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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 2003

Commission File Number: 0-5105

MILASTAR CORPORATION

(Exact name of registrant as specified in its charter)

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 $.05 per share

(Title of Class)

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 twelve months (or for such a shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of Act).

Yes No X

The aggregate market value of the Class A Common Stock held by non-affiliates of the Registrant on July 7, 2003 was $926,000 based upon the bid price of the Class A common stock as quoted on OTC Electronic Bulletin Board. On that date there were 2,723,264 shares of Class A Common Stock issued and outstanding.

Documents Incorporated by Reference

Parts I, II and III incorporate by reference certain information to be included in Registrant's definitive Information Statement relating to action taken by written consent of the Board of Directors and Majority Stockholders, which Registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14C on or before August 8, 2003.

PART I

Item 1. Business

Forward-Looking Statements

Statements included in this Annual Report on Form 10-K, in the letter to shareholders, in the Company's quarterly reports, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and oral statements made with the approval of an authorized executive officer that are not historical, or current facts are "forward-looking statements " made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believe," "expect," "will," "can," "estimate," "anticipate" and similar expressions are intended to identify such forward-looking statements. Certain important factors could cause results to differ materially from those anticipated by some statements made herein and these statements are not predictions of actual future results. Investors are cautioned that all forward-looking statements involve risks and uncertainties. A number of factors that could cause results to differ materially are those discussed in this Annual Report on Form 10-K, including those discussed under "Risk Factors," as well as others not now anticipated. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company are expressly qualified by these cautionary statements. In addition, the Company disclaims any obligation to update forward-looking statements to reflect events or circumstances after the date hereof.

These risks and uncertainties include, without limitation: competitive pressures, inflation, consumer debt levels, changes in freight rates, capital market condition and other risks indicated in the Company's filings with Securities and Exchange Commission.

General

Milastar Corporation ("Milastar" and sometimes the "Company") was organized under Delaware law on February 24, 1969. Milastar sells special metallurgical services to a diversified list of manufacturers primarily located in the greater Midwest industrial market. The customer base manufactures a variety of mechanical end-products and customarily outsources (subcontracts) the processing of some components incorporated in those end-products. The menu of special processing services performed include metallurgical engineering, heat treating, brazing and surface finishing.

Milastar owns the wholly-owned subsidiary; Flame Metals Processing Corporation ("Flame Metals") located in Minnesota. Flame Metals currently generates 100% of Milastar's consolidated net sales, which flow from the sale of a variety of subcontract services to industrial customers. These special services include metallurgical-related processing involving the heating and cooling of metal products under controlled conditions in order to restructure the molecular property of such products to achieve specified characteristics.

Flame Metals' customer list includes more than 800 firms generally classified as manufacturers. The customer furnishes all direct materials and components processed for their account. These parts are then heat treated, primarily to achieve a certain hardness or surface finish, in preparation of the metal parts for their designated use. The Company's largest customer accounted for 18 percent of total net sales in fiscal 2003.

Flame Metals' operating assets were acquired by Milastar in May 1985. Flame Metals has since been expanded by a succession of acquisitions of complementary businesses. The initial acquisition was consummated in October 1988 when Milastar directly acquired certain assets of Northwest Engineering Labs, Inc. ("Northwest") located in Minneapolis, MN. The second acquisition was consummated in November 1991 when Flame Metals directly acquired certain assets and assumed certain liabilities from Getchell Steel Treating Company, Inc. located in Bloomington, MN. The third acquisition occurred in April 1996 when Flame Metals directly acquired certain assets and assumed certain liabilities from New England Metal Treating Inc. located in Auburn, Massachusetts. Flame Metals operated this entity as the wholly owned subsidiary, New England Metal Treating Corporation until its sale in August 2000. The fourth acquisition occurred in March 1998 when Flame Metals directly acquired certain assets and assumed certain liabilities from Twin City Steel Treating Company, Inc. located in Rogers, MN.

The Company currently owns two plants located in the Minneapolis-St. Paul, Minnesota area. These include a 35,000 sq. ft. facility in St. Louis Park, MN and a 48,000 sq. ft. facility in Rogers, MN.

