TABLE OF CONTENTS

STATEMENTS OF OPERATIONS

STATEMENTS OF CASH FLOWS

NOTES TO FINANCIAL STATEMENTS

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

ITEM 3. CONTROLS AND PROCEDURES

ITEM 6. EXHIBITS

SIGNATURES

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

PART I. FINANCIAL INFORMATION

MAGSTAR TECHNOLOGIES, INC.

ITEM 1. FINANCIAL INFORMATION

BALANCE SHEETS

SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

	September 30,			December 31,
	2006			2005
	(Unaudited)			Audited
ASSETS
Current Assets:
Cash	$	600		$	600
Accounts receivable, net	1,217,937			1,024,035
Inventories	1,542,554			1,296,321
Other current assets	61,460			71,495
Total current assets	2,822,551			2,392,451

Property, plant and equipment, net	203,486			96,511
Patents	25,364			22,301
Total assets	$	3,051,401		$	2,511,263

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Senior debt	$	551,884		$	519,649
Capital lease obligations	—			48,137
Checks issued in excess of cash in bank	9,781			21,972
Accounts payable to related parties	9,164			—
Notes payable to related parties	—			3,071,154
Accounts payable	731,498			596,267
Accrued expenses	385,165			408,655
Short term deferred gain on sale – leaseback	331,524			487,554
Deposits	74,275			—
Current portion of deferred rent and equipment leases	—			243,530
Total current liabilities	2,093,291			5,396,918

Notes payable to related parties – long term	3,140,065			—
Deferred gain on sale – leaseback, net of current portion	376,128			1,040,850
Deferred rent and equipment leases	—			581,413
Deposits	—			2,000
Other liabilities	—			240
Total liabilities	5,609,484			7,021,421
Stockholders’ deficiency:
Convertible 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; 9,137,223 and 9,130,723 issued and outstanding at September 30, 2006 and December 31, 2005, respectively	1,713,229			1,712,011
Additional paid-in capital	23,559,584			22,557,683
Share-based compensation	—			(27,704		)
Accumulated deficit	(28,018,396		)	(28,939,648		)
Total stockholders’ deficiency	(2,558,083		)	(4,510,158		)
Total liabilities and stockholders’ deficiency	$	3,051,401		$	2,511,263

See accompanying notes to financial statements.

MAGSTAR TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

	(Unaudited)						(Unaudited)
	For the three months ended						For the nine months ended
	September 30,						September 30,
	2006			2005			2006			2005

Net sales	$	2,315,781		$	2,338,739		$	7,836,896		$	5,741,443
Cost of sales	1,836,073			1,812,137			5,922,364			4,646,352

Gross profit	479,708			526,602			1,914,532			1,095,091

Selling, general and administrative expenses
Gain on sale – leasebacks (see note 4)	(576,976		)	(121,888		)	(820,754		)	(365,666		)
Other selling, general and administrative expenses	559,420			456,583			1,738,611			1,131,461

Total selling, general and administrative expenses, net	(17,556		)	334,695			917,857			765,795

Operating income	497,264			191,907			996,675			329,296

Other income (expense):
Interest expense	(32,744		)	(49,887		)	(91,923		)	(126,880		)
Other, net	500			7,804			16,500			7,804

Total other income (expense), net	(32,244		)	(42,083		)	(75,423		)	(119,076		)

Net income	465,020			149,824			921,252			210,220

Deemed dividend on preferred stock	18,000			18,000			54,000			54,000

Net income attributable to common shareholders	$	447,020		$	131,824		$	867,252		$	156,220

Net income per share attributable to common shareholders – basic	$	0.05		$	0.01		$	0.09		$	0.02
Net income per share attributable to common shareholders – diluted	$	0.04		$	0.01		$	0.08		$	0.02

Weighted average common shares outstanding – basic	9,137,223			9,125,543			9,135,760			9,125,543
Weighted average common shares outstanding - diluted	10,558,550			9,592,917			10,557,086			9,592,917

See accompanying notes to financial statements.

