UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

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

		For the quarterly period ended September 30, 2004

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.

(Exact name of registrant as specified in its charter)

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

410 - 11th Avenue South, Hopkins, Minnesota 55343
(Address of principal executive offices)

952/935-6921

(Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during past 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

As of November 10, 2004, there were 9,040,173 and 1,000,000 shares of the registrant’s Common Stock, $.1875 par value and Preferred Stock, $.1875 par value, respectively, outstanding.

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

MAGSTAR TECHNOLOGIES, INC.

BALANCE SHEETS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current Assets:
Cash	$	500		$	500
Accounts receivable, net	946,758			723,413
Inventories, net	1,300,493			1,074,242
Other current assets	86,165			73,731
Total current assets	2,333,916			1,871,886

Property, plant and equipment, net	46,667			52,855
Patents	12,139			11,261
Total assets	$	2,392,722		$	1,936,002

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Senior debt	$	821,982		$	802,240
Current maturities of capital lease obligation	96,754			126,754
Accounts payable to related parties	95,378			820,411
Notes payable to related parties	2,796,154			5,703,689
Checks issued in excess of cash in bank	77,324			20,180
Accounts payable	503,046			503,995
Accrued expenses	459,984			400,813
Short term deferred gain on sale - leaseback equipment	155,576			155,576
Short term deferred gain on sale - leaseback building	331,978			331,978
Deposits	2,000			10,000
Total current liabilities	5,340,176			8,875,636

Deferred gain on sale - leaseback equipment, net of current portion	350,046			466,728
Deferred gain on sale - leaseback building, net of current portion	1,300,246			1,549,229
Deferred rent	171,696			54,478
Deferred equipment lease	64,002			—
Other liabilities	23,845			23,845
	7,250,011			10,969,916
Stockholders’ deficiency:
Preferred stock, par value $.1875 per share, Authorized 2,500,000 shares; 1,000,000 issued and Outstanding	187,500			187,500
Common stock, par value $.1875 per share, authorized 30,000,000 shares; 9,040,173 issued and outstanding	1,695,032			1,695,032

Additional paid-in capital	22,238,789			18,002,729
Accumulated deficit	(28,978,610		)	(28,919,175		)

Total stockholders’ deficiency	(4,857,289		)	(9,033,914		)
Total liabilities and stockholders’ deficiency	$	2,392,722		$	1,936,002

See accompanying notes to financial statements.

MAGSTAR TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

	(Unaudited)										(Unaudited)
	For the three months ended September 30,										For the nine months ended September 30,
	2004					2003					2004			2003

Total Net Sales	$	1,996,764				$	1,434,827				$	5,806,457		$		4,637,723
Cost of sales	1,562,849					1,364,250					4,865,878			4,380,249

Gross profit	433,915					70,577					940,639			257,474

Selling, general and administrative expenses
Gain on sale - leaseback	(121,888				)	(128,805				)	(365,665		)	(356,444			)
Insurance refund	—					—					—			(67,175			)
Other Selling, general and administrative expenses	401,184					343,964					1,152,696			1,046,679

Total Selling, general and administrative expenses, net	279,296					215,159					787,031			623,060

Operating Income (Loss)	154,619					(144,582				)	153,608			(365,586			)

Other (expense) income:
Interest expense	(48,448				)	(105,775				)	(224,881		)	(345,624			)
Gain on conversion of Senior debt to common stock	—					1,205,000					—			1,205,000
Other, net	(430				)	49,423					11,838			243,415

Total other expense, net	(48,878				)	1,148,648					(213,043		)	1,102,791

Net Income (Loss)	$		105,741			$		1,004,066			$	(59,435	)	$	737,205

Net Income (Loss) per share - basic	$			0.01		$			0.11		$	(0.01	)	$	0.08
Net Income (Loss) per share - diluted	$			0.01		$			0.11		$	(0.01	)	$	0.08

Weighted average common shares outstanding - basic	9,040,173					8,913,611					9,040,173			8,799,216
Weighted average common shares outstanding - diluted	9,796,751					9,046,062					9,040,173			8,926,223

See accompanying notes to financial statements.

