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, 2003

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, 2003 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
of March 3, 2004 was 9,711,153 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy statement to be filed with the
Securities and ExchangeCommission in connection with the Company's 2004 Annual
Annual Meeting of Shareholders ("the Proxy Statement") are incorporated by
reference in Part III of this Form 10K.









SCIENTIFIC TECHNOLOGIES INCORPORATED
                        2003 ANNUAL REPORT ON FORM 10-K
                               INDEX

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

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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 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:

a. Safety Light Curtains. Our leading product
group, which accounted for over 80% of our sales in 2003, 2002 and 2001, is a
family of optical guarding products, also called presence sensing devices or
safety light curtains, 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 harmless infrared light
beams in front of the hazard area. When one or more of the beams are blocked,
this is detected by the received 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.

We manufacture and market a family of light guards called the
MiniSafe, designed for inclusion in systems offered by original equipment
manufacturers, or OEMs, and other 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

Applications for safety light curtains are found in a variety
of manufacturing environments. Our customers use safety light curtains to guard
a wide variety of hazardous applications including automotive assembly lines,
robot work cells, semiconductor production equipment, metal stamping and
forming, food processing, aircraft manufacturing, photographic film production,
tire manufacturing and home appliance production.

The MicroSafe MC4700 series light curtain was
introduced in 2001. This product features an ultra-compact transmitter and
receiver that offers protected heights from 100 millimeters to 1,798
millimeters. Superior response time and excellent resolution, allow the MC4700
to be mounted closer to the danger points of hazardous operation. The MC4700
includes individual beam indicators, adjustable mounting brackets, exact channel
select, floating blanking, auxiliary outputs, restart interlocks, 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 series was introduced in 2001. A full
featured product, the MG4600 Series is designed to meet the safeguarding
requirements for robust applications, such as automotive manufacturing. The
MG4600 is available in 20 millimeters, 30 millimeters and 50 millimeter
resolution, provides protected heights from 435millimeters to 2,086 millimeters
depending on system resolution, and offers a 20 meter sensing range. Control
reliable circuitry eliminates the need for a separate controller, and patented
individual beam indicators simplify alignment. Additional features include
field-replaceable safety relays and weld shield, floating blanking to block up
to two beams anywhere in the zone, and exact channel select to permanently block
selected beams where machine parts will obstruct a portion of the zone.

The 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 PA4600 was introduced to our
customers in 2003.

During 2003, we also introduced the new 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.

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

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

Selected models of the safety light curtain products are
certified by independent laboratories to comply with safety and electrical
standards, including those standards required in the European 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
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
remains in Tulare, California and will be relocated to Logan at a later
date.

d.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 semiconductor
manufacturing, aerospace industries, hydraulic equipment OEMs, petro-chemical,
and water/waste-water management. In order to satisfy another important step in
maximizing resource utilization in our Automation Products Group, we focus our
product development efforts in custom and modified products for specific volume
OEM customers. This is in sharp contrast to a more traditional, capital
intensive effort to cover every possible product range.

Sources and availability of components

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

We also derive revenue from the distribution of products from
third party manufacturers, including revenues pursuant to our relationship with
EJA 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.

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, 2003, 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 2003, 2002, and 2001, we spent $4,355,000, $4,653,000, and
$5,429,000, 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 2004 to be consistent with 2003.

Patents and trademarks

We hold nineteen 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 and Sick Optic-Electronic, Inc. 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. STI
Scientific Technologies GmbH, a wholly owned German subsidiary, was established
in 1995 as our European sales office. Our products are also sold in foreign
countries by distributors and independent sales representatives. Foreign sales
represented 12% of sales in 2003 and less than 10% of sales in each of 2002 and
2001. The Company's sales by geographic location of customers in 2003 were:
North America - $53,356,000, Europe - $1,093,000 and Asia - $1,045,000. Foreign
sales represented less than 10% of sales in each of 2002 and 2001.

Customers

No customer represented more than 10% of sales in
2003, 2002 or 2001. Aggregate sales to both government agencies and government
contractors represented less than 5% of sales in 2003, 2002 and 2001.

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, 2003, we employed approximately
369 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 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 will be relocated in 2005, as the current lease expires.

STI Machine Services is located in an 8,585 square foot
facility in Anaheim, California.

STI GmbH is located in a 2,500 square foot facility in
Freiburg, Germany.

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.

We maintain insurance policies for property, casualty,
fire, business interruption, workers compensation, general liability and product
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.



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

None.

PART II



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

Market Information

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





|2003        | High  | Low   |  | 2002        | High  | Low  
|----------- | ----- | ----- |  | ----------- | ----- | -----
|1st Quarter | $5.99 | $3.36 |  | 1st Quarter | $4.90 | $3.65
|2nd Quarter | 5.98  | 3.83  |  | 2nd Quarter | 4.75  | 3.10 
|3rd Quarter | 5.15  | 4.05  |  | 3rd Quarter | 4.45  | 2.25 
|4th Quarter | 5.00  | 4.01  |  | 4th Quarter | 6.55  | 3.90 



The closing sales price of our Common Stock on March 19, 2004 was $5.50 per
share.