Milastar reported income before taxes of $210,000 in fiscal 2003 and a loss before income taxes of $187,000 in fiscal 2002. Net income amounted to $206,000 in fiscal 2003 and a net loss of $194,000 in fiscal 2002. Results of operations are discussed more fully in "Management's Discussion and Analysis" beginning on page 6.

The Company's non-operating other income (expense) resulted in a net expense of $253,000 in fiscal year 2003, down $46,000 from the $299,000 in expense recorded in fiscal year 2002. Current assets as a percent of total assets amounted to 17% and 16% at April 30, 2003 and 2002, respectively. The book value per share based on common shares outstanding was $1.79 per share at April 30, 2003 compared with $1.72 per share at April 30, 2002. The bid price per share, as quoted on the OTC Electronic Bulletin Board, was $0.34 as of April 30, 2003.

Competition

The heat treat business is highly competitive, with price, quality and consistency of service being the principal factors affecting customer preferences. Since the customers' outside manufactured product components are sensitive to freight charges, the proximity of the heat treat facility to the customers' production location is also a primary competitive factor. Thus Flame Metals' business is generally localized and, to a lesser degree, regionalized. In this regard, Flame Metals has approximately four or five metallurgical processing competitors in the Minneapolis-St. Paul, Minnesota market who can be classified as being competitive with Flame Metals. Some of these competitors may possess greater resources and may be more cost efficient. Nevertheless, the Company believes Flame Metals' geographical location to customers, relative price structure, processing quality and reliability, collectively, provide Flame Metals with the resources to be competitive.

Seasonality and Raw Materials

The heat treat business is affected during the winter holiday season and midsummer due to vacations and plant shutdowns by Flame Metals' customers. Flame Metals is not materially affected by the sources or availability of raw material in that nearly all revenue is generated by services performed on customer owned products.

Corporate

The Company's principal executive offices are located at 7317 West Lake Street, Minneapolis, MN 55426. Its communication numbers are: Telephone (952) 929-4774 and fax number (952) 925-0572.

Environmental

To the best of its knowledge, the Company believes that it is presently in substantial compliance with all existing applicable environmental laws and does not anticipate that such compliance will have a material effect on its future capital expenditures, liquidity, earnings or competitive position.

Employee Relations

The Company currently operates two separate plant locations and employs a total of approximately 75 employees; 40 in St. Louis Park, MN, and 35 in Rogers, MN. The Company believes the prevailing wage rates, fringe benefits and working conditions afforded its employees compare favorably with those received by employees employed by regional businesses competitive with the Company. The Company believes its employee relations are satisfactory; therefore the Company does not anticipate any labor disruption during the forthcoming fiscal 2004.

Item 2. Properties

The Company believes that its property and equipment are well maintained, in good working condition, and are adequately insured.

Executive Offices

The Company currently maintains its executive offices at 7317 West Lake Street, Minneapolis, Minnesota.

Flame Metals

Flame Metals owns the two industrial properties as listed below:

ACTIVITY	LOCATION	SIZE (SQ. FT.)	STATUS
Flame Metals - Plant 1	St. Louis Park, MN	35,000	Owned
Flame Metals - Plant 2	Rogers, MN	48,000	Owned

The Company believes that our current facilities are suitable and adequate for the current level of our operations.

Item 3. Legal Proceedings

The Company has been party to various legal proceedings incidental to its normal operating activities. Although it is impossible to predict the outcome of such proceedings, management believes, based on the facts currently available, that none of such claims will result in losses that would have a materially adverse effect on the Company's consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of the Company's security holders during its fiscal year ended April 30, 2003.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

The Company's Class A Common Stock is traded on the OTC Bulletin Board and the Pink Sheets under the ticker symbol "MILAA". The following table provides, for the periods indicated, the high and low bid prices per share of the Company's Class A Common Stock. The Class A share prices represent prices established between broker-dealers and therefore do not reflect prices of actual transactions.

