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

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FORM 10-K

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(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, 2004

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(Exact name of Registrant as Specified in its Charter)



|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 SystemIndicate by check mark 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
 ̈

Indicate by check mark if 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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
    Yes  
 ̈    No

The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing sales price of Common Stock on June 30, 2004 as reported by the
NASDAQ Market System, was approximately $6,534,066. 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 30,
2005 was 9,768,401 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy statement to be filed with the
Securities and Exchange Commission in connection with the Company's 2005 Annual
Annual Meeting of Shareholders ("the Proxy Statement") are incorporated by
reference in Part III of this Form 10-K.






SCIENTIFIC TECHNOLOGIES INCORPORATED
                        2004 ANNUAL REPORT ON FORM 10-K
                               INDEX

|Part I.        |                                                                                       | Page
|-------------- | ------------------------------------------------------------------------------------- | ----
|Item 1.        | Business                                                                              | 3   
|Item 2.        | Properties                                                                            | 10  
|Item 3.        | Legal Proceedings                                                                     | 10  
|Item 4.        | Submission of Matters to a Vote of Security Holders                                   | 11  
|Part II.       |                                                                                       |     
|Item 5.        | Market for the Registrant's Common Equity and Related Stockholder Matters             | 11  
|Item 6.        | Selected Financial Data                                                               | 12  
|Item 7.        | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13  
|Item 7a.       | Quantitative and Qualitative Disclosures About Market Risks                           | 26  
|Item 8.        | Financial Statements and Supplementary Data                                           | 26  
|Item 9.        | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 46  
|Item 9A.       | Controls and Procedures                                                               | 46  
|Part III.      |                                                                                       |     
|Item 10.       | Directors and Executive Officers of the Registrant                                    | 48  
|Item 11.       | Executive Compensation                                                                | 48  
|Item 12.       | Security Ownership of Certain Beneficial Owners and Management                        | 48  
|Item 13.       | Certain Relationships and Related Transactions                                        | 48  
|Item 14.       | Principal Accounting Fees and Services                                                | 48  
|Part IV.       |                                                                                       |     
|Item 15.       | Exhibits, Consolidated Financial Statement Schedules                                  | 48  
|Signatures     |                                                                                       | 50  
|Exhibits Index |                                                                                       | 51  

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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
forward-looking statements include, but are not limited to, statements regarding our research and
development expenditures in 2005; the relocation of our operations in Tulare, California: our
compliance with environmental protection laws; our plans to raise additional capital; the impact of
workplace safety issues, safety market growth and the prospects in the oil and gas, and water and
waste water markets. 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. You should also carefully consider 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. The two units maintain separate operating facilities,
engineering and support organizations, which help provide more customer-centralized sales, product
knowledge and application expertise directed at the unique needs of these focused markets. This
organizational 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.

Our corporate Internet address is www.sti.com

Our Products and Markets

1.Safety Products Group:Our leading product group, which accounted for the
majority of our sales in 2004, 2003 and 2002.

a. Safety Light Curtains., Our safety light curtains consist of a family
of optical guarding products, also called presence sensing devices, used to safeguard personnel in
manufacturing environments against injury caused by robots and automated machinery. We offer several
product variations, providing customers with a broad line of optical guarding solutions.

Safety light curtains consist of separate transmitter and receiver units. The
transmitter emits a "curtain" of infrared light beams in front of the hazard area. When one or more
of the beams are blocked, this is detected by the receiver and 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
surround multiple sides of a machine. Safety light curtains are available with different light beam
spacings, which make them suitable for many applications. The spacing of the infrared light beams,
and the optical design employed determine the resolution, or object detectability, of the safety
light curtain.

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.

Our safety light curtain offering includes the following products:

- The MiniSafe, designed for inclusion in systems offered by original equipment
manufacturers, or OEMs, and end user applications. Depending on the model selected, MiniSafe light
curtains are available in incremental sizes ranging from approximately 260 millimeters to 2,100
millimeters in coverage height. The operating distance, the distance between the transmitter and
receiver, is up to 20 meters. These products are offered in various configurations with many
features to meet a wide variety of machine guarding applications.
- The MicroSafe MC4700 series light curtain product features an ultra-compact
transmitter and receiver that offers protected heights from 100 millimeters to 1,800 millimeters.
Superior response time and excellent resolution, allow the MC4700 to be mounted closer to the danger
points of hazardous operation. The MC4700 includes features such as: individual beam indicators,
exact channel select, floating blanking, auxiliary outputs, two digit display diagnostic, 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 is a full featured, heavy duty product designed to meet
the safeguarding requirements for robust applications, such as automotive manufacturing.
- The PA4600 Series Perimeter Access Guard is a long range, multi-beam system
used for guarding the perimeters of robotic cells and large automated machinery. The PA4600 has an
operating range of up to 70 meters. The simple "two-box" design eliminates the need for a separate
controller, saving the customer installation time and expense. The PA4600 product corresponds to the
requirements of ANSI/RIA 15.06, a robot safeguarding standard used in the US, and other
international standards.
- The MP2100 Protective Light Curtain, designed to provide a reliable, low cost
guarding solution for equipment where the safety assessment indicates a low risk of injury. The
MP2100 was designed primarily for international markets, where this type of product has been used in
a variety of low risk applications.

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 Community. Products which pass the stringent European safety certifications carry the
CE test mark.

b. Mechanical Safety Interlocks and Safety Relays. 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
application of safety interlocks are complementary to our range of safety products. STI distributes
these products under the STI brand by private label arrangements with several suppliers. STI has
been distributing interlock switch products since 1993.

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.

Our UM Series mat and safety mat controller were tested and certified by an
independent test agency to an 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.

To complement the safety mats, STI also manufactures several safety mat
controllers, the MC3, MC4 and MC6. 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. The MC6 Safety Mat Controller offers enhanced diagnostics and is capable of providing up
to six individual mat zones. All 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,
comprised 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 measurethe
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.Firmware is included with the product for a
variety of scanning applications and may be simply 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 San Francisco-Oakland Bay Bridge, and toll roads in Pennsylvania,
Colorado, Florida, Maine, New Jersey and Kansas. International locations include China, France,
Belgium, Singapore and Brazil.

f. STI Machine Services Division. We acquired Dunn Sales, Inc. ("DSI"), a
provider of safety and machine services, in June 2001. In 2003, we renamed this subsidiary as STI
Machine Services Division ("MSD"). MSD is located in Anaheim, California, and provides safety
services such as: safeguarding equipment installations, machine safety assessments, and the design
and custom fabrication of guarding solutions. Furthermore, MSD specializes in machinery services
including the repair, relocation, sales, installation and service of fabricating machinery. MSD
serves customers in a variety of industries, including metal fabrication, aerospace, electronics,
building materials, automotive and food processing.

g. 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.

To cover this diversified industrial market, we market these products primarily
to end-users and original equipment manufacturers through more than 575 worldwide distributor
locations. STI Safety Product Group distributors are primarily in two categories, Automation Safety
Partners ("ASP") and Automation Safety Distributors ("ASD"). We created the ASP program to meet the
rising expectations of our customers and the demands required for STI to be a single source safety
solution provider. In order to become an ASP, an organization must commit to a number of
requirements, including an extensive training program for their STI product specialists, a
newsletter program, demonstration equipment and safety seminars for their local customers. A smaller
number of distributors that do not meet the requirements of the ASP program are classified as ASDs
and have a reduced discount structure for the purchase of STI products.

2. Automation Products Group:

a. Level and Flow Sensors. We manufacture and market a variety of
level sensing products to meet the diverse and demanding applications of our customers. To
complement our product offering, we market a variety of level and flow sensing products imported
from several manufacturers in Japan. The principal provider of these products is Nohken, a leading
level control manufacturer in Japan. We are the 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.

b. Non-contact Ultrasonic Sensors and Controllers. We produce over 75
types of ultrasonic sensors and controller systems as well as specialty 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; and 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.

c. Pressure Transducers, Digital Pressure Gauges, Displacement and Velocity
Transducers, and Pressure Comparators. These products are used in a variety of factory
automation, aerospace, medical, semiconductor, oil and gas markets and applications. During
2003, we consolidated the engineering, manufacturing, administration and sales operations of these
products into our facility in Logan Utah. A small assembly operation in Tulare, California was
relocated to Logan in the first quarter of 2005.

d. Data Acquisition and Communication equipment. Data Dolphin products are
data loggers serving APG's focused markets of oil and gas, water and waste water management. They
collect various measurement data, store it in memory and allow database retrieval through a wide
variety of wired and wireless communication systems including Ethernet and cellular systems.

e.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 market and sell these products directly to end customers or specialty
resellers.

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.

Our mission to provide tailored solutions for measurement applications is
reflected in the structure, operations, and channels to market of our Automation Products Group. A
traditional geography-based sales channel, utilizing independent representative sales organizations
was established in 2003, for this business unit. The current market focus includes oil and gas
exploration and production, aerospace industries, hydraulic equipment OEMs, water/waste-water
management and semiconductor manufacturing. 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.

3. Distribution of Third-Party Products

We also derive revenue from the distribution of products from third party
manufacturers, including revenues pursuant to our relationship with EJA Limited, a subsidiary of
Rockwell International and Nohken (See Business - Our Products and Markets - Automation Products
Group - Level and Flow Sensors), and others. In the event such arrangements are terminated or third
party products otherwise become unavailable, our results of operations could be adversely affected.

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.

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, 2004, 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 2004, 2003, and 2002, we spent $3,978,000, $4,355,000, and $4,653,000,
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 in 2005
to be consistent with 2004.

Patents and trademarks

We hold twenty two 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
eight US registered trademarks, including the use of its logo "STI". Scientific Technology,
Scientific Technologies, Datricon, STI, the STI logo, OptoSwitch, OptoData, OptoSafe and Fiberlens,
are registered trademarks of our parent company. Aegis, BeamSafe, DuoSafe, FlexSafe, FastScan,
SpectraData, PartScan, QuadSafe, MegaSafe, MicroSafe, MiniProtect, MiniSafe OptoFence, OptoShield,
TouchStart, and ValuScan are trademarks of the Company. This Annual Report on Form 10-K also refers
to trademarks and service marks of other companies and entities.

