10KSB

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

FORM 10-KSB

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

For the Fiscal Year Ended December 31, 2001

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

For the transition period from                              to                             

Commission file number 0-1561

MAGSTAR TECHNOLOGIES, INC.

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

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

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

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

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

Common Stock, par value $0.1875 per share

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

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

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

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

PART I

Forward Looking Statements

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

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

ITEM 1. DESCRIPTION OF BUSINESS.

Business Overview

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

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

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

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

Products and Services

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

Blood Centrifuge Assemblies

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

Motion Controlled Devices:

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

Conveyor Systems for Factory Automation

These can be used for custom automation of various factory assembly, laboratory and medical operations. The conveyor technology and systems have also been designed into and supplied as automation features for OEM equipment.

Robotic Components and Assembly

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

Precision Magnet Assemblies

The Company acquired in November 2000 another company, from which it took the MagStar Technologies name, and which has expertise in building precision magnet assemblies for aerospace, medical, and motion controlled applications.

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

Technology

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

Motion Control Devices

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

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Conveyor/Robotic Movement Devices

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

New Generation High Energy Magnetic Materials

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

Markets

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

Motion Control

MagStar is a supplier of custom spindle/electric motor assemblies for high technology applications. These are applications that require state of the art capabilities for large OEM market leaders. The Company is developing a solid position in this rapidly changing market place. Precision magnet assemblies and magnetizing capabilities along with precision movement and placement systems from Quickdraw technology significantly broaden Company capabilities.

Factory Automation

MagStar is the supplier to the top three leading suppliers of factory automation equipment and OEMs whose mission is to improve productivity of semiconductor manufacturing. The conveyor line serves another segment of the semiconductor manufacturing market.

Medical

MagStar is a leading manufacturer of blood separation devices used in analysis and component isolation of whole blood. The products are used in many of the world's blood banks and in operating rooms. New blood centrifuge applications include the growing market for thrombin-based orthobiologics.

Proprietary Product—Oil Centrifuge and Hydraulic Actuators

MagStar manufactures an engine oil centrifuge used primarily on stationary engines of 200 hp and above. The centrifuges are an after market addition to oil field engines and power generators used offshore. The centrifuge provides filtration to .5 micron and the ability to recover and analyze particulate for preventive maintenance. The hydraulic actuators are high torque rotary vane units adaptable to diverse industrial applications.

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

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Sales and Marketing

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

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

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

Customers

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

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

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

Strategy

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

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

Gain Early Involvement in Design Engineering: The Company seeks to become involved with its customers much earlier in their development and design process. This allows it to participate in the earlier, higher value added stage of product development and to establish a closer working

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relationship with its customers. This also leads to a greater reliance by the customer on the Company's engineering and prototyping expertise, further deepening these relationships.

Focus On Higher Value Added Products: The Company has moved away from its past "job shop" manufacture of commodity parts for its customers, due to the highly competitive, low margin nature of the business. It now focuses only on higher value added products that allow it to benefit from its design, engineering expertise.

Produce more Sub-Assemblies and Complete Assemblies: The Company seeks relationships that move beyond the manufacture of specific parts into the preparation of sub-assemblies and completed assemblies for its customers. It expects that, because of this approach, it will ultimately be the complete outsource manufacturer of products for its customers in many cases.

Demand Flow Inventory and Shipping Agreements: The Company believes that it can ultimately act as fulfillment house for certain customers handling inventory and shipping of products, to further strengthen its relationships. It will offer customized demand flow manufacturing and "just-in-time" shipping programs to minimize inventories, and stock outs for its customers.

Consolidate Operations: The Company has excess capacity within its facility. Through the integration of additional acquisitions, or through organic growth, it believes that it will be able to significantly increase its revenues while incurring proportionally less additional overhead.

Supplies

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

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

Competition

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

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

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

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

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

Research and Development

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

Backlog

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

Employees

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

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ITEM 2. DESCRIPTION OF PROPERTY.

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

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

ITEM 3. LEGAL PROCEEDINGS.

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

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

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

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

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

Name (age)	Position(s) with the Company
J. L. Reissner (61)	Chief Executive Officer and Secretary
Louis S. Matjasko (61)	President and Chief Operating Officer
Joseph A. Petrich (41)	Treasurer and Chief Financial Officer
Brian Kempski (46)	Vice President—Marketing and Sales

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

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

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

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

PART II

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

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

Year		High		Low
2001:	First Quarter	$	1.13	$	.63
	Second Quarter	$	1.00	$	.38
	Third Quarter	$	.70	$	.05
	Fourth Quarter	$	.65	$	.05
2000:	First Quarter	$	.38	$	.16
	Second Quarter	$	.25	$	.01
	Third Quarter	$	1.19	$	.01
	Fourth Quarter	$	1.63	$	.50

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

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

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

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

General

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

12

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

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

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

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

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

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

•

Expand the volume of business in the factory automation segments of the market by offering engineering solutions and assembly services to the developed customer base as their demand develops early in this year.



•

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



•

Expand the volume of business in motion control by offering new products and assemblies to a broader base of customers.

13

•

Expand business, based on core technical competencies, with new medical, magnetic and biometrics customers.



•

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

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

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

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

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

Factors That May Affect Future Results.

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

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

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

14

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

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

Impact of Recent Accounting Pronouncements.

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

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

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

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

15

ITEM 7. FINANCIAL STATEMENTS.

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

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

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

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

PART III

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

        (a)  Directors of the Registrant.

Name	Age	Position
R.F. McNamara	68	Chairman of the Board and Director
Michael J. Tate	62	Director, former President, Chief Executive Officer and Chief Financial Officer
J.L. Reissner	61	Director, Chief Executive Officer and Secretary

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

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

16

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

        (b)  Executive Officers of the Registrant.

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

        (c)  Compliance with Section 16(a) of the Exchange Act.

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

ITEM 10. EXECUTIVE COMPENSATION.

Summary of Cash and Other Compensation

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

Summary Compensation Table

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

(1)

Mr. Tate retired in September 2001.

(2)

Mr. Reissner became Chief Executive Officer and Chief Financial Officer in September 2001.

17

(3)

Mr. Matjasko became President and Chief Operating Officer in September 2001.

Option Grants

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

Option Grants During Fiscal Year Ended December 31, 2001

Name	Number of Securities Underlying Options Granted (#)	Percent of Total Options Granted to Employees in Fiscal Year	Exercise Price ($/Sh)		Expiration Date
Michael J. Tate(1)	0	—		—	—
J. L. Reissner	0	—		—	—
Louis S. Matjasko	50,000(2)	18.1%	$	0.50	1/26/11
Brian A. Kempski	50,000(2)	18.1%	$	0.50	1/26/11

(1)

At the time of Mr. Tate's retirement in September 2001, the Company and Mr. Tate entered into an Option Amendment Agreement which provided for the immediate vesting (to the extent not previously vested) and extension of exercisability to September 30, 2006 of options originally granted to Mr. Tate in April 1998 for 50,000 shares at $0.88 per share, in October 1998 for 6,058 shares at $0.8281 per share and in July 1999 for 50,000 shares at $0.50 per share.

(2)

These options become exercisable in three equal annual installments commencing on January 26, 2001.

18

Option Exercises and Values of Unexercised Options

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

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

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

(1)

These amounts represent the difference between the exercise price of the in-the-money options and the market price of the Company's Common Stock on December 31, 2001. The last reported sale on the OTC Bulletin Board on that date was at $0.10. Options are in-the-money if the market value of the shares covered thereby is greater than the option exercise price.

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

PRINCIPAL SHAREHOLDERS AND BENEFICIAL
OWNERSHIP OF MANAGEMENT

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

19

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

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

*

less than 1%.

(1)

As of March 15, 2002, unless otherwise noted, all of the shares shown are held by individuals or entities possessing sole voting and investment power with respect to such shares.

(2)

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

(3)

According to a Schedule 13G/A, dated January 25, 2002, as filed with the Securities and Exchange Commission, Perkins Capital Management, Inc. has sole voting power with respect to 85,834 of such shares, and sole dispositive power over all such shares. These shares include 50,000 shares of common stock that Mr. Perkins has the right to acquire within 60 days upon the exercise of a warrant.

(4)

Activar, Inc. has sole dispositive and voting power with respect to such shares.

(5)

Includes 16,667 shares of common stock that Mr. McNamara has the right to acquire within 60 days upon the exercise of options and 250,000 shares of common stock that Mr. McNamara has the right to acquire within 60 days upon the exercise of warrants. Mr. McNamara has shared dispositive power with respect to 2,187,500 of these shares and sole voting power over all such shares.

20

(6)

Includes 16,667 shares of common stock that Mr. Reissner has the right to acquire within 60 days upon the exercise of options. Mr. Reissner has shared dispositive power with respect to 2,812,500 shares and sole dispositive and voting power over 1,141,667 shares. Includes shares from footnote 4.

(7)

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

(8)

Consists of 50,001 shares of common stock that Mr. Matjasko has the right to acquire within 60 days upon the exercise of options.

(9)

Consists of 111,668 shares of common stock that Mr. Kempski has the right to acquire within 60 days upon the exercise of options.

(10)

Includes an aggregate of 301,061 shares of common stock and 300,000 shares of common stock that executive officers and directors have the right to acquire within 60 days upon the exercise of options and warrants, respectively.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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

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

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

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

21

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

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

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

PART IV

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

(a)  Exhibits

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

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

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

(1)

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

(2)

Directors Stock Option Plan of the Company

(3)

1991 Non-Employee Director Stock Option Plan

(4)

1991 Stock Option Plan, as amended

(5)

1997 Non-Employee Director Stock Option Plan

(6)

2001 Stock Option Plan

(7)

2001 Employee Stock Purchase Plan

(8)

Option Amendment Agreement, dated October 1, 2001 by and between Michael J. Tate and the Company

(b)  Reports on Form 8-K

        None

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SIGNATURES

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

Dated: March 29, 2002	MAGSTAR TECHNOLOGIES, INC.
	By:	/s/  LOUIS S. MATJASKO Louis S. Matjasko President and Chief Operating Officer.

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

Signature	Title
/s/  R.F. MCNAMARA R.F. McNamara	Chairman of the Board and Director
/s/  J.L. REISSNER J.L. Reissner	Chief Executive Officer and Director (Principal Executive Officer)
/s/  MICHAEL J. TATE Michael J. Tate	Director
/s/  JOSEPH A. PETRICH Joseph A. Petrich	Treasurer and Chief Financial Officer (Principal Financial Officer)
/s/  DIANNE SCHMIESS Dianne Schmiess	Controller (Principal Accounting Officer)

23

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

24

INDEPENDENT AUDITORS' REPORT

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

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

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

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

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

/s/ Virchow, Krause & Company, LLP

Minneapolis, MN
March 1, 2002

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MagStar Technologies, Inc.

(formerly Reuter Manufacturing, Inc.)

Balance Sheets

At December 31, 2001 and 2000

			2001			2000
ASSETS
Current assets:
	Cash		$	500		$	500
	Accounts receivable, net			1,200,782			1,814,791
	Inventories			1,855,104			1,898,086
	Other current assets			90,110			38,414
		Total current assets		3,146,496			3,751,791
Property, plant and equipment, net				2,003,960			2,820,048
		Total assets	$	5,150,456		$	6,571,839
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
	Senior debt		$	5,504,966		$	6,643,960
	Current maturities of capital lease obligations			186,542			405,270
	Debentures payable, related parties			375,000			—
	Payable to related parties			738,310			55,000
	Checks issued in excess of cash in bank			134,247			106,502
	Accounts payable			779,933			513,434
	Accounts payable, settlement			188,103			—
	Deferred gain on sale-leaseback			353,448			—
	Accrued expenses			638,129			1,111,942
	Note payable—related parties			2,442,913			376,693
		Total current liabilities		11,341,591			9,212,801
Debentures payable, related parties				—			377,920
Capital lease obligations, less current maturities				132,093			297,506
Accounts payable, settlement				—			242,972
Deferred gain on sale-leaseback				777,881			—
Other liabilities				15,664			28,380
		Total liabilities		12,267,229			10,159,579
Stockholders' deficiency:
	Series A preferred stock, par value $.1875 per share, authorized 2,500,000 shares			187,500			187,500
	Preferred stock, undesignated, par value $.1875 per share, authorized 7,500,000 shares, none issued and outstanding			—			—
	Common stock, par value $.1875 per share, authorized 30,000,000 shares			1,638,782			1,638,782
	Additional paid-in capital			17,839,979			17,818,979
	Accumulated deficit			(26,783,034	)		(23,233,001	)
		Total stockholders' deficiency		(7,116,773	)		(3,587,740	)
		Total liabilities and stockholders' deficiency	$	5,150,456		$	6,571,839

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

26

MagStar Technologies, Inc.

(formerly Reuter Manufacturing, Inc.)

Statements of Operations

At December 31, 2001 and 2000

			2001			2000
Net sales			$	9,721,461		$	10,769,298
Cost of sales				10,603,509			9,971,781
		Gross profit (loss)		(882,048	)		797,517
Selling, general and administrative expenses				2,281,250			1,921,373
		Operating loss		(3,163,298	)		(1,123,856	)
Other income (expense)
	Interest expense			(592,740	)		(779,379	)
	Other, net			111,968			92,810
		Total other expense, net		(480,772	)		(686,569	)
Loss before extraordinary item				(3,644,070	)		(1,810,425	)
	Extraordinary item, income from trade debt restructuring			94,037			601,786
Net loss			$	(3,550,033	)	$	(1,208,639	)
Loss per share—basic and diluted:
	Loss before extraordinary items		$	(0.37	)	$	(0.31	)
	Extraordinary item			0.01			0.10
	Net loss		$	(0.36	)	$	(0.21	)
Weighted average shares outstanding				9,740,173			5,847,706

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

27

MagStar Technologies, Inc.

(formerly Reuter Manufacturing, Inc.)

Statements of Stockholders' Deficiency

For the years ended December 31, 2001 and 2000

	Series A Preferred Stock			Common Stock
	Shares	Par Value		Shares	Par Value		Additional Paid-in Capital			Unearned Compensation			Accumulated Deficit			Total
Balances, December 31, 1999	—	$	—	4,999,385	$	937,385	$	17,871,759		$	(20,831	)	$	(22,024,362	)	$	(3,236,049	)
Private placement of preferred and common stock	1,000,000		187,500	3,500,000		656,250		(43,750	)								800,000
Issuance of common stock				240,788		45,147		(9,030	)								36,117
Amortization of deferred compensation											20,831						20,831
Net loss														(1,208,639	)		(1,208,639	)
Balances, December 31, 2000	1,000,000		187,500	8,740,173		1,638,782		17,818,979			—			(23,233,001	)		(3,587,740	)
Compensation expense								21,000									21,000
Net loss														(3,550,033	)		(3,550,033	)
Balances, December 31, 2001	1,000,000	$	187,500	8,740,173	$	1,638,782	$	17,839,979		$	—		$	(26,783,034	)	$	(7,116,773	)

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

28

MagStar Technologies, Inc.

(formerly Reuter Manufacturing, Inc.)

Statements of Cash Flows

For the years ended December 31, 2001 and 2000

				2001			2000
Cash flows from operating activities:
	Net loss			$	(3,550,033	)	$	(1,208,639	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			369,168			600,408
		Gain from trade debt restructuring			(94,037	)		(601,786	)
		Gain on sale of fixed assets			(34,321	)		(4,110	)
		Amortization of debt discount			22,080			22,080
		Deferred compensation			—			20,831
		Stock options as compensation			21,000			—
		Gain on sale/leaseback			(263,316	)		—
		Changes in operating assets and liabilities:
			Accounts receivable		614,009			(325,208	)
			Inventories		42,982			(434,989	)
			Other current assets		(51,696	)		(28,914	)
			Accounts payable		305,667			(89,882	)
			Accrued expenses		(473,813	)		410,792
			Payable to related parties		683,310			—
			Other liabilities		(12,716	)		(9,965	)
		Net cash used in operating activities			(2,421,716	)		(1,649,382	)
Cash flows from investing activities:
	Capital expenditures				(391,255	)		(2,651	)
	Proceeds from sale/leaseback				1,987,141			—
	Proceeds from the sale of fixed assets				280,000			4,110
		Net cash provided by investing activities			1,875,886			1,459
Cash flows from financing activities:
	Proceeds from line of credit and senior debt				11,535,643			12,877,439
	Repayments of line of credit and senior debt				(12,674,637	)		(11,569,573	)
	Proceeds from private placement of stock				—			800,000
	Proceeds from notes payable—related parties				2,066,220			55,000
	Repayments of notes payable—related parties				(25,000	)		—
	Payments of capital lease obligations				(384,141	)		(189,826	)
	Increase (decrease) in checks issued in excess of cash in bank				27,745			(325,117	)
		Net cash provided by financing activities			545,830			1,647,923
Net change in cash					—			—
Cash, beginning of year					500			500
Cash, end of year				$	500		$	500
Supplemental disclosures of cash flow information:
	Cash paid for interest			$	561,601		$	657,333
	Noncash investing and financing activities:
		Purchase of equipment in exchange for notes payable			—			15,071
		Purchase of accounts receivable and inventories for notes payable			—			376,693

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

29

MagStar Technologies, Inc.

(formerly Reuter Manufacturing, Inc.)

