**

**ITEM 5. MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS.**

***Market Information***

TheCompany’s Common Stock is traded in the local over-the-counter market (“OTCBulletin Board”) under the symbol “MGST.” The following table sets forth, foreach of the calendar periods indicated, the quarterly high and low bidquotations for the Company’s Common Stock quoted on the OTC Bulletin Board. Theprices in this table represent prices between dealers, and do not includeadjustments for retail mark-ups, markdowns or commissions and may not representactual transactions.
| ** ** | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------------|------------|----------|------------|---------|------------|
| 2003:      |       | First Quarter  |       | $        | .20        |    | $          | .05 |   |
|       |       | Second Quarter |       | $        | .20        |    | $          | .05 |   |
|       |       | Third Quarter  |       | $        | .60        |    | $          | .20 |   |
|       |       | Fourth Quarter |       | $        | .70        |    | $          | .30 |   |

 
| ** ** | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------------|------------|----------|------------|---------|------------|
| 2002:      |       | First Quarter  |       | $        | .50        |    | $          | .20 |   |
|       |       | Second Quarter |       | $        | .75        |    | $          | .45 |   |
|       |       | Third Quarter  |       | $        | .50        |    | $          | .10 |   |
|       |       | Fourth Quarter |       | $        | .45        |    | $          | .05 |   |

 

***Holders***

As of March 17, 2004there were approximately 1,092 registered record holders of the Company’sCommon Stock and 3 record holders of the Company’s Series A PreferredStock.

***Dividends***

No cash dividends were declared or paid by the Companyduring 2003 or 2002, and the Company does not intend to pay dividends on itsCommon Stock and Series A Preferred Stock in the foreseeable future. TheCompany is prohibited from paying dividends on its Common Stock underagreements with its senior lender.

See “Item 11. SecurityOwnership of Certain Beneficial Owners and Management.” below for EquityCompensation Plan Information.

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**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATIONS**

***General***

Through most of 2003, theCompany experienced sustained sales for its blood centrifuge models andconveyors to the Company’s largest customers compared to 2002. Sales of theCompany’s conveyor products began increasing in the third and fourth quartersof 2003 compared to 2002. There can be no assurance that sales to the Company’slargest customers will return to previous levels or that sales of otherproducts will be sufficient to allow the Company to achieve positive cash flowor profitability. The Company’s ability to continue as a going-concern isdependent on its ability to increase sales from current levels and maintainadequate margins on sales. If the Company is unable to increase sales fromcurrent levels and generate positive cash flows from operations, it would beunable to meet its debt service requirements and may be forced to ceaseoperations or may need to seek protection under U.S. bankruptcy laws.

***Critical Accounting Policies***

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

*General*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires general management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at thedates of the financial statements and reported amounts of revenues and expensesduring the reporting periods. The most significant estimates and assumptionsrelate to the valuation of inventory and the recognition of revenue. Actualamounts could differ from these estimates.

*Inventory Valuation*

The Company considersrecent historic usage and further demand in estimating its net realizable valueof its inventory. Inventory at December 31, 2003 reflects write-downs of$86,000. Should it be determined that write downs are insufficient, then theCompany would be required to record additional inventory write-downs, whichwould have a negative impact on gross profit.

*Revenue Recognition*

The Company recognizessales when products are shipped, collectability is probable and the sales priceis fixed or determinable.

***Results of Operations***

Total revenues for 2003 were $6,230,898, compared to$8,358,149 for 2002. Net sales for 2003 from medical, industrial, magnetic,high tech/contract manufacturing, and Quickdraw conveyors were, respectively,$2,272,189, $827,037, $568,275, $1,367,337, and $1,098,628. Net sales for 2002from medical, industrial, magnetic, high tech / contract manufacturing, andQuickdraw conveyors were, respectively, $4,071,330, $1,096,112, $1,064,122,$1,141,423, and $903,649. The Company’s net sales decreased by 25% in 2003 from2002, compared to a decrease in net sales of 14% in 2002 from 2001. An elementof the sales decrease for 2003 as compared to 2002 was due to less sales to theCompany’s significant customer, combined with reduced market demand in magnetsand high tech spindles. Sales are not subject to seasonal volatility.

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Cost of sales was $5,699,377 for 2003, compared to$9,014,804 in 2002, a decrease in the cost of sales of 37%. The decrease in thecost of sales is primarily due to better cost control, and improved managementof variable expenses, including labor and benefits, and process andproductivity improvement. Also, a soft manufacturing economy reduced sales andprofit margins in 2002. On February 25, 2003, MagStar Technologies, Inc.sold and leased back its headquarters and manufacturing facility in Hopkins,Minnesota. The purchaser was Hopkins Eleventh Avenue LLC (“Eleventh Avenue”),an affiliate of the Company’s largest shareholder. On March 21, 2001, theCompany entered into a sale-leaseback agreement on most of its equipment withActivar Properties, Inc. (“Lessor”), which is owned by a major shareholderof the Company. The result of this agreement reduced depreciation expense andincreased equipment lease expense for 2001, 2002, and 2003.

Gross profit was $531,521, or 9% for 2003, compared to$(656,655) or -7.9% in 2002. Thisincrease in gross profit was due to the factors discussed above.

Selling, general and administrative expenses were$746,621 or 12% of net sales in 2003, compared to $1,411,426 or 16.9% of netsales in 2002. The 47% decrease in selling, general and administrative expensesis due primarily to the factors discussed above regarding cost control.

As a consequence of the foregoing factors, the Companyhad an operating loss in 2003 of $215,100, compared to an operating loss of$2,068,081 in 2002, a decrease in operating loss of 90%.

Interest expenses in 2003 were $639,447, compared to$725,504 in 2002. This decrease is due to decreased borrowings and lower interestrates for 2003.

The effect of inflation on the Company’s results hasnot been significant.

The Company recorded a non-recurring gain, as OtherIncome, of $1,205,000 in the third quarter of 2003 due to the extinguishment ofdebt, labeled Term Loan C, with its senior lender. The Company had nonon-recurring gains or losses or extraordinary income or loss in 2002.

Net income for 2003 was $545,163 or $0.06 per basicshare, compared to a net loss of $2,681,304 or $0.31 per basic share for 2002.Net income for 2003 was $545,163 or $0.05 per diluted share, compared to a netloss of $2,681,304 or $0.31 per diluted share for 2002. Net income or loss isdue to the reasons discussed above.

The Company recorded netincome for 2003 but did not record a provision for income taxes. Generally, theCompany does not pay regular income taxes because of the availability of itsnet operating loss carry forwards.

***Liquidity and Capital Resources***

At December 31, 2003, the Company had a workingcapital deficit of $6,993,750, compared to a working capital deficit of$10,674,308 at December 31, 2002. The current ratio was 0.21 at December 31,2003, compared to .17 at December 31, 2002. The decrease in the workingcapital deficit and the increase in the current ratio are primarily due to adecrease in senior debt.

The Company had negative cash flows from operations of$1,724,766 for the year ended December 31, 2003, compared to negative cashflows from operations of $1,232,074 for the year ended December 31, 2002.The Company’s ability to meet its continuing cash requirements in the future isdependent on achieving adequate sales and margins from its manufacturingoperations.

Net cash provided by investing activities was$3,688,739 for the year ended December 31, 2003, compared to $0 for theyear ended December 31, 2002. This increase in 2003 was primarily due toproceeds generated from a sale and leaseback of most of the Company’s facilityin 2003.

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Net cash used in financingactivities was $1,963,973 for the year ended December 31, 2003, comparedto cash provided by financing activities of $1,232,074 for the year ended December 31,2002. The increase in net cash used in financing activities in 2003 was due topayments on indebtedness following the sale and leaseback of the Company’s facility.

*Preferred Stock*

On October 10, 2000, the Company completed aprivate financing (the “Financing”) pursuant to the terms of a SecuritiesPurchase Agreement dated October 10, 2000 (the “Securities PurchaseAgreement”) by and among the Company, Activar, Inc., James L. Reissner andMichael J. Tate (Activar, Reissner and Tate, collectively, the “Investors”).Pursuant to the Securities Purchase Agreement, the Company sold to theInvestors, and the Investors purchased from the Company, an aggregate of 3,500,000shares 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 convertiblePreferred Stock, par value $.1875 per share (“Series A Preferred”), all ata 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 Reissnerpurchased $700,000. The Shares were sold in a transaction exempt from theregistration requirements of the Securities Act of 1933, as amended (the “SecuritiesAct”), and are “restricted securities” within the meaning of Securities Act.

The Series APreferred is convertible at any time, without the payment of any additionalconsideration, into such number of fully paid and nonassessable shares ofCommon Stock as is determined by dividing $.1777778 by the conversion price ineffect at the time of any conversion and then multiplying such quotient by eachshare of Series A Preferred to be converted. The conversion price,initially $.1777778, is subject to adjustment for stock splits and otheractions affecting the capital structure of the Company. The Series APreferred generally votes with the Common Stock on matters submitted to theshareholders, with each share of Series A Preferred having that number ofvotes that is equal to the number of whole shares of Common Stock into whichsuch share of Series A Preferred is then convertible. The Series APreferred is entitled to 9% dividends in preference to any dividends paid onthe Common Stock, but such 9% dividends are payable only if, as and whendeclared by the Company’s board of directors.

*Equipment LeaseFinancing*

On March 21, 2001, the Company entered into two MasterEquipment Lease Agreements with Activar Properties, Inc. (“Lessor”), whichis owned by a major shareholder of the Company. Under these agreements, theCompany has leased two sets of equipment for terms of 61 months and 25 months,respectively, for monthly payments of $30,279 and $17,399, respectively. TheLessor has assigned its rights under these leases to its bank. The Companybelieves that the terms and conditions of these agreements are substantiallythe same as the terms and conditions on which it could have leased similarequipment from an unaffiliated third party. Proceeds from the sale were used topay off Term Note B in the principal amount of $1,027,000 plus accrued interestdue to the bank (Note 3) and pay off $540,034 owed to Activar, Inc. forequipment purchases. On January 1, 2003, the Company amended its equipmentlease reducing the payments to $45,646 for a term of 60 months. The Companybelieves that the terms and conditions of these agreements are substantiallythe same as the terms and conditions on which it could have leased similarequipment from an unaffiliated third party.

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*Affiliate Loans*

On January 21, 2002, the Company borrowed$500,000 from Richard F. McNamara on a term note bearing interest at 12%. Theinterest rate was lowered to 8% in October 2002. Interest is payablemonthly, with the principal balance due and payable on January 10, 2005. Mr. McNamarareceived warrants for the purchase of 250,000 shares of common stock of theCompany. Proceeds from this note were used to pay off $400,000 in debenturesissued in 1998 and 1999 and accrued interest thereon.

Throughout 2003 and 2002,the Company borrowed monies from Activar, Inc. to fund operations. Theseloans are due on demand and accrued interest at 10% through September 2002,at which time the interest rate was lowered to 6%. This lending arrangement wasconverted into a revolving credit arrangement with Richard F. McNamara andaffiliates on January 1, 2003 with interest remaining at 6%. The Companybelieves that the terms and conditions of the promissory notes given to Activarare at least as favorable as the terms and conditions on which the Companycould have obtained credit from an unaffiliated third party.

*Credit Agreement*

On October 10, 2000, the Company and US Bancorpentered into an amended and restated senior credit agreement consisting of anasset-based line of credit with availability of up to $1,750,000, and threeterm notes of $2,800,000, (“Term Note A”), $1,100,000 (“Term Note B”) and$1,325,000 (“Term Note C”). Although the line of credit was due October 2003,US Bancorp had the right to demand payment at any time. Because the creditfacilities agreement also included a subjective material adverse change clauseunder which the borrowings could become due and payable, the Company classifiedall of the amounts owing under the credit facilities at December 31, 2003and 2002 as current liabilities. In addition, although the term notes hadscheduled repayment dates, because they could be due upon demand in the eventthat US Bancorp required demand repayment under the credit facilities, theywere also classified as current liabilities.