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.

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, Banner Engineering, Cutler Hammer, Danaher
Controls, Eaton Corporation, Honeywell, Keyence, Link Controls, Omron, Rockwell Automation, Sick
Optic-Electronic, Inc, Wika, Ashcroft, Celesco and MSI. Competitors of the control components power
monitoring and defense product lines include several of the above-mentioned firms and also Hi-G,
Logitek, SCI Systems, Inc., Technitrol, and Xentek. Certain of our suppliers, including
Rockwell/EJA, also compete with us. 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. We have international
sales offices in the United Kingdom, Japan, Singapore and China. We closed our European sales office
2004. Our products are also sold in foreign countries by distributors and independent sales
representatives. Foreign sales represented 13% of sales in 2004, 12% in 2003 and less than 10% of
sales in 2002. The Company's sales by geographic location of customers in 2004 were: North America -
$55,619,000, Europe - $779,000 and Asia - $2,027,000.

Customers

One customer, H.H Barnum, an independent distributor, accounted for 10%
of sales in 2004. No customer represented more than 10% of sales in 2003 or 2002. Aggregate sales to
both government agencies and government contractors represented less than 5% of sales in 2004, 2003
and 2002.

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, 2004, we employed approximately 352 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 and all of the following buildings are leased.
Our manufacturing operations, corporate headquarters, administrative, engineering and sales offices
are located in a 95,000 square foot facility in Fremont, California, a small portion is occupied by
our parent. The facility is owned by an affiliate of our parent.

The Automation Products Group (APG) is located in a 25,000 square foot building
in Logan, Utah. This facility is owned by an affiliate of our parent. APG also leases a 25,000
square foot facility in Tulare, California, of which 20% is currently utilized. The operations that
were located in the unused portion of this building were consolidated to Logan, Utah in 2003. The
remaining Tulare operations were relocated to Logan in 2005, as the current lease expired.

STI Machine Services is located in an 8,585 square foot facility in Anaheim,
California. This facility is owned by a current employee and previous owner of the Company.

We are currently assessing our needs for additional space for our Logan, Utah
operations, otherwise, we believe that our current facilities are suitable to meet our operating
needs.

See Note 12 of Notes to Consolidated Financial Statements for information
regarding lease commitments and Note 2 regarding related parties.

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



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.

On January 19, 2005, Scientific Technologies Incorporated agreed to the terms of
a settlement with Paul Davis Automation, Inc. one of our former manufacturer's representatives,
relating to a lawsuit filed by Paul Davis Automation in the United States District Court, Eastern
Division. In the lawsuit, Paul Davis Automation had alleged unpaid commission fees upon termination
of a contract between the parties. Pursuant to the terms of the settlement agreement, we made a cash
payment of approximately $600,000 to Paul Davis Automation, in complete and final settlement of all
claims. This payment was made on February 14, 2005.



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

None.

PART II



Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED 	SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Market Information

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

Price of Common Stock

The table below represents the quarterly high and low closing prices in the NASDAQ
National Market.



|2004                                            | High                           | Low                            | 2003                                            | High                           | Low                           
|----------------------------------------------- | ------------------------------ | ------------------------------ | ----------------------------------------------- | ------------------------------ | ------------------------------
|1st Quarter
2nd Quarter
3rd Quarter
4th Quarter | $ 6.40
   6.50
   5.75
   5.50 | $ 4.62
   5.14
   4.91
   4.06 | 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter | $ 5.99
   5.98
   5.15
   5.00 | $ 3.36
   3.83
   4.05
   4.01

The closing sales price of our Common Stock on March 16, 2005 was $4.32 per share.

Holders

There were 765 shareholders of record on March 16, 2005.

Dividends

No dividends were paid in 2002, 2003 or 2004.

Equity Compensation Plan

Please see Item 12 of this Annual Report on Form 10-K for disclosure
relating to our equity compensation plans. Such information is incorporated by reference to our 2004
proxy statement.



Item 6. SELECTED FINANCIAL DATA

i) FIVE YEAR CONSOLIDATED FINANCIAL DATA

| |  | Year Ended December 31, | 
| |  | ----------------------- | 

(In thousands except per share data)

|Statement of operations data           | 2004    | 2003         | 2002    | 2001    | 2000   
|-------------------------------------- | ------- | ------------ | ------- | ------- | -------
|Net sales                              | $58,425 | $55,494      | $51,207 | $49,053 | $60,146
|Income (loss) from operations          | (7,858) | 497          | 744     | (2,474) | 8,745  
|Net income (loss)                      | (5,118) | 428          | 472     | (1,425) | 5,631  
|Basic income (loss) per common share   | $ (.53) | $ .04        | $ .05   | $ (.15) | $ .58  
|Diluted income (loss) per common share | $ (.53) | $ .04        | $ .05   | $ (.15) | $ .58  
|                                       |         |              |         |         |        
|                                       |         | December 31, |        
|Balance sheet data                     |         |              |         |         |        
|Cash and cash equivalents              | $ 3,457 | $ 2,312      | $ 2,620 | $ 1,033 | $ 4,048
|Total assets                           | 33,874  | 37,680       | 37,892  | 34,200  | 37,028 
|Shareholders' equity                   | 25,371  | 30,289       | 29,750  | 29,234  | 31,591 
|Dividends declared per share           | --      | --           | --      | $ .11   | $ .20  

ii) QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

|2004                                       | FirstQuarter | SecondQuarter | *Third
Quarter | *FourthQuarter
|------------------------------------------ | ------------ | ------------- | -------------- | --------------
|Sales                                      | $14,634      | $15,637       | $14,604        | $13,550       
|Gross profit                               | 6,068        | 6,433         | 4,701          | 645           
|Net income (loss)                          | 324          | 583           | (1,193)        | (4,832)       
|Basic net income (loss) per common share   | $ .03        | $ .06         | $ (.12)        | $ (.50)       
|Diluted net income (loss) per common share | $ .03        | $ .06         | $ (.12)        | $ (.50)       
|                                           |              |               |                |               
|2003                                       | FirstQuarter | SecondQuarter | *Third
Quarter | *FourthQuarter
|Sales                                      | $12,959      | $14,273       | $14,001        | $14,260       
|Gross profit                               | 5,546        | 6,146         | 5,282          | 6,058         
|Net income (loss)                          | 90           | 208           | (246)          | 376           
|Basic net income (loss) per common share   | $ .01        | $ .02         | $ (.03)        | $ .04         
|Diluted net income (loss) per common share | $ .01        | $ .02         | $ (.03)        | $ .04         

* During the third and fourth quarters of 2005, we recorded intangible impairment charges of $2.0
million and $4.8 million. (See Note 4 of Notes to Consolidated Financial Statements of this report
on Form 10-K)



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

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. This discussion contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 31E
of the Securities Exchange Act of 1934 that are based on our management's beliefs and assumptions
and on information currently available to our management. Forward-looking statements include, but
are not limited to statements regarding:

- Future results of operations, including statements regarding sales mix, cost
of sales, investment in research and development activities, promotion of our products, trends in
our operating expenses and provision for income taxes
- Business strategies, including expansion into new products, categories or
countries:
- Financing plans, including the adequacy of financial resources to meet future
needs;
- Industry environment, including relationships with significant customers and
suppliers;
- The impact on our business and financial results of past and future
acquisitions

We frequently identify our forward-looking statements by the use of words such as
"may," "will," "should," " potential," "continue," " expects," "anticipates," "intends," "plans," "
believes," and "estimates"

Forward-looking statements involve many risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in the forward-looking statements for a
number of reasons, including those appearing under the caption "Factors That May Affect Future
Results" and elsewhere in this Annual Report on Form 10-K. Except as required by law we undertake no
obligation to update or revise any forward-looking statements after the date of this report.

Critical Accounting Policies

Revenue Recognition

The Company has product and services sales.
During the years ended December 31, 2004 and 2003, product and services sales represented 92% and 8%
of sales, respectively. The Company has sales to OEM's and distributors. During the years ended
December 31, 2004 and 2003, $35.98 million, or 61% of sales

Revenue from product sales to OEM's and distributors is recognized upon shipment
when shipped FOB our plant or upon receipt by the customer when shipped FOB destination, if a signed
purchase order exists, the price is fixed or determinable, collection of the resulting receivable is
considered reasonably assured 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 post contract customer support.

Our agreements with our distributors include certain product rotation, price
protection, and warranty rights. All distributors have the right to rotate slow moving products four
times each fiscal year. The maximum dollar value of inventory eligible for rotation is equal to
eight percent of our products purchased by the distributor during the previous fiscal year. In order
to take advantage of their product rotation rights, the distributors must order and take delivery of
additional products equal to at least the dollar value of the products that they want to rotate.
Reserves for the right of return and restocking are established based on the requirements of
Statement of Financial Accounting Standards ("SFAS") 48, Revenue Recognition when Right of Return
Exists because we have visibility into our distributor's inventory and have sufficient history
to estimate returns. We record a reserve based on historical trend. Stock rotation and returns
estimates are recorded as reductions of sales and cost of sales.

Each distributor is also allowed certain rebates and price protection rights. If
and when we reduce or plan to reduce the price of any of our products and the distributor is holding
any of the affected products in inventory, we will credit the distributor the difference in price
when it places its next order with us. We record an allowance for price protection reducing our net
sales and increasing our accrued liabilities based on specific terms and historical trend. Price
protection estimates are recorded as reductions of sales and warranty estimates are recorded against
cost of sales.

The company provides a warranty to its customers for a period of 12 to 18 months.
Upon revenue recognition, we provide for the estimated costs that may be incurred for product
warranties. We estimate sales returns and warranty costs based on historical experience and the best
information we have at the time we report our financial statements. Actual results could differ from
these estimates. Warranty expenses are recorded against cost of sales.

Installation and engineering service revenue is recognized when services are
rendered, or when an identifiable portion of the contract is completed, no significant post-delivery
obligations exist and collection of the resulting receivable is considered reasonably assured.
Service revenue was $4.4 million and $4.3 million for the years ended December 31, 2004 and 2003,
respectively.

