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

---

FORM 10-K

---

(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[   ]  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 0-12254

SCIENTIFIC TECHNOLOGIES INCORPORATED



|Oregon                                                         | 77-0170363                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

6550 Dumbarton CircleFremont, CA     94555

(510) 608-3400

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

Securities registered pursuant to Section 12(g) of the Act:Title of Class
Name of each exchange on which registeredCommon Stock, $.001 Par Value
NASDAQ National Market SystemCheck whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months,  and (2) has been subject to such filing requirements for the past
90 days.   
 Yes [X]       No  [     ]Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will 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.     [X]The issuer's revenue for the most recent fiscal year was $48,289,000.The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing sales price of Common Stock on March 1,
2002 as reported by the NASDAQ Market System, was approximately $5,151,528.
Such amount excludes shares held by registrant's current directors and officers
and by each person who owns 5% or more of the outstanding Common Stock in that
such persons may be deemed to be "affiliates" as that term is defined pursuant
to the Rules and Regulations of the Securities Exchange Act of 1934.  This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.The number of shares of the Registrant's Common Stock outstanding as of
March 1, 2002 was 9,650,369 shares.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy statement to be filed with the
Securities and ExchangeCommission in connection with the Company's 2002 Annual
Annual Meeting of Shareholders ("the Proxy Statement") are incorporated by
reference in Part III of this Form 10K.


SCIENTIFIC TECHNOLOGIES INCORPORATED
                        2001 ANNUAL REPORT ON FORM 10-K
                               INDEX

Part I.

PageItem 1.
Business**Item 2.
Properties**Item 3.
Legal Proceedings**Item 4.
Submission of Matters to a Vote of Security Holders**Part II.Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters**Item 6.
Selected Financial Data**Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations**Item 7a.
Quantitative and Qualitative Disclosures About Market Risks**Item 8.
Financial Statements and Supplementary Data**Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures**Part III.Item 10.
Directors and Executive Officers of the Registrant**Item 11.
Executive Compensation**Item 12.
Security Ownership of Certain Beneficial Owners and Management**Item 13.
Certain Relationships and Related Transactions**Part IV.Item 14.
Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K**Signatures
**Exhibits Index
**PART I

Item 1. BUSINESS
This Annual Report contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Annual Report that are not purely historical are 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 statements
are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Factors that could
affect our actual results include the level and timing of customer orders, the
mix of products sold, fluctuations in sales of complementary third party
products with which our products are sold, the timing of operating expenditures,
general economic conditions in the U.S. and abroad, particularly in Asia and
Europe, competition, our ability to introduce successful new products and other
factors. You should carefully read the factors discussed in this Annual Report
under the caption "Factors That May Affect Future Results."
These forward-looking statements reflect management's
view only as of the date of this Annual Report. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You should also carefully consider
review the risk factors described in other documents that we file from time to
time with the Securities and Exchange Commission.
Overview
Scientific Technologies Incorporated designs,
manufactures and distributes electrical and electronic industrial controls such
as machine safety and automation sensing products. Our product lines include
safety light curtains, safety interlock switches, safety relays, profiling
scanners, factory automation sensors, controls, fiber optics, power monitoring,
safety mats, safety contact strips, non-contact ultrasonic sensors and
controllers, pressure transducers and other electronic equipment supplied to
industrial automation, commercial and defense customers. We were incorporated in
Oregon in 1979.
Eighty-six percent (86%) of our capital stock is
currently held by our parent corporation, Scientific Technology Incorporated, a
California corporation.
We are organized into two product groups, Safety Products
and Automation Products, within two business segments. This new structure was
initiated in 2000 to allow us to better target our products based on each
group's area of specialization, customer-focused applications and products. This
organization is intended to facilitate more efficient integration of new
products and acquisitions.
Scientific Technology, Scientific Technologies, Datricon,
STI, the STI logo, OptoSwitch, OptoData, OptoSafe and Fiberlens, are registered
trademarks of our parent company, Scientific Technology Incorporated. Aegis,
MiniSafe, FlexSafe, MicroSafe, BeamSafe, FastScan, SpectraData, PartScan and
ValuScan are trademarks of ours. This Annual Report on Form 10-K also refers to
trademarks and service marks of other companies and entities.


Products
1.Safety Products Group:a. Safety Light Curtains. Our leading product
group, which accounted for a significant majority of sales in 2001, 2000 and
1999, is a family of safety light guards, also called presence sensing devices
or safety light curtains, used to safeguard personnel in manufacturing
environments against injury caused by robots and moving machinery. We offer
several product variations, providing customers with a complete line of optical
guarding solutions.
Safety light curtains are devices that emit a "curtain"
of harmless infrared light beams in front of the hazard area. When any of the
beams are blocked, the light curtain sends a stop signal to the guarded machine.
Light curtains are extremely versatile and can guard areas that are more than
100 feet wide. By the use of mirrors, the light beams can be diverted around
corners to enclose a machine. Safety light curtains are available with different
light beam spacings, which makes them suitable for many applications.
We manufacture and market a miniaturized light guard
called the MiniSafe, designed for inclusion in systems offered by original
equipment manufacturers, or OEMs, and other applications where space is limited.
Applications for safety light curtains are found in a
variety of manufacturing environments. Our customers use safety light curtains
to guard a wide variety of hazardous applications including automotive assembly
lines, robot work cells, semiconductor production equipment, metal stamping and
forming, food processing, aircraft manufacturing, photographic film production,
tire manufacturing and home appliance production.

The MicroSafe MC4700 series light curtain was
introduced in 2001. This product features an ultra-compact transmitter and
receiver that offers protected heights from 100 to 1,798 millimeters. Superior
response time and excellent resolution, allow the MC4700 to be mounted closer to
the danger points of hazardous operation. The MC4700 includes individual beam
indicators, adjustable mounting brackets, exact channel select, floating
blanking, auxiliary outputs, restart interlocks, machine test signal machine
primary element control monitoring, two digit display diagnostic, two positive
negative positive safety outputs and a simple 3-box design. Designed for use in
locations in which space is limited, the small size of the MicroSafe allows it
to be integrated with the support framing used on many automated industrial
machines.

The MegaSafe MG4600 series was also introduced in 2001.
The MG4600 Series comes with a complete features set, and is designed to meet
the stringent safeguarding requirements for automotive applications, including
those of Ford and DaimlerChrysler, as well as the Ford EL4 Standard. The MG4600
is available in 20 mm, 30 mm and 50 mm resolution, provides protected heights
from 17.13 inches (435 mm) to 82.52 inches (2086 mm) depending on system
resolution, and offers a 65 foot (20 meter) sensing range. Control reliable
circuitry eliminates the need for a separate controller, and patented individual
beam indicators simplify alignment. Additional features include field-replaceable safety
relays and weld shield, floating blanking to block up to two
beams anywhere in the zone, and exact channel select to permanently block
selected beams where machine parts will obstruct a portion of the zone.

The FlexSafe is a segmented safety light curtain that
offers greater flexibility and machine guarding for unusually shaped
applications. Instead of a single transmitter and receiver, the FlexSafe is
offered with two or more segments comprising each transmitter and receiver. The
respective transmitter and receiver segments are connected with flexible cables
to facilitate fitting to the machinery.

The DuoSafe controller allows the customer to configure
two independent safety light curtains to achieve common or discrete outputs. The
DuoSafe provides further application flexibility for customers when selecting
their safeguarding solution.

Selected models of the safety light curtain products are
certified by independent laboratories to comply with safety and electrical
standards, including those standards required in the European Union. Products
which pass the stringent European safety certifications carry the CE test mark.

b. Mechanical Safety Interlocks and Safety Relays. We
have a relationship with EJA Engineering, Ltd., the manufacturer of Guardmaster
mechanical safety interlocks based in the United Kingdom. EJA is a subsidiary of
Rockwell International Guardmaster safety interlock switches are utilized on
hinged, sliding, or lift-off guards and barriers that are often installed with
our safety light curtains. When the guard is opened, the power supply to the
machine is disconnected. Safety relays are electromechanical devices which often
serve as a safety interface between the mechanical safety interlocks and the
machine's control system. The function and design of Guardmaster interlocks are
complementary to our range of safety products. Since 1993, we have been the
exclusive distributor of Guardmaster products in the United States and Canada,
and an affiliate of EJA has been the distributor for our product line in the
United Kingdom.

Under a new agreement, signed in 1999, EJA/Rockwell will
have the non-exclusive right to distribute the Guardmaster product worldwide and
we will have the right to distribute the products on a private label basis under
the STI brand.

c. Safety Mats and Controllers. Our safety mats are
designed for use in industrial environments where safety enhancements or zone
detection is required. The mats are sensitive to foot or vehicular traffic.
Safety mats are used with a mat controller, which is the interface between the
safety mat and the control system of the guarded machine.

In the first quarter of 1999, the UM Series mat and a new
safety mat controller were tested and certified by an independent test agency to
a new international safety mat standard. These products carry the European CE
test mark. The UM Series and the associated controller was introduced to our
sales channel during 2000.

In 2001, we introduced and commenced shipments of the MC6
Safety Mat Controller, capable of providing up to six individual mat zones.

During 2000, shipments commenced on two new safety mat
controllers, the MC3 and MC4. These products offer selection of either an
industry standard DIN enclosure (MC3) or a rugged industrial style metal
enclosure (MC4) with auto selection input voltages. Both new controllers are
third party certified and CE marked to international standards for safety mat
systems.

d. Safety Contact Strips. Safety contact strips are
used in edges of guards, doors and gates at possible pinch, crushing or shear
points. The contact strips are pressure sensitive devices and operate similar to
safety mats, and use an appropriate controller. The system, comprising of the
contact strips and controller are also third party certified to international
standards and carry the CE mark.

e. Optical Profiling Scanners. In today's industrial
environment, non-contact, on-the-move sensing is vital to control automated
processes and improve industrial productivity. To meet this need, we have
developed a line of optical profiling scanner products. These scanners provide
non-contact sensing for a variety of customer applications.