On March 21, 2001, the Company paid Term Note Bin full, using proceeds from the sale-leaseback of fixed assets to a relatedparty.

On February 25, 2003, the Company paid off TermNote A to US Bancorp in the amount of $2,658,078 with proceeds from asale-leaseback arrangement with a related party, Hopkins Eleventh Avenue, LLC.

Term Note C was non-interestbearing and was due and payable in full on September 30, 2003. On August 7,2003, US Bancorp canceled Term Note C in exchange for 300,000 shares of theCompany’s restricted common stock. As a consequence of the transaction, theCompany recorded non-recurring income of $1,205,000 and $120,000 from the valueof common stock issued.

On October 16, 2003, the Company negotiated a thirdamendment of its amended and restated senior credit agreement, an extensionwith US Bancorp on the line of credit.

On January 6, 2004, theCompany negotiated a fourth amendment of its amended and restated senior creditagreement, an extension with US Bancorp on the line of credit. The extendedasset-based line of credit bears interest at the bank’s reference rate plus twopercent, has availability of $1,350,000 subject to a borrowing base limitationof 80% of the Company’s eligible accounts receivable plus 40% of raw materialsand 30% of finished goods. and will expire in June 2004. The credit facilitiesare collateralized by substantially all the assets of the Company.

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*FacilitiesSale/Leaseback*

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

The purchase price for the building and property was$3,700,000. The Company entered into a 6.5-year gross lease with EleventhAvenue for the building and property at a monthly cost of $34,000 increasing to$44,436 per month. In the transaction, the Company paid in full its mortgage onthe property with US Bancorp in the amount of $2,675,798, including accruedinterest. The mortgage had originally been entered into as security for TermLoan A under the provisions of the Company’s Credit Agreement with US Bancorpdated October 20, 2000.

As a result of the sale ofthe property, the Company recognized a gain on its balance sheet of $2,675,798,which will be realized over the life of the lease from Eleventh Avenue. TheCompany realized proceeds of $1,001,397, which was applied to the Company’sdebt to Activar Properties, Inc. and affiliates.

*EnvironmentalExpense*

During December 1997,when the Company undertook a Phase I and Phase II environmental assessment ofits manufacturing facility, soil boring and groundwater work indicated thepresence of potentially hazardous substances and petroleum products within thesoil and groundwater located beneath the site. The Company notified theapplicable regulatory agency (the Minnesota Pollution Control Agency), and isworking with that agency to resolve these issues. However, because the resultsare still preliminary, the Company is not able to assess whether it willultimately be held liable for the presence of these substances at the site noris the Company able to assess its financial exposure if it is found liable.During August 2001, additional investigation work to further define theextent of ground water impact was completed. The results are generallyconsistent with previous site investigations. Further ground waterinvestigation will be necessary to fully define the extent of ground watercontamination. As of December 31, 2003, $15,000 has been accrued for thecost of additional environmental work. Ground water investigation occurredquarterly during 2003 and is expected to conclude in 2004 resulting inacceptable contaminate levels as determined by the Minnesota Pollution ControlAgency.

*Expected CapitalNeeds for 2004*

The Company does notexpect capital needs in 2004 to exceed the capacity of its asset based line ofcredit as allowable receivable and inventory borrowing are expected to coveroperating requirements. While the asset based line of credit expires in June 2004,the Company believes it will be able to replace this facility. In addition,borrowing agreements with the Company’s major shareholder are expected toremain in place. The Company believes that cash from operations, renewal of andadvances from its credit facility and borrowings from its major shareholderwill provide enough liquidity for the next 12 months of operations.

***Business Conditions***

The Company recognized net income of $545,163 for theyear ended December 31, 2003, including non-recurring income of$1,205,000, and has a working capital deficit and stockholders’ deficiency of$6,993,750, and $9,033,914, respectively, at December 31, 2003.

Management’s plans and objectives to improve thefinancial condition of the Company are based on a strategy to become atechnology leader in centrifuge and conveyor design and production by being aproduct focused company, growing sales, reducing debt, and accumulating cash.

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Steady growth may be achieved by identifying theCompany’s core business, (centrifuges, spindles, and conveyors), seekingrelationships that move beyond the manufacturing of specific parts and into thepreparation of sub-assemblies and completed assemblies for its customers,developing a focus towards proprietary products and away from contractmanufacturing, and building long term, sustainable comparative advantages overcompetitors. The Company seeks to become involved with its customers early intheir development and design process allowing the Company to participate in theearlier, higher value added stage of product development and to establish acloser working relationship with its customers.

The Company intends to add new customers by applyingcentrifuge technology to a variety of filtering and separating applications,developing new spindle applications, and by growing and nurturing the conveyorbusiness. The Company seeks to pursue a course investing in research anddevelopment that will lead to innovation and new value propositions in thefuture, establishing a reputation and expertise for product development. TheCompany seeks to be identified as a centrifuge, spindle, and conveyormanufacturer and intends to focus on higher value added products that allow itto use its design, manufacturing, and engineering capabilities.

Cash control, cost management, and margin preservationare fundamental to the Company’s profitability. Any new corporate strategiesconsidered must be accountable to existing headcounts and capital resourcesmeaning the Company must resist strategies that require significant inflows ofcapital, unless capital can be prudently raised. Other priorities includerecapitalizing the balance sheet, generating liquidity, monitoring and changingprocesses to increase productivity, and strategically adding key managers andoperational expertise as required in a prudent and responsible manner. TheCompany also has excess capacity. Through mergers, acquisitions, and growth, itbelieves it can increase its revenues while incurring proportionally lessadditional overhead. By increasing productivity, improving cost control, andreducing expenses, keeping expenses in proportion to the Company’s currentsales level, the Company intends to achieve positive cash flow.

There can be no assurance that management will be ableto accomplish all of the above plans and objectives or achieve the necessaryimprovements in its cash flows and financial position to meet its obligationsas they become due. Senior management executive needs and expenses are expectedto increase in the future.

The Company’s ability to continue operations isdependent on its ability to increase sales and maintain adequate margins onsales, 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 currentlevels and generate positive cash flows from operations, it would be unable tomeet its debt service requirements and may be forced to cease operations orseek protection under U.S. bankruptcy laws.

Accordingly, there can beno assurance that the Company will continue as a going concern in its currentform. The financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty.

***Summary***

2003 sales were down from sales in 2002. However, theCompany feels that 2003 showed improvements over 2002 due to better managementof variable expenses, including labor, employee benefits, and process andproductivity improvements, in addition to broadening the customer base.Productivity improvements, cost control measures, profitability, and growingsales remain the highest priorities for the Company. While the results of 2003were below management’s expectations, the Company feels that it has establisheda trend in productivity improvement and cost control. There can be no assurancethat these achievements, actions, and future actions, if necessary, will besufficient for the Company to meet its continuing cash flow requirements in thefuture or return to profitability.

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Except for the historicalfinancial information reported above, this report contains forward-lookingstatements that involve risk and uncertainties, including references toanticipated and projected sales volume, the risk associated with establishingnew or improving existing relationships with customers of the Company, otherbusiness development activities, anticipated financial performance, businessprospects, and similar matters. In addition, the Company has a high concentrationof business with one major customer and any reduction in sales to this customermay affect net income. Because of these and other uncertainties, actual resultscould differ materially from those reflected in the forward-looking statements.

***Factors That May Affect Future Results***

*Dependence on Major Customers**.*   Sales wereprimarily affected by a significant reduction of $898,110 in orders frommedical and laboratory products customers. These reductions were driven bylower demand and excess inventories of their customers. Demand from the Company’smajor medical customer has decreased from 2002. The Company continues to takeorders from this major medical customer and expects overall business with thatcustomer to remain steady for 2004 or increase. However, no assurance can begiven that sales to this customer will reach or exceed the previous levels of2002. The Company has no production contracts with its major medical customerand believes that reductions in orders from this customer would have a materialadverse effect on its future operating results. The Company continues to pursuecustomer diversification to reduce dependence on sales to its significantcustomer.

*Dependence on New Products andContinued Growth in Sales Volume**.*   The Company’sfuture success will depend on its ability to retain current customers and addnew customers. While the Company puts a great deal of attention on contractmanufacturing, it also looks to develop new customers for products manufacturedunder its own trade names, Quickdraw conveyors and oil centrifuges. The Companylooks to obtain production orders for prototype products including motioncontrol, magnetic, spindle, and centrifuge assemblies, and maintain asatisfactory volume of orders for current customers. Shipments to a new bloodcentrifuge customer began in 2002 and research and development into newcentrifuge products occurred during 2003.

*Competition**.*   While theCompany believes its engineering capability is a competitive advantage, andthat it offers value added assistance and solutions for improved design,manufacturability and reliability of higher-level assemblies, customers withexisting products may not change from suppliers of discrete components. Companymanagement believes the Company represents only a small portion of theaggregate national sales of contract manufacturing services.

***Impact of Recent Accounting Pronouncements.***

***SFAS No. 149***

In April 2003, theFASB issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,” effective forcontracts entered into or modified after June 30, 2003. This amendmentclarifies when a contract meets the characteristics of a derivative, clarifieswhen a derivative contains a financing component and amends certain otherexisting pronouncements. The adoption of SFAS No. 149 did not have amaterial effect on the Company’s financial statements.

***SFAS No. 150***

In May 2003, the FASBissued Statement of Financial Accounting Standards (SFAS) No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003. SFAS No. 150requires 

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theclassification as a liability of any financial instruments with a mandatoryredemption feature, an obligation to repurchase equity shares, or a conditionalobligation based on the issuance of a variable number of its equity shares. TheCompany does not have any financial instruments as defined by SFAS No. 150.The adoption of SFAS No. 150 did not have a material effect the Company’sfinancial statements.

***FIN No. 46***

In January 2003, theFASB issued FASB Interpretation No. 46, “Consolidation of VariableInterest Entities” (FIN 46). FIN 46 states that companies that have exposure tothe economic risks and potential rewards from another entity’s assets andactivities have a controlling financial interest in a variable interest entityand should consolidate the entity, despite the absence of clear control througha voting equity interest. The consolidation requirements apply to all variableinterest entities created after January 31, 2003. For variable interestentities that existed prior to February 1, 2003, the consolidationrequirements are effective for annual or interim periods beginning after December 15,2003. Disclosure of significant variable interest entities is required in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest was created. The Company does not expect the adoption of FIN46 to have a material effect on the Company’s financial statements.

**ITEM 7. FINANCIAL STATEMENTS.**

Thefollowing Financial Statements and Report of Independent Accountants thereonare included herein (page numbers refer to pages in this Report):
| ** **                                                                                       | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------|------------|----------|
| Report  of Independent Auditors                                                                  |       | 27       |
| Balance Sheets as of December 31, 2003 and 2002                                             |       | 28       |
| Statements of Operations for the years ended  December 31, 2003 and 2002                    |       | 29       |
| Statements of Stockholders’ Deficiency for the  years ended December 31, 2003 and 2002 |       | 30       |
| Statements of Cash Flows for the years ended December 31,  2003 and 2002                    |       | 31       |
| Notes  to the Financial Statements                                                               |       | 32-44    |

 

**ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE.**

Not applicable.