Notes to Financial Statements

1.    Business Description and Conditions

Business Description

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

Troubled Financial Condition and Management's Plans

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

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

•

Expand the volume of business in the factory automation segments of the market by offering engineering solutions and assembly services to the developed customer base as their demand develops early in this year.



•

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



•

Expand the volume of business in motion control by offering new products and assemblies to a broader base of customers.



•

Expand business, based on core technical competencies, with new medical, magnetic and biometrics customers.



•

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

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

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

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

2.    Significant Accounting Policies

Accounts Receivable

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

Inventories

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

Property, Plant and Equipment

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

Revenue Recognition

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

Income Taxes

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

Carrying Value of Financial Instruments

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

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Net Loss Per Share

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

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

Stock-Based Compensation

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

Use of Estimates

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

Self-Funded Employee Medical Benefits

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

Impact of Recent Accounting Pronouncements

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

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

32

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

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

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

3.    Selected Balance Sheet Information

	2001			2000
Accounts Receivable, Net
Accounts receivable	$	1,300,782		$	1,992,291
Less allowance for doubtful accounts and sales returns		(100,000	)		(177,500	)
	$	1,200,782		$	1,814,791
Inventories, Net
Raw materials and supplies	$	781,812		$	1,146,315
Work-in-process		523,255			909,771
Finished goods		663,037			—
Less allowance for obsolete inventories		(113,000	)		(158,000	)
	$	1,855,104		$	1,898,086
Property, Plant and Equipment, Net
Land and related improvements	$	206,995		$	206,995
Buildings and building improvements		3,375,198			3,375,198
Machinery and equipment		72,167			8,029,482
Equipment under capital lease obligations		770,443			1,515,944
		4,424,803			13,127,619
Less accumulated depreciation		(1,850,987	)		(9,514,588	)
Less accumulated amortization		(569,856	)		(792,983	)
	$	2,003,960		$	2,820,048

Accounts Payable

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

33

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

4.    Senior Debt

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

		2001		2000
Asset-based line of credit, payable to bank, due on demand.
	The weighted average interest rate of asset-based line of credit borrowings was 7.5% and 10.13% for the years ended December 31, 2001 and 2000, respectively.	$	1,359,768	$	1,223,000
Term loan A, payable to bank.			2,820,198		2,745,960
Term loan B, payable to bank.			—		1,100,000
Term loan C, payable to bank.			1,325,000		1,325,000
Term note, payable to bank.			—		250,000
		$	5,504,966	$	6,643,960

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

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

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

34

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

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

5.    Debentures Payable, Related Parties

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

6.    Notes Payable, Related Parties

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

	2001		2000
Note payable, stockholder, due upon demand with interest at 10%, subordinated to senior debt	$	1,962,000	$	—
Note payable, stockholder, due upon demand with interest at 8%, subordinated to senior debt		363,587		363,587
Note payable, stockholder, due upon demand with interest at 8%, subordinated to senior debt		67,326		13,106
Note payable, related entity, due upon demand with interest at 10%, subordinated to senior debt		50,000		—
	$	2,442,913	$	376,693

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

35

7.    Capital Lease Obligations

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

Year Ending December 31:
	2002	$	355,000
	2003		20,000
Total minimum lease payments			375,000
Less: interest			(56,365	)
Present value of lease payments			318,635
Less: current portion			(186,542	)
Non-current portion obligation with interest rates of 5% to 7%		$	132,093

8.    Sale/Leaseback and Related Party Lease Obligations

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

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

Year Ending December 31:
	2002	$	898,000
	2003		753,000
	2004		679,000
	2005		733,000
	2006		546,000
	Thereafter		9,000
Total minimum lease payments		$	3,618,000

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

9.    Stockholders' Deficiency

Private Placement

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

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

36

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

Stock Option Plans

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

        The following summarizes all option activity under the Plans:

	Options Outstanding		Weighted Average Exercise Price
Balances, December 31, 1999	367,203		$	1.83
Cancelled	(27,562	)	$	2.48
Granted	10,000		$	0.25
Balances, December 31, 2000	349,641		$	1.35
Cancelled	(100,240	)	$	2.00
Granted	277,000		$	0.50
Balances, December 31, 2001	526,401		$	0.78
Options exercisable at December 31, 2001	375,068		$	0.89

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

			Options Outstanding
			Weighted Average Remaining Contractual Life (Months)			Options Exercisable
Range of Exercise Prices		Options Outstanding December 31, 2001		Weighted Average Exercise Price		Number Exercisable at December 31, 2001	Weighted Average Exercise Price
$	.50	227,000	110	$	0.50	75,667	$	0.50
$	0.25 - $0.515625	171,500	84	$	0.46	171,500	$	0.46
$	0.6250 - $0.9375	88,401	60	$	0.81	88,401	$	0.81
$	2.25 - $3.375	16,500	60	$	2.42	16,500	$	2.42
$	4.25 - $4.4375	16,000	38	$	4.44	16,000	$	4.44
$	4.875 - $5.1875	7,000	48	$	4.92	7,000	$	4.92

37

Stock-Based Compensation

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

	2001			2000
Net loss	$	(3,585,783	)	$	(1,238,639	)
Net loss per share	$	(0.37	)	$	(0.21	)

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

Assumptions	2001		2000
Risk free interest rates	5	%	5.5	%
Volatility	200	%	600	%
Expected lives (months)	72		72

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

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

Warrants

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

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

10.  Income Taxes

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

	2001			2000
Net operating losses available for carryforward (expire 2004 to 2020)	$	14,535,000		$	13,500,000
Accelerated depreciation for tax reporting purposes		—			(80,000	)
Other future deductible temporary differences, net		50,000			100,000
Net deferred tax asset before valuation allowance		14,585,000			13,520,000
Valuation allowance		(14,585,000	)		(13,520,000	)
	$	-		$	—

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

38

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

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

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

	2001			2000
Benefit at federal statutory rate	$	(1,065,000	)	$	(380,000	)
Limitation of net operating loss carryforward benefit		1,065,000			380,000
Income tax provision	$	—		$	—

11.  Employee Benefit Plans

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

12.  Significant Customer Information

Accounts Receivable

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

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

	2001				2000
	Amount		%		Amount		%
Customer A	$	3,328,000	34	%	$	4,687,000	44	%
Customer B		*				1,046,000	10	%
Customer C		*				1,082,000	10	%

*

Not a significant customer in 2001.

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

13.  Environmental Contingency

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

39

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

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

40

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

41

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

42

QuickLinks

INDEPENDENT AUDITORS' REPORT
MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.) Balance Sheets At December 31, 2001 and 2000
MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.) Statements of Operations At December 31, 2001 and 2000
Statements of Stockholders Equity
MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.) Statements of Stockholders' Deficiency For the years ended December 31, 2001 and 2000
MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.) Statements of Cash Flows For the years ended December 31, 2001 and 2000
MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.) Notes to Financial Statements
MAGSTAR TECHNOLOGIES, INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB For the Fiscal Year Ended December 31, 2001

EX-3.1

                                                                    EXHIBIT 3.1

                              AMENDED AND RESTATED
                            ARTICLES OF INCORPORATION
                                       OF
                           REUTER MANUFACTURING, INC.

     These Amended and Restated Articles of Incorporation supersede the Articles
of Incorporation dated June 12, 1984 and all amendments thereto.

                                   ARTICLE I.

     The name of this corporation is MagStar Technologies, Inc. (the "Company").

                                   ARTICLE II.

     The registered office of the Company in Minnesota is 410 Eleventh Avenue
South, Hopkins, Minnesota, 55343.

                                  ARTICLE III.

     The aggregate number of shares of stock which the Company shall have
authority to issue is Forty Million (40,000,000) shares, consisting of Thirty
Million (30,000,000) shares of common stock, $0.1875 par value per share (the
"Common Stock"), and Ten Million (10,000,000) shares of preferred stock, $0.1875
par value per share (the "Preferred Stock"). The Board of Directors is
authorized to establish, from the authorized and undesignated shares of
Preferred Stock, one or more classes or series of shares, to designate each such
class and series, and to fix the rights and preferences of each such class and
series. Without limiting the authority of the Board of Directors granted hereby,
each such class or series of Preferred Stock shall have such voting powers (full
or limited or no voting powers), such preferences and relative, participating,
optional or other special rights, and such qualifications, limitations or
restrictions as shall be stated and expressed in the resolution or resolutions
providing for the issue of such class or series of Preferred Stock as may be
adopted from time to time by the Board of Directors prior to the issuance of any
shares thereof. Except as provided in the resolution or resolutions of the Board
of Directors creating any series of Preferred Stock, the shares of Common Stock
shall have the exclusive right to vote for the election and removal of directors
and for all other purposes. Each holder of Common Stock shall be entitled to one
vote for each share held.

     Of the Ten Million shares of Preferred Stock, Two Million Five Hundred
Thousand (2,500,000) shares shall be designated Series A convertible preferred
stock, $0.1875 par value per share (the "Series A Preferred") and Seven Million
Five Hundred Thousand (7,500,000) shares shall be undesignated as to series.

     The relative rights, preferences and privileges of the Series A Preferred
shall be as follows:




I.   VOTING RIGHTS.

     A.   GENERAL. At all meetings of the shareholders of the Company and in the
          case of any actions of shareholders in lieu of a meeting, each holder
          of Series A Preferred shall have that number of votes on all matters
          submitted to the shareholders that is equal to the number of whole
          shares of Common Stock into which such holder's shares of Series A
          Preferred are then convertible, as provided in Section IV, at the
          record date for the determination of the shareholders entitled to vote
          on such matters or, if no such record date is established, at the date
          such vote is taken or any written consent of such shareholders is
          effected. This provision for determination of the number of votes to
          which each holder of the Series A Preferred is entitled shall also
          apply in cases in which the holders of the Series A Preferred have the
          right to vote together as a separate class. Except as may be otherwise
          provided in this Certificate or by agreement, the holders of the
          Common Stock and the holders of the Series A Preferred shall vote
          together as a single class on all actions to be taken by the
          shareholders of the Company.

     B.   QUORUMS. The presence in person or by proxy of the holders of a
          majority of the aggregate number of shares of Common Stock and Series
          A Preferred then outstanding (on an as-if converted to Common Stock
          basis) shall constitute a quorum of the Common Stock and Series A
          Preferred.

II.  DIVIDENDS.

     A.   DIVIDENDS. The holders of Series A Preferred then outstanding shall be
          entitled to receive cumulative cash dividends, out of any funds and
          assets of the Company legally available therefor, prior and in
          preference to any declaration or payment of any dividend (other than a
          Common Stock Dividend) payable on Common Stock of the Company at the
          annual rate of nine percent (9%) for the Series A Preferred, and such
          dividends shall be payable only if, as and when declared by the Board
          of Directors of the Company (the "Board"). Other than as set forth in
          the preceding sentence, no dividend or other distribution shall accrue
          or be paid with respect to any shares of capital stock of the Company
          for any period, whether before or after the effective date of this
          Certificate, unless and until declared by the Board. In the event any
          dividend or distribution is declared or made with respect to
          outstanding shares of Common Stock, a comparable dividend or
          distribution shall be simultaneously declared or made with respect to
          the outstanding shares of Series A Preferred (as if fully converted
          into Common Stock, including fractions of shares). Dividends on shares
          of capital stock of the Company shall be payable only out of funds
          legally available therefor.

     B.   NON-CASH DIVIDENDS. Whenever a dividend provided for in this Section
          II shall be payable in property other than cash, the value of such
          dividend shall be deemed to be the fair market value of such property
          as determined in good faith by the Board.




III. LIQUIDATION RIGHTS.

     A.   NO PREFERENCE OF SERIES A PREFERRED. In the event of any liquidation,
          dissolution or winding up of the Company, whether voluntary or
          involuntary, the assets of the Company available for distribution to
          its shareholders, whether such assets are capital, surplus, or
          earnings, shall be distributed equally, on a per share basis, among
          the holders of the Common Stock and the Series A Preferred (on an
          as-if converted to Common Stock basis).

     B.   REORGANIZATION; SALE OF ASSETS. The merger, acquisition or
          consolidation of the Company into or with any other entity or entities
          which results in the exchange of outstanding shares of the Company for
          securities or other consideration issued or paid or caused to be
          issued or paid by any such entity or affiliate thereof pursuant to
          which the shareholders of the Company immediately prior to the
          transaction do not own a majority of the outstanding shares of the
          surviving corporation immediately after the transaction, or any sale,
          lease, license (on an exclusive basis) or transfer by the Company of
          all or substantially all its assets, shall be deemed to be a
          liquidation, dissolution or winding up of the Company within the
          meaning of the provisions of this Section III.

     C.   DETERMINATION OF CONSIDERATION. To the extent any distribution
          pursuant to Section III(A) consists of property other than cash, the
          value thereof shall, for purposes of Section III(A), be the fair value
          at the time of such distributions as determined in good faith by the
          Board.

IV.  CONVERSION.  The holders of the Series A Preferred shall have the following
     conversion rights (the  "Conversion Rights"):

     A.   OPTIONAL CONVERSION OF THE SERIES A PREFERRED. The Series A Preferred
          shall be convertible, without the payment of any additional
          consideration by the holder thereof and at the option of the holder
          thereof, at any time after the first issuance of shares of Series A
          Preferred by the Company, at the office of the Corporation or any
          transfer agent for the Common Stock, into such number of fully paid
          and nonassessable shares of Common Stock as is determined by dividing
          $0.1777778 by the Conversion Price, determined as hereinafter
          provided, in effect at the time of conversion and then multiplying
          such quotient by each share of Series A Preferred to be converted. The
          Conversion Price at which shares of Common Stock shall be deliverable
          upon conversion without the payment of any additional consideration by
          the holder thereof (the "Conversion Price") shall at the time of the
          filing of this Certificate initially be $0.1777778 in the case of the
          Series A Preferred. Such initial Conversion Price shall be subject to
          adjustment, in order to adjust the number of shares of Common Stock
          into which the Series A Preferred is convertible, as hereinafter
          provided.




     B.   FRACTIONAL SHARES. No fractional shares of Common Stock shall be
          issued upon conversion of the Series A Preferred. In lieu of any
          fractional share to which any holder would otherwise be entitled upon
          conversion of the Series A Preferred owned by such holder, the Company
          shall pay cash equal to such fraction multiplied by the then effective
          Conversion Price or round up to the nearest whole share.

     C.   MECHANICS OF OPTIONAL CONVERSION. Before any holder of Series A
          Preferred shall be entitled to convert the same into full shares of
          Common Stock, such holder shall surrender the certificate or
          certificates therefor, endorsed or accompanied by written instrument
          or instruments of transfer, in form satisfactory to the Company, duly
          executed by the registered holder or by such holder's attorney duly
          authorized in writing, at the office of the Company or of any transfer
          agent for the Common Stock, and shall give written notice to the
          Company at such office that such holder elects to convert the same and
          shall state therein such holder's name or the name of the nominees in
          which such holder wishes the certificate or certificates for shares of
          Common Stock to be issued. The Company shall, as soon as practicable
          thereafter, issue and deliver at such office to such holder of Series
          A Preferred, or to such holder's nominee or nominees, a certificate or
          certificates for the number of shares of Common Stock to which such
          holder shall be entitled as aforesaid, together with cash in lieu of
          any fraction of a share. Such conversion shall be deemed to have been
          made immediately prior to the close of business on the date of such
          surrender of the shares of Series A Preferred to be converted, and the
          person or persons entitled to receive the shares of Common Stock
          issuable upon conversion shall be treated for all purposes as the
          record holder or holders of such shares of Common Stock on such date.
          From and after such date, all rights of the holder with respect to the
          Series A Preferred so converted shall terminate, except only the right
          of such holder, upon the surrender of his, her or its certificate or
          certificates therefor, to receive certificates for the number of
          shares of Common Stock issuable upon conversion thereof and cash for
          fractional shares.

D.   CERTAIN ADJUSTMENTS TO CONVERSION PRICE FOR STOCK SPLITS, DIVIDENDS,
     MERGERS, REORGANIZATIONS, ETC.


          1.   ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS AND COMBINATIONS OF
               COMMON STOCK. In the event the outstanding shares of Common Stock
               shall, after the filing of this Certificate be further subdivided
               (split), or combined (reverse split), by reclassification or
               otherwise, or in the event of any dividend or other distribution
               payable on the Common Stock in shares of Common Stock, the
               applicable Conversion Price in effect immediately prior to such
               subdivision, combination, dividend or other distribution shall,
               concurrently with the effectiveness of such subdivision,
               combination, dividend or other distribution, be proportionately
               adjusted.




          2.   ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In the event of a
               reclassification, reorganization or exchange (other than
               described in subsection IV(D)(1) above) or any consolidation or
               merger of the Company with another corporation (other than a
               merger, acquisition or other reorganization as defined in Section
               III(B), which shall be considered a liquidation pursuant to
               Section III above), each share of Series A Preferred shall
               thereafter be convertible into the number of shares of stock or
               other securities or property to which a holder of the number of
               shares of Common Stock of the Company deliverable upon conversion
               of the Series A Preferred would have been entitled upon such
               reclassification, reorganization, exchange, consolidation, merger
               or conveyance had the conversion occurred immediately prior to
               the event; and, in any such case, appropriate adjustment (as
               determined by the Board) shall be made in the application of the
               provisions herein set forth with respect to the rights and
               interests thereafter of the holders of the Series A Preferred, to
               the end that the provisions set forth herein (including
               provisions with respect to changes in and other adjustments of
               the applicable Conversion Price) shall thereafter be applicable,
               as nearly as reasonably may be, in relation to any shares of
               stock or other property thereafter deliverable upon the
               conversion of the Series A Preferred.