We manufacture a family of high speed, microprocessor-based profiling
scanners designed to provide an economical way to measure the
physical size of various objects. The modular design of these scanners enables
the user to select among various output and programming functions, including
infrared beam spacings, size of the scanned area and single or multiple
axes.Software is included for a variety of scanning applications
and can be customized to meet a customer's specific needs.

We also manufacture and sell the Vehicle Scanner Series
of high speed, profiling scanners utilized in automated highway toll collection
systems. These scanners are used for vehicle detection, separation and
classification, providing imaging information to a host computer, which
determines the appropriate toll to be charged in an automatic fare collection
application.

STI Vehicle Scanners have been selected or installed on a
number of bridges and toll roads both in the United States and internationally.
Domestic locations include the Triborough and Verrazano Narrows bridges in New
York, a number of bridges in the San Francisco Bay Area, including the Golden
Gate Bridge and the Oakland-San Francisco Bay Bridge, and toll roads in
Colorado, Florida, Maine, New Jersey and Kansas. International locations include
France, Belgium, Singapore and Brazil.

f. Dunn Sales, Inc. We acquired Dunn Sales in June 2001
for $4.0 million and accounted for the acquisition using the purchase method of
accounting. Dunn Sales is located in Anaheim, California, and offers both safety
and machinery services. Dunn Sales provides safety services such as:
safeguarding equipment installations, machine safety assessments, and the design
and custom fabrication of guarding solutions. Furthermore, Dunn Sales
specializes in machinery services including the repair, rebuilding, relocation,
sales, installation and service of fabricating machinery. Over the past decade,
Dunn Sales has become one of the largest and most recognized independent
fabricating machinery service, sales and maintenance companies domiciled in the
western United States. Dunn Sales serves customers in a variety of industries,
including metal fabrication, aerospace, electronics and food processing.

2. Automation Products Group:

a. Photoelectric and Fiberoptic Sensors. We
manufacture and/or market a variety of photoelectric and fiberoptic sensors used
for detecting the presence or absence of objects in a wide range of factory
automation applications.

Fiberoptic sensors utilize flexible glass or plastic
fiberoptic cable to traverse the light beam from the solid state light source to
the receiving electronics. This cable is very small, and is resistant to high
temperatures, corrosive chemicals or repeated flexing. Fiberoptic sensors are
often used in confined spaces and in environments in which standard
photoelectric sensors typically would not survive.

Typical uses and applications for photoelectric and
fiberoptic sensors include canning and bottling lines, conveyor warehousing,
palletizing, printing, food processing, plastic molding, wood and forest
products manufacturing, automotive manufacturing, material handling and a
variety of other applications in an array of industries.

Companies who use our photoelectric and fiberoptic
sensors include those in the automotive, machine tool, metal forming, robotics,
electronics, material handling, packaging, food processing, pulp and paper,
forest products, personal care products, printing, chemical, defense and textile
industries.

To cover this diversified industrial market, we market
these products primarily to end-users and original equipment manufacturers
through more than 275 US distributors and sales representatives and 33 foreign
distributors. Customers include end-users and original equipment manufacturers.

b. Control components, power monitoring and defense
electronics. We manufacture and market a variety of sensors and relays for
commercial and defense customers. Such products include custom magnetic
components, current sensors, RPM sensors, voltage sensors, current monitors,
time delay relays, flashers, phase sequence relays and indicators, DC to DC
converters, and isolation transformers.

We are qualified as a supplier of a variety of military-specified
sensors and controls. Many of these products are selected for use on
military and general aviation aircraft and ground support systems. Products are
sold to original equipment manufacturers, government agencies and end users.

We market and sell these products primarily through our
direct sales force.

c. Level and Flow Sensors. We market a variety of
level and flow sensing products imported from several manufacturers. The
principal provider of these products is Nohken, the largest level control
manufacturer in Japan. We are the exclusive US distributor of the Nohken
products. These products provide point level detection of solids, liquids and
solids/liquids, as well as contiguous measurement of continuous flow of solids
and liquids, in a wide variety of environments.

d. Non-contact Ultrasonic Sensors and Controllers. In
April 1999, we acquired Lundahl Instruments, Inc. of Logan, Utah, a privately-held
manufacturer of non-contact ultrasonic sensors and controllers. We paid
approximately $2.7 million in connection with this acquisition which was
accounted for using the purchase method of accounting. Lundahl produces over 75
types of specialized ultrasonic sensors and controller systems as well as custom
designed products. These products fall into two categories: Sensor/Controller
Systems, which are used for monitoring, displaying or controlling level in tanks
or bins, open channel flow, tank volume, obstacle avoidance and product
dimensioning; self-contained Sensor Systems, in which all electronics are
located within the sensor, requiring no separate controller or transmitting
unit. These products are used for linear position measurements in industrial and
level applications, as well as dimensioning and sorting, measurement of roll
diameter, loop control, monitoring liquids and bulk solids and level gauging.

In January 2000, we created a new business unit, STI
Automation Sensors, by combining our Level and Flow Products with the operations
of Lundahl. This new unit is located in Logan, Utah and offers our customers one
location to obtain level, flow and positioning sensor expertise. Automation
Sensors is a part of the Automation Products Group.

e. Pressure transducers, digital pressure gauges,
displacement and velocity transducers, and pressure comparators. In March
2000, we acquired substantially all of the assets and assumed some liabilities
of PSI-Tronix, Inc., a privately-held company located in Tulare, California. We
paid approximately $8.7 million in cash and accounted for this acquisition using
the purchase method of accounting. PSI-Tronix products are used in a variety of
factory automation, aerospace, medical, semiconductor, oil and gas markets and
applications.PSI-Tronix's engineering, manufacturing, administration and
sales operations are located in a 25,000 square foot facility in Tulare.

Our mission to provide tailored solutions for measurement
applications is reflected in the structure, operations, and channels to market
of our Automation Products Group. Rather than utilizing a traditional geography-based
sales channel, for this product group we define sales territories by
vertical markets in order to develop intimate application, market, and product
knowledge within these markets. The current market focus includes semiconductor
manufacturing, textiles, aerospace industries, hydraulic equipment OEMs, petro-chemical,
and water/waste-water management. In order to satisfy another
important step in maximizing resource utilization in our Automation Products
Group, we focus our product development efforts in custom and modified products
for specific volume OEM customers. This is in sharp contrast to a more
traditional, capital intensive effort to cover every possible product range.

Sources and availability of components

We maintain an inventory of components and parts
for our manufacturing activities. Although there are many sources for most of
the components needed, we purchase some products, components and sub-assemblies
from sole sources, which may be the only available supplier or may enable us to
obtain pricing or supply efficiencies. In the event of supply interruptions from
these vendors, we believe that we could obtain most sole source components from
alternate suppliers; however, this would require us to transfer tooling or
designs, or to redesign our products to facilitate use of alternate source
components. We could incur delays by switching to an alternate source, which
could have an adverse effect on our business, financial condition and results of
operations.

We also derive revenue from the distribution of products from
third party manufacturers, including revenues pursuant to our relationship with
EJA (See "Business - Products - Safety Automation Products - Mechanical Safety
Interlocks and Safety Relays"). In the event such arrangements are terminated or
third party products otherwise become unavailable, our results of operations
could be adversely affected.

Research and development

In order to meet the changing needs of our customers,
we engage in research and development both to introduce new products and to
improve existing products. In addition, we modify products as necessary to meet
original equipment manufacturers' requirements. At December 31, 2001, there were
approximately 29 employees engaged in research and development activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results - Technological Change and New
Product Development."

In 2001, 2000, and 1999, we spent $5,429,000, $5,159,000, and
$4,780,000, respectively, on engineering, research and development. In addition
to new products and enhancements to existing products, our research and
development efforts are directed towards qualifying our light curtains, scanners
and sensors for sale in foreign countries and qualifying products that we import
for sale in the U.S. We anticipate that the level of research and development
expenditures may be higher in 2002.

Patents and trademarks

We hold eleven US patents and nine US registered
trademarks. In addition, we have been licensed by our parent company to use
three patents for its products and six US registered trademarks, including the
use of its logo "STI". Products are marketed under the following US registered
trademarks: "DUOSAFE," "OPTOFENCE," "MINISAFE," "OPTOSAFE," "FIBERLENS,"
"BEAMSAFE," "SPECTRADATA," "FLEXSAFE" and "MICROSAFE". We have filed for
additional patent protection on certain of our technologies.

We cannot assure you that these patents or trademarks or
other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology. Because of the rapid
rate of technology change in the electronics industry, we believe our success in
the future depends on the quality of our products and services and the technical
skills of our personnel to adapt to technological developments, rather than
solely on our patents.

Backlog

Because many customers place large orders for
delivery throughout the year and because of the possibility of customer changes
and cancellation of orders, our backlog as of any particular date may not be
representative of our sales for any succeeding fiscal period. At February 28,
2002, our backlog was $231,000 compared to $649,000 at February 28, 2001.

Competition

The industry in which we operate is competitive
and subject to rapid technological change. Many of our competitors are
significantly larger and possess greater financial and other resources.

Our competitors include, among others, Honeywell,
Rockwell Automation, Eaton Corporation, Banner Engineering, Sick Optic-Electronic, Inc.,
Cutler Hammer, Danaher Controls, Link Controls and Omron.
Competitors of the control components power monitoring and defense product lines
include several of the above-mentioned firms and also SCI Systems, Inc.,
Technitrol, Logitek, Hi-G and Xentek. Certain of our suppliers, including
Rockwell/EJA, also compete with us. The Datricon line's competitors include
Mizar, Pro-Log, and Ziatech. In addition, we face indirect competition from
present and potential end users who from time to time evaluate the "make or buy"
decision of whether to manufacture their own components or purchase them from
outside sources.