**ITEM 8A. CONTROLS AND PROCEDURES.**

Management of the Company has evaluated, with theparticipation of the Chief Executive Officer and Chief Financial Officer of theCompany, the effectiveness of the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the endof the fiscal year covered by this Annual Report on Form 10-KSB. Based onthat evaluation, the Chief Executive Officer and Chief Financial Officer of theCompany have concluded that the Company’s disclosure controls and procedures asof the end of the fiscal year covered by this Annual Report on Form 10-KSBare effective to provide reasonable assurance that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission. However, due to the limitednumber of Company employees engaged in the authorization, recording, processingand reporting of transactions, there is inherently a lack of segregation ofduties. The Company periodically assesses the cost versus benefit of adding theresources that would remedy or mitigate this situation and currently, does not 

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considerthe benefits to outweigh the costs of adding additional staff in light of theoversight of the financial statements by senior management.

Management of the Companyhas also evaluated, with the participation of the Chief Executive Officer andChief Financial Officer of the Company, any change in the Company’s internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the fourth fiscalquarter of the fiscal year covered by this Annual Report on Form 10-KSB.There was no change in the Company’s internal control over financial reportingidentified in that evaluation that occurred during the fourth fiscal quarter ofthe fiscal year covered by this Annual Report on Form 10-KSB that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

**PART III**

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

**Directors of theRegistrant**
| **Name**            | ** ** | ** ** | **Age** | ** **                                                                       | **Position** |
|---------------------|------------|------------|---------|----------------------------------------------------------------------------------|--------------|
| Richard F. McNamara |       | 71         |    | Chairman of the  Board and Director                                              |
| James L. Reissner   |       | 64         |    | Director, Chief  Executive Officer, President, and Secretary                     |
| Michael J. Tate     |       | 65         |    | Director, former  President, Chief Executive Officer and Chief Financial Officer |

 

*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., acompany that operates as sixteen manufacturing divisions. Mr. McNamara hasbeen a director of various other companies including Rimage Corporation and TCFFinancial Corporation and is a member of the University of Minnesota Board ofRegents.

*Mr.**Reissner*waselected CEO in September 2001 and has served as Secretary of the Companyand as a director since October 2000. He also served as Chief FinancialOfficer from September 2001 to March 2002. Mr. Reissner becamePresident of the Company in October 2002. Mr. Reissner has beenPresident of Activar, Inc. since January 1996 and served as ChiefFinancial Officer of Activar from 1992 until becoming President. Mr. Reissneris a director of several other companies, including the Chairman of the Boardof Rimage Corporation and a member of the Board of Winland Electronics.

*Mr.**Tate* retired as Chief Executive Officer, President and ChiefFinancial Officer of the Company in September 2001. He has been a directorof the Company since April 1998. During 1999, another individual was ChiefFinancial Officer until he resigned that position in December 1999 atwhich time Mr. Tate, again, became Chief Financial Officer. Previously, heserved as Vice President/Chief Operating Officer of Minnesota ValleyEngineering from August 1996 until joining the Company.

**Executive Officers and Significant Employees of theRegistrant**

The information concerningexecutive officers of the Company is included in this Report under Item 4A,Executive Officers of the Registrant. Information regarding other personnel whomay make a significant contribution to the business of the Company is alsoincluded in that section.

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**Audit Committee; Audit Committee Financial Expert**

The Board of Directors of the Company has an AuditCommittee composed of James L. Reissner and Michael J. Tate. The AuditCommittee provides assistance to the Board in satisfying its fiduciaryresponsibilities relating to the accounting, auditing, operating and reportingpractices of the Company. The Audit Committee reviews the Company’s annualfinancial statements, the selection and work of the Company’s independentaccountants and the adequacy of internal controls for compliance with corporatepolicies and directives. The Audit Committee does not have a written charter.

Because Mr. Reissner is an executive officer andprincipal shareholder of the Company, Mr. Reissner would not be considered“independent” under the Securities and Exchange Commission definition of thatterm.

The Board of Directors has reviewed the education,experience and other relevant qualifications of Mr. Tate and hasdetermined that Mr. Tate meets the Securities and Exchange Commissiondefinition of an “audit committee financial expert” and would also beconsidered “independent” under the Securities and Exchange Commissiondefinition of that term.

The Board and AuditCommittee have not yet established procedures for the handling of complaintsregarding accounting, internal accounting controls or auditing matters.

**Compliance with Section 16(a) of theExchange Act**

Section 16(a) ofthe Securities Exchange Act of 1934 requires the directors and executiveofficers of the Company and all persons who beneficially own more than 10% ofthe outstanding shares of common stock of the Company to file with theSecurities and Exchange Commission initial reports of ownership and reports ofchanges in ownership of the common stock. Executive officers, directors andgreater than 10% beneficial owners are also required to furnish the Companywith copies of all Section 16(a) forms they file. Based upon a reviewof the copies of such reports furnished to the Company and upon otherinformation known to the Company, the Company believes that all filingrequirements applicable to its directors, executive officers and beneficialowners of more than 10% of the Company’s outstanding shares of common stockwere complied with during the fiscal year ended December 31, 2003, except thatKirby Bayerle, Vice President—Sales and Marketing of the Company, Duane Bryngelson,Vice President—Operations of the Company, and Jacqueline R. Millner, Controllerof the Company, were delinquent in filing statements on Form 3 upon beingappointed to such offices, and Messrs Bayerle and Bryngelson and Joseph A.Petrich, Treasurer and Chief Financial Officer of the Company, were delinquentin filing statements on Form 4 to report the receipt of options.

**Codeof Ethics**

The Company has adopted a Code of Ethics and BusinessConduct that applies to all directors, officers and employees, including theCompany’s Chief Executive Officer, Chief Financial Officer and Controller. Inaddition, the Company has a supplemental Code of Ethics for Senior [Financial]Executives. The Company’s Code of Ethics and Business Conduct and Code ofEthics for Senior [Financial] Executives are set forth as exhibits to thisAnnual Report on Form 10-KSB. In addition, copies of the Company’s Code ofEthics and Business Conduct and Code of Ethics for Senior [Financial]Executives may be obtained from the Company upon request to James L. Reissner,in his capacity as Secretary of the Company.

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**ITEM 10. EXECUTIVE COMPENSATION.**

**Summary of Cash andOther Compensation**

Thefollowing table provides summary information concerning cash and non-cashcompensation paid to or earned by the Company’s Chief Executive Officer andexecutive officers of the Company who received or earned cash and non-cashsalary and bonus of more than $100,000 for the fiscal year ended December 31,2003.

**SummaryCompensation Table**
| ** **                                     | ** ** | **Annual  Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **          | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------|------------|
| **Name and Principal Position** | ** ** | ** **               | ** ** | **Year**                    | ** ** | **Salary ($)** | ** ** | **Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation ($)** | ** ** |
| James L. Reissner(1)                           |       | 2003                     |       |                        | 0          |                |       |   | 0 |   |   |   | 0 |   |   |
| *Chief Executive Officer, President and*       |       | 2002                     |       |                        | 0          |                |       |   | 50,000 |   |   |   | 0 |   |   |
| *former  Chief Financial Officer*              |       | 2001                     |       |                        | 0          |                |       |   | 0 |   |   |   | 0 |   |   |
|                                                |            |                          |            |                             |            |                     |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Mr. Reissnerbecame Chief Executive Officer and Chief Financial Officer in September 2001,and President in October 2002. Mr. Reissner served as Chief FinancialOfficer until March 2002.

**Option Grants**

Nooptions to purchase Common Stock of the Company were granted to the namedexecutive officers of the Company during the fiscal year ended December 31,2003.

**Option Exercisesand Values of Unexercised Options**

Thefollowing table sets forth information regarding options to purchase CommonStock of the Company exercised by the named executive officers of the Companyduring the fiscal year ended December 31, 2003 and the number and value of unexercised optionsheld by them at that date.

**OptionExercises During Fiscal Year Ended December 31, 2003 andFiscal Year End Option Values**
| **Name**          | ** ** | ** ** | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Value   Realized ($)** | ** ** | **Number of  Unexercised  Options  At FY-end (#)  Exercisable/  Unexercisable** | ** ** | **Value of Unexercised  in-the-Money Options  at FY-end ($)  Exercisable/  Unexercisable(1)** | ** ** |
|-------------------|------------|------------|------------|-------------------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| James L. Reissner |       |       | 0          |                                            |       |                               | 0          |                                                                                           |       | 33,333 / 16,667                                                                                                        |       | $ | 22,333 / $11,167 |   |
|                   |            |            |            |                                                 |            |                                    |            |                                                                                                |            |                                                                                                                        |            |  |  |  |  |  |

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(1)          Theseamounts represent the difference between the exercise price of the in-the-moneyoptions and the market price of the Company’s Common Stock on December 31,2003. The last reported sale on the OTC Bulletin Board on that date was at$0.67. Options are in-the-money if the market value of the shares coveredthereby is greater than the option exercise price.

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**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.**

***Principal Shareholders and Beneficial Ownership ofManagement***

The following table setsforth information known to the Company with respect to the beneficial ownershipof each class of the Company’s capital stock as of March 14, 2004 for (1) eachperson known by the Company to beneficially own more than 5% of any class ofthe Company’s voting securities, (2) each of the executive officers namedin the Summary Compensation Table under the heading “Executive Compensation,” (3) eachof the Company’s directors and (4) all of the Company’s executive officersand directors as a group. Except as otherwise indicated, the Company believesthat each of the beneficial owners of the Company’s capital stock listed below,based on information provided by these owners, has sole investment and votingpower with respect to its shares, subject to community property laws whereapplicable.
| ** **                                                                         | ** ** | **Common Stock** | ** ** | **Series A Preferred  Stock** | ** ** | **Common  Stock and  Common  Stock** | ** ** | **Percent  of Total  Voting** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|------------------------------------|------------|
| **Name**                                                                           | ** ** | ** **            | ** ** | **Number**                              | ** ** | **Percent**                               | ** ** | **Number**                         | ** ** | **Percent** | ** ** | **Equivalents** | ** ** | **Power** | ** ** |
| Perkins Capital  Management  730 East Lake Street  Wayzata, MN 55391-1769          |       | 1,039,465             | (3)        |                                    | 11.4       | %                                         |       | —                             |       | 0.0 | % | 1,039,465 |   |   | 10.3 | % |   |
| Activar, Inc.  7808 Creekridge Circle  Suite 200  Minneapolis, MN 55439  |       | 2,187,500             | (4)        |                                    | 24.2       | %                                         |       | 625,000                            | (4)        | 62.5 | % | 2,812,500 |   |   | 28.0 | % |   |
| Richard F. McNamara  7808 Creekridge Circle  Suite 200  Minneapolis, MN 55439 |       | 2,470,833             | (5)        |                                    | 26.5       | %                                         |       | 625,000                            | (5)        | 62.5 | % | 3,095,833 |   |   | 29.9 | % |   |
| James L. Reissner  7808 Creekridge Circle  Suite 200  Minneapolis, MN 55439   |       | 3,095,833             | (6)        |                                    | 34.1       | %                                         |       | 875,000                            | (6)        | 87.5 | % | 3,970,833 |   |   | 39.4 | % |   |
| Michael J. Tate  410 11th Avenue South  Hopkins, MN 55343                          |       | 783,403               | (7)        |                                    | 8.6        | %                                         |       | 125,000                            |       | 12.5 | % | 908,403 |   |   | 9.0 | % |   |
| All executive  officers and  directors as a group  (4 persons)                     |       | 4,162,569             | (8)        |                                    | 43.6       | %                                         |       | 1,000,000                          |       | 100.0 | % | 5,162,569 |   |   | 48.9 | % |   |
|                                                                                    |            |                       |            |                                         |            |                                           |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

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(1)          As of March 14,2004, unless otherwise noted, all of the shares shown are held by individualsor entities possessing sole voting and investment power with respect to suchshares.