          3.   ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
               the Company, at any time or from time to time after the filing of
               this Certificate, makes, or fixes a record date for the
               determination of holders of Common Stock entitled to receive, a
               dividend or other distribution payable in securities of the
               Company other than shares of Common Stock, then and in each such
               event, provision shall be made so that the holders of Series A
               Preferred shall receive upon conversion thereof, in addition to
               the number of shares of Common Stock receivable thereupon, the
               amount of securities of the Company which they would have
               received had their Series A Preferred been converted into Common
               Stock on the date of such event and had they thereafter, during
               the period from the date of such event to and including the
               conversion date, retained such securities receivable by them as
               aforesaid during such period, subject to all other adjustments
               called for during such period under this Section IV(D) with
               respect to the rights or the holders of the Series A Preferred.

     E.   NOTICES OF RECORD DATE. In the event of any taking by the Company of a
          record of the holders of any class of securities for the purpose of
          determining the holders thereof who are entitled to receive any
          dividend (other than a cash dividend which is the same as cash
          dividends paid in previous quarters) or other distribution, any
          capital reorganization of the Company, any reclassification or
          recapitalization of the Company's capital stock, any consolidation or
          merger with or into another Company, any transfer of all or
          substantially all of the assets of the Company or any dissolution,
          liquidation or winding up of the Company, the Company shall mail to
          each holder of Series A Preferred at least ten (10) days prior to the
          date




          specified for the taking of a record, a notice specifying the
          date on which any such record is to be taken for the purpose of such
          dividend or distribution.

                                   ARTICLE IV.

     No shareholder of this Company shall have any cumulative voting rights.

                                   ARTICLE V.

     No shareholder of this Company shall have any preemptive rights by virtue
of Section 302A.413 of the Minnesota Statutes (or similar provisions of future
law) to subscribe for, purchase or acquire any shares of the Company of any
class, whether unissued or now or hereafter authorized, or any obligations or
other securities convertible into or exchangeable for any such shares.

                                   ARTICLE VI.

     Any action required or permitted to be taken at a meeting of the Board of
Directors of this Company may be taken by written action signed by the number of
directors that would be required to take such action at a meeting of the Board
of Directors at which all directors are present.

                                  ARTICLE VII.

     No director of this Company shall be personally liable to the Company or
its shareholders for monetary damages for breach of fiduciary duty by such
director as a director; provided, however, that this Article VII shall not
eliminate or limit the liability of a director to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Company or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 302A.559 or Section 80A.23 of the Minnesota Statutes, as amended, (iv)
for any transaction from which the director derived an improper personal
benefit, or (v) for any act or omission occurring prior to the effective date of
this Article VII. If the Section 302A of the Minnesota Statutes is hereinafter
amended to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the Company in addition to the
limitation and elimination of personal liability provided herein, shall be
eliminated or limited to the fullest extent permitted by the Minnesota Statutes,
as so amended. No amendment to or repeal of this Article VII shall apply to, or
have any effect on, the liability or alleged liability of any director for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.

                                  ARTICLE VIII.

     The Company shall indemnify its officers and directors to the fullest
extent permissible under the provisions of Chapter 302A of the Minnesota
Statutes, as amended from time to time, or as required or permitted by other
provisions of law. Any repeal or modification of this Article VIII will be
prospective only and will not adversely affect any right to indemnification of a
director or officer of the Company existing at the time of such repeal or
modification.



     IN WITNESS WHEREOF, the Company has caused these Amended and Restated
Articles of Incorporation to be signed by Michael J. Tate, its President, this
31st day of May, 2001.


REUTER MANUFACTURING, INC.

By:  /s/ MICHAEL J. TATE
     -----------------------------------------
     Michael J. Tate
Its: President

EX-10.6

                                                                   EXHIBIT 10.6

                            MAGSTAR TECHNOLOGIES, INC.
                             2001 STOCK OPTION PLAN

1.   PURPOSE OF PLAN.

     The purpose of the MagStar Technologies, Inc. 2001 Stock Option Plan (the
"Plan") is to advance the interests of MagStar Technologies, Inc. (the
"Company") and its shareholders by enabling the Company and its Subsidiaries to
attract and retain persons of ability to perform services for the Company and
its Subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to
the achievement by the Company of its economic objectives.

2.   DEFINITIONS.

     The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:

     2.1  "ADVERSE ACTIONS" mean the actions described in Section 10.4 of the
          Plan.

     2.2  "BOARD" means the Board of Directors of the Company.

     2.3  "BROKER EXERCISE NOTICE" means a written notice pursuant to which a
          Participant, upon exercise of an Option, irrevocably instructs a
          broker or dealer to sell a sufficient number of shares or loan a
          sufficient amount of money to pay all or a portion of the exercise
          price of the Option and/or any related withholding tax obligations and
          remit such sums to the Company and directs the Company to deliver
          stock certificates to be issued upon such exercise directly to such
          broker or dealer.

     2.4  "CHANGE IN CONTROL" means an event described in Section 9.1 of the
          Plan.

     2.5  "CODE" means the Internal Revenue Code of 1986, as amended.

     2.6  "COMMITTEE" means the group of individuals administering the Plan, as
          provided in Section 3 of the Plan.

     2.7  "COMMON STOCK" means the common stock of the Company, $.1875 par value
          per share, or the number and kind of shares of stock or other
          securities into which such common stock may be changed in accordance
          with Section 4.3 of the Plan.

     2.8  "DISABILITY" means the disability of the Participant such as would
          entitle the Participant to receive disability income benefits pursuant
          to the long-term disability plan of the Company or Subsidiary then
          covering the Participant or, if no such plan exists or is applicable
          to the Participant, the permanent and total disability of the
          Participant within the meaning of Section 22(e)(3) of the Code.




     2.9  "ELIGIBLE RECIPIENTS" means all employees of the Company or any
          Subsidiary and any non-employee directors, consultants and independent
          contractors of the Company or any Subsidiary.

     2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

     2.11 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any
          date (or, if no shares were traded or quoted on such date, as of the
          next preceding date on which there was such a trade or quote) (a) the
          closing sale price of the Common Stock if the Common Stock is listed,
          admitted to unlisted trading privileges or reported on any foreign or
          national securities exchange or on the Nasdaq National Market or an
          equivalent foreign market on which sale prices are reported; (b) if
          the Common Stock is not so listed, admitted to unlisted trading
          privileges or reported, the closing bid price as reported by the
          Nasdaq SmallCap Market, OTC Bulletin Board or the National Quotation
          Bureau, Inc. or other comparable service; or (c) if the Common Stock
          is not so reported, such price as the Committee determines in good
          faith in the exercise of its reasonable discretion.

     2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
          granted to an Eligible Recipient pursuant to Section 6 of the Plan
          that qualifies as an "incentive stock option" within the meaning of
          Section 422 of the Code.

     2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
          granted to an Eligible Recipient pursuant to Section 6 of the Plan
          that does not qualify as an Incentive Stock Option.

     2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
          Option.

     2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more
          Options under the Plan.

     2.16 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are
          already owned by the Participant or, with respect to any Option, that
          are to be issued upon the exercise of such Option.

     2.17 "RETIREMENT" means termination of employment or service pursuant to
          and in accordance with the regular (or, if approved by the Board for
          purposes of the Plan, early) retirement/pension plan or practice of
          the Company or Subsidiary then covering the Participant, provided that
          if the Participant is not covered by any such plan or practice, the
          Participant will be deemed to be covered by the Company's plan or
          practice for purposes of this determination.

     2.18 "SECURITIES ACT" means the Securities Act of 1933, as amended.

     2.19 "SUBSIDIARY" means any entity that is directly or indirectly
          controlled by the Company or any entity in which the Company has a
          significant equity interest, as determined by the Committee.

     2.20 "TAX DATE" means the date any withholding tax obligation arises under
          the Code or other applicable tax statute for a Participant with
          respect to an Option.

                                       2



3.   PLAN ADMINISTRATION.

     3.1  THE COMMITTEE. The Plan will be administered by the Board or by a
          committee of the Board. So long as the Company has a class of its
          equity securities registered under Section 12 of the Exchange Act, any
          committee administering the Plan will consist solely of two or more
          members of the Board who are "non-employee directors" within the
          meaning of Rule 16b-3 under the Exchange Act and, if the Board so
          determines in its sole discretion, who are "outside directors" within
          the meaning of Section 162(m) of the Code. Such a committee, if
          established, will act by majority approval of the members (but may
          also take action with the written consent of a majority of the members
          of such committee), and a majority of the members of such a committee
          will constitute a quorum. As used in the Plan, "Committee" will refer
          to the Board or to such a committee, if established. To the extent
          consistent with corporate law, the Committee may delegate to any
          officers of the Company the duties, power and authority of the
          Committee under the Plan pursuant to such conditions or limitations as
          the Committee may establish; provided, however, that only the
          Committee may exercise such duties, power and authority with respect
          to Eligible Recipients who are subject to Section 16 of the Exchange
          Act. The Committee may exercise its duties, power and authority under
          the Plan in its sole and absolute discretion without the consent of
          any Participant or other party, unless the Plan specifically provides
          otherwise. Each determination, interpretation or other action made or
          taken by the Committee pursuant to the provisions of the Plan will be
          final, conclusive and binding for all purposes and on all persons,
          including, without limitation, the Company, the shareholders of the
          Company, the participants and their respective successors-in-interest.
          No member of the Committee will be liable for any action or
          determination made in good faith with respect to the Plan or any
          Option granted under the Plan.

     3.2  AUTHORITY OF THE COMMITTEE.

          (a)  In accordance with and subject to the provisions of the Plan, the
               Committee will have the authority to determine all provisions of
               Options as the Committee may deem necessary or desirable and as
               consistent with the terms of the Plan, including, without
               limitation, the following: (i) the Eligible Recipients to be
               selected as Participants; (ii) the nature and extent of the
               Options to be made to each Participant (including the number of
               shares of Common Stock to be subject to each Option, the exercise
               price and the manner in which Options will become exercisable)
               and the form of written agreement, if any, evidencing such
               Option; (iii) the time or times when Options will be granted;
               (iv) the duration of each Option; and (v) the restrictions and
               other conditions to which the Options may be subject. In
               addition, the Committee will have the authority under the Plan in
               its sole discretion to pay the economic value of any Option in
               the form of cash, Common Stock or any combination of both.

          (b)  The Committee will have the authority under the Plan to amend or
               modify the terms of any outstanding Option in any manner,
               including, without limitation, the authority to modify the number
               of shares or other terms and conditions of an Option, extend the
               term of an Option, accelerate the exercisability or otherwise
               terminate any restrictions relating to an Option, accept the
               surrender of any outstanding Option or, to the extent not
               previously exercised or vested, authorize the grant of new
               Options in substitution for surrendered Options; provided,
               however that the amended or modified terms are permitted by the
               Plan as then in effect and that any Participant adversely

                                       3




               affected by such amended or modified terms has consented to such
               amendment or modification. No amendment or modification to an
               Option, however, whether pursuant to this Section 3.2 or any
               other provisions of the Plan, will be deemed to be a re-grant of
               such Option for purposes of this Plan.

          (c)  In the event of (i) any reorganization, merger, consolidation,
               recapitalization, liquidation, reclassification, stock dividend,
               stock split, combination of shares, rights offering,
               extraordinary dividend or divestiture (including a spin-off) or
               any other change in corporate structure or shares, (ii) any
               purchase, acquisition, sale or disposition of a significant
               amount of assets or a significant business, (iii) any change in
               accounting principles or practices, or (iv) any other similar
               change, in each case with respect to the Company or any other
               entity whose performance is relevant to the grant or vesting of
               an Option, the Committee (or, if the Company is not the surviving
               corporation in any such transaction, the board of directors of
               the surviving corporation) may, without the consent of any
               affected Participant, amend or modify the conditions to the
               exercisability of any outstanding Option that is based in whole
               or in part on the financial performance of the Company (or any
               Subsidiary or division thereof) or such other entity so as
               equitably to reflect such event, with the desired result that the
               criteria for evaluating such financial performance of the Company
               or such other entity will be substantially the same (in the sole
               discretion of the Committee or the board of directors of the
               surviving corporation) following such event as prior to such
               event; provided, however, that the amended or modified terms are
               permitted by the Plan as then in effect.

4.   SHARES AVAILABLE FOR ISSUANCE.

     4.1  MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided
          in Section 4.3 of the Plan, the maximum number of shares of Common
          Stock that will be available for issuance under the Plan will be two
          million (2,000,000) shares of Common Stock. Notwithstanding any other
          provisions of the Plan to the contrary, no Participant in the Plan may
          be granted any Options relating to more than one hundred thousand
          (100,000) shares of Common Stock in the aggregate in any fiscal year
          of the Company (subject to adjustment as provided in Section 4.3 of
          the Plan); provided, however, that a Participant who is first
          appointed or elected as an officer, hired as an employee or retained
          as a consultant by the Company or who receives a promotion that
          results in an increase in responsibilities or duties may be granted,
          during the fiscal year of such appointment, election, hiring,
          retention or promotion, Options relating to up to two hundred thousand
          (200,000) shares of Common Stock (subject to adjustment as provided in
          Section 4.3 of the Plan).

     4.2  ACCOUNTING FOR OPTIONS. Shares of Common Stock that are issued under
          the Plan or that are subject to outstanding Options will be applied to
          reduce the maximum number of shares of Common Stock remaining
          available for issuance under the Plan. Any shares of Common Stock that
          are subject to an Option that lapses, expires, is forfeited or for any
          reason is terminated unexercised and any shares of Common Stock that
          are subject to an Option that is settled or paid in cash or any form
          other than shares of Common Stock will automatically again become
          available for issuance under the Plan.

     4.3  ADJUSTMENTS TO SHARES AND OPTIONS. In the event of any reorganization,
          merger, consolidation, recapitalization, liquidation,
          reclassification, stock dividend, stock split,

                                       4




          combination of shares, rights offering, divestiture or extraordinary
          dividend (including a spin-off) or any other change in the corporate
          structure or shares of the Company, the Committee (or, if the Company
          is not the surviving corporation in any such transaction, the board of
          directors of the surviving corporation) will make appropriate
          adjustment (which determination will be conclusive) as to the number
          and kind of securities or other property (including cash) available
          for issuance or payment under the Plan and, in order to prevent
          dilution or enlargement of the rights of Participants, the number and
          kind of securities or other property (including cash) subject to, and
          the exercise price of, outstanding Options.

5.   PARTICIPATION.

     Participants in the Plan will be those Eligible Recipients who, in the
judgment of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Options as may be determined by the Committee in its sole discretion. Options
will be deemed to be granted as of the date specified in the grant resolution of
the Committee, which date will be the date of any related agreement with the
Participant.

6.   OPTIONS.

     6.1  GRANT. An Eligible Recipient may be granted one or more Options under
          the Plan, and such Options will be subject to such terms and
          conditions, consistent with the other provisions of the Plan, as may
          be determined by the Committee in its sole discretion. The Committee
          may designate whether an Option is to be considered an Incentive Stock
          Option or a Non-Statutory Stock Option. To the extent that any
          Incentive Stock Option granted under the Plan ceases for any reason to
          qualify as an "incentive stock option" for purposes of Section 422 of
          the Code, such Incentive Stock Option will continue to be outstanding
          for purposes of the Plan but will thereafter be deemed to be a
          Non-Statutory Stock Option.

     6.2  EXERCISE PRICE. The per share price to be paid by a Participant upon
          exercise of an Option will be determined by the Committee in its
          discretion at the time of the Option grant; provided, however, that
          such per share price will not be less than (i) 100% of the Fair Market
          Value of one share of Common Stock on the date of grant with respect
          to an Incentive Stock Option, (ii) 110% of the Fair Market Value of
          one share of Common Stock on the date of grant if, at the time the
          Incentive Stock Option is granted, the Participant owns, directly or
          indirectly (as determined under Section 425(d) of the Code), more than
          10% of the total combined voting power of all classes of stock of the
          Company, any subsidiary or any parent corporation of the Company
          (within the meaning of Sections 425(f) and 425(e), respectively, of
          the Code), or (iii) 85% of the Fair Market Value of one share of
          Common Stock on the date of grant with respect to a Non-Statutory
          Stock Option.

     6.3  EXERCISABILITY AND DURATION. An Option will become exercisable at such
          times and in such installments as may be determined by the Committee
          in its sole discretion at the time of grant; provided, however, that
          no Incentive Stock Option may be exercisable after 10 years from its
          date of grant (five years from its date of grant if, at the time the
          Incentive Stock Option is granted, the Participant owns, directly or
          indirectly, more than 10% of the total combined voting power of all
          classes of stock of the Company or any parent or subsidiary
          corporation of the Company).

