SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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(MARK ONE)

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

For the quarterly period ended June 30, 2004 or
 [  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________
Commission file number 0-12254



SCIENTIFIC TECHNOLOGIES INCORPORATED



|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







Check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES [X] NO [   ].

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

Common stock outstanding as of July 31, 2004 was 9,738,648 shares.









SCIENTIFIC TECHNOLOGIES INCORPORATED

                          Three and Six Months Ended June 30, 2004
                                     INDEX



|PART I.   Financial Information                                                                                          | Page No.
|------------------------------------------------------------------------------------------------------------------------ | --------
|                                                                                                                         |         
|Item 1.   Financial Statements
                  (unaudited):                                                            |         
|                                                                                                                         |         
|Condensed Consolidated Balance Sheets as of
          
     June 30, 2004 and December 31, 2003                          | **      
|                                                                                                                         |         
|Condensed Consolidated Statements of Operations for the
          
    Three and Six Months ended June 30, 2004 and 2003 | **      
|                                                                                                                         |         
|Condensed Consolidated Statements of Cash Flows for the
          
    Six Months ended June 30, 2004 and 2003           | **      
|                                                                                                                         |         
|Notes to Condensed Consolidated Financial Statements                                                                     | **      
|                                                                                                                         |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations    | **      
|                                                                                                                         |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                     | **      
|                                                                                                                         |         
|Item 4.   Controls and Procedures                                                                                        | **      
|                                                                                                                         |         
|PART II.  Other Information                                                                                              |         
|                                                                                                                         |         
|Item 4.   Submission of Matters to a Vote of Security Holders                                                            | **      
|                                                                                                                         |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                               | **      
|                                                                                                                         |         
|Signatures                                                                                                               | **      

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PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

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SCIENTIFIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEET                  (Unaudited, in thousands, except for per share data)

|Assets                                | Jun. 30, 2004 | Dec. 31, 2003
|------------------------------------- | ------------- | -------------
|Current assets:                       |               |              
|Cash and cash equivalents             | $ 3,445       | $ 2,312      
|Accounts receivable, net              | 8,184         | 8,139        
|Inventories                           | 10,974        | 9,281        
|Deferred income taxes                 | 2,015         | 2,015        
|Receivable from Parent                | 389           | 838          
|Prepaid expenses and other assets     | 836           | 1,034        
|Total current assets                  | 25,843        | 23,619       
|                                      |               |              
|Property and equipment, net           | 3,645         | 3,740        
|Goodwill
Other intangible assets, net | 1,500
8,181   | 1,500
8,821  
|Total assets                          | $39,169       | $37,680      

Liabilities and Shareholders' Equity

|Current liabilities:                         |        
|-------------------------------------------- | -------
|Accounts payable                             | $ 3,041
|Accrued expenses                             | 3,527  
|Current portion of capital lease with Parent | 68     
|Total current liabilities                    | 6,636  
|                                             |        
|Commitments and contingencies                |        
|                                             |        
|Capital lease with Parent                    | 130    
|Deferred income taxes                        | 1,134  
|Total liabilities                            | 7,900  

Shareholders' equity:

|Common stock, $.001 par value; 100,000 shares
   authorized; 9,739 and 9,701 shares issued and
   outstanding | 10      | 10     
|------------------------------------------------------------------------------------------------------------- | ------- | -------
|Capital in excess of par value                                                                                | 5,865   | 5,792  
|Retained earnings                                                                                             | 25,394  | 24,487 
|Total shareholders' equity                                                                                    | 31,269  | 30,289 
|Total liabilities and shareholders' equity                                                                    | $39,169 | $37,680

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

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SCIENTIFIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS                  (Unaudited, in thousands, except per share data)



|                                                                 | For the three months ended  
|---------------------------------------------------------------- | ----------------------------
|                                                                 | Jun. 30, 2004               
|                                                                 |                             
|Sales                                                            | $15,637                     
|                                                                 |                             
|Cost of sales                                                    | 9,204                       
|                                                                 |                             
|Gross profit                                                     | 6,433                       
|                                                                 |                             
|Operating expenses:                                              |                             
|Selling, general and administrative                              | 4,383                       
|Research and development                                         | 1,013                       
|Amortization of intangible assets                                | 170                         
|Total operating expenses                                         | 5,566                       
|                                                                 |                             
|Income from operations                                           | 867                         
|                                                                 |                             
|Interest and other income, net                                   | 73                          
|                                                                 |                             
|Income before income taxes                                       | 940                         
|                                                                 |                             
|Provision for income taxes                                       | 357                         
|                                                                 |                             
|Net income                                                       | $583                        
|                                                                 |                             
|Net income per share:                                            |                             
|Basic and diluted                                                | $ 0.06                      
|                                                                 |                             
|Shares used to compute net income per share:
   Basic
   Diluted | 9,729
                 9,811