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

(3)          According to a Schedule13G/A, dated February 4, 2004, as filed with the Securities and ExchangeCommission, Perkins Capital Management, Inc. has sole voting power withrespect to 85,834 of such shares, and sole dispositive power over all such shares.

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(4)          Activar, Inc. hasshared dispositive and voting power with respect to such shares.

(5)          Includes 50,000 sharesof common stock that Mr. McNamara has the right to acquire within 60 daysupon the exercise of options and 250,000 shares of common stock that Mr. McNamarahas the right to acquire within 60 days upon the exercise of warrants. Includes2,187,500 shares held by Activar, Inc., with respect to which Mr. McNamarahas shared dispositive and voting power.

(6)          Includes 50,000 sharesof common stock that Mr. Reissner has the right to acquire within 60 daysupon the exercise of options. Includes 2,187,500 shares held by Activar, Inc.,with respect to which Mr. Reissner has shared dispositive and votingpower.

(7)          Includes 106,058 sharesof common stock that Mr. Tate has the right to acquire within 60 days uponthe exercise of options.

(8)          Includesan aggregate of 261,500 shares of common stock and 250,000 shares of commonstock that executive officers and directors have the right to acquire within 60days upon the exercise of options and warrants, respectively.

***Equity Compensation Plan Information***

The following table below presents the Company’sEquity Compensation Plan information as of December 31, 2003.
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights  (a)** | ** ** | **Weighted  average exercise  price of  outstanding  options, warrants  and rights  (b)** | ** ** | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding  securities reflected  in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 853,579    |                                                                                                                                      |       |                                                                                                          | $          | 0.48                                                                                                                                                                                                      |       |   |   | 1,271,421 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                      |       |                                                                                                          | $          | —                                                                                                                                                                                                    |       |   |   | — |   |   |
| Total                                                       |       |       | 853,579    |                                                                                                                                      |       |                                                                                                          | $          | 0.48                                                                                                                                                                                                      |       |   |   | 1,271,421 |   |   |

 

The Company has two equity compensation planscurrently in effect: its 2001 Stock Option Plan and its 2001 Employee Stock PurchasePlan. The Company also has its 1997 Non-Employee Directors Stock Plan.

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**ITEM 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

On March 21, 2001, the Company entered into twoMaster Equipment Lease Agreements with Activar Properties, Inc. (“Lessor”),an affiliate of Activar, Inc. Under these agreements, the Company leasedtwo sets of equipment for terms of 61 months and 25 months, respectively, formonthly payments of $30,279 and $17,399, respectively. The Lessor assigned itsrights under these leases to its bank. Proceeds from the sale were used to payoff a promissory note in the principal amount of $1,027,000 plus accruedinterest due under the Company’s bank credit agreement and to pay off $540,034owed to Activar, Inc. for equipment purchases. On January 1, 2003,the Company amended its equipment lease reducing the payments to $45,646 for aterm of 60 months. The Company believes that the terms and conditions of theseagreements are substantially the same as the terms and conditions on which itcould have leased similar equipment from an unaffiliated third party.

Since 2001, the Company has borrowed monies fromActivar, Inc. to fund operations. These loans are due on demand andaccrued interest at 10% through September 2002, at which time the interestrate was lowered to 6%. This lending arrangement was converted into a revolvingcredit arrangement with Richard F. McNamara and affiliates on January 1,2003 with interest remaining at 6%. The Company believes that the terms andconditions of the promissory notes given to Activar are at least as favorableas the terms and conditions on which the Company could have obtained creditfrom an unaffiliated third party. At December 31, 2003, the Company haddrawn $4,755,776 with this arrangement.

On January 21, 2002, the Company borrowed$500,000 from Richard F. McNamara, a director, Chairman and majorshareholder of the Company, on a term note bearing interest at 12%. Theinterest rate was lowered to 8% in October 2002. Interest is payablemonthly, with the principal balance due and payable on January 10, 2005. Mr. McNamarareceived warrants for the purchase of 250,000 shares of Common Stock of theCompany. Proceeds from this note were used to pay off $400,000 in debentures,which had been issued in 1998 and 1999 and accrued interest thereon. TheCompany believes that the terms and conditions of this financing aresubstantially the same as the terms and conditions on which the Company couldhave obtained similar credit from an unaffiliated third party.

On February 25, 2003, MagStar Technologies, Inc.sold and leased back its headquarters and manufacturing facility in Hopkins,Minnesota. The purchaser was Hopkins Eleventh Avenue LLC (“Eleventh Avenue”), awholly owned subsidiary of Activar Properties, Inc., which in turn iswholly owned by Mr. McNamara. The purchase price for the building andproperty was $3,700,000. The Company entered into a 6.5-year gross lease withEleventh Avenue for the building and property at a monthly cost of $34,000increasing to $44,436 per month. The proceeds of $1,001,397 realized by theCompany in the transaction were applied to reduce the Company’s debt to ActivarProperties, Inc. and affiliates. The Company’s outstanding balance toActivar Properties, Inc. and other affiliates of Mr. McNamara wasapproximately $5,512,918 as of February 28, 2003. James L. Reissner, thePresident of Activar Properties, Inc., is also a director and shareholderof the Company. The Board of Directors of the Company authorized thetransaction in order to reduce the indebtedness of the Company, provide workingcapital and improve cash flow. The transaction with Eleventh Avenue wasdetermined to be on better terms than could be obtained by the Company directlyfrom unaffiliated financing sources. The purchase price was based upon anindependent appraisal of the value of the property and building obtained by thebank which provided financing to Eleventh Avenue in connection with thetransaction.

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**PART IV**

**Item 13. EXHIBITSAND REPORTS ON FORM 8-K.**

**(a)****         Exhibits**

Theexhibits to this Report are listed in the Exhibit Index on pages 48 to 52of this Report.

A copy of any of theexhibits listed or referred to above will be furnished at a reasonable cost toany person who was a shareholder of the Company as of March 14, 2004, uponreceipt from any such person of a written request for any such exhibit. Suchrequest should be sent to MagStar Technologies, Inc., 410 EleventhAvenue South, Hopkins, Minnesota 55343, Attention: Investor Relations.

Thefollowing is a list of each management contract or compensatory plan orarrangement required to be filed as an Exhibit to this Report, the location ofwhich is indicated in the Exhibit Index of this Report:

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

(2)          DirectorsStock Option Plan of the Company

(3)          1991Non-Employee Director Stock Option Plan

(4)          1991Stock Option Plan, as amended

(5)          1997Non-Employee Director Stock Option Plan

(6)          2001Stock Option Plan

(7)          2001Employee Stock Purchase Plan

(8)          OptionAmendment Agreement, dated October 1, 2001 by and between Michael J. Tateand the Company

**(a)****         Reportson Form 8-K**

On October 31, 2003the Company filed a Report on Form 8-K to furnish information under thefollowing headings: Item 7. Financial Statements and Exhibits, (c) Exhibits,and Item 9. Regulation FD Disclosure.

**ITEM 14. PRINCIPALACCOUTNING FEES AND SERVICES.**

***Audit Fees***

Audit fees billed to theCompany by Virchow Krause & Company, LLP during the fiscal year ended December 31,2003 and for review of our quarterly report on Form 10-QSB and annualreviews on Form 10-KSB for the same fiscal year totaled $30,400.

***FinancialInformation Systems Design and Implementation Fees***

We did not engage VirchowKrause & Company, LLP to provide advice regarding financialinformation systems design and implementation during the last fiscal year.

***All Other Fees***

Fees billed or expected tobe billed to us by Virchow Krause & Company, LLP for all othernon-audit services, including tax-related services, provided during the lastfiscal year totaled $13,335.

***Audit Committee***

The audit committee meetsprior to filing of any Quarterly Report on Form 10-QSB, or Annual Reporton Form 10-KSB to approve those filings. In addition, the committee meetsto discuss audit plans and anticipated fees for audit and tax work prior to thecommencement of that work. Approximately 95% of all fees paid to ourindependent auditors are pre-approved by the audit committee.

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**SIGNATURES**

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.
| Dated: March 24, 2004 | MAGSTAR TECHNOLOGIES, INC.            |
|----------------------------|---------------------------------------|
|                       | /s/ James L.  Reissner                |   |
|                       | James L. Reissner                     |
|                       | President and Chief Executive Officer |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.
| ** **               | **Signature** | ** **                             | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|---------------|----------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ Richard F. McNamara  |          | Chairman of the Board  and             |       | March 24, 2004 |
| Richard F. McNamara      |          | Director                               |       |                |
| /s/ James L. Reissner    |          | Chief Executive Officer,  President,   |       | March 24, 2004 |
| James L. Reissner        |          | and Director (Principal Executive      |       |                |
|                     |          | Officer)                               |       |                |
| /s/ Michael J. Tate      |          | Director                               |       | March 24, 2004 |
| Michael J. Tate          |          |                                   |       |                |
| /s/ Joseph A. Petrich    |          | Treasurer and Chief  Financial Officer |       | March 24, 2004 |
| Joseph A. Petrich        |          | (Principal Financial Officer)          |       |                |
| /s/ Jacqueline R. Milner |          | Controller                             |       | March 24, 2004 |
| Jacqueline R. Milner     |          |                                   |       |                |

 

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**MagStar Technologies, Inc.Years Ended December 31, 2003 and 2002**

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**REPORTOF INDEPENDENT AUDITORS**

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

We have audited the accompanying balance sheets ofMagStar Technologies, Inc., as of December 31, 2003 and 2002 and therelated statements of operations, stockholders’ deficiency and cash flows forthe years then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management as wellas evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofMagStar Technologies, Inc. as of December 31, 2003 and 2002, and theresults of its operations and cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States of America.

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1 to the financialstatements, the Company has suffered recurring losses from operations and itstotal liabilities exceed its total assets. This raises substantial doubt aboutthe Company’s ability to continue as a going concern. Management’s plans inregard to these matters are also described in Note 1. The financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.
|   | /s/ Virchow, Krause & Company, LLP |
|--------|---------------------------------------------|