                                       5




     6.4  PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to
          be purchased upon exercise of an Option must be paid entirely in cash
          (including check, bank draft or money order); provided, however, that
          the Committee, in its sole discretion and upon terms and conditions
          established by the Committee, may allow such payments to be made, in
          whole or in part, by tender of a Broker Exercise Notice, Previously
          Acquired Shares, a promissory note (on terms acceptable to the
          Committee in its sole discretion) or by a combination of such methods.

     6.5  MANNER OF EXERCISE. An Option may be exercised by a Participant in
          whole or in part from time to time, subject to the conditions
          contained in the Plan and in the agreement evidencing such Option, by
          delivery in person, by facsimile or electronic transmission or through
          the mail of written notice of exercise to the Company (Attention:
          Secretary) at its principal executive office at 410 Eleventh Avenue
          South, Hopkins, Minnesota 55343, and by paying in full the total
          exercise price for the shares of Common Stock to be purchased in
          accordance with Section 6.4 of the Plan.

     6.6  EARLY EXERCISE. An Option may, but need not, contain a provision under
          which the Participant may elect to exercise the Option as to any part
          or all of the shares subject to the Option prior to full vesting of
          the Option. Any unvested shares so purchased shall be subject to a
          repurchase option in favor of the Company and to any other restriction
          the Committee determines appropriate. The Company will not exercise
          its repurchase option until at least 6 months (or such longer or
          shorter period of time required to avoid a charge to earnings for
          financial accounting purposes) have elapsed following exercise of the
          Option unless the Committee specifically provides otherwise in the
          Option.

     6.7  AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To
          the extent that the aggregate Fair Market Value (determined as of the
          date an Incentive Stock Option is granted) of the shares of Common
          Stock with respect to which incentive stock options (within the
          meaning of Section 422 of the Code) are exercisable for the first time
          by a Participant during any calendar year (under the Plan and any
          other incentive stock option plans of the Company or any subsidiary or
          parent corporation of the Company (within the meaning of the Code))
          exceeds $100,000 (or such other amount as may be prescribed by the
          Code from time to time), such excess Options will be treated as
          Non-Statutory Stock Options. The determination will be made by taking
          incentive stock options into account in the order in which they were
          granted. If such excess only applies to a portion of an Incentive
          Stock Option, the Committee, in its discretion, will designate which
          shares will be treated as shares to be acquired upon exercise of an
          Incentive Stock Option.

7.   EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.

     7.1  TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. Unless otherwise
          provided by the Committee in its sole discretion in the agreement
          evidencing an Option:

          (a)  In the event a Participant's employment or other service with the
               Company and all Subsidiaries is terminated by reason of death or
               Disability, all outstanding Options then held by the Participant
               will remain exercisable, to the extent exercisable as of the date
               of such termination, for a period of one year after such
               termination (but in no event after the expiration date of any
               such Option).

                                       6




          (b)  In the event a Participant's employment or other service with the
               Company and all Subsidiaries is terminated by reason of
               Retirement, all outstanding Options then held by the Participant
               will remain exercisable, to the extent exercisable as of the date
               of such termination, for a period of three months after such
               termination (but in no event after the expiration date of any
               such Option).

     7.2  TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.

          (a)  Unless otherwise provided by the Committee in its sole discretion
               in the agreement evidencing an Option, in the event a
               Participant's employment or other service is terminated with the
               Company and all Subsidiaries for any reason other than death,
               Disability or Retirement, or a Participant is in the employ or
               service of a Subsidiary and the Subsidiary ceases to be a
               Subsidiary of the Company (unless the Participant continues in
               the employ or service of the Company or another Subsidiary), all
               rights of the Participant under the Plan and any agreements
               evidencing an Option will immediately terminate without notice of
               any kind, and no Options then held by the Participant will
               thereafter be exercisable; provided, however, that if such
               termination is due to any reason other than termination by the
               Company or any Subsidiary for "cause," all outstanding Options
               then held by such Participant will remain exercisable, to the
               extent exercisable as of such termination, for a period of three
               months after such termination (but in no event after the
               expiration date of any such Option).

          (b)  For purposes of this Section 7.2, "cause" (as determined by the
               Committee) will be as defined in any employment or other
               agreement or policy applicable to the Participant or, if no such
               agreement or policy exists, will mean (i) dishonesty, fraud,
               misrepresentation, embezzlement or deliberate injury or attempted
               injury, in each case related to the Company or any Subsidiary,
               (ii) any unlawful or criminal activity of a serious nature, (iii)
               any intentional and deliberate breach of a duty or duties that,
               individually or in the aggregate, are material in relation to the
               Participant's overall duties, or (iv) any material breach of any
               employment, service, confidentiality or non-compete agreement
               entered into with the Company or any Subsidiary.

     7.3  MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
          provisions of this Section 7, upon a Participant's termination of
          employment or other service with the Company and all Subsidiaries, the
          Committee may, in its sole discretion (which may be exercised at any
          time on or after the date of grant, including following such
          termination), cause Options (or any part thereof) then held by such
          Participant to become or continue to become exercisable and/or remain
          exercisable following such termination of employment or service;
          provided, however, that no Option may remain exercisable beyond its
          expiration date.

     7.4  EXERCISE OF INCENTIVE STOCK OPTIONS FOLLOWING TERMINATION. Any
          Incentive Stock Option that remains unexercised more than one year
          following termination of employment by reason of Disability or more
          than three months following termination for any reason other than
          death or Disability will thereafter be deemed to be a Non-Statutory
          Stock Option.

     7.5  DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
          Committee otherwise determines in its sole discretion, a Participant's
          employment or other service will, for purposes of the Plan, be deemed
          to have terminated on the date recorded on the personnel or

                                       7



          other records of the Company or the Subsidiary for which the
          Participant provides employment or other service, as determined by the
          Committee in its sole discretion based upon such records.

8.   PAYMENT OF WITHHOLDING TAXES.

     8.1  GENERAL RULES. The Company is entitled to (a) withhold and deduct from
          future wages of the Participant (or from other amounts that may be due
          and owing to the Participant from the Company or a Subsidiary), or
          make other arrangements for the collection of, all legally required
          amounts necessary to satisfy any and all foreign, federal, state and
          local withholding and employment-related tax requirements attributable
          to an Option, including, without limitation, the grant or exercise of
          an Option or a disqualifying disposition of stock received upon
          exercise of an Incentive Stock Option, or (b) require the Participant
          promptly to remit the amount of such withholding to the Company before
          taking any action, including issuing any shares of Common Stock, with
          respect to an Option.

     8.2  SPECIAL RULES. The Committee may, in its sole discretion and upon
          terms and conditions established by the Committee, permit or require a
          Participant to satisfy, in whole or in part, any withholding or
          employment-related tax obligation described in Section 8.1 of the Plan
          by electing to tender Previously Acquired Shares, a Broker Exercise
          Notice or a promissory note (on terms acceptable to the Committee in
          its sole discretion), or by a combination of such methods.

9.   CHANGE IN CONTROL.

     9.1  CHANGE IN CONTROL. For purposes of this Section 9, a "Change in
          Control" of the Company will mean the following:

          (a)  the sale, lease, exchange, exclusive license or other transfer,
               directly or indirectly, of substantially all of the assets of the
               Company (in one transaction or in a series of related
               transactions) to a person or entity that is not controlled by the
               Company;

          (b)  the approval by the shareholders of the Company of any plan or
               proposal for the liquidation or dissolution of the Company;

          (c)  any person, other than a Grandfathered Shareholder (as defined
               below), becomes after the effective date of the Plan the
               "beneficial owner" (as defined in Rule 13d-3 under the Exchange
               Act), directly or indirectly, of (i) 20% or more, but not 50% or
               more, of the combined voting power of the Company's outstanding
               securities ordinarily having the right to vote at elections of
               directors, unless the transaction resulting in such ownership has
               been approved in advance by the Continuity Directors (as defined
               in Section 9.2 below), or (ii) 50% or more of the combined voting
               power of the Company's outstanding securities ordinarily having
               the right to vote at elections of directors (regardless of any
               approval by the Continuity Directors) (a "Grandfathered
               Shareholder" means Activar, Inc., Richard McNamara and James
               Reissner, together with any and all of their "affiliates" and
               "associates" (as defined in Rule 12b-2 under the Exchange Act)).

          (d)  a merger or consolidation to which the Company is a party if the
               shareholders of the Company immediately prior to effective date
               of such merger or consolidation have "beneficial ownership" (as
               defined in Rule 13d-3 under the Exchange

                                       8




               Act), immediately following the effective date of such merger or
               consolidation, of securities of the surviving corporation
               representing (i) more than 50%, but less than 80%, of the
               combined voting power of the surviving corporation's then
               outstanding securities ordinarily having the right to vote at
               elections of directors, unless such merger or consolidation has
               been approved in advance by the Continuity Directors, or (ii) 50%
               or less of the combined voting power of the surviving
               corporation's then outstanding securities ordinarily having the
               right to vote at elections of directors (regardless of any
               approval by the Continuity Directors);

          (e)  the Continuity Directors cease for any reason to constitute at
               least a majority of the Board; or

          (f)  any other change in control of the Company of a nature that would
               be required to be reported pursuant to Section 13 or 15(d) of the
               Exchange Act, whether or not the Company is then subject to such
               reporting requirement.

     9.2  CONTINUITY DIRECTORS. For purposes of this Section 9, "Continuity
          Directors" of the Company will mean any individuals who are members of
          the Board on the effective date of the Plan and any individual who
          subsequently becomes a member of the Board whose election, or
          nomination for election by the Company's shareholders, was approved by
          a vote of at least a majority of the Continuity Directors (either by
          specific vote or by approval of the Company's proxy statement in which
          such individual is named as a nominee for director without objection
          to such nomination).

     9.3  ACCELERATION OF EXERCISABILITY. Without limiting the authority of the
          Committee under Sections 3.2 and 4.3 of the Plan, if a Change in
          Control of the Company occurs, then, unless otherwise provided by the
          Committee in its sole discretion either in the agreement evidencing an
          Option at the time of grant or at any time after the grant of an
          Option, will become immediately exercisable in full and will remain
          exercisable for the remainder of their terms, regardless of whether
          the Participant to whom such Options have been granted remains in the
          employ or service of the Company or any Subsidiary.

     9.4  CASH PAYMENT. If a Change in Control of the Company occurs, then the
          Committee, if approved by the Committee in its sole discretion either
          in an agreement evidencing an Option at the time of grant or at any
          time after the grant of an Option, and without the consent of any
          Participant effected thereby, may determine that some or all
          Participants holding outstanding Options will receive, with respect to
          some or all of the shares of Common Stock subject to such Options, as
          of the effective date of any such Change in Control of the Company,
          cash in an amount equal to the excess of the Fair Market Value of such
          shares immediately prior to the effective date of such Change in
          Control of the Company over the exercise price per share of such
          Options.

     9.5  LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in
          Section 9.3 or 9.4 of the Plan to the contrary, if, with respect to a
          Participant, the acceleration of the exercisability of an Option as
          provided in Section 9.3 or the payment of cash in exchange for all or
          part of an Option as provided in Section 9.4 (which acceleration or
          payment could be deemed a "payment" within the meaning of Section
          280G(b)(2) of the Code), together with any other "payments" that such
          Participant has the right to receive from the Company or any

                                       9



          corporation that is a member of an "affiliated group" (as defined in
          Section 1504(a) of the Code without regard to Section 1504(b) of the
          Code) of which the Company is a member, would constitute a "parachute
          payment" (as defined in Section 280G(b)(2) of the Code), then the
          "payments" to such Participant under Section 9.3 or 9.4 of the Plan
          will be reduced to the largest amount as will result in no portion of
          such "payments" being subject to the excise tax imposed by Section
          4999 of the Code; provided, however, that, such "payments" shall only
          be reduced if such reduction would result in the Participant receiving
          a greater net benefit, on an after-tax basis (including after payment
          of any excise tax imposed by Section 4999 of the Code), than the
          participant would have received had such reduction not occurred;
          provided further, however, that if a Participant is subject to a
          separate agreement with the Company or a Subsidiary that expressly
          addresses the potential application of Sections 280G or 4999 of the
          Code (including, without limitation, that "payments" under such
          agreement or otherwise will be reduced, that the Participant will have
          the discretion to determine which "payments" will be reduced, that
          such "payments" will not be reduced or that such "payments" will be
          "grossed up" for tax purposes), then this Section 9.5 will not apply,
          and any "payments" to a Participant under Section 9.3 or 9.4 of the
          Plan will be treated as "payments" arising under such separate
          agreement.

10.  RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.


     10.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
          limit in any way the right of the Company or any Subsidiary to
          terminate the employment or service of any Eligible Recipient or
          Participant at any time, nor confer upon any Eligible Recipient or
          Participant any right to continue in the employ or service of the
          Company or any Subsidiary.

     10.2 RIGHTS AS A SHAREHOLDER. As a holder of Options, a Participant will
          have no rights as a shareholder unless and until such Options are
          exercised for, or paid in the form of, shares of Common Stock and the
          Participant becomes the holder of record of such shares. Except as
          otherwise provided in the Plan, no adjustment will be made for
          dividends or distributions with respect to such Options as to which
          there is a record date preceding the date the Participant becomes the
          holder of record of such shares, except as the Committee may determine
          in its discretion.

     10.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the
          laws of descent and distribution or as otherwise expressly permitted
          by the Plan, unless approved by the Committee in its sole discretion,
          no right or interest of any Participant in an Option prior to the
          exercise of such Option will be assignable or transferable, or
          subjected to any lien, during the lifetime of the Participant, either
          voluntarily or involuntarily, directly or indirectly, by operation of
          law or otherwise. A Participant will, however, be entitled to
          designate a beneficiary to receive an Option upon such Participant's
          death, and in the event of a Participant's death, payment of any
          amounts due under the Plan will be made to, and exercise of Options
          (to the extent permitted pursuant to Section 7 of the Plan) may be
          made by, the Participant's legal representatives, heirs and legatees.

     10.4 RESTRICTIONS REGARDING EMPLOYMENT OR SERVICE.

          (a)  Notwithstanding anything in the Plan to the contrary, in the
               event that the Committee determines, in its sole discretion, that
               a Participant, prior to or following such Participant's
               termination of employment or other service with the Company or
               any

                                       10




               Subsidiary, has taken Adverse Actions with respect to the
               Company or any Subsidiary, the Committee in its sole discretion
               will have the authority to terminate immediately all rights of
               the Participant under the Plan and any agreement evidencing
               Options then held by the Participant without notice of any kind.
               In such event, the Committee will also have the authority in its
               sole discretion to rescind the exercise of any Options of the
               Participant that have occurred since a date commencing one year
               prior to the date of such employment or service termination and
               require the Participant to disgorge any profits (however defined
               by the Committee) made by the Participant relating to such
               Options or any shares issuable upon the exercise or vesting of
               such Options. Such payment must be made in cash (including check,
               bank draft or money order) or, with the Committee's consent,
               shares of Common Stock with a Fair Market Value on the date of
               payment equal to the amount of such payment. The Company will be
               entitled to withhold and deduct from future wages of the
               Participant (or from other amounts that may be due and owing to
               the Participant from the Company or a Subsidiary) or make other
               arrangements for the collection of all amounts necessary to
               satisfy such payment obligation.

          (b)  For purposes of this Section 10.4, an "Adverse Action" will mean
               any action by a Participant that the Committee, in its sole
               discretion, determines is materially adverse to the interests of
               the Company or any Subsidiary, including, without limitation, (i)
               disclosing confidential information of the Company or any
               Subsidiary to any person not authorized by the Company to receive
               it, (ii) engaging, directly or indirectly, in any commercial
               activity that in the judgment of the Committee competes with the
               business of the Company or any Subsidiary, or (iii) interfering
               with the relationships of the Company or its Subsidiaries with
               their respective employees and customers.

     10.5 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
          to modify or rescind any previously approved compensation plans or
          programs of the Company or create any limitations on the power or
          authority of the Board to adopt such additional or other compensation
          arrangements as the Board may deem necessary or desirable.

11.  SECURITIES LAW AND OTHER RESTRICTIONS.

     Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under this Plan, and a Participant may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to
Options granted under the Plan, unless (a) there is in effect with respect to
such shares a registration statement under the Securities Act and any applicable
state or foreign securities laws or an exemption from such registration under
the Securities Act and applicable state or foreign securities laws, and (b)
there has been obtained any other consent, approval or permit from any other
regulatory body which the Committee, in its sole discretion, deems necessary or
advisable. The Company may condition such issuance, sale or transfer upon the
receipt of any representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common Stock, as
may be deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.

                                       11




12.  PLAN AMENDMENT, MODIFICATION AND TERMINATION.

     The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan will conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no amendments
to the Plan will be effective without approval of the shareholders of the
Company if shareholder approval of the amendment is then required pursuant to
Section 422 of the Code or the rules of any stock exchange or Nasdaq or similar
regulatory body. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Option without the consent of the affected
Participant; provided, however, that this sentence will not impair the right of
the Committee to take whatever action it deems appropriate under Sections 3.2,
4.3 and 9 of the Plan.

13.  EFFECTIVE DATE AND DURATION OF THE PLAN.

     The Plan is effective as of April 3, 2001, the date it was approved by the
Board subject to approval of the shareholders of the Company, which is expected
to occur on May 31, 2001. The Plan will terminate at 11:59 p.m. on April 3,
2011, and may be terminated prior to such time to by Board action, and no Option
will be granted after such termination. Options outstanding upon termination of
the Plan may continue to be exercised in accordance with their terms.