During the years ended December 31, 2004 and 2003, $36.0 million or 61% of sales
and $34.1 million or 62% of sales were to distributors, respectively.

Allowance for Doubtful Accounts

We maintain allowances for estimated losses from the inability of our
customers to make required payments. 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. An account is written off or written down to its net realizable value, when we determine
that and it is in bankruptcy, liquidation or cannot be located or the cost of collection exceeds the
realizable value of the account.

Inventory Valuation

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 may write-down excess and obsolete inventory based primarily
on our historical consumption and our estimated forecast of product demand and production
requirements. Demand for our products can fluctuate significantly. In addition, our industry is
characterized by technological change, new product development, and product obsolescence that could
result in an increase in the amount of obsolete inventory quantities on hand. Our estimates of
future product demand may differ from actual results, in which case we may adjust 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 reduced value 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 will not recognize such additional
operating income until 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.

Valuation of Goodwill and Other Long-Lived Assets

We review the recoverability of our long-lived assets, such as fixed
assets, goodwill, intangible assets and investments, when events or changes in circumstances
indicate that the carrying amount of the asset or asset group may not be recoverable. The assessment
of possible impairment is based on our ability to recover the carrying value of the asset or asset
group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If these cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between the estimated fair value and carrying
value. The measurement of impairment requires management to estimate future cash flows and the fair
value of long-termed assets. In addition, we review the valuation of goodwill at least annually.

During 2004, we reviewed the financial forecasts and 2005 budgets for
MSD, Lundahl Instruments and PSI-Tronix. Due to reduced revenue and margin levels, we determined
that approximately $3.4 million of the book value of the MSD intangibles was not recoverable and
recorded an impairment charge for this amount to reduce the MSD intangibles to their fair value.
Based on a review of the expected cash flow versus the current book value of the assets related to
the Lundahl acquisition, we determined that an impairment charge for the Lundahl reporting unit was
not necessary. Based on our review of the cash flows related to the PSI-Tronix acquisition, we
determined that a significant portion of these intangible assets was not recoverable and determined
that an impairment charge of $3.4 million was required. We believe that while the technology,
customer lists, and product lines still have value, the prolonged downturn in the semiconductor
market for our products made it unlikely that we would recover the book value of the assets.

Results of Operations

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 are organized into two product groups, Safety Products and Automation
Products, within two business segments. The two units maintain separate operating facilities,
engineering and support organizations, which help provide more customer-centralized sales, product
knowledge and application expertise directed at the unique needs of these focused markets. This
organizational 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.

The Safety Products Group is influenced by separate, but related market forces:
the demand for increased factory automation and the need for workplace safety. The market pressures
of workplace safety include financial issues, such as workers' compensation and product liability
insurance expenses as well as the safety regulatory forces of OSHA, local health and safety codes
and international safety standards experienced by global customers. During 2004, we experience a
positive influence by these market forces, as the safety market experienced overall growth. However,
we have also experienced an increased number of companies entering the machine safety market as
well, making for a more competitive market environment.

Our Automation Products Group provides tailored measurement, instrumentation and
sensing solutions for a range of industrial markets. With the increasing price of oil experienced
during the past several years, and the prospects for continued oil demand strong, the oil and gas
markets, specifically the exploration and production sector, has become a primary market for APG
during this past year. The Group is also focused on the water and wastewater market, with its
maturing infrastructure as a sector that may create future opportunities for our pressure, level and
instrumentation products. However, the semiconductor equipment sector has declined further this past
year as a market for our pressure sensors.

Sales

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, 2004, 2003 and 2002 were (in thousands):



|        | 2004              | %       | 2003              | %       | 2002              | %      
|------- | ----------------- | ------- | ----------------- | ------- | ----------------- | -------
|SPG
APG | $ 49,041
$  9,384 | 84%
16% | $ 46,708
$  8,786 | 84%
16% | $ 43,493
$  7,714 | 85%
15%

Sales in 2004 increased 5% to $58.4 million from $55.5 million in 2003. Sales by
SPG increased $2.4 million or 5% from 2003 to 2004. This was primarily the result of increased unit
sales at the Optical Sensor Division. Shipments of safety light curtains, interlocks and safety mats
grew by 7%, 10%, and 19%, respectively, offsetting a 27% decline in sales of vehicle scanners.
During 2004, APG sales increased 7% to $9.4 million, primarily due to increased sales of level
sensing products that offset declines of 4% and 5% in sales of ultrasonic and pressure products
respectively.

Sales in 2003 increased 8% to $55.5 million from $51.2 million in 2002. Sales by
SPG increased $3.2 million or 7% from 2002 to 2003, as a result of increases of 6% in shipments of
safety light curtains, 11% in shipments of profiling scanner products, 4% in interlock and relay
shipments and 8% in safety mat sales. In addition, SPG's Machine Services Division ("MSD") recorded
a 30% increase in revenue. Sales by APG grew $1.1 million or 14% due to increases of 27%, 8% and 5%
in shipments of level products, control components and pressure products, respectively.

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



|                                     | 2004 | 2003 | 2002
|------------------------------------ | ---- | ---- | ----
|Sales                                | 100% | 100% | 100%
|Gross margin                         | 31   | 42   | 43  
|Operating expenses:                  |      |      |     
|Selling, general and administrative  | 36   | 32   | 31  
|Research and development             | 7    | 8    | 9   
|Amortization of intangibles          | 1    | 1    | 1   
|Total operating expenses             | 44   | 41   | 41  
|Income (loss) from operations        | (13) | 1    | 2   
|Interest and other income, net       | --   | --   | --  
|Income (loss) before taxes           | (13) | 1    | 2   
|Provision (benefit) for income taxes | (4)  | --   | 1   
|Net income (loss)                    | (9)% | 1%   | 1%  

Gross profit

2004 = $17.8 million
 2003 = $23.0 million
 2002 = $22.2 million
 Decrease in 2004 = 23%
 Increase in 2003 = 4%

Our gross profit decreased 23% to $17.8 million in 2004 from $23.0 million in
2003. This decrease reflected a decline in our gross margin to 31% of sales in 2004 compared to 42%
of sales in 2003. This was primarily the result of impairment charges of $4.2 million relating to
technology and product lines associated with our acquisitions of MSD and PSI-Tronix. In addition,
both SPG and APG experienced a shift in the mix of products sold to those bearing a higher relative
cost and were impacted by changes made to our inventory reserves.

Our gross profit in 2003 increased 4% over 2002, due to the increased sales. This
trend was reflected in the results recorded by both SPG and APG. Our gross margin was 42% of sales
in 2003 compared to 43% of sales in 2002, as a result of a shift in the mix of products sold to
those bearing a higher relative cost.

Selling, general and administrative expenses

2004 = $21.1 million

2003 = $17.5 million
              2002 = $16.1 million
              Increase in 2004 = 17%
              Increase in 2003 = 8%

Selling, general and administrative expenses increased by $3.6 million or 21% in
2004 compared to 2003. The increase was primarily due to impairment charges of $2.6 million relating
to customer lists and trade names associated with our acquisitions of MSD and PSI-Tronix and a
$600,000 settlement of a commission lawsuit with a former sales representative organization Selling,
general and administrative expenses were 32% of sales in 2004 and 2003 compared to 36% of sales in
2002.

Selling general and administrative expenses increased $1.4 million or 9% in 2003
compared to 2002. This was primarily the result of higher marketing and selling costs associated
with the expanded revenue. In addition, APG recorded $300,000 in expenses relating to the
consolidation of the bulk of our Tulare, California operations into our Logan, Utah facility. This
consolidation was essentially completed in 2004, with the exception of one small operation, which we
expect to relocate in 2005.

Research and development expenses

2004 = $4.0 million
              2003 = $4.4 million
              2002 = $4.7 million
              Decrease in 2004 = 9%
              Decrease in 2003 = 6%

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.

As a result of the lowering of our reliance on outside contractors by
approximately $101,000, a reduction of personnel costs of approximately $146,000 and lower material
costs of approximately $138,000, we were able to reduce our research and development expenditures by
9% from 2003 to 2004.

As a result of the cost reduction measures introduced in 2001, and a lowering
of our reliance on outside contractors, we were able to reduce our research and development
expenditures by 6% from 2002 to 2003.

In 2004, 2003 and 2002, 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 remain constant in 2005. To date, all product
development costs have been expensed as incurred.

Income Taxes

As a result of the losses sustained in 2004, we recorded an income tax
benefit of 33% of the loss for the year. Our effective income tax rate was 38% in 2003 and 2002. We
expect that our effective tax rate provision for 2005 will be reasonably consistent with 2004. See
Notes 1 and 5 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

During 2004, cash flows from operating activities amounted to $1.8
million. These cash flows were provided by depreciation and amortization, intangible impairment
charges and increased accrued expenses, and were used to offset increased inventories, receivable
from our parent and inventories, to purchase fixed assets and to reduce our capital lease
obligation. Working capital amounted to $19.2 million at December 31, 2004, a 10% increase from
$17.5 million at December 31, 2003. Our bank line of credit of $6.1 million was renewed in 2004 and
extended to June 30, 2005. We have an option to convert up to $1.0 million of the credit line into a
five-year term note. Secured by qualified receivables, fixed assets and inventories, borrowings
under this credit line bear interest at the bank's prime rate. At December 31, 2004, none of the
line of credit had been utilized.

In anticipation of new product introductions, our
inventory increased 16% to $10.8 million, causing a corresponding increase in accounts payable. The
payment of the $600,000 commission lawsuit settlement was made in the first quarter of 2005 This
resulted an increase in accrued expenses in 2004.

We made certain capital expenditures during 2004, primarily for
production, quality assurance, research and development equipment, information systems and software.

Consistent with our historical operations and our current plans for growth, we
plan to make additional capital expenditures during 2005, primarily for production, quality
assurance and research and development equipment. While we had no formal commitments at December 31,
2004, it is anticipated that capital expenditures in 2005 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 2005. While we continue
to evaluate financing alternatives from time to time, we have no current plans to raise additional
outside capital. At December 31, 2004, future minimum payments under our leases were as follows.

|Payments Due by Period     
|---------------------------
|                           
|Operating Lease Obligations
|Capital Lease Obligations  

Relationship with Parent

Intercompany transactions between us and our parent company include
charges to our parent for management services provided by us, dividend payments to our parent, if
any, 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, but includes our intercompany tax
sharing arrangement.