Holders

There were 756 shareholders of record on March 19, 2004.

Dividends

In 2001, regular annual dividends of $.0525 per
share were paid on April 2 and July 5. No dividends were paid in 2002 or 2003.

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 2003 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           | 2003    | 2002         | 2001    | 2000    | 1999   
|-------------------------------------- | ------- | ------------ | ------- | ------- | -------
|Net sales                              | $55,494 | $51,207      | $49,053 | $60,146 | $49,925
|Income (loss) from operations          | 497     | 744          | (2,474) | 8,745   | 6,834  
|Net income (loss)                      | 428     | 472          | (1,425) | 5,631   | 4,505  
|Basic income (loss) per common share   | $ .04   | $ .05        | $ (.15) | $ .58   | $ .47  
|Diluted income (loss) per common share | $ .04   | $ .05        | $ (.15) | $ .58   | $ .47  
|                                       |         |              |         |         |        
|                                       |         | December 31, |        
|Balance sheet data                     |         |              |         |         |        
|Cash and cash equivalents              | $ 2,312 | $ 2,620      | $ 1,033 | $ 4,048 | $ 3,362
|Total assets                           | 37,680  | 37,892       | 34,200  | 37,028  | 32,536 
|Shareholders' equity                   | 30,288  | 29,750       | 29,234  | 31,591  | 27,849 
|Dividends declared per share           | --      | --           | $ .11   | $ .20   | $ .19  

ii) QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)



|2003                                       | First    | Second  | Third   | Fourth 
|------------------------------------------ | -------- | ------- | ------- | -------
|                                           | Quarter  | Quarter | Quarter | Quarter
|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  
|                                           |          |         |         |        
|2002                                       | First    | Second  | Third   | Fourth 
|                                           | Quarter  | Quarter | Quarter | Quarter
|Sales                                      | $ 11,229 | $12,829 | $13,034 | $14,115
|Gross profit                               | 4,854    | 5,606   | 5,783   | 5,964  
|Net income (loss)                          | (207)    | 143     | 348     | 188    
|Basic net income (loss) per common share   | $ (.02)  | $ .01   | $ .04   | $ .02  
|Diluted net income (loss) per common share | $ (.02)  | $ .01   | $ .04   | $ .02  



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

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

Results of Operations

Sales

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, 2003, 2002 and 2001 were:

|    | 2003    | %   | 2002    | %   | 2001    | %  
|--- | ------- | --- | ------- | --- | ------- | ---
|SPG | $46,708 | 84% | $43,493 | 85% | $40,085 | 82%
|APG | $ 8,786 | 16% | $ 7,714 | 15% | $ 8,968 | 18%

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 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.

Sales in 2002 increased 4% to $51.2 million from $49.1
million in 2001. Sales by SPG increased 9% from 2001 to 2002. This was the
result of increased unit sales at the Optical Sensor Division as well as the
full year effect of sales by MSD, which was acquired in June 2001. Shipments of
safety light curtains, profiling scanners and safety mats grew by 7%, 2%, and
3%, respectively, offsetting a 9% decline in sales of interlocks and relays. The
full year effect of sales by MSD accounted for approximately one third of the 9%
growth in sales by SPG. During 2002, APG continued to be negatively impacted by
economic conditions in the semiconductor industry and as a result, reported a
14% decline in its sales, primarily in the pressure sensing product line.

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



|                                     | 2003 | 2002 | 2001
|------------------------------------ | ---- | ---- | ----
|Sales                                | 100% | 100% | 100%
|Gross margin                         | 42   | 43   | 40  
|Operating expenses:                  |      |      |     
|Selling, general and administrative  | 32   | 31   | 33  
|Research and development             | 8    | 9    | 11  
|Amortization of intangibles          | 1    | 1    | 1   
|Total operating expenses             | 41   | 41   | 45  
|Income (loss) from operations        | 1    | 2    | (5) 
|Interest and other income, net       | --   | --   | --  
|Income (loss) before taxes           | 1    | 2    | (5) 
|Provision (benefit) for income taxes | --   | 1    | (2) 
|Net income (loss)                    | 1%   | 1%   | (3)%

Gross profit

2003 = $23.0 million

2002 = $22.2 million

2001 = $19.7 million

Increase in 2003 = 4%

Increase in 2002 = 13%

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. 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 43% of sales in 2002 and 40% of sales in
2001 as we sold more higher margin products at the Safety Products Division. As
a result of the higher level of shipments in 2002, our gross profit increased
13% over 2001.

Selling, general and administrative expenses

2003 = $17.5 million
                  2002 = $16.1 million
                  2001 = $16.1 million
                  Increase in 2003 = 9%
                  Change in 2002 = 0%

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 2003, with the exception of one small
operation, which we expect to relocate in 2005.