Competition is based primarily upon product quality,
performance and price. We believe that we generally compete favorably with
respect to these factors. To maintain our competitive position, we will continue
to devote substantial resources to the development of new products and
improvements to current products. See "Business - Research and Development."

Foreign operations

We have no foreign manufacturing operations. STI
Scientific Technologies GmbH, a wholly owned German subsidiary, was established
in 1995 as our European sales office. Our products are also sold in foreign
countries by distributors and independent sales representatives. Foreign sales
represented less than 10% of sales in each of 2001, 2000 and 1999.

Customers

NCC Electronics, an independent distributor,
represented 9% of sales in 2001, 10% of sales in 2000 and 14% of sales in 1999.
No other customer represented more than 10% of sales in such periods. Aggregate
sales to both government agencies and government contractors represented less
than 5% of sales in 2001, 2000 and 1999.

Costs and effects of compliance with environmental
laws

Compliance with environmental protection laws or
similar ordinances is not expected to have any material affect on our business.

Employees

At December 31, 2001, we employed approximately
339 full time employees. Included in this total were the common manufacturing,
support and administrative staff that we share with our parent and its other
subsidiaries at the Dumbarton Circle facility in Fremont, California.

None of the employees are represented by unions, and there has never been
a disruption of operations due to a labor dispute.

Many of our employees are skilled in technical and
engineering disciplines and our future success will depend, in part, upon our
ability to attract and retain such employees. We believe that relations with our
employees are good.

Item 2. PROPERTIES

We own no real estate. Our manufacturing
operations, corporate headquarters, administrative, engineering and sales
offices are located in a 95,000 square foot facility located at 6550 Dumbarton
Circle, Fremont, California. The facility is owned by an affiliate of our parent
and we lease approximately 85,000 square feet, 89% of the total. Lundahl
Instruments is located in a 4,480 square foot facility at 429 S. Main Street,
Logan, Utah. PSI-Tronix is located in a 25,000 square foot facility at 3950
South K Street, Tulare, California. Construction was begun in October 2001 on a
25,000 square foot facility in Logan, Utah, which will house the Automation
Sensors Division operations. This property is owned by our Parent Company, and
we intend to enter into an operating lease for this facility. With the
completion of the Logan facility, scheduled for early June 2002, we believe our
current facilities will be adequate for the foreseeable future. See Note 12 of
Notes to Consolidated Financial Statements for information regarding lease
commitments. We anticipate that additional space will be needed during 2001 for
the Automation Sensors operations



Item 3. LEGAL PROCEEDINGS

From time to time, we are subject to various
legal proceedings that arise in the ordinary course of our business. Although we
cannot predict the outcomes of these proceedings with certainty, our management
does not believe that the disposition of these matters will have a material
adverse effect on our financial position, results of operations or cash
flows.

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

None.



PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

The Common Stock of we is traded on the NASDAQ
National Market under the symbol STIZ. The stock tables in most daily newspapers
list the Common Stock of we under "SciTech".

Price of Common Stock



|2001                                            | High                           | Low                            | 2000                                            | High                           | Low                           
|----------------------------------------------- | ------------------------------ | ------------------------------ | ----------------------------------------------- | ------------------------------ | ------------------------------
|1st Quarter
2nd Quarter
3rd Quarter
4th Quarter | $ 9.83
   6.63
   6.32
   6.37 | $ 5.04
   4.96
   2.90
   3.45 | 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter | $ 8.63
   7.58
   8.82
   8.45 | $ 5.20
   4.93
   5.22
   7.02

The closing sales price of the Common Stock on March 1, 2002 was $4.00 per
share.

Holders

There were 856 Shareholders of record on March 14, 2002.

Dividends

In 2001, regular quarterly dividends of $.0525
per share were paid on April 2 and July 5. In 2000, regular quarterly dividends
of $.05 per share were paid on April 3, July 5, September 1, and December 8. In
1999, regular quarterly dividends of $.0475 per share were paid on April 1, July
1, September 1, and December 8. We cannot assure you that the Company's
financial performance or cash requirements will allow it to pay dividends to its
shareholders in the future.

Item 6. SELECTED FINANCIAL DATA

i) FIVE YEARS CONSOLIDATED FINANCIAL DATA



| |  | December 31, | 
| |  | ------------ | 

(In thousands except per share data)

|Statement of operations data           | 2001    | 2000    | 1999    | 1998    | 1997   
|-------------------------------------- | ------- | ------- | ------- | ------- | -------
|Net sales                              | $48,289 | $59,263 | $49,105 | $43,465 | $44,859
|Income (loss) from operations          | (2,474) | 8,745   | 6,834   | 6,340   | 9,266  
|Net income (loss)                      | (1,425) | 5,631   | 4,505   | 4,422   | 6,070  
|Basic income (loss) per common share   | $ (.15) | $ .58   | $ .47   | $ .46   | $ .63  
|Diluted income (loss) per common share | $ (.15) | $ .58   | $ .47   | $ .46   | $ .62  
|                                       |         |         |         |         |        
|Balance sheet data                     |         |         |         |         |        
|Cash and cash equivalents              | $ 1,033 | $ 4,048 | $ 3,362 | $ 2,577 | $ 4,559
|Total assets                           | $34,200 | $37,028 | $32,536 | $29,821 | $26,119
|Shareholders' equity                   | 29,234  | 31,591  | 27,849  | 25,458  | 22,518 
|                                       |         |         |         |         |        
|Dividends declared per share           | $ .11   | $ .20   | $ .19   | $ .18   | $ .17  

ii) QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)



|2001                                       | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter | 
|------------------------------------------ | ------------ | ------------- | ------------ | ------------- | 
|Sales                                      | $14,323      | $ 11,581      | $11,821      | $10,564       | 
|Gross profit                               | 6,471        | 4,089         | 5,301        | 3,863         | 
|Net income (loss)                          | 580          | (959)         | 167          | (1,213)       | 
|Basic net income (loss) per common share   | $ .06        | $ (.10)       | $ .02        | $ (.13)       | 
|Diluted net income (loss) per common share | $ .06        | $ (.10)       | $ .02        | $ (.13)       | 
|                                           |              |               |              |               | 
|2000                                       | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter | 
|Sales                                      | $13,490      | $15,209       | $14,992      | $15,572       | 
|Gross profit                               | 7,070        | 7,992         | 7,498        | 7,372         | 
|Net income                                 | 1,154        | 1,652         | 1,604        | 1,221         | 
|Basic net income per common share          | $ .12        | $ .17         | $ .17        | $ .13         | 
|Diluted net income per common share        | $ .12        | $ .17         | $ .17        | $ .13         | 





|1999                                | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter | 
|----------------------------------- | ------------ | ------------- | ------------ | ------------- | 
|Sales                               | $11,560      | $12,014       | $12,804      | $12,727       | 
|Gross profit                        | 5,751        | 6,064         | 6,394        | 6,127         | 
|Net income                          | 1,024        | 1,119         | 1,305        | 1,057         | 
|Basic net income per common share   | $ .11        | $ .12         | $ .14        | $ .11         | 
|Diluted net income per common share | $ .11        | $ .12         | $ .14        | $ .11         | 

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis below contains trend
analysis and other forward-looking statements including statements regarding
anticipated future sales, margin and expense levels, future tax rates, future
cash flow and working capital requirements. Actual results could differ
materially from those projected in the forward looking statements as a result of
the risk factors set forth under "Factors that May Affect Future Results" and
elsewhere in this report. The following discussion should be read in conjunction
with our consolidated financial statements and notes thereto. All references to
years are to fiscal years unless otherwise noted.

Results of Operations

Sales

Sales in 2001 declined 19% to $48.3 million from the
$59.3 million recorded in 2000. Unit shipments of both the Safety and Automation
Products groups were negatively impacted by the economic downturn in the first
half of 2001 and the economic impact of the events of September 11. The Safety
Products group's lower sales were partially offset by the sales associated with
Dunn Sales, Inc. (DSI), which was acquired in June 2001.

Sales in 2000 increased 21% to $59.3 million from $49.1
million in 1999. This was primarily due to sales by our subsidiary, PSI-Tronix
Technologies, which we acquired in March 2000. 2000 sales were positively
impacted to a lesser extent by increased shipments of our safety products. In
addition, we experienced slight increases in sales as a result of our
acquisition of Lundahl Instruments.

The Company is organized into two product Groups - the Safety
Products Group ("SPG") and the Automation Products Group ("APG"). Group sales
for the years ended December 31, 2001, 2000 and 1999 were:



|        | 2001              | %       | 2000              | %       | 1999              | %     
|------- | ----------------- | ------- | ----------------- | ------- | ----------------- | ------
|SPG
APG | $ 39,321
$  8,968 | 81%
19% | $ 48,686
$ 10,577 | 82%
18% | $ 45,475
$  3,630 | 93%
7%

The table below summarizes operating costs and expenses as a
percentage of sales for the most recent three years.