STATEMENTS OF CASH FLOWS

	(Unaudited)
	For the nine months ended September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	921,252		$	210,220
Adjustments to reconcile net income to net cash,
Provided by (used in) operating activities:
Depreciation and amortization	21,469			38,365
Gain on sale-leaseback	(820,752		)	(365,666		)
Deferred equipment lease	(47,530		)	96,003
Share-based compensation to employees and non-employees	85,301			56,300
Deferred rent	(10,231		)	257,544
Accrued interest on notes payable to related parties	68,911			66,677

Changes in operating assets and liabilities:
Accounts receivable	(193,902		)	(484,937		)
Inventories	(246,233		)	(147,906		)
Prepaid expenses	10,035			14,853

Accounts payable	310,841			140,723
Accrued expenses	(23,490		)	(55,619		)
Accounts payable to related parties	9,164			(10,445		)
Deposits	72,275			12,538
Other liabilities	(240		)	(12,107		)

Net cash provided by (used in) operating activities	156,870			(183,457		)

Cash flows from investing activities:
Purchases of equipment	(127,317		)	(70,547		)
Payments for patents	(4,190		)	(7,606		)

Net cash (used in) investing activities	(131,507		)	(78,153		)

Cash flows from financing activities:
Net borrowings from note payable to related party	—			285,000
Change in senior debt	32,235			128,599
Payments on capital leases	(48,137		)	(12,500		)
Proceeds from exercise of stock options	2,730			1,500
Net change in checks issued in excess of cash in bank	(12,191		)	(77,960		)

Net cash provided by (used in) financing activities	(25,363		)	324,639
Net increase in cash	—			63,029
Cash, beginning of year	600			500

Cash, end of period	$	600		$	63,529

Supplemental disclosures of cash flow information:
Cash paid for interest	$	34,254		$	60,203

Noncash investing and financing activities:
Conversion of liability to common stock	—			$	23,845
Forgiveness of related party debt and lease payable	$	942,792		$	—

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, 2006 and 2005 reflect, in the opinion of management, all adjustments (which include 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, 2005, 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, 2005, which are included in the Company’s 2005 Annual Report on Form 10-KSB.

Net Income (Loss) Per Common Share:

Basic net income (loss) per common share attributable to common shareholders is computed using the weighted average number of shares outstanding for the period. Diluted net income (loss) per common share attributable to common shareholders 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, stock purchase warrants and convertible preferred stock. At September 30, 2006, the Company had outstanding warrants for the purchase of 250,000 shares of common stock and had outstanding stock options for the purchase of 1,554,133 shares of common stock.

Stock-Based Compensation

On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123(R) is effective for all share-based awards granted on or after January 1, 2006. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective method.

As more fully described in our Annual Report on Form 10-K for the year ended December 31, 2005, we have granted stock options over the years to employees, non-employees and directors under various stockholder approved stock option plans. As of September 30, 2006, the company had 1,554,133 stock options outstanding. The fair value of each option grant was determined as of grant date, utilizing the Black-Scholes option pricing model. Based on these valuations, we recognized compensation expense of $17,673 ($0.01 per share) and $85,301 ($0.01 per share) in the quarter and nine months periods ended September 30, 2006. The amortization of each option grant will continue over the remainder of the vesting period of each option grant. We expect that the impact on earnings for the remainder of 2006 for stock based compensation will be approximately $20,000 and estimate the impact on future earnings to be approximately $80,000.

In prior years, we applied the intrinsic-value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for the issuance of stock incentives to employees, non-employees and directors. No compensation expense related to employees’ and directors’ stock incentives were recognized in the prior year financial statements, as all options granted under stock incentive plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had we applied the fair value recognition provisions of “SFAS” No. 123, “Accounting for Stock-Based Compensation,” to stock based employee compensation for periods prior to 2006, our net income per share would have decreased to the pro forma amounts indicated below:

	Three Months Ended		Nine Months Ended
	September 30, 2005		September 30, 2005
Net Income
As reported	$	149,824	$	210,220
Pro forma	149,667		178,360
Basic and diluted net income per common share:

As reported	0.02		0.02
Pro forma	0.02		0.02
Share-Based Compensation:
As reported	17,667		56,300
Pro forma	157		31,860

In determining the compensation cost of options granted during the nine months ended September 30, 2005, 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		Nine Months Ended
	September 30, 2005		September 30, 2005

Risk-free interest rate	6.75		6.75
Expected life of options granted	6 years		6 years
Expected volatility	53	%	34	%
Expected dividend yield	0	%	0	%