During 2002, as a result of the cost reduction measures
initiated in 2001 and continued in 2002, we were able to keep our 2002 selling,
general and administrative expenses at 2001 levels in absolute dollars in spite
of a 4% increase in sales. Selling, general and administrative expenses were 32%
and 31% of sales in 2003 and 2002 compared to 33% of sales in 2001.

Research and development expenses

2003 = $4.4 million
                  2002 = $4.7 million
                  2001 = $5.4 million
                  Decrease in 2003 = 6%
                  Decrease in 2002 = 13%

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 above mentioned cost reduction measures 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 and 14% from 2001 to 2002. In
2003, 2002 and 2001, 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 2004. To date, all product development costs have been expensed as
incurred.

Income Taxes

Our effective income tax rate was 38% in 2003 and
2002. As a result of the losses sustained in 2001, we recorded an income tax
benefit of 38% of the loss for the year. We expect that our effective tax rate
for 2004 will be reasonably consistent with 2003 and 2002. See Notes 1 and 5 of
Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Our working capital needs have been met through funds
generated from operating activities. During 2003, operating funds were provided
by net income adjusted for depreciation and amortization and increased accrued
expenses. These operating funds were used to offset increases in accounts
receivable, receivable from Parent and inventories, to purchase fixed assets and
to pay down our capital lease obligation. Working capital amounted to $17.5
million at December 31, 2003, a 5% increase from the $16.7 million at December
31, 2002. Our bank line of credit of $6.1 million was renewed in 2003 and
extended to June 30, 2004. 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, 2003, none of the line of credit had been
utilized.

We made certain capital expenditures during 2003, 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 2004, primarily for production, quality assurance and research and
development equipment. While we had no formal commitments at December 31, 2003,
it is anticipated that capital expenditures in 2004 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 2004. While we continue to evaluate financing alternatives from
time to time, we have no current plans to raise additional outside capital. At
December 31, 2003, future minimum payments under our leases due in the years
2004 and 2005 were approximately $1,265,000 and $1,083,000, and $230,000 each
for the years 2006 through 2008.

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 and other cash transfers. Our parent files a
consolidated tax return including our accounts. Our tax provision or benefit is
calculated on a stand-alone basis. Our income taxes payable or receivable
calculated on that basis are paid to or received from our parent.

Critical Accounting Policies

Revenue Recognition

Revenue from product sales to customers is recognized
upon shipment 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 postcontract customer support. 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.

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.

Inventories

We value our inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based primarily on our
historical consumption and our estimated forecast of product demand and
production requirements. 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 costs in our
cost of goods sold at the time of such determination. Likewise, if our inventory
is determined to be undervalued, we may have over-reported our costs of goods
sold in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although we make every effort
to ensure the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand or technological developments could
have a significant impact on the value of our inventory and our reported
operating results.

Accounts Receivable

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

Valuation of Long-Lived Assets

We review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. 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.

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. These
fluctuations are caused by a number of factors, including the level and timing
of customer orders, fluctuations in complementary third party products with
which our products are sold, the mix of products sold and the timing of
operating expenditures. Our operating results are also negatively impacted by
generally adverse economic conditions throughout the high technology sector. In
particular, our pressure products continue to experience low sales volume due to
the recent market conditions in the semiconductor industry.

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

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

The market for our products is highly competitive.

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

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

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

Our sales are dependent on 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
you that a reseller will continue to offer our products. In addition many of our
resellers are privately owned firms which may not be well capitalized, as was
demonstrated by the failure of two of our distributors during 2001. If our
ability to sell products through these third parties is impaired, our results of
operations would likely suffer.

Our international sales are subject to risks.

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

Our business could suffer 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 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 2002 and 2001, there was a
rapid and severe downturn in the U.S. market and global economy. Whether that
trend will continue is uncertain. This uncertainty 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.

We are dependent upon suppliers
and outsourced manufacturing, 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.

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.

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.

If we are unable to
successfully develop our international sales efforts, our results of operations
may suffer.

We have 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 the 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 could become more vulnerable to the 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.





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

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



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.



|                                                                                                     | Page
|---------------------------------------------------------------------------------------------------- | ----
|Report of Independent Auditors                                                                       | **  
|Consolidated Balance Sheets - December 31, 2003 and 2002                                             | **  
|Consolidated Statement of Operations - Years ended
  
    December 31, 2003, 2002 and 2001           | **  
|Consolidated Statement of Cash Flows - Years ended
  
    December 31, 2003, 2002 and 2001           | **  
|Consolidated Statement of Stockholders' Equity - Years
  
    ended December 31, 2003, 2002 and 2001 | **  
|Notes to Consolidated Financial Statements                                                           | **  

(2) Financial Statement Schedules

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

---



REPORT OF INDEPENDENT AUDITORS



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 2002, and
the results of their operations and their cash flows for each of the three 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 auditing standards
generally accepted in the United States of America, 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,
                                                           ------------------
                                                             2003      2002
                                                           --------  --------
Assets                                                                       
Current assets:
    Cash and cash equivalents............................ $  2,312  $  2,620
    Accounts receivable, net.............................    8,139     7,636
    Receivable from Parent...............................      838       384
    Inventories..........................................    9,281     8,719
    Deferred income taxes................................    2,015     2,380
    Other assets.........................................    1,034       835
                                                           --------  --------
          Total current assets...........................   23,619    22,574