Factors that May Affect Future Results

Because of the variety of factors and uncertainties affecting our
operating results, past financial performance and historical 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, which may cause the trading price of our
common stock to decline. These fluctuations are caused by a number of factors described below and
elsewhere in this section, including:

- the level and timing of customer orders;
- fluctuations in demand for complementary third party products with which our
products are sold;
- changes in the mix of our products sold;
- timing of operating expenditures;
- timing of new product introductions;
- fluctuations in prices charged by our suppliers;
- seasonality of sales within our core markets;
- volatility in supply and demand affecting industrial control products
generally, such as increases in the supply of competitive products and declines in selling prices;
and
- economic conditions in the U.S. and abroad.

Our sales are dependent on independent distributors.

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 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.

The industrial manufacturing equipment industry, and the markets of customers
that use our products, are highly cyclical.

Our continued success depends in large part on the vibrancy of various
industries that use our products.  We operate in a cyclical industry that has been subject to
significant economic downturns often in connection with, or in anticipation of, declines in general
economic conditions.  These types of downturns have occurred numerous times in the past, most
recently in 2001.  During such downturns, we experience reduced product demand, erosion of
average selling prices and gross margins. Our business could be harmed in the future by
additional cyclical downturns in the industrial manufacturing equipment industry or by slower growth
by any of the markets served by our customers' products.

The markets in which we participate are intensely competitive.

Our core markets are intensely competitive. Many competitors have
substantially greater name recognition and technical, marketing, distribution and financial
resources than we have, and we may not be able to compete successfully with them in the future.
Competitive pressures could also reduce market acceptance of our products and result in price
reductions, decreases in revenues and increases in expenses. Competition in our core markets is
based primarily on performance, quality, price and availability. If we do not compete successfully
on these and other factors, our business, financial condition and operating results would be
harmed.

Average sales prices of our products generally decline over time.

Average sales prices in the industrial manufacturing equipment market tend to
decline over time as a result of competition, technological advances, manufacturing efficiencies and
other factors.  Declines in average sales prices for our products, if not offset by reductions
in the cost of producing those products or by sales of new products with higher gross margins, would
decrease our gross margins, could cause a negative adjustment to the value of our inventories and
could materially and adversely affect our operating results.

We do not have long term contracts with our customers.

Our customers generally purchase our products on a purchase-order basis and
do not have long-term contracts with us. As a result, we cannot be certain that our customers will
continue to order products from us at the same or higher levels as in the past. The loss of one or
more significant customers, or a decline in overall orders from our customers, would harm our
business and operating results.

In addition, the lack of long-term sales contracts and significant order backlog
makes it difficult for us to forecast future sales with certainty or to accurately forecast
component and product requirements. These factors expose us to a number of risks:

- if we overestimate our requirements we may be obligated to purchase more
components or third-party products than are required;
- if we underestimate our requirements, our suppliers may have an inadequate
product or product component inventory, which could interrupt manufacturing of our products and
result in delays in shipments and revenues;
- we may also experience shortages of product components from time to time,
which also could delay the manufacturing of our products; and
- over or under production can lead to higher expenses, lower than anticipated
revenues, and reduced margins.

We may be unable to increase our international sales.

We are attempting to develop, integrate and expand our international
distribution networks in an effort to increase international sales of our products. We may not be
successful in developing or expanding our international distribution network or in marketing and
selling products in foreign markets. If the revenues generated by our international sales are not
adequate to recover the expense of establishing, expanding, and maintaining an international
distribution network, our business, financial condition, and results of operations could be
materially adversely affected. If international sales become a more significant component of net
sales, our business would be more vulnerable to risks inherent in doing business internationally,
including:

- difficulties in managing foreign resellers;
- longer payment cycles and problems in collecting accounts receivable;
- the effects of seasonal customer demand;
- changes in regulatory requirements;
- difficulties in meeting the requirements of different international product
regulations;
- risks relating to intellectual property rights;
- increased expenses due to efforts to localize our product offerings;
- export restrictions, tariffs and other trade barriers;
- fluctuations in currency exchange rates; and
- potentially adverse tax consequences and political instability.

The existence or occurrence of any one of these factors could have a material
adverse effect on our business, financial condition, and results of operations.

We depend upon suppliers and outsourced manufacturers, several of which
are located outside of the U.S. Disruption of our access to these supplies and services, or problems
with the quality of supplies or services, could prevent us from filling customer orders and harm our
business.

The principal components of our products are purchased
from outside vendors. We generally buy components under purchase orders, do not have long-term
agreements with our suppliers, and we generally do not maintain large inventories of components. Any
termination of, or significant disruption of, our relationships with the suppliers of our product
components may prevent us from filling customer orders in a timely manner which could result in
customer dissatisfaction and lost sales.

For some of our products, including
private label products, we rely on third party manufacturers for subassembly of products and for
final assembly, quality assurance, and testing of some of our products. These outsourcing
arrangements and any future outsourcing arrangements involve numerous risks, including reduced
control over product quality, delivery schedules, manufacturing yields, and costs.

For certain products that we private label, we are dependent on third party suppliers.

We rely on third party suppliers for several finished products that we sell
under the STI brand name. If we do not manage the relationship with the supplier properly or if the
supplier stops providing us with these products, we may not be able to find replacement products in
a timely manner or at all. This may prevent us from fulfilling customer orders and have an adverse
impact on our financial results.

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.

Product errors or defects could result in product recalls and claims against
us.

We manufacture machine safety and automation sensing products, many of which are
used in manufacturing, construction and other industrial environments. Errors or defects in our
products could contribute to injuries, and could subject us to product liability claims. Any such
claims would divert management's attention from our core business, would be expensive to defend, and
could result in sizeable damage awards against us. Our existing product liability insurance coverage
may be inadequate to protect us from any liabilities we might incur, and we may not be able to
maintain this insurance or do so at a reasonable cost or on reasonable terms. Any product liability
claim brought against us, with or without merit, could also increase our product liability insurance
rates or prevent us from securing any coverage in the future. If a product liability claim or series
of claims is brought against us for uninsured liabilities or is in excess of our insurance coverage,
our business would suffer. In addition, such claims may require us to recall some of our products,
which could result in significant costs to us.

Fluctuations in currency exchange rates would have an adverse effect on our
operating results and financial condition.

While substantially all of our sales are denominated in U.S. dollars, we
purchase material for resale denominated in British pounds and Euros, and, in the future, we may
transact business in other foreign currencies. Increases in value of the U.S. dollar relative to
foreign currencies have the effect of increasing the prices of our products in foreign markets and,
as a result, could harm sales of our products in those markets. Conversely, declines in value of the
U.S. dollar relative to foreign currencies, as we have recently experienced, has the effect of
increasing our operating expenses by increasing the cost of materials we purchase for resale in
British pounds and Euros. As a result, future volatility in currency exchange rates would have an
adverse effect on our operating results.

An adverse evaluation of our internal controls over financial reporting could
damage public perception of our financial statements and cause our stock price to decline.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404),
beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, we will
be required to furnish a report by our management on our internal control over financial reporting.
The report must contain a statement as to whether or not our internal controls over financial
reporting are effective. In addition, our independent auditors must attest to and report on
management's assessment of such internal controls.

We have begun to expend significant resources to perform the system and process
documentation and evaluation needed to comply with Section 404. However, if we and our auditors are
unable to adequately test our internal controls, or if during this process we identify one or more
significant deficiencies or material weaknesses in our internal controls over financial reporting
which we are unable to remedy prior to December 31, 2006, we may be unable to assert that our
internal controls over financial reporting are effective or our auditors may be unable to attest
that our management's report is fairly stated. In such case, we could lose investor confidence in
the accuracy and completeness of our financial reports, which could have an adverse effect on our
stock price.

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

We rely on a combination of patent, trademark, 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. Also, competitors may
develop their own intellectual property or technologies, obtain their own patents, or challenge the
validity of, or be able to design around, our patents. 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.

We may initiate claims or litigation against other third parties for infringement
of proprietary rights or to establish the validity of proprietary rights. Similarly, our competitors
may initiate claims or litigation against us alleging infringement of their proprietary rights or
improper use of their intellectual property. Litigation relating to intellectual property to which
we may become a party is subject to numerous risks and uncertainties, including the risk of
counterclaims or other litigation against us, and we may not be successful in any such
litigation.

Our ability to develop and market our products is dependent upon our retention
of certain executive officers and other key personnel.

We are greatly dependent on the ability to retain key
management and technical personnel, and our future success is highly dependent upon the personal
efforts of our management and technical personnel. The loss of services of any one of them could
have a material adverse effect on our business, financial condition, and results of operations. Our
success will also be dependent in part upon our ability to attract, retain, and motivate highly
skilled employees. We may need to offer additional compensation or incentives to attract and retain
these and other employees.

We may need to raise additional capital

It is possible we may need to raise additional funds in the future, and this
additional financing may not be available to us in favorable terms, if at all. We may also require
additional capital to acquire or invest in complementary businesses or products or obtain the right
to use complementary technologies. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of our common stock. If we issue debt
securities to raise funds, we may incur significant interest expense, which would harm our
profitability. The issuance of debt securities may also require us to agree to various restrictions
typical of debt securities, including limitations on further borrowing and our right to pay
dividends

Our operations have been and may continue to be negatively impacted by
uncertain global economic and political conditions

Our business may suffer as a result of general economic and political
conditions in the U.S. and abroad. In 2003 and 2002, there was a rapid and severe downturn in the
U.S. market and global economy. This downturn has been compounded by recent terrorist activity, such
as the attacks in the U.S. on September 11, 2001, and the recent military activity in Afghanistan,
Iraq and the Middle East. Additional terrorist acts or acts of war could cause damage or disruption
to us or to our suppliers and our customers. Fears of global recession, war, and terrorism may
continue to have seriously detrimental effects on the U.S. and global economies. Such conditions
could further dampen consumer confidence and cause our customers to slow or cease spending on our
products. If these events continue, our operations may be negatively impacted.

