<PAGE>
 
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                                    This document consists of
                                                    35 pages, of which this
                                                    page is number 1. The index
                                                    to Exhibits is on page 29.

                                  FORM 10-K

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

(Mark One)
[X] Annual report  pursuant to section 13 or 15 (d) of the Securities Exchange
    Act of 1934 (Fee Required) 
    For the fiscal year ended December 31, 1996

[_] Transition report pursuant to section 13 or 15(d) of the Securities
    Exchange Act of 1934 (No Fee required)
    For the  transition period from______ to ______

Commission file number 0-12254

                    SCIENTIFIC TECHNOLOGIES INCORPORATED

Incorporated in Oregon             IRS Employer Identification Number:77-0170363

Address of principal executive offices:                Telephone: (510) 608-3400
6550 Dumbarton Circle, Fremont, CA 94555

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

                                                      Name of each exchange on 
       Title of Class                                     which registered
-----------------------------                      -----------------------------
Common Stock, $.001 Par Value                      NASDAQ National Market System

Check 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 $38,294,000.

The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing sales price of Common Stock on February 28,
1997 as reported by the National Association of Securities Dealers Automatic
Quotation System, was approximately $8,935,000. 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. 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
February 28, 1997 was 9,607,758 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy statement to be filed with the
Commission in connection with the Company's 1997 Annual Meeting of Shareholders
("the Proxy Statement") are incorporated by reference in Part III of this Form
10K.

                                       1
<PAGE>
 
                                    PART I
                                    -------
                                        
ITEM 1. BUSINESS
----------------

       Scientific Technologies Incorporated (the "Company" or "STI"), operates
in one industry segment, namely the design, manufacture and distribution of
electrical and electronic industrial controls. The Company's products include:
safety light guards, profiling scanners, factory automation sensors, controls,
components, microcomputers, fiber optics, optical and radio frequency data
communications, power monitoring, safety mats, and other electronic equipment
supplied to industrial automation, commercial and defense customers.

       The Company is organized into three product divisions:
            - Optical Sensor Division ("OSD")
            - Control Components Division ("CCD")
            - Datricon Division ("DATRICON")

       Eighty-seven percent of the Company's stock is currently held by
Scientific Technology Inc., a California corporation (the "Parent").

PRODUCTS
--------

1. Safety Automation Products, Optical Sensors, Wireless Communications.
   --------------------------------------------------------------------

          OSD designs, manufactures and markets a wide variety of safety light
     guards, photoelectric sensors, fiberoptic sensors, optical data links, and
     optical profiling scanners employing patented technology under eleven
     registered trade names. The division also markets and distributes several
     products manufactured by others.

     a. Safety Light Guards. The division's leading product group which
        --------------------                                           
     accounted for a significant majority of the Company's sales in 1996, 1995
     and 1994, is a family of safety light guards, also called presence sensing
     devices or safety light curtains, used to safeguard personnel in
     manufacturing environments near robots and moving machinery. Several
     product variations are offered by OSD in order to best provide a complete
     line of optical guarding solutions.

          The division manufactures and markets a miniaturized light guard
     called the MiniSafe, designed for inclusion in systems offered by original
     equipment manufacturers ("OEM") and other small guarding needs where
     limited space precludes using larger light curtains. The MiniSafe 4300 is
     available in four-inch increments ranging from four inches in coverage
     height to 64 inches. The operating distance, the distance between the
     transmitter and receiver, is up to 30 feet.

     _____________

      Scientific Technology, STI, The STI logo, OptoData, OptoSafe and
      Fiberlens are registered trademarks of Scientific Technology Incorporated.
      Scientific Technologies, Datricon, MiniSafe, FlexSafe, MicroSafe,
      OptoSwitch, BeamSafe, FastScan, and SpectraData are registered trademarks
      of Scientific Technologies Incorporated. Aegis, PartScan and ValuScan are
      trademarks of Scientific Technologies Incorporated. This Annual Report on
      Form 10-K also refers to trademarks and service marks of other companies
      and entities.

                                                                               2
<PAGE>
 
The MiniSafe MS4400 Series offers a longer range product, up to 50 feet, in a
larger, more robust package. The MS4400 series and the more recently introduced
MS4500 series include Individual Beam Indicators, an STI patented feature,
which provide the customer with a visual indicator of the status of each
individual beam in the sensing array. The Individual Beam Indicators assist in
both the installation and operation of the MiniSafe.

     The FlexSafe is a segmented safety light curtain that offers greater
flexibility and machine guarding for the unusually shaped application. Instead
of a single head comprising the transmitter and a single head comprising the
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.

     In 1995, the Company introduced the MicroSafe safety light curtain, which
is more compact than the MiniSafe with comparable features. Designed for use in
locations where space is limited, the small size of the MicroSafe allows it to
be easily integrated with the support framing used on many automated industrial
machines.

     The PA4400 and PA4500 Perimeter Access Systems are safety light curtains
specifically designed for perimeter protection around the boundaries of large
automated machining centers and robotic work cells.

     Selected  models of the safety light curtain products are certified by
independent laboratories to comply with one or more of the following safety and
electrical standards including: UL, CSA and British Standards BS6491. The newest
MicroSafe and MiniSafe models are European certified by an independent test
agency and carry the BG test mark

b.  Other Safety Automation Products. The Company has a strategic relationship
    ---------------------------------                                         
with Guardmaster, Ltd., a manufacturer of mechanical safety interlocks based in
the United Kingdom. Guardmaster safety interlock switches are  utilized on
hinged, sliding, or lift-off guards and barriers that are often installed with
STI safety light curtains. When the guard is opened, the power supply to the
machine is disconnected. The function and design of Guardmaster interlocks are
complementary to the STI range of safety products. An affiliate of Guardmaster
is the distributor for the STI product line in the United Kingdom.

     Aegis 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. TouchStart capacitive palm switches for two hand
control applications actuate with a soft touch.


c. Optical Profiling Scanners. In today's industrial environment, non-contact,
   ---------------------------                                                
on-the-move sensing is vital to control automated processes and improve
industrial productivity. STI has developed a diverse line of optical profiling
scanner products. These scanners, (PartScan, ValuScan, and FastScan) provide
non-contact sensing on a wide variety of customer applications.