MAGSTAR TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOW

	(Unaudited)
	For the nine months ended September 30
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	(59,435	)	$	737,205
Adjustments to reconcile net income (loss) to net cash (used in) operating activities:

Interest added to debt	24,751			—
Depreciation and amortization	31,953			108,967
Gain on conversion of Senior debt to common stock	—			(1,205,000		)
Gain on sale-leaseback Equipment	(116,682		)	(116,683		)
Gain on sale-leaseback Building	(248,983		)	(239,762		)
Deferred rent	250,172			—
Provision for doubtful accounts	—			(5,072		)
Changes in operating assets and liabilities:
Receivables	(223,345		)	232,575
Inventories	(226,251		)	101,367
Prepaid expenses	(92,080		)	—
Other current assets	—			(26,396		)
Accounts payable, trade	50,576			25,879
Accrued expenses	107,338			(277,387		)
Payable to related parties	—			(947,996		)
Deposits	(8,000		)	—

Net cash provided by (used in) operating activities	(509,986		)	(1,612,302		)

Cash flows from investing activities:
Capital expenditures	—			—
Purchases of PPE	(25,765		)	—
Payments for patents	(878		)	—
Proceeds from sale of building	—			3,700,000

Net cash provided by (used in) investing activities	(26,643		)	3,700,000

Cash flows from financing activities:
Payments on debt	—			(2,658,078		)
Change in line of credit - net	19,742			(317,181		)
Net payments or proceeds from related party notes	489,743			943,580
Checks in excess of bank	57,144			35,402
Payments of capital lease obligations	(30,000		)	(91,421		)

Net cash provided by (used in) financing activities	$	536,629		$	(2,087,698	)
Net (decrease) increase in cash	—			—
Cash, beginning of year	500			500

Cash, end of period	$	500		$	500

Supplemental disclosures of cash flow information:
Cash paid for interest	$	93,538		$	143,849

See accompanying notes to financial statements.

MAGSTAR TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Financial Statements:

The unaudited financial statements of MagStar Technologies, Inc. (the “Company”) for the three and nine month periods ended September 30, 2004 and 2003 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position, and the results of operations and cash flows for the reported periods. The results of operations for any interim period are not necessarily indicative of results expected for the full year. The December 31, 2003, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2003, which are included in the Company’s 2003 Annual Report on Form 10-KSB.

Net Income (Loss) Per Common Share:

Basic net income (loss) per common share is computed using the weighted average number of shares outstanding for the period. Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding per common share adjusted for the incremental dilutive shares attributed to outstanding stock options under the Company’s stock option plans and stock purchase warrants. At September 30, 2004, the Company had outstanding warrants for the purchase of 250,000 shares of common stock and had outstanding stock options for the purchase of 1,242,079 shares of common stock. The dilutive warrants and stock options for the quarter ended September 30, 2004 were 250,000 and 812,079, respectively. In other periods presented all common stock warrants and options were anti-dilutive.

Stock-Based Compensation

In accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations, the Company uses the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of quoted market price of the Company’s common stock at the grant date over the amount the employee must pay for the stock. The Company’s general policy is to grant stock options at fair value at the date of grant. Options and warrants issued to non-employees are recorded at fair value, as required by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, using the Black Scholes pricing method.

Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and basic and diluted net income (loss) per common share would have been changed to the following pro forma amounts:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004			2003
Net Income (loss)
As reported	$	105,741	$	1,004,066	$	(59,435	)	$	737,205
Pro forma	105,741		994,341		(124,109		)	727,481
Basic and diluted net income (loss) per common share:
As reported	0.01		0.11		(0.01		)	0.08
Pro forma	0.01		0.11		(0.01		)	0.08
Stock Based Compensation:
As reported	—		—		—			—
Pro forma	—		9,742		64,674			9,742

In determining the compensation cost of options granted during the three and nine months ended September 30, 2004 and 2003, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2004	2003		2004		2003

Risk-free interest rate	N/A	4.000		4.250		4.000
Expected life of options granted	N/A	6 years		6 years		6 years
Expected Volatility	N/A	60	%	42	%	60	%
Expected dividend yield	N/A	0	%	0	%	0	%

Warranty Reserve

The Company warrants its products for one or two years. The reserve for warranty is computed by averaging the last four years warranty costs incurred and multiplying by two, which provides a full two-year warranty on all products. The Company has reserved an additional $50,000 to cover any unanticipated or unusual product warranty problems. The following summarizes the warranty transactions for the nine-month periods ended:

	September 30, 2004		September 30, 2003

Balance at Beginning of Year	$	74,000	$	104,000
Claims paid	—		(45,654		)
Expense Provision	—		45,654

Balance at End of Period	$	74,000	$	104,000

Segment Reporting

A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Company’s segments have similar economic characteristics and are similar in the nature of the products sold, type of customers, methods used to distribute the Company’s products and regulatory environment. Management believes that the Company meets the criteria for aggregating its operating segments into a single reporting segment.