`2001      2000      1999
                                                     --------  --------  --------
Sales..............................................      100%      100%      100%

Gross margin.......................................       40%       51%       50%
                                                     --------  --------  --------
Operating expenses:
  Selling, general and administrative..............       33%       26%       26%
  Research and development.........................       11%        9%       10%
  Amortization of intangibles......................        1%        1%      --
                                                     --------  --------  --------
   Total operating expenses........................       45%       36%       36%
                                                     --------  --------  --------
Income (loss) from operations......................       -5%       15%       14%
Interest and other income, net.....................      --        --          1%
                                                     --------  --------  --------
Income (loss) before income taxes..................       -5%       15%       15%
Provision (benefit) for income taxes...............       -2%        6%        6%
                                                     --------  --------  --------
Net income (loss)..................................       -3%        9%        9%
                                                     ========  ========  ========`

Gross profit

2001 = $19.7 million

2000 = $29.9 million

1999 = $24.3 million

Decrease in 2001 = 34%

Increase in 2000 = 23%

Our gross margin was 40% of sales in 2001, 51% of sales in
2000 and 50% of sales in 1999. Gross profit declined 34% in 2001 from 2000.
While we experienced sales declines in all of our product lines, higher margin
products suffered proportionately greater losses than our lower margin products.
In addition, reduced factory activity has resulted in underabsorbed
manufacturing overhead. As a result of the higher level of shipments, which
reflected less fixed cost per unit, gross profit increased 23% over 1999. Gross
margin in 2000 was positively influenced by the addition of PSI-Tronix's
products, which carry a relatively lower cost of sales.

Selling, general and administrative expenses

2001 = $16.1 million

2000 = $15.4 million

1999 = $12.7 million

Increase in 2001 = 5%

Increase in 2000 = 21%

Selling, general and administrative expenses increased to 33%
of sales in 2001 compared to a relatively constant 26% of sales during 2000 and
1999. Total expenses in dollars increased 5% in 2001 due to increased costs
associated with the DSI operations and write-offs of accounts receivable
resulting from the failure of two of our distributors. Excluding DSI and the bad
debt expense, selling, general and administrative expenses in dollars declined
slightly. Total expenditures increased 21% from 1999 to 2000, consistent with
our sales growth. We anticipate that selling, general and administrative
expenses will increase in the foreseeable future but may fluctuate as a percent
of sales.

Amortization of acquired intangibles

2001 = $.9 million

2000 = $.6 million

1999 = $.1 million

As a result of the acquisition of DSI in 2001, the amortization of acquired
intangibles increased to $.9 million in 2001 from $.6 million in 2000.

As a result of the acquisition of PSI-Tronix in 2000, the amortization of
acquired intangibles increased to $.6 million from $.1 million in 1999.

Research and development expenses

2001 = $5.4 million

2000 = $5.2 million

1999 = $4.8 million

Increase in 2001 = 4%

Increase in 2000 = 8%

Product creation, development and enhancement have always
been and continue to be an important factor in our long-term success.
Investments in this area enable us to serve the factory automation market with
increasingly sophisticated sensors and manufacturing control products. During
2001, we made a concerted effort to maintain our research and development
efforts in spite of the reduced revenue and profit levels we experienced in that
year. During 2000, we increased our development efforts with the acquisition of
PSI-Tronix. During 1999, we undertook a significant expansion of research and
development efforts, particularly in the use of outside consultants. In 2001 and
2000, we introduced a number of new products and product enhancements.
Consistent with our dedication to the development of new products, we anticipate
that the level of research and development expenses will increase in the future,
although such expenses may fluctuate as a percentage of sales. To date, all
product development costs have been expensed as incurred.

Income Tax

As a result of the losses sustained in 2001, we
recorded an income tax benefit of 38% of the loss for the year. Our effective
income tax rate was 38% in 2000 and 1999. We expect that our effective tax rate
for 2002 will be reasonably consistent with 2000 and 1999. See Notes 1 and 5 of
Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Our working capital needs have been met through funds
generated from operating activities. During 2001, operating funds were provided
by net income adjusted for depreciation and amortization, the sale of short-term
investments and decreases in accounts receivable and inventories. These
operating funds were used to finance lower accounts payable and deferred taxes,
for the acquisition of DSI, to purchase fixed assets and to pay dividends.
Working capital amounted to $14.7 million at December 31, 2001, a 25% reduction
from the $19.5 million at December 31, 2000. The bank line of credit, consisting
of a one year revolving line and term loan commitment of $6.1 million, was
renewed in 2001 and extended to June 30, 2002. Secured by qualified receivables,
fixed assets and inventories, borrowing under this credit line bears interest at
the bank's prime rate. At December 31, 2001, none of the revolving line of
credit had been utilized. We have the option to convert up to $1.0 million of
the credit line into a five-year term note. Given our current cash and short-
term investment position, we anticipate that it may be necessary to utilize this
facility in 2002. See Note 4 of Notes to Consolidated Financial Statements.

We made certain capital expenditures during 2001, primarily
for production, quality assurance, research and development equipment,
information systems and software. Consistent with our operations historically
and our current plans for growth, we plan to make additional capital
expenditures during 2002, primarily for production, quality assurance and
research and development equipment. While we had no formal commitments at
December 31, 2001, it is anticipated that capital expenditures in 2002 will be
in excess of $1.0 million, predicated on our profitability and cash resources.

We believe that cash flow from operations and available bank
borrowings will be sufficient to meet anticipated working capital requirements
through at least 2002. While we continue to evaluate financing alternatives from
time to time, we have no current plans to raise additional outside capital. At
December 31, 2001, future minimum payments under these leases due in the years
2002 through 2006 were approximately $1,163,000, $1,138,000 $1,141,000,
$1,031,000 and $946,000, respectively.

Relationship with Parent

Intercompany transactions between us and our parent
company include charges by our parent for management services provided to us,
dividend payments to our parent and other cash transfers. Our parent files a
consolidated tax return including our accounts. Our tax provision or benefit is
calculated on a stand-alone basis. Our income taxes payable or receivable
calculated on that basis are paid to or received from our parent.

Critical Accounting Policies

Revenue Recognition

Revenue from product sales to customers is recognized
upon shipment if a signed purchase order exists, the price is fixed or
determinable, collection of the resulting receivable is considered probable and
product returns can be reasonably estimated. Subsequent to the sale of the
products, we have no obligation to provide any modification or customization,
upgrades, enhancements or postcontract customer support. Upon shipment, we
provide for the estimated costs that may be incurred for product warranties.

Installation and engineering service revenue is recognized
when services are rendered, or an identifiable portion of the contract is
completed, no significant post-delivery obligations exist and collection is
probable.

Inventories

We value our inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based primarily on our
historical consumption and our estimated forecast of product demand and
production requirements. As demonstrated during 2001, demand for our products
can fluctuate significantly. In addition, our industry is characterized by
technological change, new product development, and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Additionally, our estimates of future product
demand may prove to be inaccurate, in which case we may have misstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although we make
every effort to ensure the accuracy of our forecasts of future product demand,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and our reported
operating results.

Accounts Receivable

We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we had in the past. A significant change in the
liquidity or financial position of any one of our customers could have an
adverse impact on the collectability of our accounts receivable and our future
operating results.

Valuation of long-lived and intangible assets and
goodwill

We assess the impairment of identifiable intangibles,
long-lived assets and related goodwill in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The standard requires
recognition of impairment of long-lived assets in the event the carrying value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. Impairment evaluations involve management estimates of asset useful
lives and future cash flows. Actual useful lives and cash flows could be
different from those estimated by our management. This could have a material
effect on our operating results and financial position. When we determine that
the carrying value of intangibles, long-lived assets and related goodwill may
not be recovered, we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model. No losses
from impairments have been recognized in the financial statements for the
periods presented.

On January 1, 2002, we adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121. The
adoption of SFAS No. 144 is not expected to have a material effect on our
financial position or results of operations.

Factors that May Affect Future Results

Because of the variety of factors and uncertainties
affecting our operating results, past financial performance and historic trends
may not be a reliable indicator of future performance. These factors, as well as
other factors affecting our operating performance, may result in significant
volatility in our common stock price. Among the factors which could affect our
future business, financial condition or operating results are the following:

Our operating results may fluctuate.

We have experienced fluctuations in annual and quarterly
operating results and anticipate that these fluctuations will continue. These
fluctuations are caused by a number of factors, including the level and timing
of customer orders, fluctuations in complementary third party products with
which our products are sold, the mix of products sold and the timing of
operating expenditures. Our operating results are also negatively impacted by
generally adverse economic conditions throughout the high technology sector. In
particular, our PSI-Tronix subsidiary has experienced decreases in sales due to
the current market conditions in the semiconductor industry.

The seasonality inherent in our business could cause our
operating results to fluctuate.

The industrial manufacturing equipment industry in which we
compete has historically been subject to seasonality. This is also true with
respect to European markets in which we compete where business activity declines
due to vacations taken in the summer months. This seasonality, combined with
other factors such as the variability in our operating results described above,
renders quarter-to-quarter comparisons of our results of operations unreliable
as indicia of our overall performance.

The market for our products is highly competitive.

The market for industrial sensors is highly competitive.
Many competitors have substantially greater name recognition and technical,
marketing and financial resources than we have. Competitive pressures could
reduce market acceptance of our products and result in price reductions,
decreased revenues and increases in expenses.

Our business could suffer if we do not respond to
technological change and new product development demands of our
customers.

The market for our products is characterized by
changing technology, evolving industry standards, changes in customer needs and
new product introductions. Our future success will depend on our
ability to respond to emerging industry standards, enhance current products,
develop new products, and achieve market acceptance of those products, all on a
timely and cost-effective basis. The introduction of new products also requires
that we manage the transition from older products in order to minimize
disruption of customer orders, avoid excessive levels of older product
inventories and ensure that adequate supplies of new products can be delivered
to meet customer demands.

Our sales are dependent on indirect distribution
channels.

A majority of our sales are through third party distributors,
system integrators and original equipment manufacturers. These resellers are not
required to offer our products exclusively. We cannot assure you that a reseller
will continue to offer our products. In addition many of our resellers are
privately owned firms which may not be well capitalized, as was demonstrated by
the failure of two of our distributors during 2001. If our ability to sell
products through these third parties is impaired, our results of operations
would likely suffer.