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.

Our parent company has voting control over us.

Approximately eighty-six percent (86%) of our capital stock is currently held
by our parent corporation, Scientific Technology Incorporated, a California corporation. As a
result, our parent has control over matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or similar transactions, even if other
shareholders disagree. This control, along with provisions of Oregon law affecting acquisitions and
business combinations, may delay, deter or prevent a third party from acquiring or merging with us
and prevent shareholders from realizing a premium price for their shares associated with an
acquisition. This voting control and provisions of Oregon law may also have a negative effect on the
market price of our common stock.



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.

While the majority of our sales are in US dollars, there are some sales in
foreign currency. There is minimal foreign currency exchange risk.



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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



|                                                                                                     | Page
|---------------------------------------------------------------------------------------------------- | ----
|(1) Financial Statements                                                                             |     
|Report of Registered Public Accounting Firm - BDO Seidman, LLP                                       | 26  
|Report of Registered Public Accounting Firm - PricewaterhouseCoopers, LLP                            | 27  
|Consolidated Balance Sheets - December 31, 2004 and 2003                                             | 28  
|Consolidated Statement of Operations - Years ended
  
    December 31, 2004, 2003 and 2002           | 29  
|Consolidated Statement of Cash Flows - Years ended
  
    December 31, 2004, 2003 and 2002           | 30  
|Consolidated Statement of Stockholders' Equity - Years
  
    ended December 31, 2004, 2003 and 2002 | 31  
|Notes to Consolidated Financial Statements                                                           | 32  

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 Registered Public Accounting Firm

To the Board of Directors and Shareholders
   Scientific Technologies Incorporated

We have audited the accompanying consolidated balance sheet of Scientific
Technologies Incorporated as of December 31, 2004 and the related statements of operations,
shareholders' equity and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the

effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Scientific Technologies Incorporated (a
subsidiary of Scientific Technology Incorporated) and their subsidiaries at December 31, 2004, and
the results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.







BDO Seidman, LLP

San Francisco, California
March 4, 2005, except for Note 7 which is as of March 23, 2005.

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2003, and the results of
their operations and their cash flows for each of the two years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United States of America.
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 the standards of the Public Company Accounting Oversight Board
(United States), 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 our opinion.





PricewaterhouseCoopers LLP

San Jose, California
  March 15, 2004

---





Scientific Technologies Incorporated

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

`December 31,
                                                          --------------------
                                                            2004       2003
                                                          ---------  ---------
Assets
-----------
Current assets:
    Cash and cash equivalents........................... $   3,457  $   2,312
    Accounts receivable, net of allowance of $331
          and $503......................................     8,072      8,139
    Receivable from Parent..............................       941        838
    Inventories.........................................    10,796      9,281
    Deferred income taxes...............................     3,826      2,015
    Other assets........................................       394      1,034
                                                          ---------  ---------
          Total current assets..........................    27,486     23,619

Property and equipment, net.............................     3,470      3,740
Other non-current assets................................       605         --
Goodwill................................................       216      1,500
Other intangible assets, net............................     2,097      8,821
                                                          ---------  ---------
          Total assets.................................. $  33,874  $  37,680
                                                          =========  =========

Liabilities and Shareholders' Equity
--------------------------------------
Current liabilities
    Bank overdrafts..................................... $     517  $      --
    Accounts payable....................................     3,246      2,758
    Accrued expenses....................................     2,249      1,503
    Accrued compensation................................     2,209      1,764
    Current portion of capital lease with Parent........        68         68
                                                          ---------  ---------
          Total current liabilities.....................     8,289      6,093

Capital lease with Parent...............................        96        164
Deferred income taxes ..................................       118      1,134
                                                          ---------  ---------
          Total liabilities.............................     8,503      7,391

Commitments and contingencies (Note 12)

Shareholders' equity
    Common stock; $.001 par value; 100,000
       shares authorized; shares issued and
       outstanding - 9,764 and 9,711....................        10         10
    Capital in excess of par value......................     5,992      5,792
    Retained earnings...................................    19,369     24,487
                                                          ---------  ---------
          Total shareholders' equity....................    25,371     30,289
                                                          ---------  ---------
          Total liabilities and shareholders' equity.... $  33,874  $  37,680
                                                          =========  =========`

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,
                                                     ----------------------------
                                                       2004      2003      2002
                                                     --------  --------  --------
Sales.............................................. $ 58,425  $ 55,494  $ 51,207
Cost of goods sold.................................   40,578    32,462    29,000
                                                     --------  --------  --------
  Gross profit.....................................   17,847    23,032    22,207
                                                     --------  --------  --------

Operating expenses:
  Selling, general and administrative..............   21,116    17,504    16,110
  Research and development.........................    3,978     4,355     4,653
  Amortization of acquired intangibles.............      611       676       700
                                                     --------  --------  --------
   Total operating expenses........................   25,705    22,535    21,463
                                                     --------  --------  --------
Income (loss) from operations......................   (7,858)      497       744

Interest and other income, net.....................      216       193        17
                                                     --------  --------  --------

Income (loss) before income taxes..................   (7,642)      690       761
Provision (benefit) for income taxes...............   (2,524)      262       289
                                                     --------  --------  --------

Net income (loss).................................. $ (5,118) $    428  $    472
                                                     ========  ========  ========

Basic net income (loss) per share.................. $  (0.53) $   0.04  $   0.05
                                                     ========  ========  ========

Diluted net income (loss) per share................ $  (0.52) $   0.04  $   0.05
                                                     ========  ========  ========

Weighted average shares used to compute
    basic net income (loss) per share..............    9,741     9,703     9,683
                                                     ========  ========  ========

Weighted average shares used to compute
    diluted net income (loss) per share............    9,798     9,734     9,698
                                                     ========  ========  ========`

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,
                                                        -------------------------
                                                         2004     2003     2002
                                                        -------  -------  -------
Cash flows from operating activities:
  Net income (loss)................................... $(5,118) $   428  $   472
  Adjustments to reconcile net income (loss) to
    cash provided by operating activities:
    Provision for doubtful accounts...................    (215)      80      409
    Depreciation and amortization.....................   2,615    2,692    2,632
    Deferred income taxes.............................  (2,827)    (565)    (167)
    Impairment of intangible assets...................   6,816       --       --
    Loss on sale of property and equipment............      15       --       --
    Warranty reserve..................................     234      163      122
    Changes in assets and liabilities:
       Accounts receivable, net.......................     282     (583)  (1,591)
       Receivable from Parent.........................    (103)    (454)    (384)
       Inventories....................................  (1,515)    (562)     406
       Other assets...................................      35     (199)    (254)
       Accounts payable...............................     488     (184)   1,056
       Accrued expenses...............................   1,474      268       65
                                                        -------  -------  -------
Cash flows provided by operating activities...........   2,181    1,084    2,766
                                                        -------  -------  -------
Cash flows from investing activities:
   Purchases of property  and equipment...............  (1,197)  (1,435)  (1,223)
   Proceeds from sale of property  and equipment......      29       --       --
                                                        -------  -------  -------
Cash flows used in investing activities...............  (1,168)  (1,435)  (1,223)
                                                        -------  -------  -------

Cash flows from financing activities:
   Issuance of common stock, net......................     200      111       44
   Long-term debt.....................................     (68)     (68)      --
                                                        -------  -------  -------
Cash flows provided by (used in) financing activities.     132       43       44
                                                        -------  -------  -------
Change in cash and cash equivalents...................   1,145     (308)   1,587
Cash and cash equivalents at beginning of year........   2,312    2,620    1,033
                                                        -------  -------  -------
Cash and cash equivalents at end of year.............. $ 3,457  $ 2,312  $ 2,620
                                                        =======  =======  =======

Supplemental disclosure of cash flow information:
   Cash paid to (received from) Parent for
      income taxes.................................... $   728  $   262  $   289
                                                        =======  =======  =======

Supplemental disclosure of non-cash activities:
   Capital lease with Parent.......................... $   164  $   232  $   300
                                                        =======  =======  =======

   Deferred tax liability related to acquisition of
      Dunn Sales...................................... $    --  $    --  $ 1,500
                                                        =======  =======  =======`

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

---



Scientific Technologies Incorporated

              Consolidated Statement of Shareholders' Equity
(In thousands)

`Common Stock
                                ---------------------------
                                                   Capital
                                                  in Excess
                                           Par     of Par    Retained
                                Shares    Value     Value    Earnings    Total
                                -------  -------  ---------  ---------  --------
Balances December 31, 2001.....  9,676  $    10  $   5,637  $  23,587  $ 29,234
   Issuance of common stock....     22       --         69         --        69
   Repurchase of common stock..    (11)      --        (25)        --       (25)
   Net income for the year.....     --       --         --        472       472
                                -------  -------  ---------  ---------  --------
Balances December 31, 2002.....  9,687       10      5,681     24,059    29,750
   Issuance of common stock....     24       --        111         --       111
   Net income for the year.....     --       --         --        428       428
                                -------  -------  ---------  ---------  --------
Balances December 31, 2003.....  9,711       10      5,792     24,487    30,289
   Issuance of common stock....     53       --        200         --       200
   Net loss for the year.......     --       --         --     (5,118)   (5,118)
                                -------  -------  ---------  ---------  --------
Balances December 31, 2004.....  9,764  $    10  $   5,992  $  19,369  $ 25,371
                                =======  =======  =========  =========  ========`

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

---



Scientific Technologies Incorporated
                  Notes to Consolidated Financial Statements

NOTE 1-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Scientific Technologies Incorporated (the "Company") is headquartered in
Fremont, California, and 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

The Company invests primarily in money market accounts and short-term bonds
held at financial institutions and considers all highly liquid investments with a maturity of less
than 90 days when purchased to be cash equivalents. Accordingly, these investments are subject to
minimal credit and market risk.