	Fiscal 2003			Fiscal 2002
	High	Low		High	Low
First Quarter	$ 0.34	$ 0.34		$ 0.45	$ 0.38
Second Quarter	$ 0.34	$ 0.30		$ 0.43	$ 0.32
Third Quarter	$ 0.35	$ 0.27		$ 0.40	$ 0.32
Fourth Quarter	$ 0.34	$ 0.32		$ 0.34	$ 0.33

On July 7, 2003 there were approximately 4,000 holders of record of the Company's Common Stock. The Company has not paid any cash dividends in respect of its Class A Common Stock, and it is not presently anticipating paying any cash dividends, thereon, in the near term.

Other Information Regarding Equity Compensation Plans

The following table sets forth information regarding the Company's equity compensation plans in effect as of April 30, 2003. Each of our equity compensation plans is an "employee benefit plan" as defined by Rule 405 of Regulation C of the Securities Act of 1933.

Securities Authorized for Issuance Under Equity Compensation Plans

Plan category	Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of shares of common stock remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders:	955,832		$ 0.72		44,168
Equity compensation plans not approved by stockholders:	--		--		--
Total	955,832		$ 0.72		44,168

Item 6. Selected Financial Data

(In thousands except per share data)	2003	2002	2001	2000	1999
Net sales	$ 9,338	$ 8,215	$ 8,870	$ 9,064	$ 9,198
Net income (loss)	206	(194)	198	202	462
Net income (loss) per common share - basic	.08	(.07)	.07	.07	.17
Net income (loss) per common share - diluted	.07	(.07)	.07	.07	.16
Financial Position:
Total assets	9,736	9,702	9,212	8,611	9,165
Current liabilities	1,969	1,660	1,538	1,988	1,926
Long-term debt less current maturities	2,881	3,362	2,800	1,947	2,765
Stockholders' equity	$ 4,886	$ 4,680	$ 4,874	$ 4,676	$ 4,474

The following table shows the effect that the Company's contractual obligations are expected to have on our liquidity position and cash flows in the future periods:

	Total	2004	2005	2006	2007	2008	Thereafter
Debt	$ 3,771,000	$ 890,000	$ 932,000	$ 997,000	$ 598,000	$ 43,000	$ 311,000
Operating Leases	27,000	14,000	9,000	4,000
Total contractual cash obligations	$ 3,798,000	$ 904,000	$ 941,000	$ 1,001,000	$ 598,000	$ 43,000	$ 311,000

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we used in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts being reported.

Our significant accounting policies are described in Note 1 to the consolidated financial statements. Our critical accounting policies and estimates are those both having the most impact to the reporting of our financial condition and results, and requiring significant judgments and estimates. Our critical accounting policies include those related to (a) revenue recognition, (b) allowance for uncollectible accounts receivable, (c) long-lived assets and (d) valuation allowance.

(a) Revenue Recognition - The Company's revenues are recognized when products are shipped to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the application of accounting principles generally accepted in the United States of America to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 101.

(b) Allowance for Uncollectible Accounts Receivable - The Company records an allowance for accounts receivable which are potentially uncollectible. The allowance is established by estimating the amounts that are potentially uncollectible based on a review of customer accounts, age of the receivable, the customer's financial condition and industry, and general economic conditions. Results could be materially different if economic conditions deteriorated for the Company's customers.

(c) Long-Lived Assets - Property and equipment, are depreciated over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes no impairment changes need to be recorded as of April 30, 2003.

(d) Valuation Allowance - The valuation allowance at April 30, 2003 was $21,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, tax carryover periods available, and tax planning strategies in making this assessment.

Overview

The Company's operating results for the fiscal year ended April 30, 2003 showed a 14% increase in sales and a 313% increase in operating income. Over the last two years, the weaker economy for the heat treating industry in the Midwest has continued to negatively impact the Company's traditional customer base. The Company was able to replace the lost revenues with new work received from existing customers which has translated into higher operating profits. The Company has one customer which accounted for 18% of total sales in fiscal 2003 which is up from 11% of total sales for the previous year.

Milastar's primary revenues flow from metallurgical services provided by Flame Metals Processing Corporation The Company continues to strive to increase equipment utilization, expand capacity and absorb fixed overhead costs.

Milastar has net operating loss carryforwards of approximately $1,067,000 available to offset future taxable income, if any, which in the future may enhance earnings as well as cash flow. See note 5 to "Notes to Consolidated Financial Statements."