Property and equipment, net..............................    3,740     3,725
Goodwill and other intangible assets, net................   10,321    11,593
                                                           --------  --------
          Total assets................................... $ 37,680  $ 37,892
                                                           ========  ========
                                                                             
Liabilities and Shareholders' Equity                                         
Current liabilities
    Accounts payable..................................... $  2,758  $  2,942
    Accrued expenses.....................................    3,267     2,836
    Current portion of capital lease with Parent.........       68        60
                                                           --------  --------
          Total current liabilities......................    6,093     5,838

Capital lease with Parent................................      164       240
Deferred income taxes ...................................    1,134     2,064
                                                           --------  --------
          Total liabilities..............................    7,391     8,142

Commitments and contingencies (Note 9)

Shareholders' equity
    Common stock; $.001 par value; 100,000
       shares authorized; shares issued and
       outstanding - 9,711 and 9,687.....................       10        10
    Capital in excess of par value.......................    5,792     5,681
    Retained earnings....................................   24,487    24,059
                                                           --------  --------
          Total shareholders' equity.....................   30,289    29,750
                                                           --------  --------
          Total liabilities and shareholders' equity..... $ 37,680  $ 37,892
                                                           ========  ========`

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,
                                                     ----------------------------
                                                       2003      2002      2001
                                                     --------  --------  --------
Sales.............................................. $ 55,494  $ 51,207  $ 49,053
Cost of goods sold.................................   32,462    29,000    29,329
                                                     --------  --------  --------
  Gross profit.....................................   23,032    22,207    19,724
                                                     --------  --------  --------

Operating expenses:
  Selling, general and administrative..............   17,504    16,110    16,111
  Research and development.........................    4,355     4,653     5,429
  Amortization of acquired intangibles.............      676       700       658
                                                     --------  --------  --------
   Total operating expenses........................   22,535    21,463    22,198
                                                     --------  --------  --------
Income (loss) from operations......................      497       744    (2,474)

Interest and other income, net.....................      193        17       176
                                                     --------  --------  --------

Income (loss) before income taxes..................      690       761    (2,298)
Provision (benefit) for income taxes...............      262       289      (873)
                                                     --------  --------  --------

Net income (loss).................................. $    428  $    472  $ (1,425)
                                                     ========  ========  ========

Basic and diluted net income (loss) per share...... $   0.04  $   0.05  $  (0.15)
                                                     ========  ========  ========

Shares used to compure net income (loss) per share.    9,734     9,698     9,659
                                                     ========  ========  ========`

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,
                                                        -------------------------
                                                         2002     2002     2001
                                                        -------  -------  -------
Cash flows from operating activities:
  Net income (loss)................................... $   428  $   472  $(1,425)
  Adjustments to reconcile net income (loss) to
    cash provided by operating activities:
    Depreciation and amortization.....................   2,692    2,631    2,266
    Changes in assets and liabilities:
       Accounts receivable, net.......................    (503)  (1,182)   2,727
       Receivable from Parent.........................    (454)    (384)      --
       Inventories....................................    (562)     406      369
       Prepaid expenses and other assets..............    (199)    (254)    (170)
       Accounts payable...............................    (184)   1,056   (1,020)
       Deferred income taxes..........................    (565)    (167)    (209)
       Accrued expenses...............................     431      188      (25)
                                                        -------  -------  -------
Cash flows provided by operating activities...........   1,084    2,766    2,513
                                                        -------  -------  -------
Cash flows from investing activities:
   Purchases of property  and equipment...............  (1,435)  (1,223)  (1,010)
   Acquisition of Dunn Sales..........................      --       --   (3,992)
   Sale of short-term investments, net................      --       --      406
                                                        -------  -------  -------
Cash flows used in investing activities...............  (1,435)  (1,223)  (4,596)
                                                        -------  -------  -------

Cash flows from financing activities:
   Issuance of common stock, net......................     111       44       84
   Long-term debt.....................................     (68)      --       --
   Dividends..........................................      --       --   (1,016)
                                                        -------  -------  -------
Cash flows provided by (used in) financing activities.      43       44     (932)
                                                        -------  -------  -------
Change in cash and cash equivalents...................    (308)   1,587   (3,015)
Cash and cash equivalents at beginning of year........   2,620    1,033    4,048
                                                        -------  -------  -------
Cash and cash equivalents at end of year.............. $ 2,312  $ 2,620  $ 1,033
                                                        =======  =======  =======

Supplemental disclosure of cash flow information:
   Cash paid to (received from) Parent for
      income taxes.................................... $   262  $   289  $  (873)
                                                        =======  =======  =======

Supplemental disclosure of non-cash activities:
   Capital lease with Parent.......................... $   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 Changes in Shareholders' Equity
(In thousands)

`Common Stock
                                ---------------------------
                                                   Capital
                                                  in Excess
                                           Par     of Par    Retained
                                Shares    Value     Value    Earnings    Total
                                -------  -------  ---------  ---------  --------
Balances December 31, 2000.....  9,650  $    10  $   5,553  $  26,028  $ 31,591
   Issuance of common stock....     33       --        116         --       116
   Repurchase of common stock..     (7)      --        (32)        --       (32)
   Net loss for the year.......     --       --         --     (1,425)   (1,425)
   Dividends paid..............     --       --         --     (1,016)   (1,016)
                                -------  -------  ---------  ---------  --------
Balances 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
                                =======  =======  =========  =========  ========`

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

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

Use of Estimates

The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could differ
from those estimates.