                                                                               3
<PAGE>
 
     The ValuScan is 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 the ValuScan enables the user to select
among various infrared beam spacings, size of the scanned area, single or
multiple axis and many output and programming functions.

     The FastScan uses a high speed, digital signal processor and sensing
electronics to determine object size, profile, geometry and positions accurate
to 0.1 inches in minimum detectable object size. The built-in software of the
FastScan provides the user with random access capability to selectively scan in
any order or location in the sensing field. This course scanning technique is
used when the FastScan is searching for objects of a known minimum size. When an
object is found, the scanner switches to a high resolution mode for more precise
object location and size.

     These scanners verify part presence, measure products in both X and Y axes,
scan for package sorting applications, detect flaws caused by holes or tears in
moving webs of material and control slack loops in rolled material, among many
other applications.

     The ValuScan and FastScan are microprocessor-based products which greatly
simplify configuring an object measurement system. Software is included for a
variety of scanning applications. STI can customize the software for a
customer's specific needs.

     In 1995 the Company introduced the STI VSS6600 vehicle scanner series of
high speed, profiling scanners utilized in highway toll collection systems.
These scanners are used for both detection and vehicle classification, providing
imaging information to a host computer which determines the appropriate toll to
be charged in a automatic fare collection application.

d. Photoelectric Sensors. OSD manufactures and/or markets a variety of
   ---------------------                                              
photoelectric (OptoSwitch, OmniProx) and fiberoptic (Fiberlens) sensors used for
detecting the presence or absence of objects in a wide selection 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 depending upon its design, can
provide resistance against high temperatures, corrosive chemicals or repeated
flexing. Fiberoptic sensors are often used in confined spaces and in
environments where standard photoelectric sensors 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 industry,
automotive manufacturing, material handling and a variety of other applications
in a diverse selection of industries.

                                                                               4
<PAGE>
 
e. Other Products. OSD also manufactures and/or markets a line of optical
   --------------
communications data links (OptoData) and spread spectrum radio frequency modems
(SpectraData).

     The Optical Sensor Division's products are utilized in a wide variety of
applications throughout a broad industrial base. OSD product users include
companies 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, the division's products are
marketed primarily through more than 425 US. distributors and sales
representatives and 20 foreign distributors. Customers include end-users and
original equipment manufacturers.

2. Control Components, Power Monitoring and Defense Electronics.
   ------------------------------------------------------------

     The Control Components Division manufactures and markets a wide variety of
sensors and relays for commercial and defense customers. 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. CCD also manufactures and markets
a line of power supplies for lasers.

     CCD is qualified as a supplier of a variety of military-specified sensors
and controls. Many of the division's 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.

     Marketing of CCD's products is accomplished primarily through direct sales
and, to a lesser degree by an independent European sales representative.

3. Industrial Control Microcomputers, Peripherals and Software.
   -----------------------------------------------------------

     The Datricon Division designs and produces modular, board-level, computer
products.

     The division's product line consists of a series of single board
microcomputers and related peripheral boards for industrial applications and use
by original equipment manufacturers, and pre-packaged systems. Most of the
division's microcomputers are constructed on a single circuit board and are
designed using a set of electrical and mechanical connections known as "STD-
Bus". STD-Bus is one of several competing electronic bus structures used for
microcomputers and peripherals in the industrial automation control marketplace.

     The Datricon products can be used in a wide range of customer applications,
including remote-controlled robots, process control equipment, measuring
instrumentation, plastics manufacturing, lighting controls, semiconductor
processing equipment, photographic processing and automatic test equipment.
Customers are 

                                                                               5
<PAGE>
 
        end-users and original equipment manufacturers. Datricon's products are
        marketed directly to its customers.

SOURCES AND AVAILABILITY OF COMPONENTS
--------------------------------------

        The Company maintains an inventory of components and parts for its
manufacturing activities. There are many sources for most of the components
needed; however, some products, components and sub-assemblies are obtained from
sole sources which may be the only supplier or in order to obtain pricing or
supply efficiencies. In the event of supply interruptions from these vendors,
the Company believes most sole source components could be obtained from other
suppliers, but this would require the transfer of tooling or designs or the
redesign of the Company's product to utilize components from an alternate
source. Delays would be incurred in switching to an alternate source and could
have an adverse effect on operations.

        The Company also derives revenue from the distribution of products from
third party manufacturers. In the event such arrangements are terminated or the
third party products otherwise become unavailable, the Company's results of
operations could be adversely affected.

RESEARCH AND DEVELOPMENT
------------------------

     In order to meet the changing needs of its customers, the Company
continuously engages in research and development both to introduce new products
and to improve existing products. In addition, the divisions modify products as
necessary to meet original equipment manufacturers' requirements.

     In 1996, 1995 and 1994, the Company spent $2,482,000, $1,598,000 and
$1,370,000, respectively, for engineering, research and development. In addition
to new products such as MicroSafe and Aegis safety mats, the Company's research
and development efforts also result in enhancements to existing products. The
Company anticipates that the level of research and development expenditures may
be higher in 1997.

PATENTS AND TRADEMARKS
----------------------

     The Company holds seven US patents. In addition, the Company has been
licensed by its Parent to use three patents for its products and thirteen US
registered trademarks, including the use of the Parent's logo "STI". Products
under the following US registered trademarks have also been licensed from the
Parent: "OMNIPROX," "OPTOSWITCH," "OPTODATA," "MINISAFE," "OPTOSAFE,"
"FIBERLENS," "BEAMSAFE," "FASTSCAN," "SPECTRADATA," "FLEXSAFE" and "MICROSAFE".
The Company has filed for additional patent protection on certain technologies.

     Because of the rapid rate of technology change in the electronics industry,
the Company believes its success in the future depends on the quality of its
products and services and the technical skills of its personnel to adapt to
technological developments, rather than solely on its patents.

                                                                               6
<PAGE>
 
GOVERNMENT BUSINESS
-------------------

     The Company provides components, controls and systems both directly to
governmental agencies and to many major government contractors, especially from
its Control Components Division.