14.  MISCELLANEOUS.

     14.1 GOVERNING LAW. The validity, construction, interpretation,
          administration and effect of the Plan and any rules, regulations and
          actions relating to the Plan will be governed by and construed
          exclusively in accordance with the laws of the State of Minnesota,
          notwithstanding the conflicts of laws principles of any jurisdictions.

     14.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the
          benefit of the successors and permitted assigns of the Company and
          the Participants.

                                       12

EX-10.7

                                                                   EXHIBIT 10.7

                            MAGSTAR TECHNOLOGIES, INC.
                        2001 EMPLOYEE STOCK PURCHASE PLAN

1.   PURPOSE. The purpose of this 2001 Employee Stock Purchase Plan (the "Plan")
     is to advance the interests of MagStar Technologies, Inc. (the "Company")
     and its shareholders by providing Employees (as defined below) of the
     Company and its Designated Subsidiaries (as defined below) with an
     opportunity to acquire an ownership interest in the Company through the
     purchase of Common Stock (as defined below) of the Company on favorable
     terms through payroll deductions. It is the intention of the Company that
     the Plan qualify as an "employee stock purchase plan" under Section 423 of
     the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly,
     provisions of the Plan shall be construed so as to extend and limit
     participation in a manner consistent with the requirements of Section 423
     of the Code.

2.   DEFINITIONS.

     2.1  "Board" means the Board of Directors of the Company.

     2.2  "Common Stock" means the voting common stock, par value $.1875 per
          share, of the Company, or the number and kind of shares of stock or
          other securities into which such voting common stock may be changed in
          accordance with Section 13 of the Plan.

     2.3  "Committee" means the entity administering the Plan, as provided in
          Section 3 below.

     2.4  "Compensation" means all regular straight-time earnings and
          commissions that are included in regular compensation, excluding
          bonuses and any pay for overtime (except to the extent that the
          inclusion of any such item is specifically directed by the Committee),
          determined in a manner consistent with the requirements of Section 423
          of the Code.

     2.5  "Designated Subsidiary" means a Subsidiary that has been designated by
          the Board from time to time, in its sole discretion, as eligible to
          participate in the Plan.

     2.6  "Employee" means any person, including an officer, who is customarily
          employed by the Company or one of its Designated Subsidiaries for at
          least 20 hours per week and more than five (5) months in a calendar
          year.

     2.7  "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     2.8  "Fair Market Value" means, with respect to the Common Stock, as of any
          date (or, if no shares were traded or quoted on such date, as of the
          next preceding date on which there was such a trade or quote), (a) the
          closing sale price of the Common Stock if the Common Stock is listed,
          admitted to unlisted trading privileges or reported on any foreign or
          national securities exchange or on the Nasdaq National Market or an
          equivalent foreign market on which sale prices are reported; (b) if
          the Common Stock is not so listed, admitted to unlisted trading
          privileges or reported, the closing bid price as reported by the
          Nasdaq SmallCap Market, OTC Bulletin Board or the National Quotation
          Bureau, Inc. or other comparable service; or (c) if the Common Stock


                                       1


          is not so listed or reported, such price as the Committee determines
          in good faith in the exercise of its reasonable discretion, but in a
          manner acceptable under Section 423 of the Code.

     2.9  "Offering" means any of the offerings to Participants of options to
          purchase Common Stock under the Plan, each continuing for three
          months, except for the initial Offering which shall continue for the
          period set forth in Section 5 below.

     2.10 "Offering Date" means the first day of the Offering Period under the
          Plan, as described in Section 5 below.

     2.11 "Offering Period" means the time period commencing on the Offering
          Date and ending on the Termination Date.

     2.12 "Option Price" is defined in Section 8 below.

     2.13 "Participant" means an eligible Employee who elects to participate in
          the Plan pursuant to Section 6 below.

     2.14 "Securities Act" means the Securities Act of 1933, as amended.

     2.15 "Subsidiary" means any subsidiary corporation of the Company within
          the meaning of Section 424(f) of the Code.

     2.16 "Termination Date" means the last day of the Offering Period under the
          Plan, as described in Section 5 below.

3.   ADMINISTRATION. The Plan will be administered by the Board or by a
     committee of the Board. So long as the Company has a class of its equity
     securities registered under Section 12 of the Exchange Act, the Plan will
     be administered by a committee of the Board consisting solely of not less
     than two members of the Board who are "non-employee directors" within the
     meaning of Rule 16b-3 under the Exchange Act and, if the Board so
     determines in its sole discretion, who are "outside directors" within the
     meaning of Section 162(m) of the Code (the "Committee"). Members of the
     Committee shall be appointed from time to time by the Board, shall serve at
     the pleasure of the Board, and may resign at any time upon written notice
     to the Board. A majority of the members of the Committee shall constitute a
     quorum. The Committee shall act by majority approval of the members and
     shall keep minutes of its meetings. Action of the Committee may be taken
     without a meeting if unanimous written consent is given. Copies of minutes
     of the Committee's meetings and of its actions by written consent shall be
     kept with the corporate records of the Company. In accordance with and
     subject to the provisions of the Plan, the Committee shall have authority
     to make, administer and interpret such rules and regulations as it deems
     necessary to administer the Plan, and any determination, decision or action
     in connection with construction, interpretation, administration or
     application of the Plan shall be final, conclusive and binding upon all
     Participants and any and all persons claiming under or through any
     Participant. No member of the Committee shall be liable for any action or
     determination made in good faith with respect to the Plan or any option
     granted under the Plan.

                                       2



4.   ELIGIBILITY.

     4.1  Any Employee who is employed by the Company or a Designated Subsidiary
          on the date that this Plan is approved by the Board and any Employee
          who becomes an employee after such date and has been employed by the
          Company or a Designated Subsidiary for at least one month prior to an
          Offering Date shall be eligible to participate in the Plan, beginning
          with the Offering commencing on such Offering Date, subject to the
          limitations imposed by Section 423(b) of the Code. With respect to a
          Designated Subsidiary that has been acquired by the Company, the
          period of employment of Employees of such Designated Subsidiary
          occurring prior to the time of such acquisition shall be included for
          purposes of determining whether an Employee has been employed for the
          requisite period of time under the Plan.

     4.2  Any provisions of the Plan to the contrary notwithstanding, no
          Employee shall be granted an option under the Plan if:

          (a)  immediately after the grant, such Employee (or any other person
               whose stock ownership would be attributed to such Employee
               pursuant to Section 424(d) of the Code) would own shares of
               Common Stock and/or hold outstanding options to purchase shares
               of Common Stock possessing five percent (5%) or more of the total
               combined voting power or value of all classes of shares of the
               Company or of any Subsidiary; or

          (b)  the amount of payroll deductions that the Employee has elected to
               have withheld under such option (pursuant to Section 7 below)
               would permit the Employee to purchase shares of Common Stock
               under all "employee stock purchase plans" (within the meaning of
               Section 423 of the Code) of the Company and its Subsidiaries to
               accrue (i.e., become exercisable) at a rate that exceeds $25,000
               of the Fair Market Value of such shares of Common Stock
               (determined at the time such option is granted) for each calendar
               year in which such option is outstanding at any time.

5.   OFFERINGS. Options to purchase shares of Common Stock shall be offered to
     Participants under the Plan through a continuous series of Offerings, each
     (a) continuing for three months (except for the initial Offering Period)
     and commencing on January 1, April 1, July 1 and October 1 of each year, as
     the case may be, except for the initial Offering Period (the "Offering
     Date"), and (b) terminating on March 31, June 30, September 30 and December
     31 of each year, as the case may be (the "Termination Date"). The initial
     Offering Period under the Plan shall continue for five months, commencing
     on May 1, 2001 and terminating on September 30, 2001. Offerings under the
     Plan shall continue until either (i) the Committee decides, in its sole
     discretion, that no further Offerings shall be made because the Common
     Stock remaining available under the Plan is insufficient to make an
     Offering to all eligible Employees, or (ii) the Plan is terminated in
     accordance with Section 17 below.

6.   PARTICIPATION.

     6.1  An eligible Employee may become a Participant in the Plan by
          completing a subscription agreement authorizing payroll deductions on
          the form provided by the Company (the "Participation Form") and filing
          the Participation Form with the Company's Human Resources Department
          not less than 15 days before the Offering Date of the first Offering
          in

                                       3




          which the Participant wishes to participate.

     6.2  Except as provided in Section 7.1 below, payroll deductions for a
          Participant shall begin with the first payroll following the
          applicable Offering Date, and shall continue until the termination
          date of the Plan, subject to earlier termination by the Participant as
          provided in Section 11 below or increases or decreases by the
          Participant in the amount of payroll deductions as provided in Section
          7.3 below.

     6.3  A Participant may discontinue participation in the Plan at any time as
          provided in Section 11 below.

7.   PAYROLL DEDUCTIONS.

     7.1  By completing and filing a Participation Form, a Participant shall
          elect to have payroll deductions made from the Participant's total
          Compensation (in whole percentages from one percent (1%) to a maximum
          of ten percent (10%) of the Participant's total Compensation) on each
          payday during the time he or she is a Participant in the Plan in such
          amount as he or she shall designate on the Participation Form.

     7.2  All payroll deductions authorized by a Participant shall be credited
          to an account established under the Plan for the Participant. The
          monies represented by such account shall be held as part of the
          Company's general assets, usable for any corporate purpose, and the
          Company shall not be obligated to segregate such monies. A Participant
          may not make any separate cash payment or contribution to such
          account.

     7.3  No increases or decreases of the amount of payroll deductions for a
          Participant may be made during an Offering. A Participant may increase
          or decrease the amount of payroll deductions under the Plan for
          subsequent Offerings by completing an amended Participation Form and
          filing it with the Company's Human Resources Department not less than
          15 days prior to the Offering Date as of which such increase or
          decrease is to be effective.

8.   GRANT OF OPTION. On each Offering Date, each eligible Employee who is then
     a Participant shall be granted (by operation of the Plan) an option to
     purchase (at the Option Price) as many shares of Common Stock as the
     Participant will be able to purchase with the payroll deductions credited
     to the Participant's account during the Offering Period. Notwithstanding
     the foregoing, in no event may the number of shares purchased by any
     Participant during an Offering exceed 1,000 shares of Common Stock. The
     option price per share of such shares (the "Option Price") shall be the
     lesser of (a) eighty-five percent (85%) of the Fair Market Value of one
     share of Common Stock on the Offering Date, or (b) eighty-five (85%) of the
     Fair Market Value of one share of Common Stock on the Termination Date.

9.   EXERCISE OF OPTION.

     9.1  Unless a Participant gives written notice to the Company as provided
          in Section 9.4 below or withdraws from the Plan pursuant to Section 11
          below, the Participant's option for the purchase of shares of Common
          Stock granted for an Offering will be exercised automatically at the
          Termination Date of such Offering for the purchase of the number of
          full and fractional shares calculated to the third (3rd) decimal place
          of Common Stock that the accumulated payroll

                                       4




          deductions in the Participant's account on such Termination Date will
          purchase at the applicable Option Price.

     9.2  A Participant may purchase one or more shares in connection with the
          automatic exercise of an option granted for any Offering. If the
          Committee elects to deliver a statement of account to Participants
          pursuant to Section 10.1(a)(A) below, that portion of any balance
          remaining in a Participant's payroll deduction account at the close of
          business on the Termination Date of any Offering that is less than the
          purchase price of one full share will be deemed to have purchased such
          number of fractional shares of Common Stock as would then be
          purchasable at the applicable Option Price, with such fractional
          shares calculated to the third (3rd) decimal place. If the Committee
          elects to deliver stock certificates to Participants pursuant to
          Section 10.1(a)(B) below, that portion of any balance remaining in a
          Participant's payroll deduction account at the close of business on
          the Termination Date of any Offering that is less than the purchase
          price of one full share will be carried forward into the Participant's
          payroll deduction account for the following Offering; provided that in
          no event will the balance carried forward be equal to or greater than
          the purchase price of one share on the Termination Date of an
          Offering.

     9.3  No Participant (or any person claiming through such Participant) shall
          have any interest in any Common Stock subject to an option under the
          Plan until such option has been exercised, at which point such
          interest shall be limited to the interest of a purchaser of the Common
          Stock purchased upon such exercise pending the delivery or credit of
          such Common Stock in accordance with Section 10 below. During the
          Participant's lifetime, a Participant's option to purchase shares of
          Common Stock under the Plan is exercisable only by such Participant.

     9.4  By written notice to the Company prior to the Termination Date of any
          Offering, a Participant may elect, effective on such Termination Date,
          to:

          (a)  withdraw all of the accumulated payroll deductions in the
               Participant's account as of the Termination Date (which
               withdrawal may, but need not, also constitute a notice of
               termination and withdrawal pursuant to Section 11.1); or

          (b)  exercise the Participant's option for a specified number of full
               shares not less than five that is less than the number of full
               shares of Common Stock that the accumulated payroll deductions in
               the Participant's account will purchase on the Termination Date
               of the Offering at the applicable Option Price, and withdraw the
               balance in the Participant's payroll deduction account.

10.  DELIVERY.

     10.1 As promptly as practicable after the Termination Date of each
          Offering, the Company will deliver to each Participant, as
          appropriate, the following:

          (a)  At the election of the Committee, either issue (A) in
               certificated or uncertificated form to a third party the
               aggregate number of shares of Common Stock purchased in
               connection with an Offering (including an aggregate of all of the
               fractional shares deemed to have been purchased pursuant to
               Section 9.2 above) rounded to the nearest full share, which
               shares will be held by such third party for the benefit of the

                                       5



               Participants in accordance with their respective interests, and
               to each Participant a statement summarizing the number of whole
               shares of Common Stock purchased and fractional shares deemed
               purchased upon exercise of the Participant's option granted for
               such Offering, or (B) a certificate representing the number of
               full shares of Common Stock purchased upon exercise of the
               Participant's option granted for such Offering, registered in the
               name of the Participant or, if the Participant so directs on the
               Participation Form, in the names of the Participant and his or
               her spouse.

          (b)  If the Participant makes an election pursuant to Section 9.4(a)
               above for the Offering, a check in an amount equal to the total
               of the payroll deductions credited to the Participant's account.

          (c)  If Participant makes an election pursuant to Section 9.4(b)
               above, a check in the amount of the balance of any payroll
               deductions credited to the Participant's account that were not
               used for the purchase of Common Stock.

          (d)  If the balance in the Participant's payroll deduction account
               exceeds the dollar amount necessary to purchase the maximum
               amount of shares that may be purchased in an Offering, a check in
               an amount equal to the excess balance.

     10.2 If the Company delivers a statement of account as provided in Section
          10.1(a)(A) above, a Participant may at any time request that a
          certificate for the number of whole shares of Common Stock purchased
          by such Participant in an Offering or in any previous Offering (with
          respect to which such participant has not been issued a certificate)
          be issued and delivered to such Participant by making a written
          request to the Company. Such written request shall be made to the
          Company's Human Resources Department or, at the direction of the
          Company, to the transfer agent and registrar for the Company's Common
          Stock. In lieu of issuing certificates for fractional shares,
          Participants will receive a cash distribution representing any
          fractional shares, calculated in accordance with Section 11.1 below.

     10.3 If the Company delivers a statement of account as provided in Section
          10.1(a)(A) above, all full shares purchased and fractional shares
          deemed to have been purchased by a Participant in an Offering and in
          any subsequent Offerings will accumulate for the benefit of the
          Participant until the Participant's withdrawal or termination pursuant
          to Section 11 below.

11.  WITHDRAWAL; TERMINATION OF EMPLOYMENT.

     11.1 A Participant may terminate participation in the Plan and withdraw
          all, but not less than all, of the payroll deductions credited to the
          Participant's account under the Plan at any time prior to the
          Termination Date of an Offering, for such Offering, by giving written
          notice to the Company. Such notice shall state that the Participant
          wishes to terminate the Participant's involvement in the Plan, specify
          a termination date and request the withdrawal of all of the
          Participant's payroll deductions held under the Plan. All of the
          Participant's payroll deductions credited to the Participant's account
          will be paid to such Participant as soon as practicable after the
          termination date specified in the notice of termination and withdrawal
          (or, if no such date is specified, as soon as practical after receipt
          of notice of termination and withdrawal), and the Participant's option
          for such Offering will be automatically canceled, and no further
          payroll

                                       6




          deductions for the purchase of shares of Common Stock will be made for
          such Offering or for any subsequent Offering, except in accordance
          with a new Participation Form filed pursuant to Section 6 above. If
          the Committee elects to deliver a statement of account pursuant to
          Section 10.1(a)(A) above, then on the withdrawal and termination of a
          Participant's participation in the Plan, the Participant will be
          entitled to receive, at the Participant's option, (i) cash equal to
          the Fair Market Value of all full shares of Common Stock and any
          fractional share deemed purchased pursuant to Section 9.2 then held
          for the benefit of the Participant; or (ii) a certificate representing
          the number of full shares of Common Stock held for the benefit of the
          Participant plus cash in an amount equal to the Fair Market Value of
          any remaining fractional shares deemed to have been purchased. In any
          event, Fair Market Value will be determined as set forth in Section
          11.4 below, and such certificate will be delivered and such amounts
          paid as soon thereafter as practicable.