Basis of Presentation

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

Cash and Cash Equivalents and Short-Term Investments

The Company invests primarily in money market accounts
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.

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

Inventories

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

Property and Equipment

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



Goodwill and Other Intangible Assets

Intangible assets include tradenames, customer
relationships, product lines, technologies and a covenant not to compete
acquired as part of the acquisitions of Dunn Sales, Inc., PSI-Tronix, Inc. and
Lundahl Instruments, Inc. Intangible assets are generally amortized on a
straight-line basis over a period of two to fifteen years. Goodwill is not
amortized and is subject to impairment testing at the reporting unit level at
least annually and more frequently upon the occurrence of certain events. A
reporting unit is the same level as or one level below an operating segment.

Long-Lived Assets

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

Fair Value of Financial Instruments

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

Revenue Recognition

Revenue from product sales to customers is recognized
upon shipment when shipped FOB shipping point 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 postcontract customer support. 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.

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.

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, 2003, 2002 and 2001 were
$548,000, $590,000 and $609,000.



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, | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------ | 
|                                                                                                                | 2003                     | 
|                                                                                                                |                          | 
|Net income (loss), as reported                                                                                  | $ 428                    | 
|                                                                                                                |                          | 
|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 | 90                       | 
|Pro forma net income (loss)                                                                                     | $338                     | 
|                                                                                                                |                          | 
|Net income (loss) per share - basic and
  diluted:                                                              |                          | 
|As reported                                                                                                     | $0.04                    | 
|Pro forma                                                                                                       | $0.03                    | 

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.

Reclassifications

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

Recent Accounting Pronouncements

In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The Company believes
that the adoption of this standard will not have material impact on its
financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies financial accounting and reporting of
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133 for decisions made: (a) as part of the Derivatives Implementation Group
process that require amendment to SFAS No. 133; (b) in connection with other
FASB projects dealing with financial instruments; and (c) in connection with the
implementation issues raised related to the application of the definition of a
derivative. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for designated hedging relationships after June 30,
2003. The Company adopted SFAS No. 149 during 2003. The adoption of SFAS No. 149
did not have a material impact on the Company's financial position, results of
operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." The Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and further requires that an issuer classify as a liability (or an
asset in some circumstances) financial instruments that fall within its scope
because that financial instrument embodies an obligation of the issuer. Many of
these instruments were previously classified as equity. The statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS No. 150 during 2003. The
adoption of this standard did not have a material impact on the Company's
financial position, results of operations or cash flows.

NOTE 2 - RELATED PARTY TRANSACTIONS

In 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 2003 was $353,000. In 2002 and 2001, 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 and 2001 were $806,000, and $1,005,000,
respectively.

The Company leases 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 Parent.
The lease terms are for ten years. Overhead costs are allocated primarily on the
basis of square footage utilized.

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 $838,000 at December 31, 2003 and $384,000 at December 31, 2002. In addition,
the Company is party to a capital lease of $232,000 at December 31, 2003 under
which the Parent is the lessor. At December 31, 2003, future minimum payments
under this lease due in the years 2004 through 2006 were approximately $68,000
each and $28,000 in 2007.

NOTE 3 - ACQUISITION

On June 8, 2001, the Company acquired all of the
outstanding common stock of Dunn Sales, Inc. ("DSI"), for a cash payment of
$3,992,000. DSI is a leading provider of safeguarding equipment installation,
rebuilding, repair and maintenance of fabricating machinery. The transaction was
accounted for as a purchase and accordingly, the results of DSI operations are
included in the Company's financial statements from the date of acquisition. In
2002, based on a reassessment of deferred tax liabilities related to the
acquisition, $1,500,000 was recorded to deferred tax liabilities and goodwill.
The total purchase price was allocated to the tangible and intangible assets
acquired and liabilities assumed based on their respective fair values on the
date of acquisition as follows (in thousands):

`Amortization
                                        Amount      period
                                      ----------  ----------
Working capital..................... $      140
Equipment...........................         96
Technology..........................      1,985     15 years
Customer relationships..............      1,061      7
Tradename...........................        710      5
                                      ----------
                                          3,992
Goodwill/deferred tax liability.....      1,500
                                      ----------
                                     $    5,492
                                      ==========`

NOTE 4 - BALANCE SHEET DATA

`December 31,
                                                  ----------------------
                                                     2002        2001
                                                  ----------  ----------
                                                     (In thousands)`