     Only 1% of 1996, 1995 and 1994 sales were made directly to governmental
agencies. Aggregate sales to both government agencies and government contractors
represented 2% of sales in 1996 and 3% of sales in 1995 and 1994, respectively.

BACKLOG
-------

     Because many customers place large orders for delivery throughout the year
and because of the possibility of customer changes and cancellation of orders,
the Company's backlog as of any particular date may not be representative of the
Company's sales for any succeeding fiscal period. At March 13, 1997, the
Company's backlog stood at $1,974,000. Of this total $118,000 is, at customer's
request, scheduled to be filled during periods beyond 1997.

COMPETITION
-----------

     The industry in which the Company operates is competitive and subject to
rapid technological change. Many of the Company's competitors are significantly
larger and possess greater financial and other resources.

     Competitors of the OSD Division include, among others, Honeywell, Allen
Bradley, Eaton Corporation, Banner Engineering, Sick Optic-Electronic, Inc,
Cutler Hammer, Danaher Controls, Data Instruments, Link Controls and Omron.
Competitors of the CCD division include several of the above-mentioned firms and
also SCI Systems, Inc., Technitrol, Logitek, Hi-G and Xentek. Datricon's
competitors include Mizar, Pro-Log, and Ziatech. In addition, the Company faces
indirect competition from present and potential customers 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.
The Company believes that it generally competes favorably as to these factors.
To maintain its competitive position, the Company will continue to devote
substantial resources to the development of new products. See "Research and
development."

FOREIGN OPERATIONS
------------------

     The Company has no foreign manufacturing operations. STI Scientific
Technologies GmbH, a wholly owned German subsidiary was established in 1995 as
the Company's European sales office. The Company's products are also sold in
foreign countries by distributors and independent sales representatives. Foreign
sales represented less than 10 percent of sales in each of 1996, 1995 and 1994.

MAJOR CUSTOMERS
---------------

     NCC Electronics, an independent distributor, represented 19% of sales in
1996 and 1995 and 18% in 1994. Because of the Company's diverse customer base,
no other customer represented more than 10% of sales.

                                                                               7
<PAGE>
 
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 the business of the Company.

EMPLOYEES
---------

      At December 31, 1996, the Company employed approximately 215 full time
employees. Included in this total was the common manufacturing, support and
administrative staff that the Company shares with the Parent and other
subsidiaries of the Parent 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 the Company's employees are skilled in technical and engineering
disciplines and the future success of the Company will depend, in part, upon its
ability to attract and retain such employees. The Company believes that its
relations with its employees are good.

ITEM 2. PROPERTIES
------------------
 
      The Company owns no real estate. In the fourth quarter of 1995 the Company
relocated its manufacturing operations, corporate headquarters, administrative,
engineering and sales offices to a 95,000 square foot facility located at 6550
Dumbarton Circle, Fremont, California. The facility is owned by the Parent and
the Company leases approximately 70,000 square feet, 74% of the total, for its
use. The Company believes its current facilities will be adequate for the
foreseeable future. This relocation resulted in consolidation of the Company's
operations into a single larger facility. See Note 6 of Notes to Consolidated
Financial Statements for information regarding lease commitments.

      The Company maintains insurance policies for property, casualty, fire,
business interruption, workers compensation, general liability and product
liability. There can be no assurance that in the future, the Company will
continue to be able to obtain such insurance on commercially and economically
feasible terms. In the event the Company were to suffer a claim not covered by
insurance or if insurance coverage is insufficient, such claim could have an
adverse effect on the Company's operations or financial condition.


ITEM 3. LEGAL PROCEEDINGS.
-------------------------
 
      The Company is a defendant in litigation which arose in the normal course
of business. The Company believes that it is unlikely that the outcome of the
litigation will have an adverse material effect on the Company's financial
position or results of operations.


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

     None.

                                                                               8
<PAGE>
 
                                    PART II
                                    -------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------------

MARKET INFORMATION
------------------

  The Company's common stock is traded on the NASDAQ Stock Market under the
symbol STIZ.  The stock tables in most daily newspapers list the Company as
"SciTech".

<TABLE>
<CAPTION>
 
Price of Common Stock
---------------------
1996              High       Low             1995        High         Low
<S>              <C>       <C>             <C>           <C>           <C>
1st Quarter      $16-3/4   $10-1/2         1st Quarter    $  6-1/8  $ 4-1/8
2nd Quarter       17-3/4    10-1/2         2nd Quarter      21-3/4    5-1/4
3rd Quarter       11-3/4     7-1/2         3rd Quarter      25       14-3/8
4th Quarter       10-1/4     7-1/2         4th Quarter      20-1/2   11   
</TABLE>

The closing sales price on February 28, 1997 was $7.125 per share.

HOLDERS 
-------

    There were 772 stockholders of record on February 28, 1997.

DIVIDENDS
---------

     In 1995, regular quarterly dividends of $.03 per share were paid on April
3, and July 5, and $.035 per share on September 1, and December 1. In 1996,
regular quarterly dividends of $.04 per share were paid on April 1, and July 1,
September 3, and December 3. On March 3, 1997, the Company declared a regular
quarterly dividend of $.0425 per share, payable on April 1, 1997 to shareholders
of record on March 21, 1997.

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
<TABLE> 
<CAPTION> 
                                                           December 31,
                                --------------------------------------------------------------------
                                                (In thousands except per share data)

Income statement data             1996            1995            1994            1993            1992 
---------------------             ----            ----            ----            ----            ----
<S>                             <C>             <C>             <C>             <C>             <C>
Net sales                       $38,294         $36,006         $26,115         $18,617         $12,775 
Income from operations            7,798          10,247           6,063           3,995           2,064 
Net income                        5,168           6,336           3,698           2,476           1,297 
Net income per share            $   .54         $   .66         $   .38         $   .26         $   .14

Balance sheet data
------------------
Total assets                    $21,713         $18,097         $12,284         $ 8,310         $ 6,953
Long-term obligations                --              14              58              86              57 
Stockholders equity              17,871          14,336           9,249           6,504           4,817

Dividends declared per share    $   .16         $   .13         $   .10         $   .09         $   .08

</TABLE> 

                                                                               9
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        ---------------------------------------------------------------
        RESULTS OF OPERATIONS
        ---------------------

   The following section contains certain forward looking statements based on
 current expectations. Actual results may differ materially. Among the factors
  which could effect actual results are those listed under "Business Factors"
                                     below.