Management’s Estimates

The preparation of 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 period. Actual results could differ from those estimates.

2. Significant Customers:

The Company had two customers that accounted for a significant percentage of net sales as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2004		2003		2004		2003

Customer A	492,172		298,604		1,677,768		1,543,338
% of Sales	25	%	21	%	29	%	33	%
% of Accounts Receivable	19	%	5	%	19	%	5	%

Customer B	387,497		212,623		1,001,132		441,621
% of Sales	19	%	15	%	17	%	10	%
% of Accounts Receivable	20	%	29	%	20	%	29	%

3. Senior Debt:

building and property was $3,700,000. The Company entered into a 6.5-year gross lease with Eleventh Avenue for the building and property at a monthly cost of $34,000 increasing to $44,436 per month. The proceeds of $1,001,397 realized by the Company in the transaction were applied to reduce the Company’s debt to Activar Properties, Inc. and affiliates. The Company’s outstanding balance to Activar Properties, Inc. and other affiliates of Mr. McNamara was approximately $5,512,918 as of February 28, 2003. James L. Reissner, the President of Activar Properties, Inc., is also an officer, director and shareholder of the Company. The Board of Directors of the Company authorized the transaction in order to reduce the indebtedness of the Company, provide working capital and improve cash flow. The transaction with Eleventh Avenue was determined to be on better terms than could be obtained by the Company directly from unaffiliated financing sources. The purchase price was based upon an independent appraisal of the value of the property and building obtained by the bank which provided financing to Eleventh Avenue in connection with the transaction.

The line of credit is due on demand; accordingly, it has been classified as a current liability in the Company’s September 30, 2004 and December 31, 2003 balance sheets.

On October 16, 2003, the Company negotiated a third amendment of its amended and restated senior credit agreement, obtaining an extension with US Bancorp on the line of credit.

On January 6, 2004, the Company negotiated a fourth amendment of its amended and restated senior credit agreement, obtaining an extension with US Bancorp on the line of credit. Pursuant to this amendment, the extended asset-based line of credit bore interest at the bank’s reference rate plus two percent, had availability of $1,350,000 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 and expired in June 2004. The credit facility is collateralized by substantially all the assets of the Company.

On August 13, 2004, the Company negotiated a fifth amendment of its amended and restated senior credit agreement with US Bancorp on the line of credit effective April 1, 2004. Pursuant to this amendment, the extended asset-based line of credit bears interest at the bank’s reference rate plus two and one half percent, has availability of $1,200,000 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 and will expire on June 30, 2005. The credit facility is collateralized by substantially all the assets of the Company.

As a condition to obtaining the amended line of credit, the Company was required to restructure portions of the Company’s liabilities and lease agreements with related parties. As a result, effective as of April 1, 2004, the Company amended its building and equipment leases with Hopkins Eleventh Ave, LLC and Activar Properties, respectively, and $3,941,836 of related party debt has been extinguished without additional consideration. Because the transaction is between related parties and effective as of April 1, 2004, the gain on the extinguishment of debt is classified as a contribution to equity during the quarter ended June 30, 2004. The amended and reduced building and equipment leases will positively affect the statement of operations on an ongoing basis. The reduced related party debt will reduce future interest expense.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward Looking Statements

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

General

MagStar Technologies, Inc. (“MagStar” or the “Company”) is a publicly owned company headquartered in Hopkins, Minnesota. The Company’s stock is quoted on the Over The Counter Bulletin Board under the symbol “MGST”. MagStar Technologies is a prototype developer and manufacturer of centrifuges, conveyors, medical devices, spindles, and sub assemblies. MagStar’s technical abilities in design, process, and manufacturing specialize in the “concept-to-production” process designed to result in short manufacturing cycles, high performance, and cost effective products such as electro-mechanical assemblies and devices for over two dozen medical, magnetic, motion control, and industrial original equipment manufacturers (“OEMs”). The Company strives for a unique identity as it emphasizes its design and manufacturing engineering capabilities, partnering with customers, providing engineering solutions and machining, manufacturing, and assembly services for efficiently manufactured, long life assemblies.