Accounts receivable:

`Accounts receivable........................ $    8,642  $    8,181
     Less: allowance for doubtful accounts......       (503)       (545)
                                                  ----------  ----------
                                                 $    8,139  $    7,636
                                                  ==========  ==========`

Allowance for doubtful accounts:

`Balance at beginning of year............... $      545  $      661
     Addition...................................         80         409
     Utilized...................................       (122)       (525)
                                                  ----------  ----------
     Balance at end of year..................... $      503  $      545
                                                  ==========  ==========`

`Finished goods............................. $    2,453  $    2,159
     Work in process............................      1,225       1,043
     Subassemblies..............................        911       1,016
     Raw materials..............................      4,692       4,501
                                                  ----------  ----------
                                                 $    9,281  $    8,719
                                                  ==========  ==========`

Property and equipment:

`Equipment.................................. $   10,979  $    9,995
     Furniture and fixtures.....................      1,923       1,686
     Leasehold improvements.....................        737         523
                                                  ----------  ----------
                                                     13,639      12,204
     Less: accumulated depreciation.............     (9,899)     (7,144)
                                                  ----------  ----------
                                                 $    3,740  $    5,060
                                                  ==========  ==========`

Accrued expenses:

`Accrued compensation....................... $    1,797  $    1,610
     Accrued commissions........................        192         194
     Warranty reserve...........................        221         241
     Accrued income tax.........................        227         227
     Stock rotation reserve.....................        231         105
     Price allowance reserve....................        154          70
     Other......................................        445         389
                                                  ----------  ----------
                                                 $    3,267  $    2,836
                                                  ==========  ==========`

Goodwill and other intangible assets:



|                                  |             | December 31, 2003                       | December 31, 2002                         
|--------------------------------- | ----------- | --------------------------------------- | ------------------------------------------
|                                  | Life(Years) | Gross Carrying
                  Amount | Accumulated
                  Amortization
|Technology                        | 15          | $ 7,146                                 | (1,730)                                   
|Customer relationships            | 7           | 3,476                                   | (1,686)                                   
|Tradename                         | 5           | 710                                     | (296)                                     
|Product lines                     | 12          | 1,596                                   | (395)                                     
|Covenant not to compete           | 2           | 50                                      | (50)                                      
|Total amortized intangible assets |             | 12,978                                  | $(4,157)                                  
|Goodwill                          |             | 1,500                                   |                                           
|Total                             |             | $14,478                                 |                                           
|                                  |             |                                         |                                           

The Company incurred amortization expense of $1,272,000 and
$1,296,000 in 2003 and 2002, respectively, of which $596,000 and $290,000 were
included in cost of goods sold. The Company will incur amortization expense of
approximately $1,271,000 in 2004 and 2005, $1,204,000 in 2006, $827,000 in 2007
and $676,000 in 2008.

Debt:

The Company has a $6,100,000 line of credit with a bank, of
which no amount was outstanding at December 31, 2003 or 2002. The line bears
interest at the bank's prime rate (4.00% at December 31, 2003), is secured by
accounts receivable, inventories and fixed assets, and expires on June 30, 2004.
The Company's Bank line of credit as amended, contains covenants which require
the Company to meet specific financial tests. The financial tests for 2003 were
as follows: (1) a requirement of profitably on an annual basis and (2) a minimum
tangible net worth requirement of $16,500,000. At December 31, 2003, the Company
was in compliance with the covenants.

NOTE 5 - INCOME TAXES

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

|                                 | Year Ended December 31
|-------------------------------- | ----------------------
|                                 | 2003                  
|Current tax expense (benefit)    | (In thousands)        
|Federal                          | $ 134                 
|State                            | 5                     
|                                 | 139                   
|Deferred tax expense (benefit)   |                       
|Federal                          | 157                   
|State                            | (34)                  
|                                 | 123                   
|Total provision for income taxes | $262                  
|                                 |                       

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:

|                                           | 2003 | 2002 | 2001 
|------------------------------------------ | ---- | ---- | -----
|Statutory U.S. tax rate                    | 34%  | 34%  | (34)%
|State income taxes, net of federal benefit | 6    | 6    | (1)  
|Research and development and other credits | (24) | (27) | (7)  
|Nondeductible expenses                     | 22   | 25   | 4    
|Effective tax rate                         | 38%  | 38%  | (38)%

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

|                                            | December 31,
|------------------------------------------- | ------------
|                                            | 2003        
|Short-term deferred tax asset               |             
|Inventory reserve                           | $ 784       
|Other reserves and accruals                 | 808         
|Net operating loss                          | 50          
|Depreciation                                | 165         
|Research & development tax credit and other | 208         
|Gross deferred tax assets                   | 2,015       
|                                            |             
|Long-term deferred tax liability            |             
|Depreciation and amortization               | --          
|Acquired intangible assets                  | (1,097)     
|Other                                       | (37)        
|Gross deferred tax liability                | (1,134)     
|                                            |             
|Net deferred tax assets                     | $881        

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
                                            --------  --------  --------
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
                                            ========  ========  ========

2001:
Basic earnings per share calculation...... $ (1,425)    9,659  $  (0.15)
Effect of dilutive securities:
  Stock options...........................       --        --        --
                                            --------  --------  --------
Diluted earnings per share calculation.... $ (1,425)    9,659  $  (0.15)
                                            ========  ========  ========`

The number of common stock equivalents excluded from the earnings per share
calculation because they would be antidilutive total to 444,000 in 2003, 523,000
in 2002 and 461,000 in 2001.