                             RESULTS OF OPERATIONS
                             ---------------------
                                        
SALES
-----

Sales in 1996 grew 6% to $38.3 million from $36.0 million in 1995. Sales in 1995
grew 38% to $36.0 million from $26.1 million in 1994. The most important factor
driving the growth in both periods was an increase in units shipped. Also
contributing to this growth was the introduction of new products. The Company
believes that competitive conditions could have an impact on its future sales
growth rate. The table below summarizes operating performance as a percent of
sales for the most recent three years.

<TABLE>
<CAPTION>
 
                                               1996    1995    1994
                                               -----   -----   -----
<S>                                            <C>     <C>     <C>
     Sales                                      100%    100%    100%
                                               ----    ----    ----
     Gross margin                                51      55      53
                                               ----    ----    ----
     Operating expenses:
      Selling, general and administrative        24      22      25
      Research and development                    6       4       5
                                               ----    ----    ----
          Total operating expenses               30      26      30
                                               ----    ----    ----
     Income from operations                      21      29      23
     Interest income, net                         1       1       -
                                               ----    ----    ----
     Income before taxes                         22      30      23
     Provision for income taxes                   8      12       9
                                               ----    ----    ----
     Net income                                  14%     18%     14%
                                               ====    ====    ====
 
</TABLE>

GROSS PROFIT
------------

                              1996 = $19.6 million
                              1995 = $19.9 million
                              1994 = $13.8 million
                              Decrease in 1996 = 2%
                              Increase in 1995 = 44%

Scientific Technologies' gross margin was 51% of sales in 1996, 55% in 1995 and
53% in 1994. The decline in gross profit and gross margin in 1996 compared to
1995 was attributable to: a more competitive market resulting in greater sales
discounts and a product mix change consisting of  increased proportionate sales
of lower margin products. Gross margin was also impacted by higher sales of
products manufactured by other companies and distributed by STI, which generally
have lower gross margins. In addition, during the latter part of 1995, the
Company relocated to its new and larger facility and increased its manufacturing
support staff. During 1996, the Company experienced a 36% increase in
manufacturing overhead expenses which was the result of the full year effect of
the new facilities expenses, and to a lesser extent the staff increases. The
increase in gross profits in 1995 compared to 1994 was due primarily to higher
sales levels, while the gross margin improvement was the result of continued
improvements in manufacturing techniques and 

                                                                              10
<PAGE>
 
processes resulting in decreased cost per unit. The Company believes that an
increase in sales would help to offset the higher fixed costs associated with
the larger facility and have a positive impact on gross margin in the future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------

                              1996 = $9.4 million
                              1995 = $8.0 million
                              1994 = $6.4 million
                              Increase in 1996 = 18%
                              Increase in 1995 = 25%

During 1996, the Company increased its promotional expenditures, continued to
expand its sales and information systems staff and incurred the full year effect
of expenses associated the new facilities and German sales and marketing
operations. These were the primary reasons that the growth in selling, general
and administrative expenses exceeded sales growth when compared to 1995. The
Company also translated its product literature into other languages as required
for sales activity in the European market. Increased sales volume was the chief
factor contributing to the higher selling expenses in 1995 compared to 1994. The
Company anticipates that selling, general and administrative expenses will
increase in the future but will remain constant or slightly lower as a percent
of sales.

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------
 
                              1996 = $2.5 million
                              1995 = $1.6 million
                              1994 = $1.4 million
                              Increase in 1996 = 55%
                              Increase in 1995 = 17%

Product creation, development and enhancement have been and continue to be an
important factor in STI's long-term success. Investments in this area enable the
Company to serve the factory automation market with increasingly more
sophisticated sensors, manufacturing controls and data communication products.
In 1996 and 1995, STI introduced a number of product advancements that have
helped the Company to maintain its position in a highly competitive marketplace.
The Company anticipates that the level of research and development expenses will
increase in the future, although such expenses may vary as a percentage of
sales. To date, all product development costs have been expensed as incurred,
and none have been capitalized.

INCOME BEFORE TAXES
-------------------

                             1996 = $ 8.3 million
                             1995 = $10.6 million
                             1994 = $ 6.2 million
                             Decrease in 1996 = 21%
                             Increase in 1995 = 71%

Income before taxes decreased in 1996 compared to 1995, primarily due to the
above mentioned cost increases, which more than offset increased sales. The
increase from 1994 to 1995 was 

                                                                              11
<PAGE>
 
primarily the result of increased sales. Pre-tax income was 22% of sales in
1996, 30% in 1995 and 23% in 1994.

                                   INCOME TAX
                                   ----------
                                        
The Company's effective income tax rate was 38% in 1996 and 40% in both 1995 and
1994. The Company expects that, with the continuued utilization of available
research and development tax credits, its effective tax rate will be
approximately 38% in 1997. See Notes 1 and 4 of Notes to Consolidated Financial
Statements.

                        LIQUIDITY AND CAPITAL RESOURCES
                        -------------------------------
                                        
STI's working capital needs have been met through funds generated from operating
activities. During 1996, funds were provided by net income, depreciation and
accounts payable and were used to finance increased accounts receivable,
inventories and other assets, purchase short-term investments and fixed assets,
pay dividends, repurchase common stock and debt service. Working capital
amounted to $15.4 million at December 31, 1996. The bank line of credit,
consisting of a one year $2.5 million revolving line and term loan commitment
with Bank of the West was extended in 1996 to May 31, 1997. Secured by qualified
receivables, fixed assets and inventories, the line bears interest at the bank's
prime rate. At December 31, 1996, none of the revolving line of credit had been
utilized. The Company has the option to convert up to $500,000 of the credit
line into a five year term note. See Notes 3 and 5 of Notes to Consolidated
Financial Statements.