Results of Operations

Fiscal 2003 Compared to Fiscal 2002. Net sales for fiscal 2003 totaled $9,338,000, a 14% increase from $8,215,000 in fiscal 2002. The sales increase was primarily attributable to additional work received from existing customers, with one customer accounting for approximately half of the revenue increase.

Cost of sales of $6,880,000 (74% of sales) in fiscal 2003 increased $834,000 from $6,046,000 (74% of sales) in the previous fiscal year. The increase in total dollars was primarily attributable to additional payroll, supply and utility costs associated with the increased revenue. Gross profit increased by $289,000, from $2,169,000 in fiscal 2002 to $2,458,000 in fiscal 2003.

Selling, general and administrative (SG&A) expenses of $1,917,000 (21% of sales) in fiscal 2003 decreased $59,000 from $1,976,000 (24% of sales) for the same period a year earlier. The change in SG&A expenses is primarily due to immaterial fluctuations. SG&A expenses are relatively fixed and as such are not expected to change significantly in the near future.

Total other expense amounted to $253,000 in fiscal 2003, compared with other expense of $299,000 reported in fiscal 2002. The decrease was primarily attributable to reduced interest expense which was due to a reduction in interest rates and long-term debt.

The provision for income taxes for fiscal 2003 was $4,000 compared to income taxes of $7,000 in fiscal 2002. The income tax expense in fiscal 2003 and 2002 was primarily due to minimum state income taxes. The provision for income taxes for fiscal year 2003 was favorably impacted by the recognition of deferred income tax assets for which no benefit had been provided for.

Fiscal 2002 Compared to Fiscal 2001. Net sales for fiscal 2002 totaled $8,215,000, a 7% decrease from $8,870,000 in fiscal 2001. The sales decrease was primarily attributable to the loss of revenue from the sale of New England Metal Treating in the second quarter of fiscal 2001 and to a weaker economy for the heat treating industry in the Midwest.

Cost of sales of $6,046,000 (74% of sales) in fiscal 2002 decreased $164,000 from $6,210,000 (70% of sales) in the previous fiscal year. The decrease in total dollars was primarily attributable to the sale of New England Metal Treating, being partially offset by an increase in labor costs in the Midwest. The increase in cost of sales as a percent of net sales from 70% to 74% was primarily the result of lower sales and increased labor costs in the Midwest. Gross profit decreased by $491,000, from $2,660,000 in fiscal 2001 to $2,169,000 in fiscal 2002.

Selling, general and administrative (SG&A) expenses of $1,976,000 (24% of sales) in fiscal 2002 decreased $98,000 from $2,074,000 (23% of sales) for the same period a year earlier. The decrease in SG&A expenses was primarily due to a decrease in administrative salaries.

Total other expense amounted to $299,000 in fiscal 2002, compared with other expense of $284,000 reported in fiscal 2001. The increase was primarily attributable to $68,000 gain on the sale of New England Metal Treating in fiscal 2001 being partially offset by reduced interest expense in fiscal 2002. The reduced interest expense was due to a reduction in interest rates.

The provision for income taxes for fiscal 2002 was $7,000 compared to income taxes of $9,000 in fiscal 2001. The income tax expense in fiscal 2002 was due to minimum state income taxes.

Liquidity and Capital Resources

At April 30, 2003, the Company had negative working capital of $269,000 compared with $69,000 of negative working capital as of April 30, 2002, and the ratio of current assets to current liabilities was approximately 0.9 to 1.0 and 1.0 to 1.0 at April 30, 2003 and 2002, respectively. The decrease in working capital was due primarily to an increase in accounts payable which was inflated by the timing of certain purchases. Cash and current receivables represented 71% (69% at April 30, 2002) and 12% (11% at April 30, 2002) of total current assets and total assets, at April 30, 2003, respectively.

During fiscal 2003 net cash flows from operating activities amounted to $1,280,000 compared with net cash flows from operating activities of $592,000 in fiscal 2002. The increase in net cash flows from operating activities was primarily due to increase in net income of approximately $400,000. The Company added $996,000 to property, plant and equipment in fiscal 2003 compared with $1,526,000 in the previous year. The reduction of capital expenditures was primarily due to the completion of the initial installation of equipment associated with the expansion of the Rogers, MN facility. Working capital requirements for fiscal 2003 were funded primarily from available cash, cash generated from operations and issuance of long-term debt.