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

Results of Operations

The Company’s net sales of $1,996,764 for the third quarter ended September 30, 2004 increased by approximately 39% or $561,937 from $1,434,827 for the same period in 2003. Net sales from the Company’s major product lines for the third quarter ended September 30, 2004, compared to the same period in 2003 are as follows:

	three months ended
	September 30, 2004		September 30, 2003
Medical	$	488,083	$	370,403
Magnets	$	167,806	$	90,612
Industrial	$	231,661	$	274,886
Contract manufacturing	$	195,537	$	357,226
Conveyors	$	894,156	$	325,908

Sales to the Company’s largest customer were $492,172 or 25% of net sales for the third quarter of 2004 compared to $298,604 or 21% of net sales for the same period in 2003. Sales to the Company’s second

largest customer were $387,497 or 19% of sales for the third quarter of 2004 compared to $212,623 or 15% of sales for the same period in 2003.

The Company’s net sales of $5,806,457 for the nine months ended September 30, 2004 increased by approximately 25% or $1,168,734 from $4,637,723 for the same period in 2003. Net sales from the Company’s major product lines for the nine month ended September 30, 2004, compared to the same period in 2003 are as follows:

	nine months ended
	September 30, 2004				September 30, 2003
Medical	$	1,760,714			$		1,792,325
Magnets	$		402,949		$		405,743
Industrial	$		686,940		$		680,996
Contract manufacturing	$		944,612		$	1,019,103
Conveyors	$			1,901,093	$	701,998

Sales to the Company’s largest customer were $1,677,768 or 29% of net sales for the nine months ended September 30, 2004 compared to $1,543,338 or 33% of net sales for the same period in 2003. Sales to the Company’s second largest customer were $1,001,132, or 17% of sales for the nine months ended September 30, 2004 compared to $441,621, or 10% of sales for the same period in 2003. Sales increased overall during third quarter 2004 compared to the same period in 2003 due to increased sales to the Company’s second largest customer and overall increased conveyor sales.

Gross profit was $433,915 or 22% in the third quarter of 2004, compared to $70,577 or 5% for the same period in 2003. The increase in gross profit of $363,338, or 515% for the third quarter of 2004 over the same period in 2003 is the result of growth in higher margin sales and reductions in production, labor, and overhead costs. Gross profit was $940,639 or 16% in the nine months ended September 30, 2004, compared to $257,474 or 6% for the same period in 2003. The increase in gross profit of $683,165, or 265% for the nine months ended September 30, 2004 over the same period in 2003 is the result of growth in higher margin sales and reductions in production, labor, and overhead costs. The increase in gross profit to 22% in the third quarter of 2004 versus 16% for the nine months ended September 30, 2004 is principally due to the product mix of sales during the third quarter of 2004. Therefore, the gross profit for future quarters is dependent on the future product mix the Company sells.

Selling, general and administrative expenses were $279,296 or 14% of net sales for the third quarter of 2004, compared to $215,159 or 15% of net sales for the same period in 2003. The increase for the quarter ended September 30, 2004 in selling, general and administrative expenses of $64,137 is due to an increased sales budget. The sales budget consists of commissions, trade show expenses, and marketing and advertising expenses. Selling, general and administrative expenses were $787,031 or 14% of net sales for the nine months of 2004, compared to $623,060 or 13% of net sales for the same period in 2003. The increase for the nine months ended September 30, 2004 in selling, general and administrative expenses of $163,971 is due to an increased sales budget and a one-time insurance refund in 2003.

In the third quarter of 2004, the Company had operating income of $154,619, compared to an operating loss of $144,582 in the same period of 2003, as a result of the reasons discussed above. In the first nine months of 2004, the Company had an operating income of $153,608, compared to an operating loss of $365,586 in the same period of 2003, also as a result of the reasons discussed above.

Interest expense decreased to $48,448 in the third quarter of 2004 from $105,775 in the third quarter of 2003. For the nine months ended September 30, 2004 interest expense decreased to $224,881 from $345,624 for the nine months ended September 30, 2003. While the Company did not experience any Other Income in 2004, in the third quarter of 2003, the Company recorded Other Income of $1,254,423 primarily due to a conversion of senior debt to common stock by the Company's senior lender.