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

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SCIENTIFIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS                  (Unaudited, in thousands, except per share data)



|                                                                 | For the six months ended    
|---------------------------------------------------------------- | ----------------------------
|                                                                 | Jun. 30, 2004               
|                                                                 |                             
|Sales                                                            | $30,272                     
|                                                                 |                             
|Cost of sales                                                    | 17,770                      
|                                                                 |                             
|Gross profit                                                     | 12,502                      
|                                                                 |                             
|Operating expenses:                                              |                             
|Selling, general and administrative                              | 8,785                       
|Research and development                                         | 2,030                       
|Amortization of intangible assets                                | 341                         
|Total operating expenses                                         | 11,156                      
|                                                                 |                             
|Income from operations                                           | 1,346                       
|                                                                 |                             
|Interest and other income, net                                   | 117                         
|                                                                 |                             
|Income before income taxes                                       | 1,463                       
|                                                                 |                             
|Provision for income taxes                                       | 556                         
|                                                                 |                             
|Net income                                                       | $907                        
|                                                                 |                             
|Net income per share:                                            |                             
|Basic and diluted                                                | $ 0.09                      
|                                                                 |                             
|Shares used to compute net income per share:
   Basic
   Diluted | 9,728
                 9,797

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

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SCIENTIFIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS                  (Unaudited, in thousands)



|                                                  | For the six months ended
|------------------------------------------------- | ------------------------
|                                                  | Jun. 30, 2004           
|                                                  |                         
|Cash flows from operating activities              |                         
|Net income                                        | $ 907                   
|Adjustments to reconcile net income to cash       |                         
|provided by operating activities:                 |                         
|Depreciation and amortization                     | 1,291                   
|Changes in assets and liabilities                 |                         
|Accounts receivable                               | (45)                    
|Inventories                                       | (1,693)                 
|Receivable from Parent                            | 449                     
|Prepaid expense and other assets                  | 198                     
|Accounts payable                                  | 283                     
|Accrued expenses                                  | 260                     
|Cash flows provided by operating activities       | 1,650                   
|                                                  |                         
|Cash flows from investing activities              |                         
|Purchase of property and equipment                | (556)                   
|Cash flows used in investing activities           | (556)                   
|                                                  |                         
|Cash flows from financing activities              |                         
|Repayment of capital lease with Parent            | (34)                    
|Issuance of common stock                          | 73                      
|                                                  |                         
|Cash flows provided by financing activities       | 39                      
|                                                  |                         
|Change in cash and cash equivalents               | 1,133                   
|                                                  |                         
|Cash and cash equivalents at beginning of period  | 2,312                   
|Cash and cash equivalents at end of period        | $3,445                  
|Supplemental disclosure of cash flow information: |                         
|Cash paid to Parent for income taxes              | $556                    

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

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SCIENTIFIC TECHNOLOGIES INCORPORATED
                  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                      (Unaudited)

1. INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements
for the three and six months ended June 30, 2004 and 2003 are unaudited and have
been prepared in accordance with generally accepted accounting principles in the
United States of America and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
in the United States of America for complete financial statements. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
considered necessary to present fairly the financial position, results of
operations and cash flows of Scientific Technologies Inc. (the "Company") and
its subsidiaries for all periods presented.

To prepare these condensed consolidated financial statements
in conformity with generally accepted accounting principles, management of the
Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities at the date of the financial statements and revenue
and expenses during the reporting period. Actual results could differ from those
estimates.

The results of operations are not necessarily indicative of
the results to be expected in the future or for the full fiscal year. It is
recommended that these condensed consolidated financial statements be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto included in its 2003 Annual Report on Form 10-K.

The Company is substantially owned by Scientific Technology
Incorporated, a California corporation (the "Parent"). See discussion of
intercompany activities below.

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.