     11.2 Upon termination of a Participant's employment for any reason,
          including retirement or death, the payroll deductions accumulated in
          the Participant's account will be returned to the Participant as soon
          as practicable after such termination or, in the case of death, to the
          person or persons entitled thereto under Section 14 below, and the
          Participant's option will be automatically canceled. If the Committee
          elects to deliver a statement of account pursuant to Section
          10.1(a)(A), then upon the termination of a Participant's employment
          for any reason, including retirement or death, the Participant, or, in
          the case of death, the Participant's designated beneficiary (if
          allowed by the Committee) as determined in accordance with Section 14
          or the executor or administrator of the Participant's estate will be
          entitled to receive, at their option, (i) cash equal to the Fair
          Market Value of all full shares of Common Stock and any fractional
          share deemed purchased pursuant to Section 9.2 then held for the
          benefit of the Participant; or (ii) a certificate representing the
          number of full shares of Common Stock held for the benefit of the
          Participant plus cash in an amount equal to the Fair Market Value of
          any remaining fractional share deemed to have been purchased. In any
          event, Fair Market Value will be determined as set forth in Section
          11.4 below and such certificate will be delivered and such amounts
          paid as soon thereafter as practicable. For purposes of the Plan, the
          termination date of employment shall be the Participant's last date of
          actual employment and shall not include any period during which such
          Participant receives any severance payments. A transfer of employment
          between the Company and a Designated Subsidiary or between one
          Designated Subsidiary and another Designated Subsidiary, or absence or
          leave approved by the Company, shall not be deemed a termination of
          employment under this Section 11.2.

     11.3 A Participant's termination and withdrawal pursuant to Section 11.1
          above will not have any effect upon the Participant's eligibility to
          participate in a subsequent Offering by completing and filing a new
          Participation Form pursuant to Section 6 above or in any similar plan
          that may hereafter be adopted by the Company.

     11.4 For purposes of this Section 11 only, "Fair Market Value" means the
          prevailing market price of the Common Stock on any national securities
          exchange (if the Common Stock is listed on any such exchange) or as
          reported by the Nasdaq National Market, the Nasdaq SmallCap System or
          the National Quotation Bureau, Inc. (or any comparable reporting
          service), as the case may be, (if transactions or bid and asked prices
          are reported in the over-the-counter market are so reported) on the
          first day on which shares of Common Stock are traded following the day
          on which the Company, or if the Company so designates, the Company's
          agent, receives

                                       7




          notice from a Participant of an event specified in Section 11.1 or
          11.2 above.

12.  INTEREST.  No interest shall accrue on a Participant's payroll deductions
     under the Plan.

13.  STOCK SUBJECT TO THE PLAN.

     13.1 The maximum number of shares of Common Stock that shall be reserved
          for sale under the Plan shall be 250,000 shares, subject to adjustment
          upon changes in capitalization of the Company as provided in Section
          13.2 below. The shares to be sold to Participants under the Plan may
          be, at the election of the Company, either treasury shares or shares
          authorized but unissued. If the total number of shares of Common Stock
          that would otherwise be subject to options granted pursuant to Section
          8 above on any Termination Date exceeds the number of shares then
          available under the Plan (after deduction of all shares for which
          options have been exercised or are then outstanding), the Company
          shall make a pro rata allocation of the shares of Common Stock
          remaining available for issuance in as uniform and equitable a manner
          as is practicable as determined in the Company's sole discretion. In
          such event, the Company shall give written notice of such reduction of
          the number of shares subject to the option to each Participant
          affected thereby and shall return any excess funds accumulated in each
          Participant's account as soon as practicable after the Termination
          Date of such Offering.

     13.2 In the event of any reorganization, merger, consolidation,
          recapitalization, liquidation, reclassification, stock dividend, stock
          split, combination of shares, rights offering, divestiture or
          extraordinary dividend (including a spin-off) or any other change in
          the corporate structure or shares of the Company, the Committee (or,
          if the Company is not the surviving corporation in any such
          transaction, the board of directors of the surviving corporation) will
          make appropriate adjustment (which determination will be conclusive)
          as to the number and kind of securities or other property (including
          cash) available for issuance or payment under the Plan and, in order
          to prevent dilution or enlargement of the rights of Participants, the
          number and kind of securities or other property (including cash)
          subject to, and the exercise price of, outstanding options.

     13.3 In the event that Participants are deemed to have purchased fractional
          shares of Common Stock pursuant to Section 9.2 above, the aggregate of
          such fractional share interests at any given time will be applied to
          reduce the maximum number of shares of Common Stock remaining
          available for issuance under the Plan.

14.  DESIGNATION OF BENEFICIARY.

     14.1 In the discretion of the Committee, a Participant may file written
          designation of a beneficiary who is to receive shares of Common Stock
          and/or cash, if any, from the Participant's account under the Plan in
          the event of such Participant's death at a time when cash or shares of
          Common Stock are held for the Participant's account.

     14.2 Such designation of beneficiary may be changed by the Participant at
          any time by written notice. In the event of the death of a Participant
          in the absence of a valid designation of a beneficiary who is living
          at the time of such Participant's death, the Company shall deliver
          such shares of Common Stock and/or cash to the executor or
          administrator of the estate of the Participant; or, if no such
          executor or administrator has been appointed (to the knowledge of the

                                       8




          Company), the Company, in its discretion, may deliver such shares of
          Common Stock and/or cash to the spouse or to any one or more
          dependents or relatives of the Participant; or, if no spouse,
          dependent or relative is known to the Company, then to such other
          person as the Company may designate.

15.  TRANSFERABILITY. Neither payroll deductions credited to a Participant's
account nor any rights with regard to the exercise of an option or to receive
shares of Common Stock under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14 above) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 11.1 above.

16.  AMENDMENT OR TERMINATION. The Plan may be amended by the Board from time to
time to the extent that the Board deems necessary or appropriate in light of,
and consistent with, Section 423 of the Code; provided, however, that no such
amendment shall be effective, without approval of the shareholders of the
Company, if shareholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Exchange Act or any successor rule or Section 423 of the
Code. The Board also may terminate the Plan or the granting of options pursuant
to the Plan at any time; provided, however, that the Board shall not have the
right to modify, cancel, or amend any outstanding option granted pursuant to the
Plan before such termination unless each Participant consents in writing to such
modification, amendment or cancellation.

17.  NOTICES. All notices or other communications by a Participant to the
Company in connection with the Plan shall be deemed to have been duly given when
received in the Company's Human Resources Department or in such other department
or by such other person as may be designated by the Company for the receipt of
such notices or other communications, in the form and at the location specified
by the Company.

18.  TERM OF PLAN. The Plan shall be effective as of April 3, 2001, the date the
Plan was adopted by the Board. The Plan has been adopted by the Board subject to
shareholder approval within twelve months before or after the date the Board
adopted the Plan and subject to completion of the Company's initial public
offering of Common Stock. Prior to shareholder approval, shares of Common Stock
may be issued under the Plan subject to such approval. The Plan will terminate
at midnight on April 3, 2011, and may be terminated prior to such time by Board
action in accordance with Section 16.

19.  CONDITIONS UPON ISSUANCE OF SHARES.

     19.1 COMPLIANCE. Shares shall not be issued with respect to an option
          unless the exercise of such option and the issuance and delivery of
          such shares pursuant thereto shall comply with all applicable
          provisions of law, domestic or foreign, including, without limitation,
          the Securities Act, the Exchange Act, the rules and regulations
          promulgated thereunder, and the requirements of any stock exchange or
          Nasdaq upon which the shares may then be listed, and shall be further
          subject to the approval of counsel for the Company with respect to
          such compliance. As a condition to the exercise of an option, if
          required by applicable securities laws, the Company may require the
          Participant for whose account the option is being exercised to

                                       9




          represent and warrant at the time of such exercise that the shares are
          being purchased only for investment and without any present intention
          to sell or distribute such shares if, in the opinion of counsel for
          the Company, such a representation is required by any of the
          aforementioned applicable provisions of law.

     19.2 SHARE TRANSFERS. Shares of Common Stock issued pursuant to options
          granted under the Plan may not be sold, assigned, transferred,
          pledged, encumbered or otherwise disposed of, whether voluntarily or
          involuntarily, directly or indirectly, by operation of law or
          otherwise, except pursuant to registration under the Securities Act
          and applicable state securities laws or pursuant to exemptions from
          such registrations. The Company may condition the sale, assignment,
          transfer, pledge, encumbrance or other disposition of such shares not
          issued pursuant to an effective and current registration statement
          under the Securities Act and all applicable state securities laws on
          the receipt from the party to whom the shares of Common Stock are to
          be so transferred of any representations or agreements requested by
          the Company in order to permit such transfer to be made pursuant to
          exemptions from registration under the Securities Act and applicable
          state securities laws.

     19.3 LEGENDS. Unless a registration statement under the Securities Act and
          applicable state securities laws is in effect with respect to the
          issuance or transfer of shares of Common Stock under the Plan, each
          certificate representing any such shares shall be endorsed with a
          legend in substantially the following form, unless counsel for the
          Company is of the opinion as to any such certificate that such legend
          is unnecessary:

          THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE
          STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
          INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED,
          TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT
          PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH
          STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
          AND SUCH STATE LAWS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
          THE SATISFACTION OF THE COMPANY.

20.  MISCELLANEOUS. The headings to Sections in the Plan have been included for
     convenience of reference only. Except as otherwise expressly indicated, all
     references to Sections in the Plan shall be to Sections of the Plan. The
     Plan shall be interpreted and construed in accordance with the laws of the
     State of Minnesota.

                                       10




                            MAGSTAR TECHNOLOGIES, INC.
                        2001 EMPLOYEE STOCK PURCHASE PLAN

                    PAYROLL DEDUCTION AUTHORIZATION FORM AND
                             SUBSCRIPTION AGREEMENT

______            Original Application
______            Change in Payroll Deduction Amount

1.  I, _______________________________ hereby elect to participate in the
MagStar Technologies, Inc. 2001 Employee Stock Purchase Plan (the "Plan") and
subscribe to purchase shares of the Company's Common Stock (the "Shares") in
accordance with this Agreement and the Plan.

2.  I hereby authorize payroll deductions, beginning ____________, 20__, from
each paycheck in the amount of __% of my compensation (may not exceed ten
percent (10%) of total compensation on each payday) in accordance with the Plan.

3.  I understand that said payroll deductions shall be accumulated for the
purchase of shares in accordance with the Plan, and that shares will be
purchased for me automatically at the end of each Offering Period under the Plan
unless I withdraw my accumulated payroll deductions, withdraw from the Plan, or
both, by giving written notice to the Company prior to the end of the offering
period, as provided in the Plan.

4.  Shares purchased for me under the Plan should be issued or held in an
account in the name(s) of:


    ----------------------------------------------------------------
                               (name(s))


    ----------------------------------------------------------------
                               (address)


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


    ----------------------------------------------------------------
                          (social security number)

5.  I understand that if I dispose of any Shares received by me pursuant to the
Plan within two years after the first day of the Offering Period during which I
purchased such Shares, I may be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an amount
equal to the excess of the fair market value of the Shares at the time such
Shares were delivered to me over the option price paid for the Shares. I HEREBY
AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY SUCH
DISPOSITION. However, if I dispose of such shares at any time after the
expiration of the two year holding period, I understand that I will be treated
for federal income tax purposes as having received income only

                                       11




at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of (a)
the excess of the fair market value of the Shares at the time of such
disposition over the amount paid for the Shares under the option, or (b) the
excess of the fair market value of the Shares over the option price, measured
as if the option had been exercised on the first day of the offering period
during which I purchased such shares. The remainder of the gain, if any,
recognized on such disposition will be taxed at capital gains rates.

6.  I have read the current prospectus for the MagStar Technologies, Inc.
2001 Employee Stock Purchase Plan.

Date:
     ----------------------             ----------------------------------------
                                             Signature of Employee


CERTIFICATION OF TAX IDENTIFICATION NUMBER


- -------------------------------------------------------------------------------
Please indicate your Social Security or Tax Identification Number

I certify under penalties of perjury (1) that the number above is my correct
Social Security or Taxpayer Identification Number and (2) that I am not subject
to backup withholding either because I have not been notified by the IRS that I
am subject to backup withholding as a result of failure to report all interest
or dividends, or the IRS has notified me that I am no longer subject to backup
withholding.

Date:
     ----------------------             ----------------------------------------
                                             Signature

                                       12

EX-10.15

                                                                  EXHIBIT 10.15

                     FIRST AMENDMENT TO AMENDED AND RESTATED
                                CREDIT AGREEMENT

                  This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment"), made and entered into as of November 30, 2001, is by and
between MagStar Technologies Inc. f/k/a Reuter Manufacturing, Inc., a Minnesota
corporation (the "Borrower"), and U.S. Bank National Association, a national
banking association (the "Lender").

                                    RECITALS

                  1.       The Lender and the Borrower entered into a Amended
and Restated Credit Agreement dated as of October l0, 2000 (the "Credit
Agreement"); and

                  2.       The Borrower desires to amend certain provisions of
the Credit Agreement, and the Lender has agreed to make such amendments, subject
to the terms and conditions set forth in this Amendment.

                                    AGREEMENT

                 NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
covenant and agree to be bound as follows:

                 SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Credit Agreement, unless the context shall otherwise require.

                 SECTION 2. AMENDMENTS. The Credit Agreement is hereby amended
as follows:

                  2.1      DEFINITIONS. The definition of "Reference Rate"
         contained in Section 1.1 of the Credit Agreement is amended to read in
         its entirety as follows:

                 "REFERENCE RATE": The rate of interest from time to time
        publicly announced by the Lender as its "prime rate." The Lender may
        lend to its customers at rates that are at, above or below the Reference
        Rate. For purposes of determining any interest rate hereunder or under
        the Notes which is based on the Reference Rate, such interest rate shall
        change as and when the Reference Rate changes.

                 Section 1.1 of the Credit Agreement is further amended by
         adding the definitions of "Eligible Inventory" and "Inventory" thereto
         in correct alphabetical order:

                 "ELIGIBLE INVENTORY": means Inventory of the Borrower which
         meets the following requirements: (a) it is owned by the Borrower, is
         subject to a first priority perfected security interest in favor of the
         Lender, and is not subject to any assignment, claim or Lien other than
         (i) a Lien in favor of the Lender and (ii) Liens consented to by the
         Lender in writing; (b) the consists of raw materials or finished
         produce (not including





         work in process and supplies; (c) if held for sale or lease or
         furnishing under contracts of service, it is (except as the Lender may
         otherwise consent in writing) new and unused; (d) except as the Lender
         may otherwise consent, it is not stored with a bailee, warehouseman or
         similar party; if so stored with the Lender's consent, such bailee,
         warehouseman or similar party has issued and delivered to the Lender,
         in form and substance acceptable to the Lender, such documents and
         agreements as the Lender may require, including, without limitation,
         warehouse receipts therefor in the Lender's name; (e) the Lender has
         determined, in its sole and absolute discretion, that it is not
         unacceptable due to age, type, category, quality and/or quantity; (f)
         it is not held by the Borrower on consignment and is not subject to any
         other repurchase or return agreement; (g) it is not held by a customer
         of the Borrower or any other Person on consignment; (h) it complies
         with all standards imposed by any governmental agency having regulatory
         authority over such goods and/or their use, manufacture or sale; and
         (i) the warranties, representations and covenants contained in any
         security agreement or other agreement of the Borrower with or given to
         the Lender relating directly or indirectly to the Borrower's Inventory
         are applicable to it without exception.

                  "INVENTORY" means any and all of the Borrower's goods,
         including, without limitation, goods in transit, wherever located which
         are or may at any time be leased by the Borrower to a lessee, held for
         sale or lease, furnished under any contract of service or held as raw
         materials, work in process, or supplies or materials used or consumed
         in the Borrower's business, or which are held for use in connection
         with the manufacture, packing, shipping, advertising, selling or
         finishing of such goods, and all goods, the sale or other disposition
         of which has given rise to account, which are returned to and/or
         repossessed and/or stopped in transit by the Borrower or the Lender, or
         at any time hereafter in the possession or under the control of the
         Borrower or the Lender, or any agent or bailee of either thereof, and
         all documents of title or other documents representing the same.

                  2.2      THE COMMITMENTS. Section 2.1(a) and (b) of the Credit
         Agreement are amended to read in their entireties as follows:

                  Section  2.1 THE COMMITMENTS On the terms and subject to the
         conditions hereof, the Lender agrees to make the following lending
         facilities available to the Borrower:

                  2.1 (a)  REVOLVING CREDIT. A revolving loan (the "Revolving
         Loan") to the Borrower available as advances ("Advances") at any time
         and from time to time from the Closing Date to October 1 ,2002 (the
         "Revolving Maturity Date"), during which period the Borrower may
         borrow, repay and reborrow in accordance with the provisions hereof,
         PROVIDED, that the unpaid principal amount of revolving Advances shall
         not at any time exceed $1,750,000 (the "Revolving Commitment Amount");
         and PROVIDED, FURTHER, that no revolving Advance will be made if, after
         giving effect thereto, the unpaid principal amount of the Advances
         would exceed the Borrowing Base.