The Company recorded net income for the third quarter and a net loss for the first nine months of 2004 and consequently did not record a provision for income taxes and, generally, does not pay regular income taxes because of the availability of its net operating loss carry forwards.

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

Net income for the third quarter of 2004 was $105,741 or $0.01 per basic and diluted share, compared to a net income of $1,004,066 or $0.11 per basic and diluted share for the third quarter of 2003. The net income is due to the reasons discussed above. The net loss for the first nine months of 2004 was $59,435 or $0.01 per basic and diluted share, compared to a net income of $737,205 or $0.08 per basic and diluted share for the first nine months of 2003. The net loss and income are due to the reasons discussed above.

Liquidity and Capital Resources

At September 30, 2004, the Company had a working capital deficiency of $3,006,260, compared to a working capital deficiency of $7,003,750 at December 31, 2003. The current ratio was .44 at September 30, 2004 and .21 at December 31, 2003. The increase in working capital is due to the related party debt restructuring discussed under Note 3 to the Financial Statements above.

The credit facility under the Company’s amended and restated senior credit agreement consist of an asset-based line of credit with availability of up to $1,200,000, 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. As of September 30, 2004, the Company had borrowed $821,982 under the credit facilities. The proceeds were used to fund operating activities. Based on the current amended and restated credit agreement, current sales, inventory, and cash needs, the Company sustains an average availability of credit of approximately $150,000 and believes it will have adequate capital for the nest 12 months.

The credit facility restricts the payment of dividends and the Company’s ability to incur other indebtedness. The credit facility is collateralized by all of the Company’s assets, except for certain equipment obtained with purchase-money financing. The bank may at any time apply the funds available in any Company bank account against the outstanding loan balances. The asset-based line of credit bears interest at the bank’s reference rate plus 2.5% and matures in June 2005. The line of credit is due on demand; accordingly, this amount has been classified as a current liability in the Company’s September 30, 2004 and December 31, 2003 balance sheets.

On February 25, 2003, the Company sold and leased back its headquarters and manufacturing facility in Hopkins, Minnesota. The purchaser was Hopkins Eleventh Avenue LLC (“Eleventh Avenue”), a wholly owned subsidiary of Activar Properties, Inc., which in turn is wholly owned by Richard McNamara, a director and substantial shareholder of the Company. The purchase price for the building and property was $3,700,000. The Company entered into a 6.5-year gross lease with Eleventh Avenue for the building and property at a monthly cost of $34,000 increasing to $44,436 per month. The proceeds of $1,001,397 realized by the Company in the transaction were applied to reduce the Company’s debt to Activar Properties, Inc. and affiliates. The Company’s outstanding balance to Activar Properties, Inc. and other affiliates of Mr. McNamara was approximately $5,512,918 as of February 28, 2003. At the time of the transaction, James L. Reissner, the President of Activar Properties, Inc., was also an officer, director and shareholder of the Company. The Board of Directors of the Company authorized the transaction in order to reduce the indebtedness of the Company, provide working capital and improve cash flow. The transaction with Eleventh Avenue was determined to be on better terms than could be obtained by the Company directly from unaffiliated financing sources. The purchase price was based upon an independent appraisal of the value of

the property and building obtained by the bank which provided financing to Eleventh Avenue in connection with the transaction.

Net cash used in operating activities was $509,986 for the nine months ended September 30, 2004, compared to net cash used in operating activities of $1,612,302 for the comparable period in 2003. The decrease in cash flows used in operating activities for the nine months ended September 30, 2004, from the comparable period in 2003, was due primarily to the increased sales and operational improvements in 2004 allowing available cash to adequately cover operating expenses as well as payments in the nine months ended September 30, 2003 on accounts payable due to the cash generated from the sale leaseback transaction and restructuring of related party payables in 2004.

Net cash used in investing activities for the nine month period ended September 30, 2004 was $26,643, compared to $3,700,000 provided by investing activities in the same nine month period in 2003. The change was due to the building sale and lease back transaction discussed above. The Company does not anticipate any material commitments for capital expenditures for the next 12 months.

Net cash provided by financing activities was $536,629 for the nine month period ended September 30, 2004, compared to cash used in financing activities of $2,087,698 for the same period in 2003. The change was primarily due to the building sale and lease back transaction in 2003 discussed above.