Our international sales are subject to risks.

Our international sales may be disrupted by currency
fluctuations or other events beyond our control, including political or
regulatory changes. If our international sales were disrupted for any reason,
our revenue levels would decline.

Our business could suffer is we are unable to protect and
enforce our intellectual property rights.

We rely on a combination of patent, trademark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. There can be no assurance that our patents,
trademarks, or contractual arrangements or other steps taken by us to protect
our intellectual property will prove sufficient to prevent misappropriation of
our technology or defer independent third party development of similar
technologies. Moreover, there can be no assurance that the technology licenses
granted to us from our parent company will continue to be available. The loss of
any of our proprietary technology could require us to obtain technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect our business, results of operations and financial condition.
Furthermore, the laws of certain foreign countries may not protect our products,
services or intellectual property rights to the same extent as do the laws of
the United States.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.

The market risk inherent in our investments represents the potential
loss arising from adverse changes in interest rates. We are exposed to market
risk in the area of interest rate changes impacting the fair value of our
investment securities. Our policy is to invest primarily in money market
accounts and short-term investments held at financial institutions. We do not
have any derivative instruments in our investment portfolio. Due to their highly
liquid nature, our investments are subject to minimal credit and market
risk.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

(a) The following documents are filed as a part of this
Report:

(1) Financial Statements



|                                                                                                   | Page
|-------------------------------------------------------------------------------------------------- | ----
|Report of Independent Accountants                                                                  | 19  
|Consolidated Balance Sheets - December 31, 2001 and 2000                                           | 20  
|Consolidated Statement of Operations - Years ended
  
    December 31, 2001, 2000 and 1999         | 21  
|Consolidated Statement of Cash Flows - Years ended
  
    December 31, 2001, 2000 and 1999         | 22  
|Consolidated Statement of Shareholders' Equity - Years
  
  ended December 31, 2001, 2000 and 1999 | 23  
|Notes to Consolidated Financial Statements                                                         | 24  

(2) Financial Statement Schedules

Financial Statement Schedules have been omitted because they are
not required or applicable, or the information required to be set forth therein is
included in the Financial Statements or notes thereto.

---

REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
   Shareholders of Scientific Technologies Incorporated

In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, of cash flows and of
shareholders' equity present fairly, in all material respects, the financial
position of Scientific Technologies Incorporated (a subsidiary of Scientific
Technology Incorporated) and its subsidiaries at December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of our management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.





PricewaterhouseCoopers LLP
   San Jose, California
   March 13, 2002

---

Scientific Technologies Incorporated

                            Consolidated Balance Sheet
(In thousands, except per share data)

`December 31,
                                                           ------------------
                                                             2001      2000
                                                           --------  --------
                         Assets                                              
Current assets:
    Cash and cash equivalents............................ $  1,033  $  4,048
    Short-term investments...............................      --        406
    Accounts receivable, net.............................    6,454     8,776
    Inventories..........................................    9,125     9,283
    Deferred income taxes................................    2,081     1,680
    Other assets.........................................      581       505
                                                           --------  --------
          Total current assets...........................   19,274    24,698

Property and equipment, net..............................    3,537     3,749
Intangible assets, net...................................   11,389     8,581
                                                           --------  --------
          Total assets................................... $ 34,200  $ 37,028
                                                           ========  ========
                                                                             
          Liabilities and Shareholders' Equity                               

Current liabilities
    Trade accounts payable............................... $  1,886  $  2,775
    Accrued expenses.....................................    2,648     2,422
                                                           --------  --------
          Total current liabilities......................    4,534     5,197

Deferred income taxes ...................................      432       240
                                                           --------  --------
          Total liabilities..............................    4,966     5,437

Commitments and contingencies (Note 12)

Shareholders' equity
    Common stock; $.001 par value; 100,000
       shares authorized; shares issued and
       outstanding - 9,676 and 9,650.....................       10        10
    Capital in excess of par value.......................    5,637     5,553
    Retained earnings....................................   23,587    26,028
                                                           --------  --------
          Total Shareholders' equity.....................   29,234    31,591
                                                           --------  --------
          Total liabilities and Shareholders' equity..... $ 34,200  $ 37,028
                                                           ========  ========`

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

---

Scientific Technologies Incorporated

                      Consolidated Statement of Operations
(In thousands, except per share data)

`Year Ended December 31,
                                                     ----------------------------
                                                       2001      2000      1999
                                                     --------  --------  --------
Sales.............................................. $ 48,289  $ 59,263  $ 49,105
Cost of goods sold.................................   28,565    29,331    24,769
                                                     --------  --------  --------
  Gross profit.....................................   19,724    29,932    24,336
                                                     --------  --------  --------

Operating expenses:
  Selling, general and administrative..............   16,111    15,387    12,633
  Research and development.........................    5,429     5,159     4,780
  Amortization of acquired intangibles.............      658       641        89
                                                     --------  --------  --------
   Total operating expenses........................   22,198    21,187    17,502
                                                     --------  --------  --------
Income (loss) from operations......................   (2,474)    8,745     6,834

Interest and other income, net.....................      176       337       432
                                                     --------  --------  --------

Income (loss) before income taxes..................   (2,298)    9,082     7,266
Provision (benefit) for income taxes...............     (873)    3,451     2,761
                                                     --------  --------  --------

Net income (loss).................................. $ (1,425) $  5,631  $  4,505
                                                     ========  ========  ========

Basic and diluted net income (loss) per share...... $  (0.15) $   0.58  $   0.47
                                                     ========  ========  ========

Shares used to compure net income (loss) per share.    9,659     9,667     9,682
                                                     ========  ========  ========`

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

---

Scientific Technologies Incorporated

                   Consolidated Statement of Cash Flows
(In thousands)

`Year Ended December 31,
                                                        -------------------------
                                                          2001    2000     1999
                                                        -------  -------  -------
Cash flows from operating activities:
  Net income (loss)................................... $(1,425) $ 5,631  $ 4,505
  Adjustments to reconcile net income (loss) to
    cash provided by operating activities:
    Depreciation and amortization.....................   2,266    1,766      963
    Changes in assets and liabilities:
       Accounts receivable, net.......................   2,727    1,136   (1,964)
       Inventories....................................     369     (305)  (2,280)
       Other assets...................................    (170)     238     (429)
       Trade accounts payable.........................  (1,020)     (45)     162
       Deferred income taxes..........................    (209)    (588)     280
       Accrued expenses...............................     (25)     301     (140)
                                                        -------  -------  -------
Cash flows provided by operating activities...........   2,513    8,134    1,097
                                                        -------  -------  -------
Cash flows from investing activities:
   Purchases of property  and equipment...............  (1,010)  (1,620)  (1,128)
   Acquisition of Lundahl Instruments.................      --       --   (2,659)
   Acquisition of PSI-Tronix..........................      --   (8,742)      --
   Acquisition of Dunn Sales..........................  (3,992)      --       --
   Sale of short-term investments, net................     406    4,803    5,589
                                                        -------  -------  -------
Cash flows provided by (used in) investing activities.  (4,596)  (5,559)   1,802
                                                        -------  -------  -------

Cash flows from financing activities:
   Issuance (repurchase) of common stock, net.........      84       44     (278)
   Dividends..........................................  (1,016)  (1,933)  (1,836)
                                                        -------  -------  -------
Cash flows used in financing activities...............    (932)  (1,889)  (2,114)
                                                        -------  -------  -------
Change in cash and cash equivalents...................  (3,015)     686      785
Cash and cash equivalents at beginning of year........   4,048    3,362    2,577
                                                        -------  -------  -------
Cash and cash equivalents at end of year.............. $ 1,033  $ 4,048  $ 3,362
                                                        =======  =======  =======

Supplemental disclosure of cash flow information:
   Cash paid to (received from) Parent for
      income taxes.................................... $  (873) $ 3,451  $ 2,761
                                                        =======  =======  =======`

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

---

Scientific Technologies Incorporated

              Consolidated Statement of Changes in Shareholders' Equity
(In thousands)

`Common Stock
                                 ---------------------------
                                                    Capital
                                                   in excess
                                            Par     of par    Retained
                                 Shares    value     value    Earnings   Total
                                 -------  -------  ---------  --------  --------
Balances at December 31, 1998...  9,671  $    10  $   5,787  $ 19,661  $ 25,458
   Issuance of common stock.....     27      --         107       --        107
   Repurchase of common stock...    (65)     --        (385)      --       (385)
   Net income for the year......    --       --         --      4,505     4,505
   Dividends paid...............    --       --         --     (1,836)   (1,836)
                                 -------  -------  ---------  --------  --------
Balances at December 31, 1999...  9,633       10      5,509    22,330    27,849
   Issuance of common stock.....     36      --         160       --        160
   Repurchase of common stock...    (19)     --        (116)      --       (116)
   Net income for the year......    --       --         --      5,631     5,631
   Dividends paid...............    --       --         --     (1,933)   (1,933)
                                 -------  -------  ---------  --------  --------
Balances at December 31, 2000...  9,650       10      5,553    26,028    31,591
   Issuance of common stock.....     33      --         116       --        116
   Repurchase of common stock...     (7)     --         (32)      --        (32)
   Net loss for the year........    --       --         --     (1,425)   (1,425)
   Dividends paid...............    --       --         --     (1,016)   (1,016)
                                 -------  -------  ---------  --------  --------
Balances at December 31, 2001...  9,676  $    10  $   5,637  $ 23,587  $ 29,234
                                 =======  =======  =========  ========  ========`

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

---

Scientific Technologies Incorporated
                  Notes to Consolidated Financial Statements

NOTE 1-WE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Scientific Technologies Incorporated (the "Company")
develops, manufactures and markets safety light curtains, industrial sensors,
optical profilers, microcomputers and power monitoring devices for factory
automation applications. In addition, the Company provides safeguarding
equipment installation, rebuilding, repair and maintenance of fabricating
machinery. A majority of the Company's outstanding common stock is held by
Scientific Technology Incorporated, a California corporation (the "Parent").