Warranty Reserve

The Company warrants its products for one or five years. The reserve for warranty is included in accrued expenses and is computed by averaging the last four years warranty costs incurred. The following summarizes the warranty transactions for the three-month periods ended:

	September 30,			September 30,
	2006			2005

Balance at Beginning of Period	$	20,000		$	74,000
Claims paid	248			3,444
Expense Provision	(248		)	(3,444		)
Adjustments	—			(53,693		)
Balance at End of Period	$	20,000		$	74,000

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,
	2006			2005			2006			2005

Customer A	$	724,073		$	922,396		$	3,459,224		$	2,217,963
% of Sales	31		%	39		%	44		%	39		%
% of Accounts Receivable	12		%	39		%	12		%	39		%

Customer B	$	234,655		$	270,668		$	838,899		$	719,859
% of Sales	10		%	12		%	11		%	13		%
% of Accounts Receivable	13		%	19		%	13		%	19		%

3. Senior Debt:

The credit facility under the Company’s first amendment to second amended and restated senior credit agreement consists of an asset-based line of credit with availability of up to $1,200,000, subject to a borrowing base limitation of 85% of the Company’s eligible accounts receivable plus 40% of eligible raw materials and 30% of eligible finished goods. The asset-based line of credit bears interest

at the bank’s reference rate plus one-half percent. At September 30, 2006, the effective rate was 8.75% on the line of credit.

The credit facility is collateralized by substantially all of the Company’s assets, except for certain equipment purchased with notes payable. The bank may at any time apply the funds available in any Company bank account against the outstanding loan balances. The line of credit expires June 30, 2007.

4. Related Party Transactions

As of April 1, 2006, the Company agreed to amend its building and equipment lease agreements with the lessor (a related party through common ownership). The amended lease combined the former building and equipment lease agreements into one lease. As part of the amended lease, the Company now leases a portion of the building. The amended lease term is month to month, continuing for an undetermined number of months, with monthly payments totaling $16,250. As part of the amended lease agreement, the lessor agreed to forgive all deferred rent totaling $942,792 which was recorded to additional paid in capital in the second quarter of 2006.

The Company has determined that the amended lease is in substance a term lease based on the Company’s intent to continue to use the equipment and building under the lease for an extended period of time. Since the Company now leases only a portion of the building, the Company recognized $494,094 of the deferred gain on sale-leaseback immediately into income. The remaining gain on sale-leaseback related to the building as of July 1, 2006 totaling $557,169 will be amortized over thirty-eight months. The gain on sale-leaseback of equipment will continue to be amortized over the remaining life of the previous term which had eighteen months remaining as of July 1, 2006.

On June 30, 2006, related party creditors agreed to restructure their short term debt to term notes, due and payable on July 1, 2008. The notes totaled $3,071,154 and the interest rate remained at 3%.

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 is a manufacturer of conveyors, material handling equipment, motion control devices, and contract manufactured medical devices. MagStar’s primary product is Quickdraw brand conveyor systems, used in factory and laboratory automation. MagStar also manufactures customized motion control products (custom servo motors, spindles, and linear slides), disposable based medical centrifuges and devices, and its’ other proprietary product, oil centrifuges. Products manufactured by MagStar are used in high-tech manufacturing, electronics assembly, surgical procedures, and laboratory processes. Engineering strengths, precision machining abilities, and assembly services enable MagStar to be a prototype developer and production manufacturer of high performance and cost effective products.

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

The Company’s ability to continue operations is dependent on its ability to sustain 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 sustain sales at current levels and sustain positive cash flows from operations and maintain its credit facilities, it would be unable to meet its debt service requirements and may be forced to cease operations and / or liquidate assets.

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.