Minneapolis,MinnesotaMarch 8, 2004

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**MagStarTechnologies, Inc.**Balance SheetsAt December 31, 2003 and 2002
| ** **                                                                                                                                                                                  | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                  |       |        |       |        |       |
| Current Assets:                                                                                                                                                                             |       |        |       |        |       |
| Cash                                                                                                                                                                                        |       | $           | 500        |        | $          | 500 |   |
| Accounts receivable, net                                                                                                                                                                    |       | 723,413     |       | 831,820     |       |
| Inventories, net                                                                                                                                                                            |       | 1,074,242   |       | 1,296,252   |       |
| Other current assets                                                                                                                                                                        |       | 73,731      |       | 41,497      |       |
| Total current assets                                                                                                                                                                        |       | 1,871,886   |       | 2,170,069   |       |
| Property, plant and  equipment, net                                                                                                                                                         |       | 52,855      |       | 1,723,182   |       |
| Patents                                                                                                                                                                                     |       | 11,261      |       | —      |       |
| Total assets                                                                                                                                                                                |       | $           | 1,936,002  |        | $          | 3,893,251 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIENCY**                                                                                                                                          |       |        |       |        |       |
| Current Liabilities:                                                                                                                                                                        |       |        |       |        |       |
| Senior debt                                                                                                                                                                                 |       | $           | 802,240    |        | $          | 5,086,475 |   |
| Current maturities of  capital lease obligations                                                                                                                                            |       | 126,754     |       | 140,875     |       |
| Accounts payable to  related parties                                                                                                                                                        |       | 820,411     |       | 1,532,169   |       |
| Notes payable to related  parties                                                                                                                                                           |       | 5,703,689   |       | 4,507,509   |       |
| Checks issued in excess  of cash in bank                                                                                                                                                    |       | 20,180      |       | 90,949      |       |
| Accounts payable                                                                                                                                                                            |       | 503,995     |       | 635,327     |       |
| Accrued expenses                                                                                                                                                                            |       | 400,813     |       | 695,497     |       |
| Short term deferred gain  on sale—leaseback equipment                                                                                                                                  |       | 155,576     |       | 155,576     |       |
| Short term deferred gain  on sale—leaseback building                                                                                                                                   |       | 331,978     |       | —      |       |
| Total current  liabilities                                                                                                                                                                  |       | 8,865,636   |       | 12,844,377  |       |
| Capital lease  obligations, less current maturities                                                                                                                                         |       | —      |       | 116,028     |       |
| Deferred gain on sale—leaseback  equipment, net of current portion                                                                                                                     |       | 466,728     |       | 622,305     |       |
| Deferred gain on sale—leaseback  building, net of current portion                                                                                                                      |       | 1,549,229   |       | —      |       |
| Deferred Rent                                                                                                                                                                               |       | 54,478      |       | —      |       |
| Deposits                                                                                                                                                                                    |       | 10,000      |       | —      |       |
| Other liabilities                                                                                                                                                                           |       | 23,845      |       | 9,619       |       |
| Total Liabilities                                                                                                                                                                           |       | 10,969,916  |       | 13,592,328  |       |
| Stockholders’ deficiency:                                                                                                                                                              |       |        |       |        |       |
| Preferred stock, par  value $.1875 per share, authorized 2,500,000 shares; 1,000,000 issued and  outstanding                                                                                |       | 187,500     |       | 187,500     |       |
| Common stock, par value  $.1875 per share, authorized 30,000,000 shares; issued and outstanding  9,040,173 shares at December 31, 2003 and 8,740,173 shares at  December 31, 2002 |       | 1,695,032   |       | 1,638,782   |       |
| Additional paid-in  capital                                                                                                                                                                 |       | 18,002,729  |       | 17,938,979  |       |
| Accumulated deficit                                                                                                                                                                         |       | (28,919,175 | )          | (29,464,338 | )          |
| Total stockholders’  deficiency                                                                                                                                                        |       | (9,033,914  | )          | (9,699,077  | )          |
| Total liabilities and stockholders’ deficiency                                                                                                                                         |       | $           | 1,936,002  |        | $          | 3,893,251 |   |

 

The accompanying notes are an integral part of the financialstatements.

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**MagStar Technologies, Inc.**Statements of OperationsFor the years ended December 31, 2003 and 2002
| ** **                                               | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| Total Net Sales                                          |       | $          | 6,230,898  |       | $          | 8,358,149 |   |
| Cost of sales                                            |       | 5,699,377  |       | 9,014,804  |       |
| Gross profit (loss)                                      |       | 531,521    |       | (656,655   | )          |
| Selling, general  and administrative expenses            |       |       |       |       |       |
| Gains on sale—leaseback                             |       | (432,224   | )          | (353,451   | )          |
| Other selling, general and administratve expenses        |       | 1,178,845  |       | 1,764,877  |       |
| Total selling, general and administrative expenses,  net |       | 746,621    |       | 1,411,426  |       |
| Operating loss                                           |       | (215,100   | )          | (2,068,081 | )          |
| Other income  (expense):                                 |       |       |       |       |       |
| Interest expense                                         |       | (639,447   | )          | (725,504   | )          |
| Gain on conversion of senior debt for common stock       |       | 1,205,000  |       | —     |       |
| Other, net                                               |       | 194,710    |       | 112,281    |       |
| Total other income (expense), net                        |       | 760,263    |       | (613,223   | )          |
| Net Income (loss)                                        |       | $          | 545,163    |       | $          | (2,681,304 | ) |
| Net income (loss)  per share—basic                  |       | $          | 0.06       |       | $          | (0.31 | ) |
| Net income (loss)  per share—diluted                |       | $          | 0.05       |       | $          | (0.31 | ) |
| Weighted average  common shares outstanding—basic   |       | 8,860,995  |       | 8,740,173  |       |
| Weighted average common  shares outstanding—diluted |       | 10,323,637 |       | 8,740,173  |       |

 

The accompanying notes are an integral part of the financialstatements.

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**MagStar Technologies, Inc.**Statements of Stockholders’ DeficiencyFor the years ended December 31, 2003 and 2002
| ** **                                 | ** ** | **Series A Preferred** | ** ** | ** **            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **               | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|----------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **Stock**                        | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **     | ** ** | ** **           | ** ** |
| ** **                                 | ** ** | **Shares**                       | ** ** | **Par  Value**        | ** ** | **Shares**     | ** ** | **Par  Value** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| Balances, December 31, 2001           |       | 1,000,000                        |       | $                     | 187,500    |           | 8,740,173  |           | $          | 1,638,782            |       | $                        | 17,938,979 |   | $ | (26,783,034 | ) | $ | (7,017,773 | ) |
| Compensation expense                       |       |                             |       |                  |       |           |       |           |       |                 |       |                     |       | — |   |
| Net loss                                   |       |                             |       |                  |       |           |       |           |       |                 |       | (2,681,304               | )          | (2,681,304 | ) |
| Balances, December 31, 2002           |       | 1,000,000                        |       | 187,500               |       | 8,740,173      |       | 1,638,782      |       | 17,938,979           |       | (29,464,338              | )          | (9,699,077 | ) |
| Conversion of senior debt for common stock |       |                             |       |                  |       | 300,000        |       | 56,250         |       | 63,750               |       |                     |       | 120,000 |   |
| Net income                                 |       |                             |       |                  |       |           |       |           |       |                 |       | 545,163                  |       | 545,163 |   |
| Balances,  December 31, 2003          |       | 1,000,000                        |       | $                     | 187,500    |           | 9,040,173  |           | $          | 1,695,032            |       | $                        | 18,002,729 |   | $ | (28,919,175 | ) | $ | (9,033,914 | ) |

 

The accompanying notes are an integral part of the financialstatements.

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**MagStarTechnologies, Inc.**Statements of Cash FlowsFor the years ended December 31, 2003 and 2002
| ** **                                                                              | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from  operating activities:                                                  |       |       |       |       |       |
| Net income (loss)                                                                       |       | $          | 545,163    |       | $          | (2,681,304 | ) |
| Adjustments to  reconcile net income (loss) to net cash (used in) operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                           |       | 128,183    |       | 280,777    |       |
| Gain on conversion of senior debt for common stock                                      |       | (1,205,000 | )          | —     |       |
| Gain on sale-leaseback Equipment                                                        |       | (155,577   | )          | (353,448   | )          |
| Gain on sale-leaseback Building                                                         |       | (276,649   | )          | —     |       |
| Deferred Rent                                                                           |       | 54,478     |       | —     |       |
| Changes in  operating assets and liabilities:                                           |       |       |       |       |       |
| Receivables                                                                             |       | 108,407    |       | 368,962    |       |
| Inventories                                                                             |       | 222,010    |       | 558,852    |       |
| Other current assets                                                                    |       | (32,234    | )          | 48,614     |       |
| Accounts payable                                                                        |       | (131,332   | )          | (297,030   | )          |
| Accrued expenses                                                                        |       | (294,684   | )          | 21,692     |       |
| Accounts payable, related parties                                                       |       | (711,758   | )          | 826,859    |       |
| Other liabilities and deposits                                                          |       | 24,227     |       | (6,048     | )          |
| Net cash (used  in) operating activities                                                |       | (1,724,766 | )          | (1,232,074 | )          |
| Cash flows from  investing activities:                                                  |       |       |       |       |       |
| Proceeds from sale of building and land and related  improvements                       |       | 3,700,000  |       | —     |       |
| Payments for patents                                                                    |       | (11,261    | )          | —     |       |
| Net cash provided  by investing activities                                              |       | 3,688,739  |       | —     |       |
| Cash flows from  financing activities:                                                  |       |       |       |       |       |
| Payments on debt                                                                        |       | (2,658,078 | )          | (162,120   | )          |
| Net (payments on) line of credit                                                        |       | (301,157   | )          | (256,371   | )          |
| Net borrowings note-payable—related party                                          |       | 1,196,180  |       | 1,630,596  |       |
| Checks in excess                                                                        |       | (70,769    | )          | (43,299    | )          |
| Proceeds from warrants                                                                  |       | —     |       | —     |       |
| Repayment of debentures                                                                 |       | —     |       | (375,000   | )          |
| Net proceeds on term note—related party                                            |       |       |       | 500,000    |       |
| Payments of capital lease obligations                                                   |       | (130,149   | )          | (61,732    | )          |
| Net cash provided  by (used in) financing activities                                    |       | $          | (1,963,973 | )          | $          | 1,232,074 |   |
| Net (decrease)  increase in cash                                                        |       | —     |       | —     |       |
| Cash, beginning  of year                                                                |       | 500        |       | 500        |       |
| Cash, end of  period                                                                    |       | $          | 500        |       | $          | 500 |   |
| Supplemental  disclosures of cash flow information:                                     |       |       |       |       |       |
| Cash paid for interest                                                                  |       | $          | 191,145    |       | $          | 547,855 |   |
| Noncash investing  and financing activities:                                            |       |       |       |       |       |
| Conversion of  senior debt to common stock                                              |       | $          | 120,000    |       | $          | — |   |

 

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

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**MagStar Technologies, Inc. Notes to Financial Statements**

**1. BusinessDescription and Conditions**

**BusinessDescription**

MagStar Technologies, Inc. (“MagStar” or the “Company”)is a publicly owned company headquartered in Hopkins, Minnesota that tradeslocally, over the counter, under the symbol “MGST”. MagStar Technologies is aprototype developer and manufacturer of centrifuges, conveyors, medicaldevices, spindles, and sub assemblies. MagStar’s technical abilities in design,process, and manufacturing specialize in the “concept-to-production” processdesigned to result in short manufacturing cycles, high performance, and costeffective products such as electro-mechanical assemblies and devices for overtwo dozen medical, magnetic, motion control, and industrial original equipmentmanufacturers (“OEMs”). The Company’s products are sold throughout the UnitedStates and North America, Europe, and Asia.

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

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

**Troubled FinancialCondition and Management’s Plans**

The Company has recognized net income of $545,163 forthe year ended December 31, 2003, including non-recurring income of$1,205,000, and has a working capital deficit of $6,993,750 and stockholders’deficiency of $9,033,914 at December 31, 2003.

Management’s plans and objectives to improve thefinancial condition of the Company are based on a strategy to become atechnology leader in centrifuge and conveyor design and production by being aproduct focused company, growing sales, reducing debt, and accumulating cash.

Steady growth may be achieved by identifying theCompany’s core business, (centrifuges, spindles, and conveyors), seekingrelationships that move beyond the manufacturing of specific parts and into thepreparation of sub-assemblies and completed assemblies for its customers,developing a focus towards proprietary products and away from contractmanufacturing, and building long term, sustainable competitive advantages overcompetitors. The Company seeks to become involved with its customers early intheir development and design process allowing the Company to participate in theearlier, higher value added stage of product development and to establish acloser working relationship with its customers.

The Company intends to add new customers by applyingcentrifuge technology to a variety of filtering and separating applications,developing new spindle applications, and by growing and nurturing the conveyorbusiness. The Company seeks to be identified as a centrifuge, spindle, andconveyor manufacturer and intends to focus on higher value added products thatallow it to use its design, manufacturing, and engineering capabilities.