Allowance for Doubtful Accounts

We maintain allowances for estimated losses from the inability of our
customers to make required payments. 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. An account is written off or written down to its net realizable value, when we determine
that and it is in bankruptcy, liquidation or cannot be located or the cost of collection exceeds the
realizable value of the account.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.
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 may write-down excess and obsolete inventory based primarily on our historical consumption
and our estimated forecast of product demand and production requirements. Demand for our products
can fluctuate significantly. In addition, our industry is characterized by technological change, new
product development, and product obsolescence that could result in an increase in the amount of
obsolete inventory quantities on hand. Our estimates of future product demand may differ from actual
results, in which case we may adjust 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
reduced value 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 will not recognize such additional operating income until 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.

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.

Goodwill and Other Intangible Assets

We review the recoverability of our long-lived assets, such as fixed assets,
goodwill, intangible assets and investments, when events or changes in circumstances indicate that
the carrying amount of the asset or asset group may not be recoverable. The assessment of possible
impairment is based on our ability to recover the carrying value of the asset or asset group from
the expected future pre-tax cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset, an impairment loss
is recognized for the difference between the estimated fair value and carrying value. The
measurement of impairment requires management to estimate future cash flows and the fair value of
long-termed assets. In addition, we review the valuation of goodwill at least annually.

During 2004, we reviewed the financial forecasts and 2005 budgets for
MSD, Lundahl Instruments and PSI-Tronix. Due to reduced revenue and margin levels, we determined
that approximately $3.4 million of the book value of the MSD intangibles was not recoverable and
recorded an additional impairment charge for this amount to reduce the MSD intangibles to their fair
value. Based on a review of the expected cash flow versus the current book value of the assets
related to the Lundahl acquisition, we determined that an impairment charge was not necessary. Based
on our review of the cash flows related to the PSI-Tronix acquisition, we determined that a
significant portion of these intangible assets was not recoverable and determined that an impairment
charge of $3.4 million was required. We believe that while the technology, customer lists, and
product lines still have value, the prolonged downturn in the semiconductor market for our products
makes it unlikely that we will recover the current book value of the assets. A portion of these
charges $4.2 million was recorded in cost of sales and the balance of $2.6 million was recorded as a
charge to general, selling and administrative expense.

Fair Value of Financial Instruments

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

Revenue Recognition

The Company has product and services sales. During
the years ended December 31, 2004 and 2003, product and services sales represented 92% and 8% of
sales, respectively. The Company has sales to OEM's and distributors. During the years ended
December 31, 2004 and 2003, $35.98 million, or 61% of sales

Revenue from product sales to OEM's and distributors is recognized upon shipment
when shipped FOB our plant or upon receipt by the customer when shipped FOB destination, if a signed
purchase order exists, the price is fixed or determinable, collection of the resulting receivable is
considered reasonably assured 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 post contract customer support.

Our agreements with our distributors include certain product rotation, price
protection, and warranty rights. All distributors have the right to rotate slow moving products four
times each fiscal year. The maximum dollar value of inventory eligible for rotation is equal to
eight percent of our products purchased by the distributor during the previous fiscal year. In order
to take advantage of their product rotation rights, the distributors must order and take delivery of
additional products equal to at least the dollar value of the products that they want to rotate.
Reserves for the right of return and restocking are established based on the requirements of
Statement of Financial Accounting Standards ("SFAS") 48, Revenue Recognition when Right of Return
Exists because we have visibility into our distributor's inventory and have sufficient history
to estimate returns. We record a reserve based on historical trend. Stock rotation and returns
estimates are recorded as reductions of sales and cost of sales. Price protection estimates are
recorded as reductions of sales and warranty estimates are recorded against cost of sales.

Each distributor is also allowed certain rebates and price protection rights. If
and when we reduce or plan to reduce the price of any of our products and the distributor is holding
any of the affected products in inventory, we will credit the distributor the difference in price
when it places its next order with us. We record an allowance for price protection reducing our net
sales and increasing our accrued liabilities based on specific terms and historical trend.

The company provides a warranty to its customers for a period of 12 to 18 months.
Upon revenue recognition, we provide for the estimated costs that may be incurred for product
warranties. We estimate sales returns and warranty costs based on historical experience and the best
information we have at the time we report our financial statements. Actual results could differ from
these estimates. Warranty expenses are recorded against cost of sales.

Installation and engineering service revenue is recognized when services are
rendered, or when an identifiable portion of the contract is completed, no significant post-delivery
obligations exist and collection of the resulting receivable is considered reasonably assured.
Service revenue was $4.4 million and $4.3 million for the years ended December 31, 2004 and 2003,
respectively.

During the years ended December 31, 2004 and 2003, $36.0 million or 61% of sales
and $34.1 million or 62% of sales were to distributors, respectively.

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, 2004, 2003 and 2002 were $492,000, $548,000 and $590,000.

Stock-based compensation

The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, or APB No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, compensation cost is measured as
the excess, if any, of the quoted market price of the Company's stock at the date of grant over the
exercise price of the option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company provides additional pro forma disclosures as required
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure".

SFAS No. 148, issued in December 2003 amends SFAS No. 123 in December
2003 to require that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently and in a tabular
format. The following table sets forth the effect on the Company's net income (loss) and net income
(loss) per share as if the Company had recorded compensation costs based on the estimated grant date
fair value as defined by SFAS No. 123 for all granted stock-based awards (in thousands, except
per share amounts).



|                                                                                                                | Years Ended December 31, | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------ | 
|                                                                                                                | 2004                     | 
|                                                                                                                |                          | 
|Net income (loss), as reported                                                                                  | $(5,118)                 | 
|                                                                                                                |                          | 
|Add: Stock-based employee compensation
   expense included in reported net income
   (loss)                     | -                        | 
|Deduct: Stock-based employee compensation
   expense determined under fair value based
   method for all awards | 100                      | 
|Pro forma net income (loss)                                                                                     | $(5,218)                 | 
|                                                                                                                |                          | 
|Net income (loss) per share - basic and
   diluted:                                                             |                          | 
|As reported                                                                                                     | $(0.53)                  | 
|Pro forma                                                                                                       | $(0.54)                  | 

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 2004, 2003
and 2002 using the following assumptions:

|                                | Stock Options | Employee Stock Purchase Plan
|------------------------------- | ------------- | ----------------------------
|                                | 2004          | 2003                        
|                                |               |                             
|Risk-free interest rates        | 3.39 - 3.85%  | 2.1 - 3.6%                  
|Expected lives (in years)       | 4             | 5                           
|Expected dividend yield         | 0%            | 1.8%                        
|Expected stock price volatility | 90.1%         | 43.5%                       

The weighted-average estimated fair value of options granted during the year
2004, 2003 and 2002 were $1.72, $1.43 and $1.78, respectively. The weighted-average estimated fair
value of employee stock purchase rights granted under the Employee Stock Purchase Plan were $0.66,
$.57 and $1.10 in 2004, 2003 and 2002, respectively. The effect on earnings per share of using the
fair value of options is disclosed in Note 1 above.

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

Comprehensive income is defined to include all changes in shareholders'
equity during a period from non-owner sources. There were no significant differences between the
Company's net income (loss) and its total comprehensive income (loss) for any of the periods
presented. Further, the Company has no accumulated comprehensive income at December 31, 2004 or
2003.

Reclassifications

The Company has reclassified certain prior years' information to conform to the current
year's financial statements.

Recent Accounting Pronouncements



In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). SFAS No. 151 requires these items be recognized as
current-period charges. In addition, SFAS No. 151 requires the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. This statement
is effective for fiscal years beginning after June 15, 2005. The adoption of this standard is not
expected to have a material impact on our financial position, results of operations or cash flows.

In December 2004, the FASB") issued SFAS No. 153, "Exchanges of
Nonmonetary Assets an Amendment of APB Opinion No. 29. SFAS No. 153 eliminates the fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion
No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges
that do not have commercial substance. This Statement specifies that a nonmonetary exchange has
substance if the future cash flows of the entity are expected to change significantly as a result of
the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard is not
expected to have a material impact on our financial position, results of operations or cash flows.

NOTE 2 - RELATED PARTY TRANSACTIONS

In 2004 and 2003, the Company provided certain management services to the
Parent. Costs of these services were allocated to the Parent based upon the amount of time employees
spent providing these services. The amount charged to the Parent for 2004 was $327,000 and $353,000
for 2003. In 2002, the Parent provided certain management, marketing and sales services to the
Company. The costs of these services were 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 2002 was $806,000.

The Company leases approximately 85,000 square feet in a 95,000 square foot
facility owned by an affiliate of the Parent. The Company also leases another 25,000 square feet in
another facility owned by the same affiliate. The lease terms are for ten years. Overhead costs are
allocated primarily on the basis of square footage utilized. See Commitments and Contingencies.

The Company utilizes a receivable from/payable to Parent account to record
activity including cash received, cash disbursed and amounts owed to and receivable from the Parent
for allocated charges and dividends. The net effect of transactions with the Parent resulted in a
receivable from Parent of $901,000 at December 31, 2004 and $838,000 at December 31, 2003. In
addition, the Company is party to a capital lease of $164,000 at December 31, 2004 under which the
Parent is the lessor. At December 31, 2004, future minimum payments under this lease due in the
years 2005 and 2006 were approximately $68,000 each and $28,000 in 2007.

Aurora Technology Pte. Ltd., a supplier of parts and services to us is a 50%
owned joint venture company of ours. During 2004 and 2003, we paid Aurora approximately $6,311,000
and $4,973,000, respectively for products. The carrying value of our investment in Aurora, which is
accounted for using the equity method, amounted to approximately $550,000 and $363,000 as of
December 31, 2004 and 2003.