NOTE 7 - DIVIDENDS

During 2003 and 2002, the Company paid no dividends.
During 2001, the Company paid quarterly dividends of $.0525 per share for the
first two quarters of the year on April 3 and July 5.

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, 2003 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, 2000 | 384,608             | 486,432                      | $6.36                          
| | Granted                      | (67,566)            | 67,566                       | $4.73                          
| | Exercised                    | --                  | (6,200)                      | $1.21                          
| | Cancelled                    | 24,800              | (24,800)                     | $6.20                          
| | 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                          

Information relating to stock options outstanding and exercisable at December
31, 2003 is as follows:

|               | Options
Outstanding |  |                                                     | Options Vested and
Exercisable
|-------------- | ------------------- |  | --------------------------------------------------- | ------------------------------
|Exercise
Price | Number
outstanding  |  | Weighted Average
Remaining Contractual Life (Years) |                               
|$2.75 - $4.06  | 213,900             |  | 8.1                                                 |                               
|$4.10 - $5.74  | 77,000              |  | 3.9                                                 |                               
|$6.00 - $6.80  | 256,000             |  | 6.4                                                 |                               
|$7.00 - $11.45 | 109,832             |  | 3.7                                                 |                               
|               | 656,732             |  |                                                     |                               
|               |                     |  |                                                     |                               

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, 2003, 2002 and 2001, 20,826, 15,091and 22,958 shares of common
stock were purchased under this plan at a weighted-average price of $4.12, $2.68
and $5.77, respectively.

Fair Value Disclosures

This information is required to be determined as if the
Company had accounted for its employee stock options (including shares issued
under the Employee Stock Purchase Plan, collectively called options) as defined
by SFAS No. 123. The fair value of options reported below has been estimated at
the date of grant using the Black-Scholes option-pricing model for 2003, 2002
and 2001 using the following assumptions:

|                                | Stock Options | Employee Stock Purchase Plan
|------------------------------- | ------------- | ----------------------------
|                                | 2003          | 2002                        
|                                |               |                             
|Risk-free interest rates        | 2.1 - 3.6%    | 4.3 - 5.1%                  
|Expected lives (in years)       | 5             | 5                           
|Expected dividend yield         | 1.8%          | 1.9%                        
|Expected stock price volatility | 43.5%         | 43.1%                       

The weighted-average estimated fair value of options granted
during the year 2003, 2002 and 2001 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
2003, 2002 and 2001, respectively. The effect on earnings per share of using the
fair value of options is disclosed in Note 1 above.

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 2003 or 2002 and contributed
$219,000 in 2001.



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, 2003, 2002 and 2001 follows:

`Safety Products   Automation Products
                                       ----------------  -------------------
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
                                                                            
2001 
Sales................................ $         40,085  $             8,968
Group operating profit (loss)........ $           (846) $            (1,628)
Total assets......................... $         25,526  $             8,674
Capital expenditures................. $            859  $               151
Depreciation and amortization........ $          1,920  $               346`

The Company's sales by geographic location of customers in 2003 were: North
America - $53,356,000, Europe - $1,093,000 and Asia - $1,045,000. Foreign sales
represented 12% of sales in 2003 and less than 10% of sales in each of 2002 and 2001.

NOTE 11 - CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of
cash, cash equivalents, short-term investments and trade accounts receivable.
The Company places its cash and cash equivalents in a variety of money market
accounts. The Company further limits its exposure to these investments by
placing such investments with various high quality financial institutions. The
Company routinely performs evaluations of these financial institutions. The
Company offers credit terms on the sale of its products to its customers in the
normal course of business. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, requires no collateral from
its customers. The Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectability of all accounts receivable. No
customer accounted for more than 10% of accounts receivable at December 31,
2003, 2002 or 2001.

The Company operates principally in the United States. The
Company's operations in Germany are insignificant to the Company as a whole.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company leases certain office and manufacturing space
and other equipment under noncancellable operating leases. At December 31, 2003,
future minimum payments under these leases due in the years 2004 through 2005
were approximately $1,265,000 and $1,083,000 and $230,000 per year from 2006 to
2008. Of these amounts $1,026,000 in 2004, $951,000 in 2005 and $126,000 from
2006 to 2008 was related to lease agreements with the Parent or an affiliate of
the Parent.

Rent expense under operating lease agreements was
approximately $1,168,000 in 2003, $1,123,000 in 2002, and $1,007,000 in 2001. Of
these amounts, $963,000, $974,000 and $900,000 were related to lease agreements
with the Parent or an affiliate of the Parent.