Cash control, cost management, and margin preservationare fundamental to the Company’s profitability. Any new corporate strategiesconsidered must be accountable to existing headcounts and capital resourcesmeaning the Company must resist strategies that require significant inflows ofcapital, unless capital can be prudently raised. Other priorities includerecapitalizing the balance sheet, generating liquidity, monitoring and changingprocesses to increase productivity and strategically adding key managers andoperational expertise as required in a prudent and responsible manner. TheCompany also has excess 

32

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**1.Business Description and Conditions (Continued)**

capacity. Through mergers,acquisitions, and growth, it believes it can increase its revenues whileincurring proportionally less additional overhead. By increasing productivity,improving cost control, and reducing expenses, keeping expenses in proportionto the Company’s current sales level, the Company intends to achieve positivecash flow.

There can be no assurance that management will be ableto accomplish all of the above plans and objectives or achieve the necessaryimprovements in its cash flows and financial position to meet its obligationsas they become due.

The Company’s ability to continue operations isdependent on its ability to increase sales and maintain adequate margins onsales, 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 currentlevels and generate positive cash flows from operations, it would be unable tomeet its debt service requirements and may be forced to cease operations orseek protection under U.S. bankruptcy laws.

Accordingly, there can beno assurance that the Company will continue as a going concern in its currentform. The financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty.

**2. Significant AccountingPolicies**

**Accounts Receivable**

The Company extendsunsecured credit to customers in the normal course of business and believes allaccounts receivable in excess of the allowance for doubtful accounts to befully collectible. If accounts receivable in excess of the provided allowanceare determined uncollectible, they are charged to expense in the year thatdetermination is made. The Company does not accrue interest on trade accountsreceivable. Accounts receivable are due 30 days after the invoice date.Accounts receivable are written off only after all collection attempts havefailed.

**Inventories**

Inventories are valued atthe lower of cost or market with cost determined on a first-in, first-outbasis.

**Property, Plant andEquipment**

Property, plant andequipment are recorded at cost. Depreciation and amortization is provided forby the straight-line method based on the estimated useful lives of the relatedassets. Useful lives ranged from 15 to 40 years for buildings and buildingimprovements and 5 to 7 years for machinery and equipment. Expenditures formajor renewals and betterments are capitalized, and expenditures formaintenance and repairs are charged to operations as incurred. Upon retirementor other disposition of property, plant or equipment, the applicable cost andaccumulated depreciation and amortization are eliminated from the accounts, andthe resulting gain or loss is included in operations unless the sale is subjectto the Company leasing the property back for a period of time.

33

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**2.Significant Accounting Policies (Continued)**

**Revenue Recognition**

The Company recognizessales when products are shipped, collectability is probable and the sales priceis fixed or determinable.

**Advertising**

Advertising costs arecharged to operations when incurred. Advertising expense was $40,853 and$87,388 for the years ended December 31, 2003 and 2002, respectively.

**Shipping andHandling Costs**

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

**Income Taxes**

The Company utilizes the assetand liability method of accounting for income taxes whereby deferred taxes aredetermined based on the temporary difference between the financial statementand tax basis of assets and liabilities using enacted tax rates in effect inthe years in which the differences are expected to reverse. Valuationallowances are established when necessary to reduce deferred tax assets to theamount expected to be realized.

**FinancialInstruments**

The carrying amounts forall financial instruments approximates fair value. The carrying amounts forcash, accounts payable and accrued liabilities approximate fair value becauseof the short maturity of these instruments. The fair value of lines of credit,and related party debt approximates the carrying amounts based upon the Company’sexpected borrowing rate for debt with similar remaining maturities andcomparable risk.

**Net Income (Loss)per Common Share**

Basic net income (loss)per common share is computed by dividing net income (loss) by the weightedaverage number of common shares outstanding for the reporting period. Dilutednet income (loss) per common share is computed by dividing net income (loss) bythe sum of the weighted average number of common shares outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to common share equivalents (stock options,stock warrants, and convertible preferred shares) had been issued. Dilutivecommon equivalent shares of 389,679 and 2,445,665 at December 31, 2003 and2002, respectively, have not been included in the computation of diluted netincome (loss) per common share for all periods presented because theirinclusion would be anti-dilutive.

**Cash**

The Company deposits itscash in high credit quality financial institutions. The balances, at times, mayexceed federally insured limits.

34

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**2.Significant Accounting Policies (Continued)**

**Stock-BasedCompensation**

In accordance with Accounting Principles Board (APB)Opinion No. 25 “Accounting for Stock Issued to Employees” and relatedinterpretations, the Company uses the intrinsic value-based method formeasuring stock-based compensation cost which measures compensation cost as theexcess, if any, of the estimated fair value of the Company’s common stock atthe grant date over the amount the employee must pay for the stock. The Company’spolicy is to grant stock options at fair value at the date of grant. Requiredpro forma disclosures of compensation expense determined under the fair valuemethod of Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” is presented below. Options and warrants issuedto non-employees are recorded at fair value, as required by SFAS No. 123,using the Black Scholes pricing model. The Company has adopted the disclosureonly provision of SFAS No. 148.

Hadcompensation cost for the Plans been determined based on the fair value ofoptions at the grant date for awards in 2003 and 2002, the Company’s pro formanet income/(loss) and net income/(loss) per common share would have been asfollows:
| ** **                                | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net income/(loss)                         |       | Reported   |       | $        | 545,163    |     | $          | (2,681,304 | ) |
|                                      |       | Pro  Forma |       | $        | 444,004    |     | $          | (2,779,721 | ) |
| Basic income/(loss) per common share      |       | Reported   |       | $        | 0.06       |     | $          | (0.31 | ) |
|                                      |       | Pro  Forma |       | $        | 0.05       |     | $          | (0.32 | ) |
| Diluted  income/(loss) per common share   |       | Reported   |       | $        | 0.05       |     | $          | (0.31 | ) |
|                                      |       | Pro  Forma |       | $        | 0.04       |     | $          | (0.32 | ) |
| Stock based compensation—as reported |       |       |       | $        | —     |     | $          | — |   |
| Stock based  compensation—pro forma  |       |       |       | $        | 101,159    |     | $          | 98,417 |   |

 

Theweighted average grant-date fair value of options granted during 2003 and 2002was $0.05 and $.30, respectively, which was determined using the Black-Scholesoption pricing model with the following key assumptions:
| **Assumptions**           | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|----------|------------|
| Risk free  interest rates |       |       | 4          | %        |       | 4        | %          |
| Volatility                |       |       | 60         | %        |       | 255      | %          |
| Expected lives (months)   |       |       | 72         |     |       | 72       |       |

 

**Use of Estimates**

The preparation of theCompany’s financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting periods. Actual results could differ from those estimates.

35

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**2.Significant Accounting Policies (Continued)**

**Self-FundedEmployee Medical Benefits**

The Company participatesin a self-insured employee health insurance plan administered by an outsideparty. The Company is required to pay up to $30,000 of annual medical claimsper participant. The annual plan medical claims will vary depending upon thenumber of employees and their level of participation.

**Impact of RecentAccounting Pronouncements**

***SFAS No. 149***

In April 2003, theFASB issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,” effectivefor contracts entered into or modified after June 30, 2003. This amendmentclarifies when a contract meets the characteristics of a derivative, clarifieswhen a derivative contains a financing component and amends certain otherexisting pronouncements. The adoption of SFAS No. 149 did not have amaterial effect on the Company’s financial statements.

***SFAS No. 150***

In May 2003, the FASBissued Statement of Financial Accounting Standards (SFAS) No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003. SFAS No. 150requires the classification as a liability of any financial instruments with amandatory redemption feature, an obligation to repurchase equity shares, or aconditional obligation based on the issuance of a variable number of its equityshares. The Company does not have any financial instruments as defined by SFAS No. 150.The adoption of SFAS No. 150 did not have a material effect the Company’sfinancial statements.

***FIN No. 46***

In January 2003, the FASB issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities” (FIN46). FIN 46 states that companies that have exposure to the economic risks andpotential rewards from another entity’s assets and activities have acontrolling financial interest in a variable interest entity and shouldconsolidate the entity, despite the absence of clear control through a votingequity interest. The consolidation requirements apply to all variable interestentities created after January 31, 2003. For variable interest entitiesthat existed prior to February 1, 2003, the consolidation requirements areeffective for annual or interim periods beginning after December 15, 2003.Disclosure of significant variable interest entities is required in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest was created. The Company does not expect the adoption of FIN46 to have a material effect on the Company’s financial statements.

36

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**3. SelectedBalance Sheet Information**
| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2003**              | ** ** | **2002** | ** ** |
| **Accounts  Receivable, Net**                           |       |                  |       |   |   |
| Accounts Receivable                                     |       | $                     | 787,352    |   | $ | 925,011 |   |
| Less Allowance  for doubtful accounts and sales returns |       | (63,939               | )          | (93,191 | ) |
|                                                    |       | $                     | 723,413    |   | $ | 831,820 |   |
| **Inventories,  Net**                                   |       |                  |       |   |   |
| Raw materials and supplies                              |       | $                     | 372,450    |   | $ | 526,058 |   |
| Work-in-process                                         |       | 262,610               |       | 191,291 |   |
| Finished goods                                          |       | 497,159               |       | 722,931 |   |
| Less allowance  for obsolete inventories                |       | (57,977               | )          | (144,028 | ) |
|                                                    |       | $                     | 1,074,242  |   | $ | 1,296,252 |   |
| **Property,  Plant, and Equipment, Net**                |       |                  |       |   |   |
| Land and related improvements                           |       | $                     | —     |   | $ | 206,995 |   |
| Buildings and  building improvements                    |       | —                |       | 3,375,198 |   |
| Machinery and  equipment                                |       | 72,167                |       | 72,167 |   |
| Equipment under  capital lease obligations              |       | 770,443               |       | 770,443 |   |
|                                                    |       | 842,610               |       | 4,424,803 |   |
| Less accumulated  depreciation                          |       | (72,166               | )          | (2,017,110 | ) |
| Less accumulated  amortization                          |       | (717,589              | )          | (684,511 | ) |
|                                                    |       | $                     | 52,855     |   | $ | 1,723,182 |   |

 

**Accounts Payable toRelated Parties**

Accounts Payable to relatedparties are due to Activar, Inc. and affiliates and consist of leasepayments and accrued interest. Activar, Inc. and affiliates are relatedparties as a consequence of Activar’s significant ownership of stock of theCompany and common ownership by a shareholder of Activar. The accounts payableare unsecured and non-interest bearing.

**Warranty Reserve**

The Company warrants itsproducts for one, two, or five years. The reserve for warranty is computed byaveraging the last four years warranty costs incurred and multiplying by two,which provides a full two-year warranty on all products. The Company hasreserved an additional $50,000 to cover any unanticipated

37

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**3.Selected Balance Sheet Information (Continued)**

or unusual productwarranty problems. The following summarizes the warranty transactions for theyears ended December 31:
| ** **                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at Beginning of Year |       | $        | 104,000    |     | $          | — |   |
| Claims Paid                  |       | (30,000  | )          | (96,000  | )          |
| Expense Provision            |       | —   |       | 200,000  |       |
| Balance at End of Year       |       | $        | 74,000     |     | $          | 104,000 |   |

 

**4. Senior Debt**

Seniordebt at December 31, 2003 and 2002, consisted of the following:
| ** **                                                                                                                                                           | ** ** | **2003** | ** ** | **2002**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|
| Asset-based line of  credit, payable to bank, due upon demand.                                                                                                       |       |     |       |      |       |
| The weighted average interest rate of asset-based  line of credit borrowings was 4.00% and 4.38% for the years ended  December 31, 2003 and 2002, respectively. |       | $        | 802,240    |      | $          | 1,103,397 |   |
| Term Note A,  payable to bank—paid in full 2003                                                                                                                 |       | —   |       | 2,658,078 |       |
| Term Note C,  payable to bank—converted to common stock in 2003                                                                                                 |       | —   |       | 1,325,000 |       |
|                                                                                                                                                                 |       | $        | 802,240    |      | $          | 5,086,475 |   |

 

The Company has entered into an amended and restatedsenior credit agreement. The credit facilities under the new agreement consistof an asset-based line of credit with availability of up to $1,350,000, subjectto a borrowing base limitation of 80% of the Company’s eligible accountsreceivable plus eligible inventories.