NOTE 3 - BALANCE SHEET DATA

`December 31,
                                                  ----------------------
                                                     2004        2003
                                                  ----------  ----------
                                                     (In thousands)`

Allowance for doubtful accounts:

`Balance at beginning of year............... $      503  $      545
     Addition...................................        215          80
     Utilized...................................       (387)       (122)
                                                  ----------  ----------
     Balance at end of year..................... $      331  $      503
                                                  ==========  ==========`

`Finished goods............................. $    2,957  $    2,453
     Work in process............................        616       1,225
     Subassemblies..............................      1,518         911
     Raw materials..............................      5,705       4,692
                                                  ----------  ----------
                                                 $   10,796  $    9,281
                                                  ==========  ==========`

Property and equipment:

`Equipment.................................. $   10,489  $   10,979
     Furniture and fixtures.....................      2,034       1,923
     Leasehold improvements.....................        757         737
                                                  ----------  ----------
                                                     13,280      13,639
     Less: accumulated depreciation.............     (9,810)     (9,899)
                                                  ----------  ----------
                                                 $    3,470  $    3,740
                                                  ==========  ==========

     Depreciation expense....................... $    1,423  $    1,359
                                                  ==========  ==========`

Accrued expenses:

`Accrued commissions........................ $      218  $      299
     Warranty reserve...........................        285         221
     Stock rotation reserve.....................        385         231
     Price allowance reserve....................        296         154
     Returns reserve............................        221          50
     Accrued income tax.........................         --         227
     Legal accrual..............................        600          --
     Other......................................        244         321
                                                  ----------  ----------
                                                 $    2,249  $    1,503
                                                  ==========  ==========`

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS:

|                                  |                                | December 31, 2004                       | December 31, 2003                         
|--------------------------------- | ------------------------------ | --------------------------------------- | ------------------------------------------
|                                  | Life
                  (Years) | Gross Carrying
                  Amount | Accumulated
                  Amortization
|Technology                        | 15                             | $ 3,696                                 | (2,194)                                   
|Customer relationships            | 7                              | 2,457                                   | (2,174)                                   
|Tradename                         | 5                              | 403                                     | (403)                                     
|Product lines                     | 12                             | 840                                     | (528)                                     
|Covenant not to compete           | 2                              | 50                                      | (50)                                      
|Total amortized intangible assets |                                | 7,446                                   | $ (5,349)                                 
|Goodwill                          |                                | 216                                     |                                           
|Total                             |                                | $ 7,662                                 |                                           

We incurred amortization expense of $1,194,000 and $1,272,000 in 2004 and 2003,
respectively, of which $580,000 and $596,000 were included in cost of goods sold.



|Future Amortization |       
|------------------- | ------
|2005                | $ 338 
|2006                | 258   
|2007                | 221   
|2008                | 201   
|2009                | 191   
|Thereafter          | 888   
|Total               | $2,097
|                    |       

During 2004, we reviewed the financial forecasts and 2005 budgets for
MSD, Lundahl Instruments and PSI-Tronix. Due to reduced revenue and margin levels, we determined
that approximately $3.4 million of the book value of the MSD intangibles was not recoverable and
recorded an additional impairment charge of this amount to reduce the MSD intangibles to their fair
value. Based on a review of the expected cash flow versus the current book value of the assets
related to the Lundahl acquisition, we determined that an impairment charge was not necessary. Based
on our review of the cash flows related to the PSI-Tronix acquisition, we determined that a
significant portion of these intangible assets was not recoverable and determined that an impairment
charge of $3.4 million was required. We believe that while the technology, customer lists, and
product lines still have value, the prolonged downturn in the semiconductor market for our products
makes it unlikely that we will recover the current book value of the assets. Of this expense, $4.2
million relating to technology and product lines was recorded in cost of sales and $2.6 million was
recorded as selling, general and administrative expense.

NOTE 5 - INCOME TAXES

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



|                                  | Year Ended December 31
|--------------------------------- | ----------------------
|                                  | 2004                  
|Current tax expense (benefit)     | (In thousands)        
|Federal                           | $ 289                 
|State                             | 9                     
|                                  | 298                   
|Deferred tax expense (benefit)    |                       
|Federal                           | (2,365)               
|State                             | (463)                 
|                                  | (2,828)               
|Charge in lieu of tax for options | 6                     
|Total provision for income taxes  | $(2,524)              
|                                  |                       

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:



|                                           | 2004  | 2003 | 2002
|------------------------------------------ | ----- | ---- | ----
|Statutory U.S. tax rate                    | (34)% | 34%  | 34% 
|State income taxes, net of federal benefit | (4)   | 6    | 6   
|Research and development and other credits | (1)   | (24) | (27)
|Nondeductible expenses                     | 6     | 22   | 25  
|Effective tax rate                         | (33)% | 38%  | 38% 

Deferred tax assets (liabilities) consist of the following: (In
thousands)



|                                            | December 31,
|------------------------------------------- | ------------
|                                            | 2004        
|Short-term deferred tax asset               |             
|Inventory reserve                           | $1,104      
|Other reserves and accruals                 | 892         
|Net operating loss                          | -           
|Depreciation and amortization               | 1,521       
|Research & development tax credit and other | 309         
|Gross deferred tax assets                   | 3,826       
|                                            |             
|Long-term deferred tax liability            |             
|Amortization of intangibles                 | (116)       
|Other                                       | (2)         
|Gross deferred tax liability                | (118)       
|                                            |             
|Net deferred tax assets                     | $3,708      

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
                                            --------  --------  --------
2004:
Basic earnings per share calculation...... $ (5,118)    9,741  $  (0.53)

2003:
Basic earnings per share calculation...... $    428     9,711  $   0.04
Effect of dilutive securities:
  Stock options...........................       --        23        --
                                            --------  --------  --------
Diluted earnings per share calculation.... $    428     9,734  $   0.04
                                            ========  ========  ========

2002:
Basic earnings per share calculation...... $    472     9,683  $   0.05
Effect of dilutive securities:
  Stock options...........................       --        15        --
                                            --------  --------  --------
Diluted earnings per share calculation.... $    472     9,698  $   0.05
                                            ========  ========  ========`

The number of common stock equivalents excluded from the earnings per share calculation because
they would be antidilutive total to 633,000 in 2004.

NOTE 7 - DEBT:

The Company has a $6,100,000 line of credit with a bank, of which no amount was
outstanding at December 31, 2004 or 2003. The line bears interest at the bank's prime rate (4.00% at
December 31, 2004), is secured by accounts receivable, inventories and fixed assets, and expires on
June 30, 2005. The Company's Bank line of credit as amended, contains covenants which require the
Company to meet specific financial tests. The financial tests were as follows: (1) a minimum
tangible net worth requirement of $18,000,000 (2) ratio of debt to tangible net worth of no more
that 1.00 to 1. (3) ratio of the sum of cash, cash equivalents and accounts receivable to current
liabilities of not less than 1.10 to 1, and (4) losses not to exceed $1,000,000 on an annual basis.
At December 31, 2004, the Company was not in compliance with the covenant for losses. A waiver for
the covenant was received on March 23, 2005.

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 options for 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, 2004 vest
over a five-year period.

Activity under the Plan is set forth below:

| |                              | Available for Grant | Number of Shares
                  Outstanding | Weighted Average Exercise
                  Price
| | ---------------------------- | ------------------- | ---------------------------------------------- | -------------------------------------------------
| | Balance at December 31, 2001 | 341,842             | 522,998                                        | $6.17                                            
| | Granted                      | (203,900)           | 203,900                                        | $3.99                                            
| | Exercised                    | --                  | (4,000)                                        | $1.28                                            
| | Cancelled                    | 51,000              | (51,000)                                       | $1.94                                            
| | Balance at December 31, 2002 | 188,942             | 671,898                                        | $5.87                                            
| | Granted                      | (7,500)             | 7,500                                          | $4.15                                            
| | Exercised                    | --                  | (3,000)                                        | $3.19                                            
| | Cancelled                    | 19,666              | (19,666)                                       | $5.09                                            
| | Balance at December 31, 2003 | 201,108             | 656,732                                        | $5.88                                            
| | Granted                      | (20,000)            | 20,000                                         | $5.29                                            
| | Exercised                    | --                  | (25,000)                                       | $4.00                                            
| | Cancelled                    | 32,000              | (35,500)                                       | $5.95                                            
| | Balance at December 31, 2004 | 213,108             | 616,232                                        | $5.48                                            

Information relating to stock options outstanding and exercisable at December 31, 2004 is as
follows:

|               | Options Outstanding |  |                                                     | Options Vested and
Exercisable
|-------------- | ------------------- |  | --------------------------------------------------- | ------------------------------
|Exercise Price | Number outstanding  |  | Weighted Average Remaining Contractual Life
(Years) |                               
|$2.75 - $3.99  | 187,900             |  | 7.5                                                 |                               
|$4.01 - $5.74  | 84,500              |  | 8.2                                                 |                               
|$6.00 - $6.80  | 245,000             |  | 5.5                                                 |                               
|$7.00 - $11.48 | 98,832              |  | 2.5                                                 |                               
|               | 616,232             |  |                                                     |                               

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 the Company's common stock. Each offering period commences on the
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,
2004, 2003 and 2002, 16,812, 20,826 and 15,091 shares of common stock were purchased under this plan
at a weighted-average price of $3.93, $4.12 and $2.68, respectively.

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 made no contributions in
2004, 2003 or 2002.

NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION

The Company is organized 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,
2004, 2003 and 2002 follows:

`Safety Products   Automation Products
                                       ----------------  -------------------
2004                                                                        
Sales................................ $         49,041  $             9,384
Intangible impairment charges........ $          3,378  $             3,438
Group operating profit (loss)........ $         (2,943) $            (4,915)
Total assets......................... $         26,285  $             7,589
Capital expenditures................. $          1,006  $               191
Depreciation and amortization........ $          1,426  $             1,189
                                                                            
2003                                                                        
Sales................................ $         46,708  $             8,786
Group operating profit (loss)........ $          2,265  $            (1,769)
Total assets......................... $         32,469  $             5,210
Capital expenditures................. $            636  $               799
Depreciation and amortization........ $          1,552  $             1,140
                                                                            
2002                                                                        
Sales................................ $         43,493  $             7,714
Group operating profit (loss)........ $          2,419  $            (1,675)
Total assets......................... $         28,646  $             9,246
Capital expenditures................. $          1,101  $               122
Depreciation and amortization........ $          1,517  $             1,114`

The Company's sales by geographic location of customers in 2004 were: North America -  $55,619,000, Europe  - $779,000
and Asia - $2,027,000. Foreign sales represented 13% of sales in 2004, 12% of sales in 2003 and less than 10%.

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 and short-term bonds. 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 collectability of all accounts receivable. No customer accounted
for more than 10% of accounts receivable at December 31, 2004, 2003 or 2002. HH Barnum accounted for
10% of net sales for the year ended December 31, 2004.