The Company relocated its facilities in late 1995 and made certain capital
expenditures during 1996, primarily for production, quality assurance, research
and development equipment, information systems and software. The Company has
entered into a ten year lease for a majority of its facility which is owned by
the Parent. In keeping with normal operations and plans for growth, the Company
plans to make certain capital expenditures during 1997, primarily for
production, quality assurance and research and development equipment. While the
Company had no formal commitments at December 31, 1996, it is anticipated that
capital expenditures in 1997 will be approximately $850,000. See Note 6 of Notes
to Consolidated Financial Statements.

Scientific Technologies believes its cash flow from operations and available
bank borrowings will be sufficient to meet anticipated working capital
requirements through at least 1997. While the Company continues to evaluate its
financing alternatives from time to time, it has no current plans to raise
additional outside capital.

                            RELATIONSHIP WITH PARENT
                            ------------------------

The Parent manages cash for the Company. Cash collected by the Parent on the
Company's behalf is reflected as a decrease to the Payable to Parent account or
as an increase to the Receivable from Parent account. Cash transfers, management
service, interest and rent charges from the Parent to the Company, charges for
income taxes and the Parent's share of dividends are reflected as increases to
the payable account or as decreases to the receivable account. The Parent files
consolidated returns, including the accounts of the Company, for federal and
state income taxes. See Note 2 of Notes to Consolidated Financial Statements.

                                                                              12
<PAGE>
 
                                BUSINESS FACTORS
                                ----------------
                                        
Because of the variety of factors and uncertainties affecting the Company's
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 the Company's operating performance may result in significant
volatility in the Company's common stock price. Among the factors which could
affect future results:

VARIABILITY OF OPERATING RESULTS
--------------------------------

The Company has experienced fluctuations in annual and quarterly operating
results and anticipates 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 STI products are sold, the mix of products sold and the timing of
operating expenditures.

SEASONALITY
-----------

The industrial manufacturing equipment industry can be subject to seasonality.
This is also true with respect to European markets where business activity
declines due to vacations taken in the summer months.

COMPETITION
-----------

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

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
------------------------------------------------------

The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new product introductions. The Company's future success will depend on its
ability to enhance its current products, develop new products and respond to
emerging industry standards, all on a timely and cost-effective basis. The
introduction of new products also requires the Company to 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.

DEPENDENCE ON INDIRECT DISTRIBUTION CHANNEL
-------------------------------------------

A majority of the Company's sales are sold through third party distributors,
system integrators and original equipment manufacturers. These resellers are not
required to offer the Company's products exclusively. There can be no assurance
that a reseller will continue to offer the Company's products. In addition many
of the Company's resellers are privately owned firms and some may not be well
capitalized.

INTERNATIONAL SALES
-------------------

The Company's international sales may be disrupted by currency fluctuations or
other events beyond the Company's control, including political or regulatory
changes.

                                                                              13
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
----------------------------------------------------

(a) The following documents are filed as a part of this Report:
 
 
                                                                           PAGE
                                                                           ----
(1) Financial Statements                                                  
                                                                          
    Consolidated Balance Sheets - December 31, 1996 and 1995                 15
                                                                          
    Consolidated Statement of Operations - Years ended December 31, 1996, 
       1995 and 1994                                                         16
                                                                          
    Consolidated Statement of Cash Flows - Years ended December 31, 1996, 
      1995 and 1994                                                          17
                                                                          
    Consolidated Statement of Changes in Stockholders' Equity - Years     
      ended December 31, 1996, 1995 and 1994                                 18
                                                                          
    Notes to Consolidated Financial Statements                               19
                                                                          
    Report of Independent Accountants                                        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.
 

                                                                              14
<PAGE>
 
                      SCIENTIFIC TECHNOLOGIES INCORPORATED
                      ------------------------------------
                           CONSOLIDATED BALANCE SHEET
                           --------------------------
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,  
                                                                   1996      1995
                                                                  -------   -------
<S>                                                               <C>       <C>
Assets
Current Assets
    Cash and cash equivalents                                     $ 2,371   $ 3,477
    Short-term investments                                          4,989     3,387
    Accounts receivable, net                                        6,692     5,253
    Inventories                                                     4,066     3,487
    Deferred income taxes                                             840       400
Other assets                                                          278       195
                                                                  -------   -------
                  Total current assets                             19,236    16,199
 
Property and equipment, net                                         2,477     1,898
                                                                  -------   -------
                  Total assets                                    $21,713   $18,097
                                                                  =======   =======
 
Liabilities and Stockholders' Equity
 
Current Liabilities
    Short-term debt                                               $    --   $    50
    Trade accounts payable                                          2,385     2,218
    Accrued expenses                                                1,457     1,479
                                                                  -------   -------
                  Total current liabilities                         3,842     3,747
Long-Term Debt                                                         --        14
                                                                  -------   -------
                  Total liabilities                                 3,842     3,761
                                                                  -------   -------
 
Commitments and contingencies (Notes 3 and 6)
 
Stockholders' Equity
    Common stock; shares authorized - 20,000;
       shares issued and outstanding - 9,607 and
       9,602, respectively; $.001 par value                            10        10
    Capital in excess of par value                                  5,319     5,415
    Retained earnings                                              12,542     8,911
                                                                  -------   -------
                  Total stockholders' equity                       17,871    14,336
                                                                  -------   -------
                  Total liabilities and stockholders' equity      $21,713   $18,097
                                                                  =======   =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                                                              15
<PAGE>
 
                      SCIENTIFIC TECHNOLOGIES INCORPORATED
                      ------------------------------------
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      ------------------------------------
                     (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                     --------------------------
                                                      1996      1995      1994
                                                     -------   -------   -------
<S>                                                  <C>       <C>       <C>       
Sales                                                $38,294   $36,006   $26,115
Cost of goods sold                                    18,661    16,139    12,323
                                                     -------   -------   -------
    Gross profit                                      19,633    19,867    13,792
Operating expenses
    Selling, general and administrative                9,353     8,022     6,359
    Research and development                           2,482     1,598     1,370
                                                     -------   -------    ------
     Total operating expenses                         11,835     9,620     7,729
                                                     -------   -------   -------
 