                                      -2-



                  2.1 (b)  TERM LOAN. A term loan ("Term Loan A") from the
         Lender to the Borrower in the amount of $2,847,217.68 (the "Term Loan A
         Commitment Amount").

                  2.3      BORROWING BASE AND MANDATORY PAYMENT. Section 2.5 of
         the Credit Agreement is amended to read in its entirety as follows:

                  Section 2.5 BORROWING BASE AND MANDATORY PREPAYMENT The
          Borrowing Base shall be equal to the sum of (1) the lesser of(x) 40%
          of the lower of cost or market value of raw material Eligible
          Inventory plus 30% of the lower of cost (determined on a first in,
          first out basis) or market value of finished good Eligible Inventory
          or (y) $500,000, PLUS (2) 80% of the face value of Eligible Accounts.
          The Borrower shall deliver borrowing base certificates in
          substantially the form attached hereto (a "Borrowing Base
          Certificate") to the Lender not less than weekly. Each such
          certificate shall state the amount of Eligible Accounts and the
          Borrowing Base as of the end of the previous month or the date of the
          Lender's request, as appropriate. Any limitations on advances or
          required prepayments relating to the Borrowing Base shall be based on
          the latest borrowing base certificate the Borrower shall have
          delivered to the Lender. If the principal balance of the Advances at
          any time exceeds the Borrowing Base, the Borrower shall immediately
          prepay the Advances by the amount of that excess.

                  2.4      USE OF PROCEEDS. Section 2.9 of the Credit Agreement
         is amended to read in its entirety as follows

                  Section 2.9 USE OF PROCEEDS. The proceeds of the initial
         Revolving Advance shall be used to satisfy obligations to the Lender
         under the Existing Agreement. Any remaining balance of the initial
         Revolving Advance and the proceeds of any subsequent Revolving Advance
         shall be used for the Borrower's general business purposes in a manner
         not in conflict with any of the Borrower's covenants in this Agreement.
         The proceeds of the Term Loans shall be used to satisfy obligations to
         the Lender under the Existing Agreement, PROVIDED, HOWEVER, that
         $398,477.68 of the proceeds of Term Loan A shall be used to pay the
         Borrower's real estate taxes due on the real property that is subject
         to the Mortgage (the "Real Estate Taxes"). The Borrower acknowledges
         that the Lender may directly pay the Real Estate Taxes to the taxing
         authority or may issue a check made payable to the taxing authority and
         deliver to such check to the Borrower. The Borrower acknowledges that
         payment of the Real Estate Taxes is the sole obligation of the Borrower
         and that the Borrower has requested the Lender advance funds for the
         purpose of paying the Real Estate Taxes.

                  2.5      BORROWING BASE CERTIFICATE. The Borrowing Base
         certificate attached to the Credit Agreement is hereby amended to read
         as set forth on Exhibit C attached to this Amendment.

                 SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments
contained in this Amendment shall become effective upon delivery by the Borrower
of, and compliance by the Borrower with, the following:


                                       -3-



                  3.1      This Amendment duly executed by the Borrower.

                  3.2      A copy of the resolutions of the Board of Directors
         of the Borrower authorizing the execution, delivery and performance of
         this Amendment and the Notes certified as true and accurate by its
         Secretary or Assistant Secretary, along with a certification by such
         Secretary or Assistant Secretary (i) certifying that there has been no
         amendment to the Articles of Incorporation or Bylaws of the Borrower
         since true and accurate copies of the same were delivered to the Lender
         with a certificate of the Secretary of the Borrower dated October
         10 ,2000, and (ii) identifying each officer of the Borrower authorized
         to execute this Amendment and any other instrument or agreement
         executed by the Borrower in connection with this Amendment
         (collectively, the "Amendment Documents"), and certifying as to
         specimens of such officer's signature and such officer's incumbency in
         such offices as such officer holds.

                  3.3      Certified copies of all documents evidencing any
         necessary corporate action, consent or governmental or regulatory
         approval (if any) with respect to this Amendment.

                  3.4      A good standing certificate for the Borrower and from
         the State of Minnesota issued not more than 30 days prior to the date
         of this Amendment.

                  3.5      The Borrower shall have satisfied such other
         conditions as specified by the Lender, including payment of all unpaid
         legal fees and expenses incurred by the Lender through the date of this
         Amendment in connection with the Credit Agreement and the Amendment
         Documents.

                  SECTION 4. REPRESENTATIONS, WARRANTIES, AUTHORITY, NO ADVERSE
         CLAIM.

                  4.1      REASSERTION OF REPRESENTATIONS AND WARRANTIES, NO
         DEFAULT. THE Borrower hereby represents that on and as of the date
         hereof and after giving effect to this Amendment (a) all of the
         representations and warranties contained in the Credit Agreement are
         true, correct and complete in all respects as of the date hereof as
         though made on and as of such date, except for changes permitted by the
         terms of the Credit Agreement, and (b) there will exist no Default or
         Event of Default under the Credit Agreement as amended by this
         Amendment on such date which has not been waived by the Lender.

                  4.2      AUTHORITY, NO CONFLICT, NO CONSENT REQUIRED. The
         Borrower represents and warrants that the Borrower has the power and
         legal right and authority to enter into the Amendment Documents and has
         duly authorized as appropriate the execution and delivery of the
         Amendment Documents and other agreements and documents executed and
         delivered by the Borrower in connection herewith or therewith by proper
         corporate action, and none of the Amendment Documents nor the
         agreements contained herein or therein contravenes or constitutes a
         default under any agreement, instrument or indenture to which the
         Borrower is a party or a signatory or a provision of the Borrower's
         Articles of Incorporation, Bylaws or any other agreement or requirement
         of law, or result in the


                                      -4-



          imposition of any Lien on any of its property under any agreement
          binding on or applicable to the Borrower or any of its property
          except, if any, in favor of the Lender. The Borrower represents and
          warrants that no consent, approval or authorization of or registration
          or declaration with any Person, including but not limited to any
          governmental authority, is required in connection with the execution
          and delivery by the Borrower of the Amendment Documents or other
          agreements and documents executed and delivered by the Borrower in
          connection therewith or the performance of obligations of the Borrower
          therein described, except for those which the Borrower has obtained or
          provided and as to which the Borrower has delivered certified copies
          of documents evidencing each such action to the Lender.

                  4.3      NO ADVERSE CLAIM. The Borrower warrants, acknowledges
         and agrees that no events have been taken place and no circumstances
         exist at the date hereof which would give the Borrower a basis to
         assert a defense, offset or counterclaim to any claim of the Lender
         with respect to the Obligations.

                  SECTION 5. AFFIRMATION OF CREDIT AGREEMENT, FURTHER
REFERENCES, AFFIRMATION OF SECURITY INTEREST. The Lender and the Borrower
each acknowledge and affirm that the Credit Agreement, as hereby amended, is
hereby ratified and confirmed in all respects and all terms, conditions and
provisions of the Credit Agreement, except as amended by this Amendment,
shall remain unmodified and in full force and effect. All references in any
document or instrument to the Credit Agreement are hereby amended and shall
refer to the Credit Agreement as amended by this Amendment. The Borrower
confirms to the Lender that the Obligations are and continue to be secured by
the security interest granted by the Borrower in favor of the Lender under
Security Agreement, and all of the terms, conditions, provisions, agreements,
requirements, promises, obligations, duties, covenants and representations of
the Borrower under such documents and any and all other documents and
agreements entered into with respect to the obligations under the Credit
Agreement are incorporated herein by reference and are hereby ratified and
affirmed in all respects by the Borrower.

                  SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This
Amendment, from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto and supersedes and has merged into this
Amendment all prior oral and written agreements on the same subjects by and
between the parties hereto with the effect that this Amendment, shall control
with respect to the specific subjects hereof and thereof.

                  SECTION 7. SEVERABILITY. Whenever possible, each provision of
this Amendment and the other Amendment Documents and any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be interpreted in such manner as to be effective, valid and
enforceable under the applicable law of any jurisdiction, but, if any provision
of this Amendment, the other Amendment Documents or any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be held to be prohibited, invalid or unenforceable under the
applicable law, such provision shall be ineffective in such jurisdiction only to
the extent of such prohibition, invalidity or unenforceability, without
invalidating or rendering unenforceable the remainder of such


                                       -5-



provision or the remaining provisions of this Amendment, the other Amendment
Documents or any other statement, instrument or transaction contemplated hereby
or thereby or relating hereto or thereto in such jurisdiction, or affecting the
effectiveness, validity or enforceability of such provision in any other
jurisdiction.

                  SECTION 8. SUCCESSORS. The Amendment Documents shall be
binding upon the Borrower and the Lender and their respective successors and
assigns, and shall inure to the benefit of the Borrower and the Lender and the
successors and assigns of the Lender.

                  SECTION 9. LEGAL EXPENSES. As provided in Section 8.2 of the
Credit Agreement, the Borrower agrees to reimburse the Lender, upon execution of
this Amendment, for all reasonable out-of-pocket expenses (including attorney
fees and legal expenses of Dorsey & Whitney LLP, counsel for the Lender)
incurred in connection with the Credit Agreement, including in connection with
the negotiation, preparation and execution of the Amendment Documents and all
other documents negotiated, prepared and executed in connection with the
Amendment Documents, and in enforcing the obligations of the Borrower under the
Amendment Documents, and to pay and save the Lender harmless from all liability
for, any stamp or other taxes which may be payable with respect to the execution
or delivery of the Amendment Documents, which obligations of the Borrower shall
survive any termination of the Credit Agreement.

                  SECTION 10. HEADINGS. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.

                  SECTION 11. COUNTERPARTS. The Amendment Documents may be
 executed in several counterparts as deemed necessary or convenient, each of
 which, when so executed, shall be deemed an original, provided that all such
 counterparts shall be regarded as one and the same document, and either party
 to the Amendment Documents may execute any such agreement by executing a
 counterpart of such agreement.

                  SECTION 12. GOVERNING LAW. THE AMENDMENT DOCUMENTS SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT
TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.


                                       -6-



                  IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date and year first above written.

BORROWER:

                                            MAGSTAR TECHNOLOGIES INC. F/K/A
                                            REUTER MANUFACTURING, INC.


                                            By:  /s/ J. L. Reissner
                                               -------------------------------
                                            Title:  CEO
                                                  ----------------------------


LENDER:
                                            U.S. BANK NATIONAL ASSOCIATION


                                            By: [ILLEGIBLE]
                                               -------------------------------
                                            Title: Vice President
                                                  ----------------------------


                                      -7-




                                                                       EXHIBIT C

                           BORROWING BASE CERTIFICATE
                            MAGSTAR TECHNOLOGIES INC.

         Borrowing Base Certificate for the period ended ____________, 20____

         This Borrowing Base Certificate is delivered in accordance with the
 Credit Agreement dated as of October 10 ,200O between U.S. Bank National
 Association (the "Lender") and Magstar Technologies Inc. ("the Borrower").
 Capitalized terms used herein which are defined in the Credit Agreement shall
 have the meanings set forth for such terms therein. All amounts are as of the
 date shown above except as otherwise stated herein.

         I certify that the following amounts were correctly determined
according to the Credit Agreement:


Total Receivables                                          $_____________(A)

   Receivables 90+ days           $_____________

   Other Ineligible               $_____________

Total Ineligible                                           $_____________(B)

Eligible Receivables (A) - (B)                             $_____________(C)

Eligible Receivables                                       $_____________(D)
Borrowing Base (80% of(C))

Total Raw Material Inventory                               $_____________(E)

Ineligible Raw Material                                    $_____________(F)
Inventory

Eligible Raw Material                                      $_____________(G)
Inventory (E) - (F)

Raw Material Inventory                                     $_____________(H)
Borrowing Base 40% of (G)

Total Finished Goods                                       $_____________(I)
Inventory

Ineligible Finished Goods                                  $_____________(J)
Inventory

Eligible Finished Goods                                     $_____________(K)
Inventory (I) - (J)





Finished Goods Inventory                                    $_____________(L)
Borrowing Base 30% of(K)

Total Borrowing Base (D) +                                  $_____________(M)
(H) + (L)

Outstanding Advances                                        $_____________(N)

Availability (M) - (N)                                      $_____________(O)


        I hereby certify that all payroll and unemployment taxes are current as
of this date.

         For the purpose of inducing the Lender to extend credit to the Borrower
pursuant to the Credit Agreement, the Borrower hereby certifies that the
foregoing information is true and correct in all respects. The Borrower further
certifies that all amounts outstanding under the Note were properly authorized
for the benefit of the Borrower and constitute obligations of the Borrower in
accordance with the terms of the Credit Agreement. The Borrower further
certifies that no circumstances or conditions exist at the date of the Borrowing
Base Certificate which constitute an Event of Default.

                                                  MAGSTAR TECHNOLOGIES INC.



                                                  BY________________________

                                                    Title___________________

                                       2

EX-10.19

                                                                  EXHIBIT 10.19

                           OPTION AMENDMENT AGREEMENT

         This Option Amendment Agreement ("Agreement") is made, effective as of
October 1, 2001 (the "Effective Date"), by and between Michael J. Tate
("Employee"), and MagStar Technologies, Inc.("Employer").

         FOR GOOD AND VALUABLE CONSIDERATION, THE PARTIES AGREE AS FOLLOWS:

 1.      STOCK OPTIONS.

         (a)      The Employer and Employee agree that the following agreements
         shall remain in full force and effect in accordance with their
         respective terms, except as set forth in Sections l(b) and l(c) below:
         (1) that certain Incentive Stock Option Agreement effective April 1,
         1998, as amended (the "April 1998 Agreement"); (2) that certain
         Incentive Stock Option Agreement effective October 12, 1998 (the
         "October 1998 Agreement"); and (3) that certain Incentive Stock Option
         Agreement effective July 13, 1999 (the "October 1998 Agreement") (the
         "July 1999 Agreement") (the April 1998 Agreement, the October 1998
         Agreement and the July 1999 Agreement, collectively, the "Option
         Agreements").

         (b)     The Employer and Employee further agree that:

                  (1)      options to purchase 50,000 shares pursuant to the
                  April 1998 Agreement, which options had not vested as of
                  September 30, 2001, shall be exercisable for $0.88 per share
                  and shall immediately become vested and exercisable and remain
                  exercisable through September 30, 2006;

                  (2)      options to purchase 6,058 shares pursuant to the
                  October 1998 Agreement, all of which options have vested as of
                  September 30, 2001, shall be exercisable for $0.8281 per share
                  and shall remain exercisable through September 30, 2006; and

                  (3)      options to purchase 50,000 shares pursuant to the
                  July 1999Agreemcnt, all of which options have vested as of
                  September 30, 2001, shall be exercisable for $0.50 per share
                  and shall remain exercisable through September 30, 2006.

         (c)      The Employee acknowledges that to the extent he does not
         exercise any of such options within 90 days after the Effective Date,
         such options will not qualify as "incentive stock options" under
         Section 422 of the Internal Revenue Code.

2.       CHOICE OF LAW/VENUE. This Agreement shall be construed and interpreted
in accordance with applicable federal laws and the laws of the State of
Minnesota. If either party brings a legal action pursuant to this Agreement
including, but not limited to, an action to enforce its terms, or to challenge
its validity, such legal action shall be properly filed in a court of competent
jurisdiction located in Hennepin County, Minnesota.

               (BALANCE OF PAGE BLANK; SIGNATURE PAGE FOLLOWS NEXT.)




                                                                /s/  MJT
                                                                    --------
                                                                    EMPLOYEE
                                                                    INITIALS




         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.

                                              MAGSTAR TECHNOLOGIES, INC.



                                              By:   /s/ James L. Reissner
                                                    ------------------------
                                                    James L. Reissner

                                              Its:  Chief Executive Officer




                                                    /s/ Michael J. Tate
                                                    ------------------------
                                                    Michael J. Tate




                                       2
                                                                /s/  MJT
                                                                    --------
                                                                    EMPLOYEE
                                                                    INITIALS

EX-10.20

                                                                  EXHIBIT 10.20

                                 PROMISSORY NOTE

$500,000                                                  Minneapolis, Minnesota
                                                                January 21, 2002

         FOR VALUE RECEIVED, the receipt of which is hereby acknowledged, the
undersigned, MagStar Technologies, Inc., a Minnesota corporation ("MagStar"),
promises to pay to the order of Richard F. McNamara, an individual residing in
Hennepin County, Minnesota ("Lender"), the principal sum of Five Hundred
Thousand dollars ($500,000), such principal amount to bear interest at the rate
of twelve percent (12%) per annum. Interest shall be payable monthly on the
10th day of each month. Interest shall be computed for the actual number of days
principal is unpaid, using a daily factor obtained by dividing the stated
interest rate by 360. The unpaid principal balance and interest on this Note
shall be due and payable on January 10, 2005.

         Payment shall be made to Lender, as directed by Lender, at 7808
Creekridge Circle, #200, Minneapolis, MN 55439, or at such other address as
Lender shall direct by written notice to the undersigned at its principal place
of business.

         This Note is given in connection with that certain Mortgage dated as
of January 21, 2002 given by MagStar to Lender, in which MagStar grants to
Lender a security interest in certain registered real property at 410-11th
Avenue South, Hopkins, Minnesota 55343, legally described as:

         Including adjacent vacated 3 1/2 Street subject to road, Lot 3,
         Auditor's Subdivision No. 195, Hennepin County, Minnesota.