The Company believes it has sufficient capital resources to meet its fiscal 2004 operations and equipment acquisitions cash flow requirements.

Risks Related to our Business

The following are important factors that could cause actual results to differ materially from those anticipated in any forward-looking statements made by or on behalf of the Company.

Changes in regional capacity - The commercial heat treating industry is extremely competitive and highly dependent upon available capacity. The installation of additional equipment in the Minnesota area by either a competitor or a customer could have a material adverse effect on our business operations.

Energy prices - The cost of natural gas and electricity accounted for 14% of Cost of Sales for the years ended April 30, 2003 and 2002. Increases in energy and in particular, natural gas, could have a material adverse effect on our business operations.

Product liability exposure - The Company performs a service on metal products, for which a failure may involve product liability risk. We carry general casualty insurance, including coverage for product liability claims up to $1 million per occurence. We also carry liability umbrella coverage of an additional $2 million. However, there can be no assurance that this coverage will be adequate for any claims that may be raised. We have not had any significant product liability claims in the past and we are not aware of any pending product liability claims against us. However, a successful product liability suit could have a material adverse effect on our business operations.

Effects of Inflation

During fiscal 2003 and 2002 the Company's monetary liabilities materially exceeded its monetary assets resulting in a net negative monetary position. In periods in which the general price-level index is rising (inflation), it is advantageous to maintain a net negative monetary position. During periods of significant price inflation, the Company's purchasing power could be eroded if the value of the Company's underlying tangible assets fail to appreciate in value. Under such a scenario, the Company may be positioned to raise prices to offset the inflation effect and in addition take advantage of revaluation of underlying tangible assets to bolster borrowing capacity. There is no clear correlation between the effects of inflation and the Company's earning capacity.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

Market Risks

The Company is exposed to certain market risks relative to interest rates on its long-term debt and $500,000 line of credit of which $0 is outstanding at April 30, 2003. The majority of long-term debt bears interest at 2.5% above the LIBOR rate and the line of credit bears interest at the bank's reference rate.

Item 8. Financial Statements

	Page No.
Independent Auditors' Reports	10 - 11
Consolidated Balance Sheets at April 30, 2003 and 2002	12 - 13
Consolidated Statements of Operations for the three years ended April 30, 2003	14
Consolidated Statements of Cash Flows for the three years ended April 30, 2003	15
Consolidated Statements of Changes in Stockholders' Equity for the three years ended April 30, 2003	16
Notes to Consolidated Financial Statements	17 - 25
Financial Statement Schedule:
Independent Auditors' Report	26
Valuation and Qualifying Accounts for the three years ended April 30, 2003	27

INDEPENDENT AUDITORS' REPORT

Stockholders and Board of Directors

Milastar Corporation and Subsidiary

Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheet of Milastar Corporation and Subsidiary as of April 30, 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Milastar Corporation and Subsidiary as of April 30, 2003 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Virchow, Krause & Company, LLP

Minneapolis, Minnesota

June 6, 2003

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors

Milastar Corporation:

We have audited the consolidated balance sheets of Milastar Corporation and subsidiaries as of April 30, 2002, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the fiscal years in the two-year period ended April 30, 2002. In connection with our audits of the consolidated financial statements, we have also audited the accompanying consolidated financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Milastar Corporation and subsidiaries as of April 30, 2002, and the results of their operations and their cash flows for each of the fiscal years in the two-year period ended April 30, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

KPMG LLP

Minneapolis, Minnesota

June 3, 2002

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Years Ended April 30,

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business -- Milastar Corporation ("Milastar" and sometimes the "Company") sells special metallurgical services to a diversified list of manufacturers primarily located in the greater Midwest region. The menu of special processing services performed include metallurgical engineering, heat treating, brazing and surface finishing. The Company extends credit to many of its customers.

Principles of consolidation -- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Flame Metals Processing Corporation. In consolidation, all significant intercompany accounts and transactions are eliminated.

Cash -- The Company maintains its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits.