The Company operates in two business segments - the
development, manufacture and marketing of industrial safety products, and the
development, manufacture and marketing of industrial automation products. The
Company operates in an industry characterized by significant competition.

Use of 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 reported periods. Actual results could differ
from those estimates.

Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its subsidiaries after elimination of all
significant intercompany accounts and transactions.

Cash and Cash Equivalents and Short-Term Investments

The Company invests primarily in money market accounts
and certificates of deposit held at financial institutions and considers all
highly liquid investments with an original maturity of less than 90 days to be
cash equivalents. Accordingly, these investments are subject to minimal credit
and market risk.

Short-term investments consist of highly liquid investments,
which mature in less than one year and are classified as "held-to-maturity".
Interest income is accrued as earned.

Inventories

Inventories are stated at the lower of cost (first-in,
first-out) or market.

Property and Equipment

Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives, which range from three to
ten years. Leasehold improvements are amortized over the shorter of the term of
the lease or the estimated life of the improvements.

Intangible Assets

Intangible assets include tradenames, customer
relationships, product lines, technologies and a covenant not to compete
acquired as part of the acquisitions of Dunn Sales, Inc., PSI-Tronix, Inc. and
Lundahl Instruments Inc. Intangible assets are generally amortized on a
straight-line basis not exceeding fifteen years.

Long-Lived Assets

The Company periodically evaluates the recoverability of
its long-lived assets based upon the expected undiscounted cash flows
attributable to such assets, and recognizes impairment from the carrying value
of long-lived assets, if any, based on the fair value of such assets. No losses
from impairment have been recognized in the financial statements.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities
in accordance with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, cash equivalents, short-term
investments, trade accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturities.

Revenue Recognition

Revenue from product sales to customers is recognized
upon shipment if a signed purchase order exists, the price is fixed or
determinable, collection of the resulting receivable is considered probable and
product returns can be reasonably estimated. Subsequent to the sale of the
products, the Company has no obligation to provide any modification or
customization, upgrades, enhancements or postcontract customer support. Upon
shipment, the Company provides for the estimated costs that may be incurred for
product warranties.

Installation and engineering service revenue is recognized
when services are rendered, or an identifiable portion of the contract is
completed, no significant post-delivery obligations exist and collection is
probable.

Shipping and Handling

All amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and are classified as revenue. Costs incurred for shipping and
handling are included in cost of sales.

Research and Development

Research and development costs are expensed as
incurred.

Advertising Costs

Advertising costs are recorded as expenses when incurred.
Advertising costs for the years ended December 31, 2001, 2000 and 1999 were
$609,000, $707,000 and $601,000, respectively.

Income Taxes

Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The Company is included in the consolidated
tax return of the Parent, but provides for income taxes on a separate return
basis pursuant to a tax sharing arrangement, which limits the Company's tax
liability to the amount payable to the Parent. Income taxes payable are recorded
as a reduction to the receivable from Parent account or as an increase to the
payable to Parent account.

Comprehensive Income

Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), 'Reporting Comprehensive Income," establishes standards for
reporting income and its components in financial statements. Comprehensive
income, as defined, includes all changes in Shareholders' equity during a period
from non-owner sources. There were no differences between the Company's net
income (loss) and its total comprehensive income (loss) for any of the periods
presented.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 141
"Business Combinations" (SFAS 141) and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting, thereby eliminating use
of the pooling of interests method. SFAS 141 also requires that an intangible
asset acquired in a business combination be recognized apart from goodwill if
(i) the intangible asset arises from contractual or other legal rights or (ii)
the acquired intangible asset is capable of being separated from the acquired
enterprise, as defined in SFAS 141.

SFAS 142, which is effective for fiscal years beginning after
December 15, 2001, requires, among other things, that goodwill not be amortized
but should be subject to impairment testing at the "reporting unit level" at
least annually and more frequently upon the occurrence of certain events, as
defined by SFAS 142. A reporting unit is the same level as or one level below an
operating segment, as defined by Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information."

Management does not expect the adoption of either SFAS 141 or
SFAS 142 to have a material impact on the Company's financial position, results
of operations, or cash flows.

In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS 144). SFAS 144 supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121), and certain provisions of APB Opinion No. 30 "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB 30). SFAS 144 establishes standards for long-lived assets to be disposed
of, and redefines the valuation and presentation of discontinued operations.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Management does not expect the
adoption of SFAS 144 to have a material effect on the Company's financial
position, results of operations, or cash flows.

NOTE 2 - RELATED PARTY TRANSACTIONS

The Parent provides certain management, marketing and
sales services to the Company. The costs are allocated to the Company based on
the percentage of the Company's sales to total sales of the Parent and its
subsidiaries. The amounts allocated to the Company for 2001, 2000 and 1999 were
$1,005,000, $1,071,000 and $977, 000, respectively.

The Company leases approximately 85,000 square feet in a
95,000 square foot facility owned by an affiliate of the Parent. The lease term
is for ten years. Overhead costs are allocated primarily on the basis of square
footage utilized.

The Company utilizes a payable to Parent account to record
activity including cash received, cash disbursed and amounts owed to the Parent
for allocated charges and dividends. The net effect of transactions with the
Parent resulted in a zero balance at December 31, 2001 and 2000.



NOTE 3 - ACQUISITIONS

Dunn Sales, Inc.

On June 8, 2001, the Company acquired all of the
outstanding common stock of Dunn Sales, Inc. ("DSI"), for a cash payment of
$3,992,000. DSI is a leading provider of safeguarding equipment installation,
rebuilding, repair and maintenance of fabricating machinery. The transaction was
accounted for as a purchase and accordingly, the results of DSI operations are
included in the Company's financial statements from the date of acquisition. The
total purchase price was allocated to the tangible and intangible assets
acquired and liabilities assumed based on their respective fair values on the
date of acquisition as follows (in thousands):

`Amortization
                                        Amount      period
                                      ----------  ----------
Working capital..................... $      140
Equipment...........................         96
Technology..........................      1,985     15 years
Customer relationships..............      1,061      7
Tradename...........................        710      5
                                      ----------
                                     $    3,992
                                      ==========`

PSI-Tronix, Inc.

On March 16, 2000, the Company acquired substantially all
of the assets of PSI-Tronix, Inc. for a cash payment of $8,742,000. PSI-Tronix
designs, develops and manufactures pressure transducers, digital pressure
gauges, displacement and velocity transducers and pressure comparators for use
in a variety of factory, aerospace, medical, semiconductor and oil and gas
market applications. The acquisition was accounted for by the Company using the
purchase method and, accordingly, the results of operations of PSI-Tronix are
included in the Company's financial statements from the date of acquisition. The
total purchase price was allocated to the tangible and intangible assets
acquired and liabilities assumed based on their respective fair values on the
date of acquisition as follows (in thousands):

`Amortization
                                        Amount      period
                                      ----------  ----------
Working capital..................... $    1,402
Equipment...........................        478
Technology..........................      3,631     15 years
Customer relationships..............      1,953      7
Product lines.......................      1,278     12
                                      ----------
                                     $    8,742
                                      ==========`

The following unaudited pro-forma consolidated amounts give effect to the
acquisitions of DSI and PSI-Tronix as if the acquisitions had occurred on
January 1, 2000 (in thousands):

`2001        2000
                                                  ----------  ----------
Sales........................................... $   50,322  $   64,805
Net income...................................... $   (1,025) $    5,485
Basic and diluted net income per share.......... $    (0.11) $     0.62
Shares used to compute net income per share..... $    9,659  $    9,667`

Lundahl Instruments, Inc.

On April 1, 1999, the Company acquired all of the
outstanding capital stock of Lundahl Instruments, Inc. for a cash payment of
$2,659,000. Lundahl Instruments designs and manufactures non-contact ultrasonic
sensors and controllers for use in the automation of industrial processes for
applications involving level and flow control, environmental monitoring,
automated vehicle collision avoidance and material positioning. The acquisition
was accounted for by the Company using the purchase method and, accordingly, the
results of operations of Lundahl are included in the Company's financial
statements from the date of acquisition. The total purchase price was allocated
to the tangible and intangible assets acquired and liabilities assumed based on
their respective fair values on the date of acquisition as follows (in
thousands):

`Amortization
                                        Amount      period
                                      ----------  ----------
Working capital..................... $      299
Technology..........................      1,530     15 years
Customer relationships..............        462      7
Covenant not to compete.............         50      2
Product lines.......................        318     12
                                      ----------
                                     $    2,659
                                      ==========`

NOTE 4 - BALANCE SHEET DATA

`December 31,
                                                  ----------------------
                                                     2001        2000
                                                  ----------  ----------
                                                     (In thousands)`

Accounts receivable:

`Accounts receivable........................ $    7,115  $    9,321
     Less: allowance for doubtful accounts
        and sales returns.......................       (661)       (545)
                                                  ----------  ----------
                                                 $    6,454  $    8,776
                                                  ==========  ==========`

Inventories:

`Finished goods............................. $    1,943  $    5,310
     Work in process............................        475         659
     Subassemblies..............................      1,042       1,105
     Raw materials..............................      5,665       2,209
                                                  ----------  ----------
                                                 $    9,125  $    9,283
                                                  ==========  ==========`

Property and equipment:

`Equipment.................................. $    9,045  $    8,147
     Furniture and fixtures.....................      1,234       1,189
     Leasehold improvements.....................        402         238
                                                  ----------  ----------
                                                     10,681       9,574
     Less: accumulated depreciation.............     (7,144)     (5,825)
                                                  ----------  ----------
                                                 $    3,537  $    3,749
                                                  ==========  ==========`

Intangible assets:

`Technology................................. $    7,146  $    5,161
     Customer relationships.....................      3,476       2,415
     Tradename..................................        710         --
     Product lines..............................      1,596       1,596
     Covenant not to compete....................         50          50
                                                  ----------  ----------
                                                     12,978       9,222
     Less: accumulated amortization.............     (1,589)       (641)
                                                  ----------  ----------
                                                 $   11,389  $    8,581
                                                  ==========  ==========`

Accrued expenses:

`Accrued compensation....................... $    1,345  $    1,707
     Accrued commissions........................        146         139
     Warranty reserve...........................        278         338
     Accrued income tax.........................        270           1
     Accrued marketing expenses.................        284         122
     Other......................................        325         115
                                                  ----------  ----------
                                                 $    2,648  $    2,422
                                                  ==========  ==========`

Debt:

The Company has a $6,100,000 line of credit with a bank, of
which no amount was outstanding at December 31, 2001 or 2000. The line bears interest
at the bank's prime rate (4.75% at December 31, 2001), is secured by accounts
receivable, inventories and fixed assets, and expires on May 31, 2002. The line
is subject to certain financial covenants, and the Company has requested a
waiver.