STOCK-BASED COMPENSATION

The following table sets forth the effect on the Company's
net income and net income 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).



|                                                                                                                            | Six Months Ended June 30, | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------- | 
|                                                                                                                            | 2004                      | 
|Net income, as reported                                                                                                     | $ 907                     | 
|Add: Stock-based compensation included in the
   statement of operations.                                                   | -                         | 
|Deduct: Stock-based employee compensation expense
   determined under fair value based method for all
   awards, net of tax | 46                        | 
|Pro forma net income                                                                                                        | $ 861                     | 
|Net income per share - basic and diluted:                                                                                   |                           | 
|As reported                                                                                                                 | $ 0.09                    | 
|Pro forma                                                                                                                   | $ 0.09                    | 

Options to purchase 17,000 shares of common stock were
granted in the quarter ended June 30, 2004. The assumption regarding the annual
vesting of these stock options was 20%. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumption used for grants in 2004: Dividend
yield of 1.86%; expected volatility of 46.03%; risk-free interest rate of 2.57%;
and expected life of five years.

2. INVENTORIES

Inventories consist of the following (in thousands):



|                | Jun. 30, 2004 | Dec. 31, 2003
|--------------- | ------------- | -------------
|Raw materials   | $ 5,595       | $4,692       
|Subassemblies   | 1,160         | 911          
|Work in process | 1,327         | 1,225        
|Finished goods  | 2,892         | 2,453        
|                | $10,974       | $9,281       

3. NET INCOME PER SHARE

A reconciliation of the numerators and denominators used to
compute basic and diluted income per common share is provided below.



|                                                  | (In thousands) | (Per share)
|------------------------------------------------- | -------------- | -----------
|                                                  | Income         | Shares     
|Three months ended June 30, 2004                  |                |            
|Basic earnings per share calculation              | $ 583          | 9,729      
|Effect of dilutive securities
      Stock options |                | 82         
|Diluted earnings per share calculation            | $ 583          | 9,811      
|Three months ended June 30, 2003                  |                |            
|Basic earnings per share calculation              | $ 208          | 9,700      
|Effect of dilutive securities
      Stock options |                | 23         
|Diluted earnings per share calculation            | $ 208          | 9,723      
|Six months ended June 30, 2004                    |                |            
|Basic earnings per share calculation              | $ 907          | 9,728      
|Effect of dilutive securities
      Stock options |                | 69         
|Diluted earnings per share calculation            | $ 907          | 9,797      
|Six months ended June 30, 2003                    |                |            
|Basic earnings per share calculation              | $ 298          | 9,695      
|Effect of dilutive securities
      Stock options |                | 34         
|Diluted earnings per share calculation            | $ 298          | 9,729      

4. RELATED PARTY TRANSACTIONS

The Company provides 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 Company leases approximately 85,000 square feet in a
95,000 square foot facility owned by an affiliate of the Parent. The Company
also leases another 25,000 square feet in another facility owned by the same
affiliate. 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. The net effect of
transactions with the Parent resulted in a receivable from Parent of $389,000 at
June 30, 2004. In addition, the Company is party to a capital equipment lease of
$198,000 at June 30, 2004 under which the Parent is the lessor.

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

5. SEGMENT REPORTING AND OTHER 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 is as
follows: (in thousands)



|                              | Three months ended
                  June 30,
|----------------------------- | ---------------------------------------------
|                              | 2004                                         
|Safety Products               |                                              
|Sales                         | $12,981                                      
|Group operating profit        | 838                                          
|                              |                                              
|Automation Products           |                                              
|Sales                         | $ 2,626                                      
|Group operating profit (loss) | 29                                           





|                       | Six months ended
                  June 30,
|---------------------- | -------------------------------------------
|                       | 2004                                       
|Safety Products        |                                            
|Sales                  | $25,337                                    
|Group operating profit | 1,360                                      
|                       |                                            
|Automation Products    |                                            
|Sales                  | $ 4,935                                    
|Group operating loss   | (14)                                       
|                       |                                            
|                       | At                                         
|                       | Jun. 30
                  2004             
|Total Assets           |                                            
|Safety Products        | $33,285                                    
|Automation Products    | 5,884                                      
|Total                  | $  39,169                                  

The Company operates principally in the United States.
The Company's operations in Germany are less than 10% of total operations. Sales
to foreign customers represented 14% and 13% of total sales in the three and six
months ended June 30, 2004, compared to 12% in the comparable periods in
2003.