The asset-based line of credit bears interest at thebank’s reference rate (4.0% at December 31, 2003) plus 2.00%, is due ondemand, and is payable in full in June 2004. Term Note A bore interest ata fixed rate of 10% per year, was payable in monthly principal and interestinstallments of $27,020 commencing November 2000, with a final balloonpayment due in October 2005, and was paid off in 2003. Term Note C wasnon-interest bearing, was due and payable in full on September 2003, andwas cancelled in consideration for 300,000 shares of common stock in 2003. TheCompany recorded a non-recurring gain of $1,205,000 related to the conversionof the debt into common stock in September 2003.

The credit facilities restrict the payment ofdividends and the Company’s ability to incur other indebtedness. The bank mayat any time apply the funds available in any Company bank account against theoutstanding loan balances. In addition, the credit facilities arecollateralized by all of the Company’s assets, except for certain equipmentpurchased with notes payable.

Term Notes A and C weredue on demand; accordingly, they had been classified as current in the Company’sDecember 31, 2002 balance sheet.

38

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**5. Notes Payable, RelatedParties**

Notespayable, related parties at December 31, 2003 and 2002, consisted of thefollowing:
| ** **                                                                                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable;  stockholder, due upon demand with interest at 6% subordinated to senior debt,  unsecured     |       | $        | 4,255,776  |     | $          | 3,092,596 |   |
| Note payable;  stockholder, due upon demand with interest at 8% subordinated to senior debt,  unsecured     |       | 430,913  |       | 430,913  |       |
| Note payable;  stockholder, due upon demand with interest at 8% subordinated to senior debt,  unsecured     |       | 467,000  |       | 434,000  |       |
| Note payable;  stockholder, due upon demand with interest at 6% subordinated to senior debt,  unsecured     |       | 500,000  |       | 500,000  |       |
| Note payable;  related entity, due upon demand with interest at 10% subordinated to senior  debt, unsecured |       | 50,000   |       | 50,000   |       |
|                                                                                                        |       | $        | 5,703,689  |     | $          | 4,507,509 |   |

 

Accrued interest on thesenotes at December 31, 2003 and 2002 was $649,000 and $384,000 respectivelyand interest expense for the years ended December 31, 2003 and 2002 was$338,000 and $335,000, respectively.

**6. Capital LeaseObligations**

TheCompany leases equipment under noncancelable leases classified as capitalleases. The following is a schedule of future minimum lease payments forcapital leases together with the present value of the net minimum leasepayments:
| Year Ending  December 31:   |   |    |    |
|----------------------------------|--------|---------|---------|
| 2004                             |   | $       | 164,501 |   |
| Total minimum  lease payments    |   | 164,501 |    |
| Less: interest                   |   | (37,747 | )       |
| Present value of lease  payments |   | $       | 126,754 |   |

 

**7. Sale/Leaseback andRelated Party Lease Obligations**

The Company sold various equipment during 2001 to anentity owned by a stockholder for $1,987,141 and concurrently entered into anoperating lease. The leases were amended on January 1, 2003 under a leasethat expires in 2007.

39

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**7.Sale/Leaseback and Related Party Lease Obligations (Continued)**

Future minimum paymentsrequired under these leases are as follows: (Continued)
| Year ending  December 31: |   |    |      |
|--------------------------------|--------|---------|-----------|
| 2004                           |   | $       | 547,748   |   |
| 2005                           |   | 547,748 |      |
| 2006                           |   | 547,748 |      |
| 2007                           |   | 547,748 |      |
| Total minimum lease  payments  |   | $       | 2,190,992 |   |

 

Rent expense under these leases for the years ended December 31,2003 and 2002 was $554,000 and $919,000 respectively.

Futuredeferred gains resulting from this transaction are as follows:
| Year ending  December 31: |   |    |    |
|--------------------------------|--------|---------|---------|
| 2004                           |   | $       | 155,576 |   |
| 2005                           |   | 155,576 |    |
| 2006                           |   | 155,576 |    |
| 2007                           |   | 155,576 |    |
| Total deferred gain            |   | $       | 622,304 |   |

 

On February 25, 2003,MagStar Technologies, Inc. sold and leased back its headquarters andmanufacturing facility in Hopkins, Minnesota. The purchaser was HopkinsEleventh Avenue LLC (“Eleventh Avenue”), a wholly owned subsidiary of ActivarProperties, Inc., which in turn is wholly owned by Mr. McNamara. Thepurchase price for the building and property was $3,700,000. The Companyentered into a 6.5-year gross lease with Eleventh Avenue for the buildingand property at a monthly cost of $34,000 increasing to $44,436 per month. Thenet proceeds of $1,001,397, after paying off the mortgage, realized by theCompany in the transaction were applied to reduce the Company’s debt to ActivarProperties, Inc. and affiliates. James L. Reissner, the President ofActivar Properties, Inc., is also a director and shareholder of theCompany. The Board of Directors of the Company authorized the transaction inorder to reduce the indebtedness of the Company, provide working capital and improvecash flow. The transaction with Eleventh Avenue was determined to be on betterterms than could be obtained by the Company directly from unaffiliatedfinancing sources. The purchase price was based upon an independent appraisalof the value of the property and building obtained by the bank which providedfinancing to Eleventh Avenue in connection with the transaction. Rent expenseon the lease was $314,000 and $0 for 

40

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**7.Sale/Leaseback and Related Party Lease Obligations (Continued)**

the years ended December 31,2003 and 2002, respectively. The following tables represent building leasepayments and deferred gain schedules.
| Lease payments on  building    |   |    |      |
|--------------------------------|--------|---------|-----------|
| 2004                           |   | $       | 426,700   |   |
| 2005                           |   | 450,170 |      |
| 2006                           |   | 474,926 |      |
| 2007                           |   | 501,048 |      |
| 2008                           |   | 528,600 |      |
| Thereafter                     |   | 355,488 |      |
| Total building lease  payments |   | $       | 2,736,932 |   |

 
| Deferred gain on  sale/leaseback of building |   |    |      |
|----------------------------------------------|--------|---------|-----------|
| 2004                                         |   | $       | 331,978   |   |
| 2005                                         |   | 331,978 |      |
| 2006                                         |   | 331,978 |      |
| 2007                                         |   | 331,978 |      |
| 2008                                         |   | 331,978 |      |
| Thereafter                                   |   | 221,317 |      |
| Total deferred gain                          |   | $       | 1,881,207 |   |

 

**8. Stockholders’Deficiency**

**Private Placement**

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

The Series A Preferred is convertible at any timeinto shares of common stock as is determined by dividing $.1777778 by theconversion price in effect at the time of any conversion and multiplying suchquotient by each share of Series A Preferred to be converted. At allmeetings of the shareholders of the Company or in the case of any actions ofshareholders in lieu of a meeting, each holder of Series A Preferred stockshall have that number of votes equal to the number of whole shares of CommonStock into which such holder’s shares are then convertible. Holders of the Series A Preferred Stock areentitled to receive cumulative cash dividends, in preference to dividendspayable on common stock, at the annual rate of 9% and share equally with thecommon stock, on an as-converted basis, in any dividends declared on the commonstock. Dividends in arrears totaled $288,000 at December 31, 2003. Inthe event of any liquidation, whether voluntary or involuntary, the assets ofthe Company available for distribution to its shareholders shall be distributedequally among the holders of the Common Stock and the Series A Preferredstock.

In connection with theprivate placement, the Company, the investors and certain individuals from theCompany’s existing stockholders (collectively, the control group) entered intoa voting agreement. Among 

41

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**8.Stockholders’ Deficiency (Continued)**

otherprovisions, the voting agreement requires that the control group vote theirshares to designate the investors as members of the Company’s Board ofDirectors. The voting agreement further requires the control group to vote asdirected by the investors on all matters, which are presented for a vote to theCompany’s stockholders.

**Stock Option Plans**

The Company’s Stock Option Plans (the Plans) providefor grants of stock options to employees and directors. The number of commonshares available for grant pursuant to the Plans was 2,125,000 and 1,723,000 atDecember 31, 2003 and 2002, respectively. Options become exercisable overperiods of up to four years from the date of grant and expire 10 years from thedate of grant.

Thefollowing summarizes all option activity under the Plans:
| ** **                                     | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| Balances,  December 31, 2001              |       |                     | 526,401    |                                   |       |   | $ | 0.78 |   |   |
| Cancelled                                      |       |                     | (190,236   | )                                      |       |   | $ | 0.20 |   |   |
| Granted                                        |       |                     | 459,500    |                                   |       |   | $ | 0.13 |   |   |
| Balances,  December 31, 2002              |       |                     | 795,665    |                                   |       |   | $ | 0.50 |   |   |
| Cancelled                                      |       |                     | (52,586    | )                                      |       |   | $ | 0.12 |   |   |
| Granted                                        |       |                     | 110,500    |                                   |       |   | $ | 0.05 |   |   |
| Balances,  December 31, 2003              |       |                     | 853,579    |                                   |       |   | $ | 0.48 |   |   |
| Options exercisable at  December 31, 2003 |       |                     | 735,627    |                                   |       |   | $ | 0.55 |   |   |

 

The following tablesummarizes information about fixed price stock options outstanding at December 31,2003:
| ** **                              | ** ** | ** ** | ** ** | **Options Outstanding**                      | ** ** | **Options Exercisable**                                  | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** ** | ** ** | **Options  Outstanding  December 31,  2003** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (Months)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable at  December 31,  2003** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.05                                   |       |       | 285,500    |                                              |       |                                                          | 108        |   |   |   | $ | 0.05 |   |   |   | 170,172 |   |   |   | $ | 0.05 |   |   |
| $0.25-$0.515625                         |       |       | 453,400    |                                              |       |                                                          | 73         |   |   |   | $ | 0.38 |   |   |   | 450,776 |   |   |   | $ | 0.38 |   |   |
| $0.625-$0.9375                          |       |       | 73,179     |                                              |       |                                                          | 67         |   |   |   | $ | 0.84 |   |   |   | 73,179 |   |   |   | $ | 0.84 |   |   |
| $2.25-$3.375                            |       |       | 13,500     |                                              |       |                                                          | 58         |   |   |   | $ | 2.45 |   |   |   | 13,500 |   |   |   | $ | 2.45 |   |   |
| $4.25-$4.4375                           |       |       | 21,000     |                                              |       |                                                          | 63         |   |   |   | $ | 4.44 |   |   |   | 21,000 |   |   |   | $ | 4.44 |   |   |
| $4.875-$5.1875                          |       |       | 7,000      |                                              |       |                                                          | 66         |   |   |   | $ | 4.92 |   |   |   | 7,000 |   |   |   | $ | 4.92 |   |   |
| Total                                   |       |       | 853,579    |                                              |       |                                                          | 70         |   |   |   | $ | 0.48 |   |   |   | 735,627 |   |   |   | $ | 0.55 |   |   |
|                                         |            |            |            |                                                   |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

42

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**8. Stockholders’Deficiency (Continued)**

**Warrants**

In connection with the private placement of debenturesin December 1998, the Company granted five-year warrants to purchase350,000 shares of the Company’s common stock at an exercise price of $.6625 pershare, exercisable immediately. These warrants expired in December 2003.In February 1999, the Company granted five-year warrants to purchase anadditional 50,000 shares of the Company’s common stock at an exercise price of$.6625 per share, exercisable immediately. No warrants have been exercised.