NOTE 5 - INCOME TAXES

The provision (benefit) for income taxes was as follows:

`Year Ended December 31,
                                      ----------------------------------
                                          2001       2000        1999
                                      ----------  ----------  ----------
                                                 (In thousands)
  Current tax expense (benefit)
   Federal.......................... $     (637) $    3,237  $    1,941
   State, net of federal benefit....        (27)        802         540
                                      ----------  ----------  ----------
                                           (664)      4,039       2,481
  Deferred tax benefit..............       (209)       (588)        280
                                      ----------  ----------  ----------
   Total                             $     (873) $    3,451  $    2,761
                                      ==========  ==========  ==========`

Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Net deferred tax assets of $1,649,000 and
$1,440,000 were comprised of $846,000 and $791,000 of inventory reserves and of
$803,000 and $649,000 of other accruals and reserves not currently deductible at
December 31, 2001 and 2000, respectively.

The provision (benefit) for income taxes differs from the
amount of tax determined by applying the applicable federal statutory income tax
rate to pretax income as a result of the following differences:

`Year Ended December 31,
                                      ----------------------------------
                                          2001       2000        1999
                                      ----------  ----------  ----------
   Statutory U.S. tax rate..........        (34)%        34 %        34 %
   State income taxes, net of
     federal benefit................         (1)          6           6
   Research and development
     and other credits..............         (7)         (2)         (2)
   Nondeductible expenses...........          4         --          --
                                      ----------  ----------  ----------
   Effective tax rate...............        (38)%        38 %        38 %
                                      ==========  ==========  ==========`

NOTE 6 - INCOME (LOSS) PER SHARE

A reconciliation of the numerators and denominators of the basic and
diluted income (loss) per common share computations is provided below.

`(In thousands)     (Per
                                            ------------------   Share)
                                             Income    Shares    Amount
                                            --------  --------  --------
2001:
Basic earnings per share calculation...... $ (1,425)    9,659  $  (0.15)
Effect of dilutive securities:
  Stock options...........................      --        --        --
                                            --------  --------  --------
Diluted earnings per share calculation.... $ (1,425)    9,659  $  (0.15)
                                            ========  ========  ========

2000:
Basic earnings per share calculation...... $  5,631     9,640  $   0.58
Effect of dilutive securities:
  Stock options...........................      --         27       --
                                            --------  --------  --------
Diluted earnings per share calculation.... $  5,631     9,667  $   0.58
                                            ========  ========  ========

1999:
Basic earnings per share calculation...... $  4,505     9,658  $   0.47
Effect of dilutive securities:
  Stock options...........................      --         24       --
                                            --------  --------  --------
Diluted earnings per share calculation.... $  4,505     9,682  $   0.47
                                            ========  ========  ========`

NOTE 7 - DIVIDENDS

During 2001, the Company paid quarterly dividends of
$.0525 per share for the first two quarters of the year on April 3 and July 5.
During 2000, the Company paid quarterly dividends of $.05 per share. During
1999, the Company paid quarterly dividends of $.0475 per share.

NOTE 8 - STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Stock Option Plan

The 1997 Stock Option Plan (the "Plan") provides for the
granting of stock options to employees and consultants of the Company. Options
granted under the Plan may be either incentive stock options or nonqualified
stock options. Incentive stock options ("ISO") may be granted only to Company
employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") and stock purchase rights may be granted to
Company employees and consultants. The Company has reserved 1,000,000 shares of
common stock for issuance under the Plan. No person will be eligible to receive
more than 250,000 shares in any fiscal year.

Options under the Plan may be granted for periods of up to
ten years and at prices no less than 85% of the estimated fair market value of
the shares on the date of grant, provided, however, that (i) the exercise price
of an ISO shall not be less than 100% of the estimated fair market value of the
shares on the date of grant, and (ii) the exercise price of an ISO granted to a
10% or more Shareholder shall not be less than 110% of the estimated fair value
of the shares on the date of grant. Most options granted under the Plan through
December 31, 2001 vest over a five-year period.

Activity under the Plan is set forth below:

`Weighted
                                                               Average
                                     Available                Exercise
                                        for       Options       Price
                                       Grant    Outstanding   Per Share
                                     ---------- ------------  ---------
  Balance, December 31, 1998........   644,426      227,948  $    6.64
    Granted ........................   (15,000)      15,000       4.93
    Canceled .......................    12,050      (12,050)      8.55
                                     ---------- ------------
  Balance, December 31, 1999........   641,476      230,898       6.43
    Granted ........................  (345,600)     345,600       6.07
    Exercised ......................       --         -1334       4.36
    Canceled .......................    88,732      (88,732)      5.42
                                     ---------- ------------
  Balance, December 31, 2000........   384,608      486,432       6.36
    Granted ........................   (67,566)      67,566       4.73
    Exercised ......................       --        (6,200)      1.21
    Canceled .......................    24,800      (24,800)      6.20
                                     ---------- ------------
  Balance, December 31, 2001........   341,842      522,998  $    6.17
                                     ========== ============`

Information relating to stock options outstanding and exercisable at December
31, 2001 is as follows:

`Options Outstanding
                   ----------------------------------    Options Vested and
                                Weighted                     Exercisable
                                 Average               -------------------------
                                Remaining   Weighted                  Weighted
                               Contractual   Average                   Average
     Range of        Number       Life      Exercise      Number      Exercise
   Exercise Prices outstanding   (Years)      Price    outstanding      Price
 ----------------- ----------- -----------  ---------  ------------  -----------
$  1.20                 4,000         1.0  $    1.28         4,000  $      1.28
   2.75 - $  4.00      20,500         5.2       3.45        12,500         3.25
   4.25 -    5.74      76,500         6.1       4.72        48,150         4.56
   6.00      6.80     272,500         8.4       6.04        68,150         6.11
   7.01      7.87     134,498         6.3       7.44       109,573         7.51
$  8.61 - $ 11.48      15,000         4.6  $    9.76        14,400  $      9.80
                   -----------                         ------------
                      522,998                              256,773
                   ===========                         ============`

Employee Stock Purchase Plan

The Company has reserved 600,000 shares of Common Stock
for issuance under the 1997 Employee Stock Purchase Plan (the "Purchase Plan").
Employees generally will be eligible to participate in the Purchase Plan if they
are customarily employed by the Company for more than 20 hours per week and more
than five months in a calendar year and are not (and would not become as a
result of being granted an option under the Purchase Plan) 5% Shareholders of
the Company. Under the Purchase Plan, eligible employees may choose each year to
have up to 15% of their eligible annual compensation withheld to purchase our
common stock. Each offering period commences on first trading day of each
calendar quarter, or on such other date as the Board shall determine. The price
at which the common stock is purchased under the Purchase Plan is 85% of the
lesser of the closing price of the Company's common stock on the first day of
the applicable offering period or on the last day of that purchase period. The
Purchase Plan will terminate after a period of ten years unless terminated
earlier as permitted by the Purchase Plan. During the years ended December 31,
2001, 2000 and 1999, 22,958, 23,082 and 33,782 shares of common stock were
purchased under this plan at a weighted-average price of $5.77, $5.03 and $4.07,
respectively.

Fair Value Disclosures

This information is required to be determined as if the
Company had accounted for its employee stock options (including shares issued
under the Employee Stock Purchase Plan, collectively called options) as defined
by SFAS No. 123. The fair value of options reported below has been estimated at
the date of grant using the Black-Scholes option-pricing model for 2001, 2000
and 1999 using the following assumptions:

|                                | Stock Options | Stock Purchase Plan
|------------------------------- | ------------- | -------------------
|                                | 2001          | 2000               
|                                |               |                    
|Risk-free interest rates        | 4.03 - 4.93%  | 6.49 - 6.62%       
|Expected lives (in years)       | 5             | 5                  
|Dividend yield                  | 0.90%         | 2.96%              
|Expected stock price volatility | 47.75%        | 33.40%             

The weighted-average estimated fair value of options granted
during the year 2001, 2000 and 1999 were $1.78, $2.29 and $2.27, respectively.
The weighted-average estimated fair value of employee stock purchase rights
granted under the Employee Stock Purchase Plan were $1.10, $1.31 and $1.10 in
2001, 2000 and 1999, respectively.