Results of Operations

The Company’s net sales of $2,315,781 for the third quarter ended September 30, 2006 decreased by 1% or $22,958 from $2,338,739 for the same period in 2005. The Company’s net sales of $7,836,896 for the nine months ended September 30, 2006 increased by 36% or $2,095,453 from $5,741,443 for the same period in 2005. Net sales from the Company’s major product lines for the third quarter and nine months ended September 30, 2006 compared to the same periods in 2005 are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Quickdraw conveyors	$	869,070	$	774,596	$	2,226,513	$	1,444,114
Spindles and motion control	$	920,105	$	1,038,893	$	4,073,648	$	2,532,487
Industrial centrifuges	$	319,552	$	187,155	$	863,206	$	777,266
Contract Manufacturing	$	196,894	$	324,546	$	725,725	$	942,456

Sales to the Company’s largest customer, Customer A, were $724,073 or 31% of net sales for the third quarter of 2006 compared to $922,396, or 39% of net sales for the same period in 2005. Sales to Customer B, the Company’s second largest customer were $234,655 or 10% of net sales for the third quarter of 2006 compared to $270,668 or 12% of sales for the same period in 2005. Sales were flat during the third

quarter of 2006 compared to the same period in 2005. Sales to the Company’s largest customer, Customer A, were $3,459,224 or 44% of net sales for the nine months ended September 30, 2006 compared to $2,217,963 or 39% of net sales for the same period in 2005. Sales to Customer B, the Company’s second largest customer were $838,899 or 11% of net sales for the nine months ended September 30, 2006 compared to $719,859 or 13% of sales for the same period in 2005. Sales increased overall during the nine months ended September 30, 2006 compared to the same period in 2005 due to a large increase in sales to the Company’s largest customers.

Gross profit was $479,708 or 21% for the third quarter ended September 30, 2006, compared to $526,602 or 23% for the same period in 2005. Gross profit decreased by $46,894 or 9% because of the less favorable product mix sold in the third quarter of 2006. Gross profit was $1,914,532 or 24% for the nine months ended September 30, 2006, compared to $1,095,091 or 19% for the same period in 2005. Gross profit increased by $819,441 or 75% due to increased sales in the nine months ended September 30, 2006. The gross profit for future quarters is dependent on the volume of sales and the product mix.

Selling, general and administrative expenses were $(17,556) or (1)% of net sales for the third quarter of 2006 compared to $334,695 or 14% of net sales for the same period in 2005. The decrease for the quarter ended September 30, 2006 of $352,251 or 105% is due to a one-time recognition of a portion of the deferred gain on the sale of building in 2003 as a result of restructuring of the building lease in July 2006. Selling, general and administrative expenses were $917,857 or 12% of net sales for the nine months ended September 30, 2006 compared to $765,795 or 13% of net sales for the same period in 2005. The increase for the nine months ended September 30, 2006 of $152,062 or 20% is due to increased expenses attributable to advertising, tradeshows, and administrative expenses including expensing of share-based compensation offset partially by a one-time recognition of a portion of the deferred gain on the sale of building in 2003 as a result of restructuring of the building lease in June 2006.

In the third quarter of 2006, the Company had operating income of $497,264 or 21% of net sales compared to $191,907 or 8% of net sales for the same period of 2005. The operating income increased for the third quarter by $305,357 or 159% due to the reasons discussed above. For the nine months ended September 30, 2006, the Company had operating income of $996,675 or 13% of net sales compared to $329,296 or 6% of net sales for the same period of 2005. The operating income increased for the nine months ended September 30, 2006 by $667,379 or 203% due to the reasons discussed above.

Other expenses (net) were $32,244 or 1% of net sales for the third quarter of 2006 compared to $42,083 or 2% for the same period of 2005. The decrease for the quarter ended September 30, 2006 of $9,839 or 23% is due to a decrease in interest expense as a result of lower average outstanding balance of our senior debt. Other expenses (net) were $75,423 or 1% of net sales for the nine months ended September 30, 2006 compared to $119,076 or 2% for the same period of 2005. The decrease for the nine months ended September 30, 2006 of $43,653 or 37% is due to a decrease in interest expense as a result of lower average outstanding balance of our senior debt and from the gain on sale of equipment.

The Company recorded net income for the third quarter ended September 30, 2006 and did not record a provision for 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 attributable to common shareholders for the third quarter of 2006 was $447,020 or $0.05 per basic and $.04 per diluted share, compared to a net income attributable to common shareholders of $131,824 or $0.01 per basic and diluted share for the third quarter of 2005. The change in net income is due to the reasons discussed above. Net income attributable to common shareholders for the nine months ended September 30, 2006 was $867,252 or $0.09 per basic and $0.08 per diluted share, compared to a net income

attributable to common shareholders of $156,220 or $0.02 per basic and diluted share for the third quarter of 2005. The change in net income is due to the reasons discussed above.