         MagStar shall have the right, at any time and from time to time after
the date hereof, to prepay the unpaid principal amount hereof, in whole or in
part; provided that any prepayment of the full amount of this Note shall include
interest accrued on past due amounts, if any.

         MagStar agrees to pay all costs (including reasonable counsel fees)
incurred by the holder hereof in enforcing the terms and conditions hereof and
in effecting collection of any amounts due hereunder.

         No delay or omission on the part of the holder hereof in exercising any
 right or option herein given to such holder shall impair such right or option
 or be considered as a waiver thereof or as a waiver of or acquiescence in any
 default hereunder.

         MagStar hereby waives presentment, demand, notice of dishonor and
notice of protest.

         This Note shall be governed by the laws of the State of Minnesota.

         IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
as of the date first above written.

                                        MAGSTAR TECHNOLOGIES, INC.


                                        By: /s/ Louis S. Matjasko
                                            -------------------------------
                                        Its: President
                                            -------------------------------

EX-10.21

                                                                  EXHIBIT 10.21

                        WARRANT FOR PURCHASE OF SHARES OF
                                  COMMON STOCK
                          OF MAGSTAR TECHNOLOGIES, INC.

                                 JANUARY 21,2002

         For value received, Richard F. McNamara, or his registered assigns
(the "Holder") is entitled to purchase from MagStar Technologies, Inc., a
Minnesota corporation (the "Company"), at any time on or before January 21,
2007, two hundred fifty thousand (250,000) fully paid and non-assessable shares
of the Company's common Stock, $.1875 par value (such class of stock being
hereinafter referred to as the "Common Stock" and such shares of Common Stock as
may be acquired upon exercise hereof being hereinafter referred to as the
"Warrant Shares") at an exercise price equal to $0.25 per share (80% of the
average of the closing bid and ask prices on January 3, 2002) ("Warrant Exercise
Price").

         This Warrant is being issued in connection with the 12% Promissory
Note, dated January 21, 2002, issued to Richard F. McNamara, due and payable on
January 10, 2005.

         This Warrant is subject to the following provisions, terms and
conditions:

         1.       The rights represented by the Warrant may be exercised by the
Holder, in whole or in part (but not as to a fractional share of Common Stock),
by written notice of exercise delivered to the Company accompanied by the
surrender of this Warrant (properly endorsed if required) at the principal
office of the Company and upon payment to it, by cash, certified check or bank
draft, of the warrant exercise price for such shares. In addition, the Holder
may elect to pay the full purchase price by receiving a number of shares of
Common Stock computed using the following formula:

              Y(A-B)
         X = --------
                A

         Where: X = the number of shares of Common Stock to be issued to the
Holder.

                  Y =      the number of shares of Common Stock as to which
                           this Warrant is being exercised.

                  A =      the Fair Market Value of one share of Common Stock.

                  B =      Warrant exercise price.

         For purposes of this Section 1, "Fair Market Value" means, with respect
to the Company's Common Stock, as of any date (or, if no shares were traded or
quoted on such date, as of the next preceding date on which there was such a
trade or quote) (a) the mean between the reported high and low sale prices of
the Common Stock if the Common Stock is listed, admitted to unlisted trading
privileges or reported on any foreign or





national securities exchange or on the Nasdaq National Market or an equivalent
foreign market on which sale prices are reported; (b) if the Common Stock is not
so listed, admitted to unlisted trading privileges or reported, the closing bid
price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the
National Quotation Bureau, Inc. or other comparable service; or (c) if the
Common Stock is not so listed or reported, such price as the Company's Board of
Directors determines in good faith in the exercise of its reasonable discretion.

         The Company agrees that the Warrant Shares so purchased shall be and
are deemed to be issued as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such Warrant Shares as
aforesaid. Certificates for the shares of Warrant Shares so purchased shall be
delivered to the Holder within 15 days after the rights represented by this
Warrant shall have been so exercised, and, unless this Warrant has expired, a
new Warrant representing the number of Warrant Shares, if any, with respect to
which this Warrant has not been exercised shall also be delivered to the Holder
within such time. Notwithstanding the foregoing, however, the Company shall not
be required to deliver any certificates for the Warrant shares, except in
accordance with the provisions and subject to the limitations of Paragraph 5
below.

         2.       The Company covenants and agrees that all Warrant Shares that
may be issued upon the exercise of this Warrant will, upon issuance, be duly
authorized and issued, fully paid and non-assessable. The Company further
covenants and agrees that until expiration of this Warrant, the Company will at
all times have authorized, and reserved for the purpose of issuance or transfer
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.

         3.       The foregoing provisions are, however, subject to the
following:

                  (a)      The Warrant Exercise Price shall be subject to
         adjustment from time to time as hereinafter provided. Upon each
         adjustment of the Warrant Exercise Price, the Holder of this Warrant
         shall thereafter be entitled to purchase, at the Warrant Exercise Price
         resulting from such adjustment, the number of shares obtained by
         multiplying the Warrant Exercise Price in effect immediately prior to
         such adjustment by the number of shares purchasable pursuant hereto
         immediately prior to such adjustment and dividing the product thereof
         by the Warrant Exercise Price resulting from such adjustment.

                  (b)      In case the Company shall at any time subdivide the
         outstanding Common Stock into a greater number of shares or declare a
         dividend payable in Common Stock, the Warrant Exercise Price in effect
         immediately prior to such subdivision shall be proportionately reduced,
         and conversely, in case the outstanding Common Stock shall be combined
         into a smaller number of shares, the Warrant Exercise Price in effect
         immediately prior to such combination shall be proportionately
         increased.


                                        2




                  (c)      If any capital reorganization or reclassification of
         the capital stock of the Company, or consolidation or merger of the
         Company with another corporation shall be effected in such a way that
         holders of Common Stock shall be entitled to receive stock, securities
         or assets ("Substituted Property") with respect to or in exchange for
         such Common Stock, then, as a condition of such reorganization,
         reclassification, consolidation, merger or sale, the Holder shall have
         the right to purchase and receive upon the basis and upon the terms and
         conditions specified in the Warrant and in lieu of the Common Stock of
         the Company immediately theretofore purchasable and receivable upon the
         exercise of the rights represented hereby, such Substituted Property as
         would have been issued or delivered to the Holder if it had exercised
         this Warrant and had received upon exercise of this Warrant the Common
         Stock prior to such reorganization, reclassification, consolidation,
         merger or sale. The Company shall not effect any such consolidation,
         merger or sale, unless prior to the consummation thereof the successor
         corporation (if other than the Company) resulting from such
         consolidation or merger or the corporation purchasing such assets shall
         assume by written instrument executed and mailed to the Holder at the
         last address of the Holder appearing on the books of the Company, the
         obligation to deliver to the Holder such shares of stock, securities or
         assets as, in accordance with the foregoing provision, the Holder may
         be entitled to purchase.

                  (d)      Upon any adjustment of the Warrant Exercise Price,
         the Company shall give written notice thereof, by first-class mail,
         postage prepaid, addressed to the Holder at the address of the Holder
         as shown on the books of the Company, which notice shall state the
         Warrant Exercise Price resulting form such adjustment and the increase
         or decrease, if any, in the number of shares purchasable at the Warrant
         Exercise Price upon exercise of this Warrant, setting forth in
         reasonable detail the method of calculation and the facts upon which
         such calculation is based.

         4.       This Warrant shall not entitle the Holder to any voting rights
or other rights as a shareholder of the Company.

         5.       The Holder, by acceptance hereof, represents and warrants that
(a) it is acquiring this Warrant for its own account for investment purposes
only and not with a view to its resale or distribution and (b) it has no present
intention to resell or otherwise dispose of all or any part of this Warrant.
Other than pursuant to registration under federal and state securities laws or
an exemption from such registration, the availability of which the Company shall
determine in its sole discretion, (y) the Company will not accept the exercise
of this Warrant or issue certificates for Warrant Shares and (z) neither this
Warrant nor any Warrant Shares may be sold, pledged, assigned or otherwise
disposed of (whether voluntarily or involuntarily). The Company may condition
such issuance or sale, pledge, assignment or other disposition on the receipt
from the party to whom this Warrant is to be so transferred or to whom Warrant
Shares are to be issued or so transferred of any representations and agreements
requested by the Company in order to permit such issuance or transfer to be made
pursuant to exemptions from registration


                                        3



under federal and applicable state securities laws. Each certificate
representing the Warrant (or any part thereof) and any Warrant Shares shall be
stamped with appropriate legends setting forth these restrictions on
transferability. The Holder, by acceptance hereof, agrees to give written notice
to the Company before exercising or transferring this Warrant or transferring
any Warrant Shares of the Holder's intention to do so, describing briefly the
manner of any proposed exercise or transfer. Within thirty (30) days after
receiving such written notice, the Company shall notify the Holder as to whether
such exercise or transfer may be effected.

         6.       The Holder of this Warrant shall be entitled to the
Registration Rights set forth in Exhibit A hereto.

         7.       This Warrant shall be transferable only on the books of the
Company by the Holder in person, or by duly authorized attorney, on surrender of
the Warrant, property assigned.

         8.       Neither this Warrant nor any term hereof may be changed,
waived, discharged or terminated orally but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.

         IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer as of the date set forth above.

                                                MAGSTAR TECHNOLOGIES, INC


                                                By: /s/ Louis S. Matjasko
                                                   -------------------------
                                                    Its: President
                                                         -------------------


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS EXEMPT
FROM REGISTRATION UNDER THE APPLICABLE FEDERAL AND STATE SECURITIES LAWS.


                                       4



                                                            Exhibit A to Warrant


                              REGISTRATION RIGHTS

1.       REGISTRATION RIGHTS.

         (a)      PIGGYBACK REGISTRATION RIGHTS. If at any time during the
period beginning on the date hereof and ending ten years from the date hereof,
the Company shall determine to proceed with the actual preparation and filing of
a registration statement under the federal Securities Act of 1933 (the
"Securities Act") in connection with the proposed offer and sale for money of
any of its equity securities by it, the Company will give written notice of its
determination to the Holder. Upon the written request of any Holder given within
20 days after receipt of any such notice from the Company, the Company will,
except as herein provided, cause all such shares of Company common stock that
are acquired by the Holder upon the exercise of this Warrant and with respect to
which such Holder has requested registration, to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by such Holder of the shares to be so registered; provided, however,
that (i) the Company shall not be required to include this Warrant in any such
registration statement, (ii) the Company shall not be required to include any
such shares of Common Stock in any such registration for any Holder who is able
to sell all such shares during a three-month period beginning on the date such
notice is received by such Holder, pursuant to Rule 144 under the Securities Act
(or any similar rule or regulation); (iii) the Company shall not be required to
give such notice with respect to, or to include shares of Common Stock in, any
such registration which is primarily (A) a registration of a stock option plan
or other employee benefit plan or of securities issued or issuable pursuant to
any such plan, or (B) a registration of securities proposed to be issued in
exchange for securities or assets of, or in connection with a merger or
consolidation with, another corporation; (iv) the Company shall not be required
to include in any such registration any shares of Common Stock previously duly
registered under the Securities Act; and (v) the Company may, in its sole
discretion, withdraw any such registration statement and abandon the proposed
offering in which any such Holder had requested to participate. If any such
registration shall be underwritten in whole or in part, the Company may require
that the shares requested for inclusion by the Holder pursuant to this section
be included in the underwriting on the same terms and conditions as the
securities otherwise being sold though the underwriters. In the event that if in
the good faith judgement of the managing underwriter of such public offering the
inclusion of all the shares originally covered by a request for registration
made by all persons other than the Company would reduce the number of shares to
be offered by the Company or interfere with the successful marketing of the
shares of stock offered by the Company, the number of shares owned by the Holder
and otherwise to be included in the underwritten public offering may be reduced,
or may be eliminated entirely from such underwritten public offering; provided,
however, that any such required reduction shall be pro rata among all persons
(other than the Company) who are participating in such offering. Those shares
which are thus excluded from the underwritten public offering shall be withheld
from the market by the Holder for a


                                       5



period, not to exceed 180 days, which the managing underwriter reasonably
determines is necessary in order to effect the underwritten public offering.

         (b)      FORM S-3 DEMAND REGISTRATION RIGHTS. At any time during which
the Company is eligible to register on Form S-3, or a successor form thereto,
under the Securities Act a sale of its outstanding Common Stock made solely for
the account of any person other than the Company, but ending four (4) years
after the date hereof, upon each request by the Holder (each such request shall
be in writing and shall state the number of shares to be disposed of and the
intended methods of disposition of such shares by such Holder), the Company will
promptly take all necessary steps to register all such shares of the Company's
common stock that are acquired by the Holder upon the exercise of this Warrant
and with respect to which the Holder has requested registration under the
Securities Act and such state securities or blue sky laws as the Holder may
reasonably request. Notwithstanding the foregoing, the Company shall not be
obligated to effect any such registration if (i) the Holder, together with the
holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell securities on Form S-3 at an aggregate price to
the public of less than $250,000; (ii) the Holder is able to sell all such
shares during a three-month period, beginning on the date of notice hereunder to
the Company, pursuant to Rule 144 under the Securities Act (or any similar rule
or regulation); (iii) in a given twelve-month period, after the Company has
effected on (1) such registration in any such period; or (iv) such shares of
Common Stock have previously been duly registered under the Securities Act. In
addition, the Company may, on not more than one occasion, delay the filing of
any registration statement requested hereunder to a date not more than 180 days
following the date of the Holder's request for registration in the event that
the Company has furnished the Holder with a certificate executed by the
Company's President or Chief Executive Officer stating that such delay is
necessary in order not to significantly adversely affect financing efforts then
underway at the Company or not to disclose material non-public information (in
which case the expiration date of this Section shall be extended by a period
equal to the period of such delay). From and after the date on which the Company
has a class of equity securities registered under the Securities Exchange Act of
1934, as amended, the Company will file with the Commission, on a timely basis,
all reports required to be filed thereunder and any other documents required to
meet the public information requirements of Rule 144(c) under the Securities
Act, and, after such time as the Company becomes eligible to use Form S-3, or
any comparable or successor form, for the sale of its outstanding Common Stock
solely for the account of any person other than the Company, the Company will
use its best efforts to maintain such eligibility.

2.       REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions of section 1 to effect the registration of any shares under the
Securities Act, the Company will:

         (a)      prepare and file with the commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed three
(3) months;


                                       6



         (b)      prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such securities, not to
exceed three (3) months;

         (c)      furnish to the Holders and to the underwriters of the
securities being registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other documents as
the Holders and underwriters may reasonably request in order to facilitate the
public offering of such securities;

         (d)      use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as the underwriters may reasonably request within 20
days following the original filing of such registration statement, except that
the Company shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified; and

         (e)      prepare and promptly file with the Commission and promptly
notify the Holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading.

3.       EXPENSES. With respect to any registration of shares pursuant to
section 1, the Company shall bear the following fees, costs and expenses: all
registration, filing and NASD fees, printing expenses, fees and disbursements of
counsel and accountants for the Company, fees and disbursements of counsel for
the underwriter or underwriters of such securities (if the Company and/or
selling security holders are required to bear such fees and disbursements), all
internal Company expenses, the premiums and other costs of policies of insurance
against liability arising out of the public offering, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of counsel and accountants for
the Holders, underwriting discounts and commissions and transfer taxes for the
Holders and any other expenses incurred by the Holders not expressly included
above shall be borne by the Holders.

4.       INDEMNIFICATION. In the event that any shares owned by the Holders are
included in a registration statement under section 1.

         (a)      The Company will indemnify and hold harmless any Holder and
any underwriter (as defined in the Securities Act) from and against any and all
loss, damage, liability, cost and expense to which any such Holder or any such
underwriter may


                                       7



become subject under the Securities Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, damage, liability, cost or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in conformity with information furnished
by such Holder or such underwriter.

         (b)      Each Holder will indemnify and hold harmless the Company and
any underwriter from and against any and all loss, damage, liability, cost or
expense to which the Company or any underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
strict conformity with information furnished by such Holder.

         (c)      Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this section of notice of the commencement
of any action involving the subject matter of the foregoing indemnity
provisions, such indemnified party will, if a claim thereof is to be made
against the indemnifying party pursuant to the provisions of said paragraph (a)
or (b), promptly notify the indemnifying party of the commencement thereof; but
the omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
if the defendants in any action include both the indemnified party and the
indemnifying party and there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select one separate
counsel to participate in the defense of such action on behalf of such
indemnified party or parties, which counsel shall be reasonably satisfactory to
the indemnifying party. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provision of said paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof


                                       8



other than reasonable costs of investigation, unless (i) the indemnified party
shall have employed counsel in accordance with the proviso of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after the notice of the commencement of the action, or (iii)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.


                                       9

EX-23.1

                                                                   EXHIBIT 23.1

                                AUDITOR'S CONSENT



We hereby consent to the incorporation by reference in this Annual Report on
Form 10-KSB of MagStar Technologies, Inc. (formerly Reuter Manufacturing, Inc.),
for the year ended December 31, 2001, of our report, dated March 1, 2002,
appearing in the Company's 2001 Annual Report to Shareholders.




                                    /s/ VIRCHOW, KRAUSE & COMPANY, LLP



Minneapolis, Minnesota
March 1, 2002