     Income from operations                            7,798    10,247     6,063
 
Interest income, net                                     537       312       101
                                                     -------   -------   -------
 
     Income before income taxes                        8,335    10,559     6,164
Provision for income taxes                             3,167     4,223     2,466
                                                     -------   -------   -------
 
          Net income                                 $ 5,168   $ 6,336   $ 3,698
                                                     =======   =======   =======
 
     Net income per share                            $   .54   $   .66   $   .38
                                                     =======   =======   =======

     Weighted average common shares outstanding        9,604     9,607     9,607
                                                     =======   =======   =======
</TABLE>

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

                                                                              16
<PAGE>
 
                      SCIENTIFIC TECHNOLOGIES INCORPORATED
                      ------------------------------------
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      ------------------------------------
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                ------------------------------------------------
                                 (In thousands)

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31
                                           -----------------------------
                                             1996       1995       1994
                                           --------   --------   --------
<S>                                        <C>        <C>        <C>
Cash flows from operating activities:
  Net income                               $ 5,168    $ 6,336    $ 3,698
  Adjustments to reconcile net income to   
    cash provided by (used in)
     operating activities:
    Depreciation and amortization              649        465        337
    Changes in assets and liabilities:
       Accounts receivable, net             (1,439)      (467)    (1,841)
       Inventories                            (579)    (1,120)      (652)
       Payable to Parent                        --        (19)       675
       Trade accounts payable                  167        670        670
       Accrued expenses                        (22)        97        590
       Other                                  (523)      (344)       (98)
                                           -------    -------    -------
Cash flows provided by operating                                        
 activities                                  3,421      5,618      3,379
                                           -------    -------    -------

Cash flows from investing activities:
       Purchases of property  and                                        
        equipment                           (1,228)      (863)    (1,041)
       Sale (Purchase) of short-term                                    
        investments                         (1,602)    (2,254)       809 
                                           -------    -------    -------
Cash flows used in investing activities     (2,830)    (3,117)      (232)
                                           -------    -------    -------
 
Cash flows from financing activities:
   Payments on debt                            (64)       (22)       (50)
   Issuance (repurchase) of common stock       (96)         -          4
   Dividends                                (1,537)    (1,249)      (957)
                                           -------    -------    -------
         Cash flows used in financing                                    
          activities                        (1,697)    (1,271)    (1,003)
                                           -------    -------    ------- 

Change in cash and cash equivalents         (1,106)     1,230      2,144
 
Cash and cash equivalents at beginning                                  
 of year                                     3,477      2,247        103
                                           -------    -------    -------
Cash and cash equivalents at end of year   $ 2,371    $ 3,477    $ 2,247
                                           =======    =======    =======
 
Supplemental disclosure of cash flow
 information:
            Cash paid to Parent for                                     
             income taxes                  $ 3,167    $ 4,223    $ 2,466
                                           =======    =======    =======
</TABLE>

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

                                                                              17
<PAGE>
 
                      SCIENTIFIC TECHNOLOGIES INCORPORATED
                      ------------------------------------
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
 -----------------------------------------------------------------------------
                       DECEMBER 31,  1996, 1995 AND 1994
                       ---------------------------------
                                 (In thousands)

<TABLE>
<CAPTION>
                                          Common stock
                                   -------------------------
                                                     Capital
                                                       in
                                                     excess
                                              Par    of par     Retained
                                   Shares    value    value     earnings     Total
                                   ------    -----   -------    --------    -------
<S>                                <C>       <C>     <C>        <C>         <C>
Balances December 31, 1993          9,607      $10    $5,411     $ 1,083    $ 6,504
   Issuance of common stock                                4                      4
   Net income for the year                                         3,698      3,698
   Dividends paid                                                   (957)      (957)
                                    -----      ---    ------     -------    -------
Balances December 31, 1994          9,607       10     5,415       3,824      9,249
   Net income for the year                                         6,336      6,336
   Dividends paid                                                 (1,249)    (1,249)
                                    -----      ---    ------     -------    -------
Balances December 31, 1995          9,607       10     5,415       8,911     14,336
   Repurchase of common stock          (5)               (96)                   (96)
   Net income for the year                                         5,168      5,168
   Dividends paid                                                 (1,537)    (1,537)
                                    -----      ---    ------     -------    -------
Balances December 31, 1996          9,602      $10    $5,319     $12,542    $17,871
                                    =====    =====    ======     =======    =======
</TABLE>

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

                                                                              18
<PAGE>
 
                     SCIENTIFIC TECHNOLOGIES INCORPORATED
                     ------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                        
NOTE 1-OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

DESCRIPTION OF OPERATIONS

Scientific Technologies Incorporated (the "Company") develops, manufactures and
markets safety light curtains, industrial sensors, optical profilers,
microcomputers, power monitoring devices and data communications products for
factory automation applications. A majority of the Company's outstanding  common
stock is held by Scientific Technology Incorporated (the "Parent").

The Company operates in one business segment - the development, manufacture and
marketing  of  electronic products. Sales to foreign customers represented less
than 10% of total sales in 1996, 1995 and 1994. One customer, a distributor,
accounted for 19% of total sales in 1996 and 1995 and 18% in 1994.

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.

REVENUES

Revenues from product sales are recognized when products are shipped. The
Company warranties its products for 12 months from date of installation and
provides for warranty upon shipment.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company invests primarily in money market accounts and short-term
investments held at financial institutions and considers all highly liquid
investments with an original maturity of less than 90 days to be cash
equivalents.

Short-term investments consist of highly liquid investments which generally
mature in less than one year and are classified as "available for sale".
Interest income is accrued as earned. The investments are carried at cost plus
accrued interest, which approximates market value.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment, including furniture and fixtures, are recorded at cost.
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
improvement.

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.

                                                                              19
<PAGE>
 
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. 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
uncollectable accounts receivable based upon the expected collectability of all
accounts receivable. The Company's short-term investments are primarily composed
of highly rated mutual funds and treasury bonds.