Liquidity and Capital Resources

At September 30, 2006, the Company had working capital of $729,260, compared to a working capital deficiency of $3,004,467 at December 31, 2005. The current ratio was 1.35 at September 30, 2006 and .44 at December 31, 2005. The increase in working capital is due to debt restructuring, modification of lease agreements and as a result of profits during the quarter and nine months ended September 30, 2006.

Net cash provided by operating activities was $156,870 for the nine months ended September 30, 2006, compared to net cash used in operating activities of $183,457 for the comparable period in 2005. The increase in cash flows from operating activities for the nine months ended September 30, 2006, from the comparable period in 2005, was due primarily to net income from operations as a result of increased sales and an increase in accounts payable and customer deposits

Net cash used in investing activities for the nine month period ended September 30, 2006 was $131,507, compared to $78,153 used in investing activities during the same nine month period in 2005. The change was due to increased expenditures in capital equipment. The Company does not anticipate any material commitments for capital expenditures for the next 12 months.

Net cash used in financing activities was $25,363 for the nine month period ended September 30, 2006, compared to cash provided by financing activities of $324,639 for the same period in 2005. The change was primarily due to paying down the senior debt in 2006 versus additional borrowings in 2005.

On June 30, 2005, the Company entered into its second amended and restated senior credit agreement. That credit agreement consisted 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 eligible raw materials and 30% of eligible finished goods. The asset-based line of credit bore interest at the bank’s reference rate plus two percent.

On June 30, 2006, the Company entered into its first amendment to second amended and restated senior credit agreement consisting of an asset-based line of credit with availability of up to $1,200,000, subject to a borrowing base limitation of 85% of the Company’s eligible accounts receivable plus 40% of eligible raw materials and 30% of eligible finished goods. The asset-based line of credit bears interest at the bank’s reference rate plus one-half percent and matures in June 2007. At September 30, 2006, the effective rate was 8.75% on the line of credit.

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. As of September 30, 2006, the Company had borrowed $551,884 under the credit facilities. The line of credit is due on demand; accordingly, this amount has been classified as a current liability in the Company’s September 30, 2006 and December 31, 2005 balance sheets.

As of April 1, 2006, the Company agreed to modify its building and equipment lease agreements with a related party. The new lease term is month to month, with monthly payments totaling $16,250. As part of the new lease agreements, the related party agreed to forgive all deferred rent totaling $942,792 which was recorded to additional paid in capital.

On June 30, 2006, related party creditors agreed to restructure their short term debt to term notes, due and payable on July 1, 2008. The balance of the notes on June 30, 2006 totaled $3,071,154 and the interest rate remains at 3%.

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 factory and laboratory automation conveyors, motion control and spindle devices, and industrial centrifuges.

· 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 nine month period ending September 30, 2006 compared to the prior year is the result of operational efficiencies and improvements at a constant and measured pace, debt restructuring, and a balanced approach to the risk management of operations and sales. With the appropriate managerial policy actions, the upside and downside risks to the attainment of both sustainable growth and operational stability should be kept roughly equal. 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.

While the Company’s performance in the third quarter of 2006 has shown improvement, its sustainability is uncertain. It is reasonable to assume that a large portion of the sales growth in 2006 is due to unique opportunities with significant customers. Management anticipates that these unique opportunities are exceptions above and beyond the Company’s business plan. Despite this uncertainty, the Company’s business plan will continue to include the execution of strategic plans designed to increase sales and profitability. The Company has no intention of issuing any specific performance guidance for future periods.

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 any 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, 2005. The accounting policies used in preparing the Company’s interim 2006 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 judgments and estimates. The Company’s critical accounting policies include those related to revenue recognition, share-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 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.

ITEM 6. 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

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MAGSTAR TECHNOLOGIES, INC.
		(Registrant)


Date:	November 9, 2006	By:	/s/ Jon L. Reissner
		Jon L. Reissner
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	November 9, 2006	By:	/s/ Joseph A. Petrich
		Joseph A. Petrich
		Treasurer and Chief Financial Officer
		(Principal Financial Officer)

INDEX TO EXHIBITS

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

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

For the quarterly period ended September 30, 2006

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

For the transition period from to

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

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