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

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, 2003 and 2002 follows (in
thousands):

|                                               | December 31,
|---------------------------------------------- | ------------
|                                               | 2003        
|Warranty accrual at the beginning of the year  | $ 241       
|Accruals for warranties issued during the year | 163         
|Expenses incurred during the year              | (183)       
|Warranty accrual at the end of the year        | $221        

As permitted under Oregon law the Company has agreements
whereby the Company indemnifies its officers and directors for certain events or
occurrences while the officer or director is, or was serving at the Company's
request in such capacity. The indemnification term is for the period that the
officer or director is serving in such capacity or is subject to any possible
claim or action by reason of the fact that the Indemnitee was serving in that
capacity. The maximum potential amount of future payments by the Company could
be unlimited; however the Company has a director and officer insurance policy
that limits the Company's exposure and enables the Company to recover a portion
of any future amounts paid. As a result of the insurance policy coverage, the
Company believes that the estimated fair value of these agreements is
minimal.



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

None.



Item 9A.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and
procedures.    Based on their evaluation as of December 31,
2003, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.

(b) Changes in internal controls.   
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

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 2003 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 2003 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 2003 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 2003 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 2003 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 2003 Annual Meeting of Shareholders.

PART IV



Item 15 EXHIBITS LIST AND REPORTS ON FORM 8-K.

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

1.FINANCIAL STATEMENTS

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

2. EXHIBITS AND EXHIBIT INDEX:

|Exhibit 3.1  | Articles of Incorporation, as amended, are incorporated by reference to the
Registrant's Form 10- K for the year ended December 31, 1988, Exhibit 3.1.                                                                           
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3.3  | By-Laws are incorporated by reference to the Registrant's Form 10- K for the
year ended December 31, 1985, Exhibit 3.                                                                                                            
|Exhibit 4.1  | 1997 Employee Stock Purchase Plan is incorporated by reference to the
Registrant's Registration Statement on Form S-8 dated October 2, 1998.                                                                                     
|Exhibit 4.2  | 1997 Stock Plan is incorporated by reference to the Registrant's Registration
Statement on Form S-8 dated
October 2, 1998.                                                                                                       
|Exhibit 10.1 | Lease agreement dated February 21, 1995 for 6550 Dumbarton Circle, Fremont,
California 94555, is incorporated by reference to the Registrant's Form 10-KSB
for the year ended December 31, 1994, Exhibit 10.4.                   
|Exhibit 10.2 | Bank agreement dated November 29, 1994 with Bank of The West is incorporated
by reference to the Registrant's Form 10-KSB for the year ended December 31,
1994, Exhibit 10.3.                                                    
|Exhibit 10.3 | Amendment dated June 28, 2003 to Bank Agreement dated November 29, 1994 with
Bank of the West.                                                                                                                                   
|Exhibit 10.4 | 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-KSB for the year ended December 31, 2002, Exhibit
10.4.
|Exhibit 21.1 | Subsidiaries of the Registrant.                                                                                                                                                                                                  
|Exhibit 23.1 | Consent of PricewaterhouseCoopers LLP, Independent Accountants.                                                                                                                                                                  
|Exhibit 24.1 | Power of Attorney (included on page 36).                                                                                                                                                                                         
|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                                                    



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) A Report on Form 8-K was filed on November 4, 2003 furnishing the
Company's Earnings Release for the quarter ended September 30, 2003 to the
Securities and Exchange Commission.

---



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, 2004



| |                                     
| | ------------------------------------
| | 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, 2004
|/s/ Joseph J. Lazzara
Joseph J. Lazzara         | President, Chief Executive Officer,
     Treasurer, Director (Principal
     Executive Officer) | March 29, 2004
|/s/ James A. Lazzara
James A. Lazzara           | Vice President, Secretary and
     Director                                                     | March 29, 2004
|/s/ James A. Ashford
James A. Ashford           | Vice President and Director                                                                     | March 29, 2004
|/s/ Richard S. Baldwinson
Richard S. Baldwinson | Director                                                                                        | March 29, 2004
|/s/ Carl H. Frei
Carl H. Frei                   | Director                                                                                        | March 29, 2004
|/s/ Bernard J. Ploshay
Bernard J. Ploshay       | Director                                                                                        | March 29, 2004
|/s/ Richard O. Faria
Richard O. Faria           | Vice President and Chief Financial Officer
     (Principal Financial Officer)                   | March 29, 2004

---

SCIENTIFIC TECHNOLOGIES
INCORPORATED

EXHIBITS

TO



Annual Report on Form 10-K
                   Year ended December 31, 2003





EXHIBITS - TABLE OF CONTENTS



|Exhibit Number |                                                                                                                                                                                        
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.3   | - Amendment dated June 16, 2003 to Bank Agreement dated November 29, 1994
   PDF                                                                                                       
|Exhibit 21.1   | - Subsidiaries of the Registrant                                                                                                                                                       
|Exhibit 23.1   | - Consent of Independent Accountants                                                                                                                                                   
|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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