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.

FOREIGN CURRENCY

The Company's German subsidiary transacts its business in German Marks.
Translation and transaction gains and losses to date have been immaterial.

INCOME PER SHARE

Income per common share is computed based on the weighted average number of
shares outstanding during the period. There were no options or warrants for the
purchase of common stock of the Company outstanding during the periods
presented.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of 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.

STOCK BASED COMPENSATION PLANS

The employees of the Company are eligible to participate in the stock option and
stock purchase plans of the Parent. The Company applied the provisions of
Statement of Accounting Standards No. 123 (FAS123) to the stock option and stock
purchase plans of the Parent for 1995 and 1996, and found that the allocated pro
forma effects of applying FAS123 were immaterial to the Company's financial
position and results of operations.

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 1996, 1995 and 1994 were $949,000, $890,000 and
$789,000, respectively.

                                                                              20
<PAGE>
 
The Company leases approximately 70,000 square feet in a 95,000 square foot
facility owned by the Parent. The lease term is for ten years. Overhead costs
are allocated primarily on the basis of square footage utilized.

Additionally, the Parent manages the Company's cash. 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, 1996 and 1995. The Company charges interest on the receivables from
the Parent and pays interest on payables to Parent at the Company's average
interest rate on bank borrowings. Interest expense amounted to $42,000 in 1996,
interest income amounted to $20,000 in 1994. There was no interest income or
expense in 1995.

NOTE 3-BALANCE SHEET DATA

<TABLE>
<CAPTION>
 
                                                    December 31,
                                                  1996       1995
                                                --------   --------
                                                  (In thousands)
<S>                                             <C>        <C>
     ACCOUNTS RECEIVABLE:
     Trade accounts receivable                  $ 6,806    $ 5,367
     Less: Allowance for doubtful accounts         (114)      (114)
                                                -------    -------
     Accounts receivable, net                   $ 6,692    $ 5,253
                                                =======    =======
 
     INVENTORIES:
     Finished goods                             $ 1,449    $   886
     Work in process                                509        767
     Subassemblies                                  493        426
     Raw materials                                1,615      1,408
                                                -------    -------
                                                $ 4,066    $ 3,487
                                                =======    =======
     PROPERTY AND EQUIPMENT:
     Equipment                                  $ 3,659    $ 3,205
     Furniture and fixtures                         651        879
     Leasehold improvements                          20         67
                                                -------    -------
                                                  4,330      4,151
     Less: accumulated depreciation              (1,853)    (2,253)
                                                -------    -------
                                                $ 2,477    $ 1,898
                                                =======    =======
     ACCRUED EXPENSES:
     Accrued compensation and benefits          $   666    $   541
     Accrued commissions                            222        223
     Warranty reserve                               229        191
     Other                                          340        524
                                                -------    -------
                                                $ 1,457    $ 1,479
                                                =======    =======
     DEBT:
     Note payable to bank                       $    --    $    64
                                                 
     Less: portion due within one year               --        (50)
                                                -------    -------
     Long-term portion of debt                  $    --    $    14
                                                =======    =======
</TABLE>

The Company has a  $2,500,000 line of credit with a bank, of which no amount was
outstanding at December 31, 1996 or December 31, 1995. The line, which is
subject to certain financial statement covenants, bears interest at the bank's
prime rate (8.25% and 8.50%, respectively, at December 31,1996 and December 31,
1995), is  secured by accounts receivable, inventories and fixed assets, expires
on May 31, 1997.

                                                                              21
<PAGE>
 
NOTE 4-INCOME TAXES

The provision for income taxes was as follows:

<TABLE>
<CAPTION>
                                                Year Ended December 31
                                            1996          1995         1994
                                           ------        ------       ------
Current tax expense:                                (In thousands) 
<S>                                        <C>           <C>          <C>
    Federal                                $2,691        $3,578       $1,893
    State, net of federal benefit             876         1,085          573
                                           ------        ------       ------
    Sub total                               3,567         4,663        2,466
    Deferred tax benefit                     (400)         (440)          --
                                           ------        ------       ------
    Total                                  $3,167        $4,223       $2,466
                                           ======        ======       ======
</TABLE>

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. At December 31, 1996 and 1995, the deferred tax assets of  $840,000
and $440,000, respectively, were comprised primarily of the following items:
$425,000 and $170,000, respectively, of inventory reserves and $415,000 and
$270,000, respectively, of other accruals and reserves not currently deductible.
At December 31, 1994, the deferred tax assets and deferred tax liabilities were
not significant.

The provision for income taxes differs from the amount of tax determined by
applying the applicable U.S. statutory income tax rate to pretax income as a
result of the following differences:

<TABLE>
<CAPTION>
 
                                                  Year Ended December 31
                                                    1996    1995    1994
                                                   -----   -----   -----
<S>                                                <C>     <C>     <C> 
Percentage of pretax income:                                           
Statutory U.S. tax rate                              34%     34%     34%
State income taxes, net of federal benefit            6       6       6
Research and development and other credits           (2)      -       -
                                                   ----    ----    ----
Effective tax rate                                   38%     40%     40%
                                                   ====    ====    ==== 
</TABLE>

NOTE 5-DIVIDENDS

On March 3, 1997, the Company declared a regular quarterly dividend of $.0425
per share on all its common shares, payable on April 1, 1997 to shareholders of
record on March 21, 1997. During 1996, the Company paid quarterly dividends of
$.04 per share. During 1995, the Company paid regular quarterly dividends of
$.03 per share on April 3, and July 5, and $.035 per share on September 1, and
December 1. During 1994, the Company paid quarterly dividends of $.025 per
share.

NOTE 6-COMMITMENTS AND CONTINGENCIES

The Company leases certain office and manufacturing space and other equipment
under noncancellable operating leases. At December 31, 1996, future minimum
payments under these leases due in the years 1997 through 2005 were
approximately $630,000 per year.

Rent expense under operating lease agreements was approximately $630,000,
$261,000 and $291,000 in 1996, 1995 and 1994, respectively.