Had compensation costs for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates for
the awards under a method prescribed by SFAS No. 123, the Company's net income
(loss) and net income (loss) per share would have been decreased to the pro
forma amounts indicated below:

`Years Ended December 31,
                                              -------------------------------
                                                2001       2000       1999
                                              ---------  ---------  ---------
                                          (In thousands, except per share data) 
Pro Forma net income (loss)                  $  (1,630) $   5,520  $   4,278

Pro Forma net income (loss) per share        $   (0.17) $    0.57  $    0.44`

NOTE 9 - RETIREMENT SAVINGS PLAN

The Company adopted a defined contribution retirement
savings plan under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all employees who meet minimum age and service requirements and
allows participants to defer a portion of their annual compensation on a pre-tax
basis. The plan allows employer's matching contributions equal to 50% of
employees' contributions subject to a maximum of 6% of employees' compensation.
Contributions to the plan may be made at the discretion of the Board of
Directors. The Company contributed $219,000, $313,000 and $262,000 to the plan
in 2001, 2000 and 1999, respectively.

NOTE 10 - SEGMENT INFORMATION

In 2000, with the acquisition of PSI-Tronix, the Company
organized itself into two business segments: Safety Products Group, whose
products include safety light curtains, safety interlocks and relays, safety
mats and controllers, safety contact strips, and optical profiling scanners, and
installation services, and Automation Products Group, whose products include
photoelectric and fiberoptic sensors, control components, power monitoring
electronics, defense electronics, industrial control microcomputers, peripherals
and software, level and flow sensors, non-contact ultrasonic sensors and
controllers, pressure transducers, digital pressure gauges, displacement and
velocity transducers and pressure comparators.

Financial information for each product group for the years
ended December 31, 2001, 2000 and 1999 follows:

`2001                                   Safety Products   Automation Products
-------------------------------------  ----------------  -------------------
Sales................................ $         39,321  $             8,968
Group operating profit............... $           (846) $            (1,628)
Total assets......................... $         25,526  $             8,674
Capital expenditures................. $            859  $               151
Depreciation and amortization........ $          1,920  $               346

2000
-------------------------------------
Sales................................ $         48,686  $            10,577
Group operating profit............... $          6,311  $             2,434
Total assets......................... $         17,459  $            19,569
Capital expenditures................. $          1,436  $               184
Depreciation and amortization........ $          1,063  $               703

1999
-------------------------------------
Sales................................ $         45,475  $             3,630
Group operating profit............... $          5,652  $             1,182
Total assets......................... $         24,238  $             8,298
Capital expenditures................. $          1,128  $               --
Depreciation and amortization........ $            892  $                71`

NOTE 11 - CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of
cash, cash equivalents, short-term investments and trade accounts receivable.
The Company places its cash and cash equivalents in a variety of money market
accounts. The Company further limits its exposure to these investments by
placing such investments with various high quality financial institutions. The
Company routinely performs evaluations of these financial institutions. The
Company offers credit terms on the sale of its products to its customers in the
normal course of business. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, requires no collateral from
its customers. The Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.
One customer accounted for 14% of sales in 1999. No customer accounted for more
than 10% of sales in 2001 or 2000.

The Company operates principally in the United States. The
Company's operations in Germany are insignificant to the Company as a whole.
Sales to foreign customers represented less than 10% of total sales in 2001,
2000 and 1999.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company leases certain office and manufacturing space
and other equipment under noncancellable operating leases. At December 31, 2001,
future minimum payments under these leases due in the years 2002 through 2006
were approximately $1,163,000, $1,138,000 $1,141,000, $1,031,000 and $946,000,
respectively.

Rent expense under operating lease agreements was
approximately $1,007,000 in 2001, $997,000 in 2000 and $859,000 in 1999. Of
these amounts, $900,000, $853,000 and $844,000 were related to lease agreements
with an affiliate of the Parent.

From time to time, the Company is involved in litigation in
the normal course of business. Management believes that the outcome of matters
to date will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.



PART III

Certain information required by Part III is omitted from
this Report in that the registrant will file a definitive Proxy Statement for
its 2002 Annual Meeting of Shareholders pursuant to Regulation 14A (the "Proxy
Statement") no later than 120 days after the end of the fiscal year covered by
this Report, and certain information included therein is incorporated herein by
reference.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

The information required by this Item concerning the
Company's directors and the Company's executive officers is incorporated by
reference to the sections entitled "Nominees" and "Management", respectively,
appearing in the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated
by reference to the sections entitled "Executive Compensation" and "Report of
the Compensation Committee" appearing in the Proxy Statement for its 2002 Annual
Meeting of Shareholders.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The information required by this Item is incorporated
by reference to the sections entitled "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement for its 2002 Annual
Meeting of Shareholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

The information required by this Item is incorporated
by reference to the sections entitled "Certain Relationships and Related
Transactions" appearing in the Proxy Statement for its 2002 Annual Meeting of
Shareholders.

PART IV

Item 14. EXHIBITS LIST AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this Report:

1. FINANCIAL STATEMENTS

Reference is made to the index appearing in Item 8(a) of this report.

2. EXHIBITS AND EXHIBIT INDEX:



|Exhibit Number | Exhibit Title                                                                                                                                                                                                                                                                                                                                    
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 2.1    | -  Asset Purchase Agreement by and among PSI-Tronix Technologies, Inc.,
Scientific Technologies Incorporated, PSI-Tronix, Inc. and Melvin R. Heier and
Donna Mae Heier, Trustees of  the Heier Family Trust Dated 6/27/89 dated as of
March 16, 2000 is incorporated by reference to the Registrant's Form 8-K/A dated
May 30, 2000, Exhibit 2.1.
|Exhibit 3.1    | -   Articles of Incorporation, as amended, are incorporated by reference to the
Registrant's Form 10-K for the year ended December 31, 1988, Exhibit 3.1.                                                                                                                                                                                        
|Exhibit 3.3    | -  By-Laws are incorporated by reference to the Registrant's Form 10-K for the
year ended December 31, 1985, Exhibit 3.                                                                                                                                                                                                                          
|Exhibit 4.1    | -  1997 Employee Stock Purchase Plan is incorporated by reference to the
Registrant's Registration Statement on Form S-8 dated October 2, 1998.                                                                                                                                                                                                  
|Exhibit 4.2    | -  1997 Stock Plan is incorporated by reference to the Registrant's Registration
Statement on Form S-8 dated October 2, 1998.                                                                                                                                                                                                                    
|Exhibit 10.1   | - Lease agreement dated February 21, 1995 for 6550 Dumbarton Circle, Fremont,
California 94555, is incorporated by reference to the Registrant's Form 10-KSB for
the year ended December 31, 1994, Exhibit 10.4.                                                                                                                                 
|Exhibit 10.2   | - Bank agreement dated November 29, 1994 with Bank of The West is incorporated by
reference to the Registrant's Form 10-KSB for the year ended December 31, 1994,
Exhibit 10.3.                                                                                                                                                                  
|Exhibit 10.3   | - Amendment dated June 28, 2001 to Bank Agreement dated November 29, 1994 with
Bank of The West.                                                                                                                                                                                                                                                 
|Exhibit 10.4   | - Amendment dated October 6, 2000 to Bank Agreement dated November 29, 1994 with
Bank of The West.                                                                                                                                                                                                                                               
|Exhibit 21.1   | - Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                
|Exhibit 23.1   | - Consent of PricewaterhouseCoopers LLP, Independent Accountants.                                                                                                                                                                                                                                                                                
|Exhibit 24.1   | - Power of Attorney (included on the signature page hereto).                                                                                                                                                                                                                                                                                     

All other exhibits for which provision is made in Regulation
S-K of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have
been omitted.

(b) No Reports on Form 8-K were filed during the last quarter of 2001.

---

SIGNATURES

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

Dated:  March 29, 2002



| |                                     
| | ------------------------------------
| | SCIENTIFIC TECHNOLOGIES INCORPORATED



| |     |                       
| | --- | ----------------------
| | By: | /s/ Anthony R. Lazzara

| |                      
| | ---------------------
| |                      
| | Anthony R. Lazzara   
| | Chairman of the Board

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints Anthony R. Lazzara
and Joseph J. Lazzara, jointly and severally, his attorney-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.



|Signature                                       | Title                                                                                                         | Date          
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | --------------
|/s/ Anthony R. Lazzara
Anthony R. Lazzara       | Chairman of the Board and Director                                                                            | March 29, 2002
|/s/ Joseph J. Lazzara
Joseph J. Lazzara         | President, Chief Executive Officer,
     Treasurer, Director (Principal
     Executive and Financial Officer) | March 29, 2002
|/s/ James A. Lazzara
James A. Lazzara           | Vice President, Secretary and
     Director                                                                   | March 29, 2002
|/s/ James A. Ashford
James A. Ashford           | Vice President and Director                                                                                   | March 29, 2002
|/s/ Richard S. Baldwinson
Richard S. Baldwinson | Director                                                                                                      | March 29, 2002
|/s/ Carl H. Frei
Carl H. Frei                   | Director                                                                                                      | March 29, 2002
|/s/ Bernard J. Ploshay
Bernard J. Ploshay       | Director                                                                                                      | March 29, 2002
|/s/ Richard O. Faria
Richard O. Faria           | Vice President, Finance and Administration
     (Principal Accounting Officer)                                | March 29, 2002

---

SCIENTIFIC TECHNOLOGIES
INCORPORATED

EXHIBITS

TO



Annual Report on Form 10-K
                   Year ended December 31, 2001





EXHIBITS - TABLE OF CONTENTS



|Exhibit Number | Exhibit Title                                                                                   
|-------------- | ------------------------------------------------------------------------------------------------
|Exhibit 10.3   | - Amendment dated June 28, 2001 to Bank Agreement dated November 29, 1994 with
Bank of The West.
|Exhibit 21.1   | - Subsidiaries of the Registrant.                                                               
|Exhibit 23.1   | - Consent of PricewaterhouseCoopers LLP, Independent Accountants.                               
|Exhibit 24.1   | - Power of Attorney (included on the signature page hereto).                                    

---