Credit risk and allowance for doubtful accounts -- The Company reviews customers' credit history before extending unsecured credit and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and other information. Invoices for services are due net 30 days. Accounts receivable over 60 days are considered past due. The Company does not accrue interest on past due accounts receivable. The Company writes off accounts receivable when they are deemed uncollectible. Accounts receivable are shown net of an allowance for doubtful accounts of $50,000 at both April 30, 2003 and 2002.

Inventory -- Inventory is valued at the lower of cost or market utilizing costing methods using the First-In-First-Out (FIFO) method.

Prepaid supplies -- Prepaid supplies are expensed as used.

Property, plant and equipment -- Property, plant and equipment are carried at cost. Depreciation is provided for using the straight-line method. When assets are retired or otherwise disposed of, the cost and related depreciation are removed from the accounts, and any gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized and deductions are made for retirements resulting from the renewals or betterments. Depreciation expense was $932,000, $880,000 and $869,000 for the years ended April 30, 2003, 2002 and 2001, respectively.

The estimated useful lives of the fixed assets are as follows:

Buildings and Improvements	23 to 40 years
Equipment	5 to 12 years
Vehicles	3 to 5 years

Other assets -- Other assets were comprised of one five-year non-compete agreement which was being amortized over 60 months using the straight-line method. The non-compete agreement expired during the year ended April 30, 2003.

Income taxes -- Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, tax carryover periods available, and tax planning strategies in making this assessment.

Accounting 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.

Fair value of financial instruments -- The Company's financial instruments are recorded on its balance sheet. The carrying amount for cash, accounts receivable, accounts payable, and accrued expenses approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates the carrying amounts based upon the Company's expected borrowing rate for debt with similar remaining maturities and comparable risk.

Impairment of long-lived assets and long-lived assets to be disposed of -- In August 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," among other items. The Company adopted the provisions of SFAS No. 144 as of May 1, 2002. Similar to SFAS No. 121, SFAS No. 144 established procedures for review of recoverability, and measurement of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 also requires that long-lived assets to be disposed of other than by sale shall continue to be classified as held and used until disposal. Further, SFAS No. 144 specifies the criteria for classifying long-lived assets as "held for sale" and requires that long-lived assets to be disposed of by sale be reported as the lower of carrying amount or fair value less estimated selling costs. Management believes that there has not been any impairment of the Company's long-lived assets.

Stock-based compensation -- The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock options. Under the intrinsic value method, compensation expense is recorded only to the extent that the market price of the common stock exceeds the exercise price of the stock option on the date of grant.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."  SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides requires additional disclosures about the method of accounting for stock-based employee compensation.  The amendments are effective for financial statements for fiscal years ending after December 31, 2002 and for the interim periods beginning after December 15, 2002. The Company adopted the annual disclosure provision of SFAS No. 148 during the year ended April 30, 2003. The Company has currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation, pursuant to SFAS No. 148.

The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized with respect to stock options. Had compensation cost for stock options been determined based on the fair value methodology prescribed by SFAS 123, the Company's income (loss) per share would have been reduced to the pro forma amounts indicated below:

	2003		2002		2001
Net income (loss) - as reported	$ 206,000		$ (194,000)		$ 198,000
Net income (loss) - pro forma	$ 171,000		$ (200,000)		$ 192,000
Net income (loss) per share - basic - as reported	$ 0.08		$ (0.07)		$ 0.07
Net income (loss) per share - basic - pro forma	$ 0.06		$ (0.07)		$ 0.07
Stock based compensation - as reported	$ --		$ --		$ --
Stock based compensation - pro forma	$ 35,000		$ 6,000		$ 6,000

The pro forma amounts may not be representative of the effects on reported net income (loss) for future years. The per share, weighted-average fair value of each option granted is calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the following years:

	2003		2002		2001
Dividend yield	0%		0%		0%
Expected volatility	60%		64%		66%
Risk-free interest rate	5.0%		6.0%		5.0%
Expected lives	5-10 years		10 years		5 years

The weighted average fair value of options granted during the years ended April 30, 2003, 2002 and 2001, was $0.34 $0.00 and $0.47, respectively.

Earnings per share -- Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share includes the effect of all dilutive potential common shares (primarily related to st