The Company is a defendant in litigation which arose in the normal course of
business. The Company believes that it is unlikely that the outcome of  the
litigation will have an adverse material effect on the Company's financial
position or results of operations.

                                                                              22
<PAGE>
 
NOTE 7-UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)
<TABLE>
<CAPTION>
 
1996                            First    Second     Third    Fourth
                               Quarter   Quarter   Quarter   Quarter         Total 
                               -------   -------   -------   -------        -------
<S>                            <C>       <C>       <C>       <C>            <C>
Sales                           $9,351    $9,254    $9,713   $9,976          $38,294
Gross Profit                     5,069     4,484     4,897    5,183           19,633
Net Income                       1,507       948     1,204    1,509/(1)/       5,168
Net Income per share            $  .16    $  .10    $  .13   $  .16/(1)/     $   .54
<CAPTION> 

1995                            First    Second     Third    Fourth
                               Quarter   Quarter   Quarter   Quarter         Total  
                               -------   -------   -------   -------        --------
<S>                            <C>       <C>       <C>       <C>            <C>
Sales                           $8,652    $8,767    $9,479   $9,108          $36,006
Gross Profit                     5,004     4,948     4,976    4,939           19,867
Net Income                       1,577     1,645     1,586    1,528            6,336
Net Income per share            $  .16    $  .17    $  .17   $  .16          $   .66
</TABLE>

(1) Includes a $167 benefit from a change in the Company's effective tax rate.

                                                                              23
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


     To the Board of Directors and
     Shareholders of Scientific Technologies Incorporated

     In our opinion, the consolidated financial statements listed in the index
     appearing under Item 8(a)(1) 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,
     1996 and 1995, and the results of their operations and their cash flows for
     each of the three years in the period then ended, in conformity with
     generally accepted accounting principles. These financial statements are
     the responsibility of the Company's management; our responsibility is to
     express an opinion on these financial statements based on our audits. We
     conducted our audits of these statements in accordance with generally
     accepted auditing standards which require that we plan and perform the
     audit to obtain reasonable assurance about whether the financial statements
     are free of material misstatement. An audit includes examining, on a test
     basis, evidence supporting the amounts and disclosures in the financial
     statements, 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 the opinion expressed above.



     PRICE WATERHOUSE LLP
     San Jose, California
     March 3, 1997

                                                                              24
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        ---------------------------------------------------------------
        FINANCIAL DISCLOSURE
        --------------------
        None.


                                   PART III
                                   --------

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 1996 Annual Meeting of Shareholders (the "Proxy
Statement").

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.

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.

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.

                                                                              25
<PAGE>
 
                                    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.   EXHIBITS AND EXHIBIT INDEX:

     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 -  1987 Employee Stock Purchase Plan is incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-8 dated May 13, 1988.

     Exhibit 4.2 -  1987 Stock Option Plan is incorporated by reference to the
                    Registrant's Registration Statement on Form S-8 dated May
                    13, 1988.

     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 May 31, 1996 to Bank Agreement dated
                    November 29, 1994 with Bank of The West.
                    
     Exhibit 10.4 - Lease agreement dated November 21, 1995 for 1,835 square
                    feet of space in Menlo Park California is incorporated by
                    reference to the Registrant's Form 10-KSB for the year ended
                    December 31, 1995, Exhibit 10.4.

     Exhibit 21.1 - Subsidiaries of the Registrant.

     Exhibit 23.1 - Consent of Independent Accountants.

     Exhibit 24.1 - Power of Attorney (included on page 27).

     Exhibit 27.0 - Financial Data Schedule.

     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 1996.

                                                                              26
<PAGE>
 
                                  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.

                                 SCIENTIFIC TECHNOLOGIES INCORPORATED


Dated: March 24, 1997            By /s/ Anthony R. Lazzara
       --------------              ---------------------------------
                                        Anthony R. Lazzara
                                        Chairman


                               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.

<TABLE>
<CAPTION>
 
      Signature                             Title                            Date
-------------------------   ------------------------------------------   --------------
<S>                         <C>                                          <C>

/s/ Anthony R. Lazzara      Chairman of the Board and                    March 24, 1997
-------------------------   Director                                     --------------
Anthony R. Lazzara                  
 
/s/ Joseph J. Lazzara       President, Chief Executive Officer,          March 24, 1997
-------------------------   Treasurer, Director (Principal               --------------
Joseph J. Lazzara           Executive and Financial Officer)
                                                            
/s/ James A. Lazzara        Vice President, Secretary and                March 24, 1997
-------------------------   Director                                     --------------
James A. Lazzara                     
 
/s/ James A. Ashford        Vice President and Director                  March 24, 1997
-------------------------                                                --------------
James A. Ashford                                       
 
/s/ Carl H. Frei            Director                                     March 24, 1997
-------------------------                                                --------------
Carl H. Frei                        
 
/s/ Bernard J. Ploshay      Director                                     March 24, 1997
-------------------------                                                --------------
Bernard J. Ploshay                   
 
/s/ Richard O. Faria        Vice President, Finance and Administration   March 24, 1997
-------------------------   (Principal Accounting Officer)               --------------
Richard O. Faria                                          

</TABLE>

                                                                              27
<PAGE>
 
                     SCIENTIFIC TECHNOLOGIES INCORPORATED
                     ------------------------------------
                                        
                                   EXHIBITS

                                      TO


                          ANNUAL REPORT ON FORM 10-K
                         YEAR ENDED DECEMBER 31, 1996

                                                                              28
<PAGE>
 
                         EXHIBITS - TABLE OF CONTENTS
                         ----------------------------
                                        
<TABLE>
<CAPTION>
 
                                                                   Page
                                                                   ----
<S>                                                                <C>
 
Exhibit 10.3 - Amendment dated May 31, 1996 to Bank Agreement
               dated November 29, 1994                               30
                                                                     --

Exhibit 21.1 - Subsidiaries of the Registrant                        33
                                                                     --

Exhibit 23.1 - Consent of Independent Accountants                    34
                                                                     --

Exhibit 24.1 - Power of Attorney (included on page 27)


Exhibit 27.0 - Financial Data Schedule                               35
                                                                     --
</TABLE>

                                                                              29