In connection with theissuance of debt to a stockholder in January 2002, the Company grantedfive-year warrants to purchase 250,000 shares of the Company’s common stock atan exercise price of $0.25 per share, exercisable immediately. The warrantswere valued using the Black Scholes model pricing model. The value wasdetermined to be immaterial.

**9. Income Taxes**

The following table sets forth the components of thetax-affected deferred tax assets at December 31, 2003 and 2002:
| ** **                                                              | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Net operating  losses available for carry forward (expire 2004 to 2022) |       | $           | 11,600,000 |        | $          | 11,600,000 |   |
| Other future  deductible temporary differences, net                     |       | 432,000     |       | 650,000     |       |
| Net deferred tax  asset before valuation allowance                      |       | 12,032,000  |       | 12,250,000  |       |
| Valuation  allowance                                                    |       | (12,032,000 | )          | (12,250,000 | )          |
|                                                                    |       | $           | —     |        | $          | — |   |

 

The Company has established a valuation allowance forany tax benefits for which management believes, based on the relative weight ofcurrently available evidence, that it is “more likely than not” that therelated net deferred tax asset will not be realized. As a result, no taxbenefit has been provided for the net loss incurred for the years ended December 31,2002 and prior years. The Company’s net income for the year ended December 31,2003 was offset by the reduction of current year temporary differences. TheCompany has net operating loss carryforwards for federal income tax purposes ofapproximately $29,000,000. Under the Internal Revenue Code, certain stocktransactions, including sales of stock and the granting of warrants to purchasestock, may limit the amount of net operating loss carry forwards that may beutilized on an annual basis to offset taxable income in future periods.

Reconciliation of the income tax computed at thefederal statutory rate to the actual income tax provision is as follows:
| ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Federal statutory rate (benefit)            |       | $        | 218,000    |     | $          | (925,000 | ) |
| Increase  (decrease) in valuation allowance |       | (218,000 | )          | 925,000  |       |
| Income tax provision                        |       | $        | —     |     | $          | — |   |

 

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**MagStar Technologies, Inc. Notes to Financial Statements (Continued)**

**10. Employee Benefit Plans**

All employees who are atleast 21 years of age and have completed six months of service and have workedat 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 ofthe Board of Directors. The Company’s 401(k) matching contributions and profitsharing contributions for the years ended December 31, 2003 and 2002 were$18,000 and $23,000, respectively.

**11. Significant CustomerInformation**

TheCompany’s major customers accounted for the following percentages of net sales:
| ** ** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|------------|------------|------------|------------|----------|------------|
| ** ** | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Customer A |       | $          | 1,999,980  |     | 32         | % | $ | 2,898,000 |   | 35 | % |
| Customer B |       | $          | 671,000    |     | 11         | % | $ | 559,000 |   | 7 | % |

 

Accounts receivable fromCustomer A at December 31, 2003 and 2002 totaled $62,586 and $190,112,respectively. Accounts receivable from Customer B at December 31, 2003 and2002 totaled $101,059 and $38,216, respectively.

**12. EnvironmentalContingency**

The Company has undertakena Phase I and Phase II environmental assessment of its manufacturing facility.Soil boring and groundwater work indicated the presence of potentiallyhazardous substances and petroleum products within the soil and groundwaterlocated beneath the site. The Company notified the applicable regulatory agency(the Minnesota Pollution Control Agency), and is working with that agency toresolve these issues. However, because the results are still preliminary, theCompany is not able to assess whether it will ultimately be held liable for thepresence of these substances at the site nor is the Company able to assess itsfinancial exposure if it is found liable. As of December 31, 2003, $15,000has been accrued for the cost of additional environmental work. Ground waterinvestigation occurred quarterly during 2003 and is expected to conclude in2004 resulting in acceptable contaminate levels as determined by the MinnesotaPollution Control Agency.

*The remainder ofthis page is intentionally left blank.*

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**MAGSTAR TECHNOLOGIES,INC.**

**EXHIBIT INDEX TO ANNUAL REPORTON FORM 10-KSB**

**Forthe Fiscal Year Ended December 31, 2003**
| **Item No.** | ** ** | **Item**                                                                                                       | ** ** | **Method of Filing**                                                                                                                                                          |
|--------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          |       | Restated Articles of Incorporation, As amended                                                                 |       | Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report  on Form 10-KSB for the year ended December 31, 2001 (File  No. 0-1561)      |
| 3.2          |       | Amended Bylaws                                                                                                 |       | Incorporated by  reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1990 (File No. 0-1561)        |
| 4.1          |       | Form of the Company’s Common Stock Certificate                                                       |       | Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 1990 (File  No. 0-1561)        |
| 4.2          |       | Voting Agreement, dated September 12, 2000, by  and among the Company, certain shareholders and investors |       | Incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                     |
| 10.1         |       | Incentive Stock Option Plan of the Company, as  amended effective December 17, 1987                       |       | Incorporated by reference to Exhibit 10(a) to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1987  (File No. 0-1561) |
| 10.2         |       | Directors Stock Option Plan of the  Company                                                                    |       | Incorporated by reference to Exhibit 10(c) to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1987  (File No. 0-1561) |
| 10.3         |       | 1991 Non-Employee Director Stock Option Plan                                                                   |       | Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 1993 (File  No. 0-1561)       |
| 10.4         |       | 1991 Stock Option Plan, as amended                                                                             |       | Incorporated by  reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 1995 (File No. 0-1561)     |
| 10.5         |       | 1997 Non-Employee Director Stock Option Plan                                                                   |       | Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report  on Form 10-KSB for the year ended December 31, 1997 (File  No. 0-1561)     |

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| 10.6  |   | 2001 Stock Option Plan                                                                                                                                                                                                         |   | Incorporated by reference to Exhibit 10.6 to  the Company’s Annual Report on Form 10-KSB for the year ended  December 31, 2001 (File No. 0-1561) |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7  |   | 2001 Stock Purchase Plan                                                                                                                                                                                                       |   | Incorporated by  reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 2001 (File No. 0-1561) |
| 10.8  |   | Environmental and ADA  Indemnification Agreement, dated December 3, 1997, between the Company  and US Bancorp National Association                                                                                        |   | Incorporated by reference to Exhibit 10.7 to the Company’s Current  Report on Form 8-K, dated December 18, 1997 (File No. 0-1561)                |
| 10.9  |   | Environmental Letter of Undertaking, dated  December 3, 1997, between the Company and US Bancorp National  Association                                                                                                    |   | Incorporated by reference to Exhibit 10.8 to the Company’s Current  Report on Form 8-K, dated December 18, 1997 (File No. 0-1561)                |
| 10.10 |   | Securities Purchase Agreement, dated  October 10, 2000, by and among the Company and certain Investors                                                                                                                    |   | Incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                 |
| 10.11 |   | Amended and Restated Credit Agreement dated  October 10, 2000, by and between the Company and US Bancorp National  Association                                                                                            |   | Incorporated by reference to Exhibit 10.4 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                 |
| 10.12 |   | Amended, Restated and Consolidated Mortgage,  Security Agreement, Assignment of Leases and Rents and Fixture Financing  Statement, dated October 10, 2000 by and between the Company and US  Bancorp National Association |   | Incorporated by reference to Exhibit 10.5 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                 |
| 10.13 |   | Security Agreement, dated October 10, 2000, by  and between the Company and US Bancorp National Association                                                                                                               |   | Incorporated by reference to Exhibit 10.6 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                 |

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| 10.14 |   | $6,800,000 Amended and Restated Note, dated  October 10, 2000, given by the Company to US Bancorp National  Association                                                                                        |   | Incorporated by reference to Exhibit 10.7 to the Company’s Current  Report on Form 8-K, dated October 24, 2000 (File No. 0-1561)                    |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15 |   | First Amendment to Amended and Restated Credit  Agreement, dated November 30, 2001, by and between the Company and US  Bancorp  National Association                                                           |   | Incorporated by reference to Exhibit 10.15 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 2001  (File No. 0-1561)   |
| 10.16 |   | Asset Purchase Agreement, Promissory Note and  Equipment Lease by and between Reuter Manufacturing, Inc. and MagStar  Technologies, Inc. for the acquisition of certain assets at  December 1, 2000  |   | Incorporated by reference to Exhibit 10.20 to the Company’s Annual  Report on Form 10-KSB, for the year ended December 31, 2000  (File No. 0-1561)  |
| 10.17 |   | Bill of Sale and two Master Equipment Leases, with  attached exhibits and assignments, dated March 21, 2001 related to the  sale-leaseback of equipment between the Company and Activar  Properties, Inc. |   | Incorporated by reference to Exhibit 10.21 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended March 31, 2001  (File No. 0-1561) |
| 10.18 |   | Promissory Note between the Company and Activar  Properties, Inc. related to the purchase of Quickdraw Conveyor  Systems, Inc. dated February 23, 2001                                               |   | Incorporated by reference to Exhibit 10.22 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended March 31, 2001  (File No. 0-1561) |
| 10.19 |   | Option Amendment Agreement, dated October 1,  2001 by and between Michael J. Tate and the Company                                                                                                              |   | Incorporated by reference to Exhibit 10.19 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 2001  (File No. 0-1561)   |

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| 10.20 |   | 12% Promissory Note dated January 21, 2002  issued to Richard F. McNamara                                            |   | Incorporated by reference to Exhibit 10.20 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 2001  (File No. 0-1561) |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21 |   | Warrant for Purchase of Shares of Common Stock of  the Company dated January 21, 2002 issued to  Richard F. McNamara |   | Incorporated by reference to Exhibit 10.21 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 2001  (File No. 0-1561) |
| 10.22 |   | Lease from Hopkins Eleventh Avenue, LLC to the  Company dated  February 21, 2003                                               |   | Incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, dated March 11, 2003 (File No. 0-1561)                    |
| 10.23 |   | Promissory Note from Hopkins Eleventh Ave LLC dated  February 21, 2003                                                         |   | Incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, dated March 11, 2003 (File No. 0-1561)                    |
| 10.24 |   | Third Amendment to Amended and Restated Credit  Agreement dated as of September 30, 2003                                       |   | Incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, dated October 31, 2003 (File No. 0-1561)                  |
| 10.25 |   | Fourth Amendment to Amended and Restated Credit  Agreement dated as of January 6, 2004                                         |   | Filed herewith electronically                                                                                                                                              |
| 10.26 |   | Amended Equipment Lease Agreement between Activar  Properties, Inc. and the Company dated as of December 30,  2002        |   | Filed herewith electronically                                                                                                                                              |
| 14.1  |   | Code of Ethics and Business Conduct                                                                                                 |   | Filed herewith electronically                                                                                                                                              |
| 14.2  |   | Code of Ethics for Senior [Financial] Executives                                                                                    |   | Filed herewith electronically                                                                                                                                              |
| 31.1  |   | Certification of President and Chief Executive  Officer                                                                             |   | Filed herewith electronically                                                                                                                                              |
| 31.2  |   | Certification of Treasurer and Chief Financial  Officer                                                                             |   | Filed herewith electronically                                                                                                                                              |
| 32.1  |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                            |   | Filed herewith electronically                                                                                                                                              |
| 32.2  |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                            |   | Filed herewith electronically                                                                                                                                              |

 

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