As a condition to obtaining the amended line of credit with US Bancorp on August 13, 2004, the Company was required to restructure portions of the Company’s liabilities and lease agreements with related parties. As a result, effective as of April 1, 2004, the Company amended its building and equipment leases with Hopkins Eleventh Ave, LLC and Activar Properties, Inc., respectively, and $3,930,596 of related party debt has been extinguished without additional consideration. Because the transaction is between related parties and effective as of April 1, 2004, the gain on the extinguishment of debt is classified as a contribution to equity during the quarter ended June 30, 2004. Commencing April 1, 2004, the amended and reduced building and equipment leases will positively affect the statement of operations on an ongoing basis by approximately $39,283 per month and the reduced related party debt will reduce interest expense by approximately $22,990 per month.

Troubled Financial Condition and Management’s Plans

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

• Grow sales of new and existing customers offering the application of MagStar’s strengths, which are engineering solutions, precision machining, and assembly services.

• Focus on products and capabilities that are a source of unique value for customers and a reflection of what MagStar does best.

• Pursue a course of investing in research and development which management believes will lead to innovation and new value propositions in the future, establishing a reputation and expertise for product development.

• Focus on proprietary products and away from contract manufacturing, developing long term sustainable comparative advantages over our competitors.

• Seek growth through strategic acquisitions, alliances, and mergers.

• Improve productivity, improve cost control, and manage expenses in proportion with the Company’s current sales levels to achieve and maintain positive cash flow.

• Strategically add key managers and operational expertise as required in a prudent and responsible manner.

There can be no assurance that management will be able to accomplish any 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. Nor can there be any assurance that the Company’s financial performance will improve even if the above strategy is fully implemented.

The Company’s ability to continue operations is dependent on its ability to maintain sales with adequate margins, manage expenses, and maintain credit facilities with a lending institution. Accordingly, there can be no assurance that the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Summary

The improved operating performance for the three and nine month period ending September 30, 2004 is the result of measured sales growth, operational efficiencies and improvements, debt restructuring, and a balanced approach to the risk management of operations and sales. Management is cautiously optimistic and intends to respond to changes in economic prospects as needed to fulfill its obligation to prudent fiscal management and stable and fiscally responsible growth, while focusing on its profitable strengths and advantages.

Except for the historical financial information reported above, this Form 10-QSB contains forward-looking statements that involve risk and uncertainties, including references to sales, business development activities, anticipated financial performance, business prospects, and similar matters. In addition, the Company has a high concentration of business with major customers and any significant reduction in sales to these customers may have a material effect on net income. Because of these and other uncertainties, actual results could differ materially from those reflected in the forward-looking statements.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 2 to the financial statements included in our annual report on form 10-KSB for the year ended December 31, 2003. The accounting policies used in preparing the Company’s interim 2004 condensed financial statements are the same as those described in the Company’s annual report.

The Company’s critical accounting policies are those both having the most impact to the reporting of the Company’s financial condition and results, and requiring significant judgements and estimates. The Company’s critical accounting policies include those related to revenue recognition, stock-based compensation and valuation of inventories.

ITEM 3: CONTROLS AND PROCEDURES

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form 10-QSB. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company

have concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-QSB are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation and currently, does not consider the benefits to outweigh the costs of adding additional staff in light of the oversight of the financial statements by senior management.

Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB. There was no change in the Company’s internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits.

	31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1		Certificate of Chief Executive and Chief Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)		Reports on Form 8-K

On August 27, 2004 the Company filed a Current Report on Form 8-K dated August 23, 2004, announcing that James L. Reissner, resigned from his positions as the Company’s President and Chief Executive Officer and the Company had appointed Jon L. Reissner, to replace James L. Reissner as the Company’s President and Chief Executive Officer.

	MAGSTAR TECHNOLOGIES, INC.
	(Registrant)


Date: November 10, 2004	By:	/s/ Jon L. Reissner
		Jon L. Reissner
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 10, 2004	By:	/s/ Joseph A. Petrich
		Joseph A. Petrich
		Treasurer and Chief Financial Officer
		(Principal Financial Officer)

ITEM 1. FINANCIAL INFORMATION
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENTS OF CASH FLOW
NOTES TO FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3: CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION
EXHIBIT 31.2
CERTIFICATION
CERTIFICATION

Exhibit		Item

31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certificate of Chief Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002