The Company operates principally in the United States.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company leases certain office and manufacturing space and other equipment
under noncancellable operating leases. At December 31, 2004, future minimum payments under these
leases due in the years 2005 through 2006 were approximately $1,092,000 and $179,000 and $126,000
per year from 2007 to 2009. Of these amounts, $951,000 in 2005 and $126,000 from 2007 to 2009 was
related to lease agreements with the Parent or an affiliate of the Parent.

Rent expense under operating lease agreements was approximately $1,320,000 in
2004, $1,168,000 in 2003, and $1,123,000 in 2002. Of these amounts, $1,133,000, $963,000 and
$974,000 were related to lease agreements with the Parent or an affiliate of the Parent. Rent
expense is recorded on a straight-line basis.

Future minimum lease payments under noncancellable operating and capital leases,
are as follows(in thousands):



|Year ending December 31. | Operating | Capital
|------------------------ | --------- | -------
|2005                     | $1,058    | $ 68   
|2006                     | 179       | 68     
|2007                     | 126       | 29     
|2008                     | 126       | --     
|2009                     | 126       | --     
|Thereafter               | 315       | --     
|Total                    | $ 1,930   | $ 165  

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

On January 19, 2005, Scientific Technologies Incorporated agreed to the terms of
a settlement with Paul Davis Automation, Inc. relating to a lawsuit filed by Paul Davis Automation
in the United States District Court, Eastern Division. In the lawsuit, plaintiff had alleged unpaid
commission fees upon termination of a contract between the parties. The settlement was agreed to as
a compromise among the parties for the complete and final settlement of the lawsuit. Based on the
terms of the settlement agreement, which was fully executed by the parties on January 21, 2005,
Scientific Technologies will make a cash payment of approximately $600,000 to Paul Davis Automation,
a former manufacturer's representative for Scientific Technologies, no earlier than February 1, 2005
and no later than February 15, 2005. This amount was accrued at December 31, 2004 and payment was
made on February 14, 2005.

The Company offers warranties on certain products and records a liability for the
estimated future costs associated with warranty claims, which is based upon historical experience
and the Company's estimate of the level of future costs. A reconciliation of the changes in the
Company's warranty liability for the years ended December 31, 2004 and 2003 follows (in
thousands):

|                                               | December 31,
|---------------------------------------------- | ------------
|                                               | 2004        
|Warranty accrual at the beginning of the year  | $ 221       
|Accruals for warranties issued during the year | 234         
|Expenses incurred during the year              | (170)       
|Warranty accrual at the end of the year        | $ 285       

INDEMNIFICATIONS

In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others. We
have determined that certain agreements, described below, fall within the scope of FIN 45.

Under our by-laws, we have agreed to indemnify our officers and directors for
certain events or occurrences arising as a result of the officer or director's serving in such
capacity. We have a directors and officers liability policy that limits our exposure and enables us
to recover a portion of any future amounts paid resulting from the indemnification of our officers
and directors We believe the fair value of the indemnification agreements is minimal and we have not
recorded a liability for these agreements as of December 31, 1004.



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

None



Item 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer ("CEO") and our Chief
Financial Officer ("CFO"), are responsible for evaluating and attesting as to the effectiveness of
our disclosure controls and procedures as of the end of the period covered by this Annual Report on
Form 10-K. This evaluation includes consideration of our internal control over financial
reporting.

In connection with the audit of our consolidated financial statements for the
year ended December 31, 2004, and in light of new, recently issued interpretative guidance in
relation to the assessment of the operating effectiveness of a company's internal controls, our
management and our independent registered public accounting firm, BDO Seidman, LLP, identified
certain "material weaknesses" (as such term is defined under Public Company Accounting Oversight
Board Auditing Standard No. 2 ) in our internal controls.

The material weaknesses identified related to: (1) inadequate preparation
and insufficient review and analysis of certain financial statement account reconciliations
primarily relating to inventory and accounts receivable valuation; (2) lack of documented
policies and procedures related to changes and updates in the accounting system; and (3) lack
of sufficient personnel with appropriate qualifications and training in certain key accounting roles
and adherence to certain control disciplines within the accounting and financial reporting function.
Our management believes that the material weaknesses arose as a result of the Company's significant
acquisitions in Logan, Utah and Anaheim, California in recent years.

These material weaknesses may also constitute deficiencies in our disclosure
controls and procedures. In light of these weaknesses, our management, including the CEO and CFO,
have concluded that, as of December 31, 2004, our disclosure controls and procedures were not
effective. However, subsequent to December 31, 2004, we undertook corrective actions, including the
implementation of certain reporting tools and independent internal reviews of key account
reconciliations, to ensure that the financial statements and other financial information included in
this annual report are complete and accurate in all material respects.

Changes in Internal Control Over Financial Reporting

In response to the material weaknesses in our internal controls noted above,
and in preparation for our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which
will be required as of the end of our fiscal 2006, we have commenced the following corrective
actions to remediate the material weaknesses:

(1) We are implementing additional general ledger close and account analysis
procedures including procedures to analyze consolidated fluctuations and reporting. These procedures
also include analysis of inventory and accounts receivable aging and valuation.

(2) We are working with advisors to help establish policies and procedures
related to changes and updates in our accounting system; and

(3) We have begun a process to address our need for additional experienced finance personnel in
order to improve our controls over financial reporting.

We intend to continue to evaluate the remediation efforts addressing the material
weaknesses that were identified and to take appropriate action to correct the deficiencies
identified. In addition, as part of the assessment of our internal control over financial reporting
that we will undergo during our 2006 fiscal year in connection with the process required by
Section 404 of the Sarbanes-Oxley Act of 2002, we intend to continue to review, evaluate and
strengthen our controls and processes. The Audit Committee of our Board of Directors is performing
oversight of our implementation of enhancements and improvements to our internal controls, and our
management is reporting to our Audit Committee on a regular basis regarding these matters.

We began to implement the changes described above during the first quarter of
fiscal 2005. During the fourth quarter of fiscal 2004, there were no changes in our internal control
over financial reporting that have materially affected, or are likely to materially effect, our
internal control over financial reporting.

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 2005 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 2005
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 2005 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" and "Equity
Compensation" appearing in the Proxy Statement for its 2005 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 2005 Annual Meeting of Shareholders.



Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference to the
sections entitled "Principal Accountant" appearing in the Proxy Statement for its 2005 Annual
Meeting of Shareholders.

PART IV



Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(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 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 June 30, 2004 with Bank of The West.                                                                                                                                                                       
|Exhibit 10.3 | - Lease agreement dated June 1, 2002 with Scientific Technology  Incorporated for 1025 W. 1700 N., Logan Utah 84321
is incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 2003, Exhibit 10.4.
|Exhibit 21.1 | - Subsidiaries of the Registrant.                                                                                                                                                                                                 
|Exhibit 23.1 | - Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm                                                                                                                                                      
|Exhibit 23.2 | - Consent of PricewaterhouseCoopers, LLP, Independent Registered Public Accounting Firm                                                                                                                                           
|Exhibit 24.1 | - Power of Attorney (included on page 39).                                                                                                                                                                                        
|Exhibit 31.1 | - Certification of Chief Executive Officer
    Pursuant To Section 302(a)
    of the Sarbanes-Oxley Act Of 2002                                                                                                                   
|Exhibit 31.2 | - Certification of Chief Financial
    Officer Pursuant To Section 302(a)
    of the Sarbanes-Oxley Act Of 2002                                                                                                                   
|Exhibit 32.1 | - Certification Of Chief Executive Officer And Chief Financial
    Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
    To Section 906 Of The Sarbanes-Oxley Act Of 2002                                           

* Management contract or compensatory plan

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) Exhibits

See Item 15(a) above.

(c) Financial Statements

See Item 15(a) above.

---



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, 2005



| |                                     
| | ------------------------------------
| | 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                                                                           | March 29, 2005
|/s/ Joseph J. Lazzara
Joseph J. Lazzara         | President, Chief Executive Officer,
     Treasurer, Director (Principal
     Executive Officer) | March 29, 2005
|/s/ James A. Lazzara
James A. Lazzara           | Vice President, Secretary and
     Director                                                     | March 29, 2005
|/s/ James A. Ashford
James A. Ashford           | Vice President and Director                                                                     | March 29, 2005
|/s/ Richard S. Baldwinson
Richard S. Baldwinson | Director                                                                                        | March 29, 2005
|/s/ Carl H. Frei
Carl H. Frei                   | Director                                                                                        | March 29, 2005
|/s/ Bernard J. Ploshay
Bernard J. Ploshay       | Director                                                                                        | March 29, 2005
|/s/ Ralph Marimon
Ralph Marimon                 | Vice President and Chief Financial Officer
     (Principal Financial Officer)                   | March 29, 2005

---

SCIENTIFIC TECHNOLOGIES
INCORPORATED

EXHIBITS

TO



Annual Report on Form 10-K
                   Year ended December 31, 2004

EXHIBITS - TABLE OF CONTENTS



|Exhibit Number |                                                                                                                                                                                        
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.2   | - Bank agreement dated June 30, 2004 with Bank of The West
   PDF                                                                                                                      
|Exhibit 21.1   | - Subsidiaries of the Registrant                                                                                                                                                       
|Exhibit 23.1   | - Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm                                                                                                           
|Exhibit 23.2   | - Consent of PricewaterhouseCoopers, LLP, Independent Registered Public Accounting Firm                                                                                                
|Exhibit 24.1   | - Power of Attorney (included on page 39)                                                                                                                                              
|Exhibit 31.1   | - Certification of Chief Executive Officer
    Pursuant To Section 302(a)
    of the Sarbanes-Oxley Act Of 2002                                                                        
|Exhibit 31.2   | - Certification of Chief Financial
    Officer Pursuant To Section 302(a)
    of the Sarbanes-Oxley Act Of 2002                                                                        
|Exhibit 32.1   | - Certification Of Chief Executive Officer And Chief Financial
    Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
    To Section 906 Of The Sarbanes-Oxley Act Of 2002

PDF    Also provided in PDF format as a courtesy.

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