6. COMMITMENTS AND CONTINGENCIES

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 follows (in thousands):

|                                        | Three months ended June 30,
|--------------------------------------- | ---------------------------
|                                        | 2004                       
|Warranty accrual at beginning of period | $221                       
|Accruals for warranties issued          | 54                         
|Expenses incurred                       | (57)                       
|Warranty accrual at end of period       | $ 218                      

|                                        | Six months ended June 30,
|--------------------------------------- | -------------------------
|                                        | 2004                     
|Warranty accrual at beginning of period | $221                     
|Accruals for warranties issued          | 96                       
|Expenses incurred                       | (99)                     
|Warranty accrual at end of period       | $ 218                    

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.

7. 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
June 15, 2004. The Company believes it has no Variable Interest Entities and,
thus, the adoption of this standard did not have an impact on the Company's
financial position, results of operations or cash flows.



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This interim report on Form 10-Q contains trend analysis
and other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934. Such
statements include expectations, beliefs, intentions or strategies regarding
future operating results, future expenditures, future cash requirements and
future industry conditions that involve risks and uncertainties. The Company's
actual results could differ materially from those projected in such
forward-looking statements as a result of many factors, including, without limitation,
those set forth under this section, the section entitled "Business Factors"
below and elsewhere in this report on Form 10-Q.

Results of Operations

(Amounts in thousands, except percentages)

Scientific Technologies Incorporated designs,
manufactures and distributes automation safeguarding and specialty sensor
products for the industrial control market. The Company's products include
safety light guards, profiling scanners, factory automation sensors, machine
safeguarding installation services, safety interlock switches, safety relays,
safety edges, safety mats, ultrasonic sensors, level and flow controllers,
pressure, displacement and velocity transducers, digital pressure gauges and
comparators and other electronic equipment supplied to industrial automation,
commercial and defense customers.

Sales for the three and six months ended June 30, 2004
increased 10% and 11% to $15,637 and $30,272, respectively from $14,273 and
$27,233 in the comparable periods in 2003. During the second quarter and first
six months of 2004, we experienced increased number of units shipped by the
Safety Products Group ("SPG") of 8% and 10%, while the Automation Products Group
("APG") reported 10% and 15% unit sales growth over the same periods in 2003.
The increased sales growth by SPG was primarily related to an increase in the
number of safety products sold. APG sales growth was due to increased sales of
level sensor products and pressure products.

Gross profit as a percent of sales declined to 41% for
the second quarter and first six months of 2004 from 43% in the comparable
periods in 2003. SPG margin declined primarily due to higher costs at Machine
Services Division ("MSD). Cost of sales at MSD rose primarily due to the
reclassification of $180 of indirect cost of sales which had been reflected in
operating expense in 2003. This decline was partially offset by higher margins
at APG, which resulted from a change in the mix of products sold to those
bearing a lower relative cost. Gross profit grew $287 and $810 to $6,433 and
$12,502 in the three and six months ended June 30, 2004 from $6,146 and $11,692
recorded in the same periods of 2003.

Selling, general and administrative expenses for the
three months ended June 30, 2004 declined 3% to $4,383 from $4,504 in the same
period of 2003. This was primarily the result of $142 expenses associated with
the relocation of APG's PSI-Tronix Division to Logan, Utah in the second quarter
of 2003. As a percentage of sales for the three months ended June 30, 2004,
selling, general and administrative expenses improved to 28% compared to 32% for
the same period in 2003. For the six months ended June 30, 2004, selling,
general and administrative expenses increased 2% to $8,785 from $8,568 in 2003.
Increased SPG and corporate personnel costs of $312 were partially offset by the
lowered personnel costs of $102 at APG due to the PSI-Tronix relocation in 2003.
As a percentage of sales for the six months ended June 30, 2004, selling,
general and administrative expenses improved to 29% compared to 32% for the same
period in 2003.

Research and development expenses declined 12% and 13% to
$1,013 and $2,030 during the three and six months ended June 30, 2004 from to
$1,155 and $2,030 recorded in the comparable periods in 2003. This was primarily
the result of lower staffing levels, and reduced consulting expenses in the both
2004 periods compared to the comparable 2003 periods. As a percentage of sales,
research and development expenses in the second quarter and first half of 2004,
were 6% and 7% respectively compared to 8% and 9% for the same periods of 2003.
We expect research and development expenses to rise as a percentage of sales in
subsequent quarters.

Our effective income tax rate for the three and six months
ended June 30, 2004 was 38%. Income taxes payable or receivable are calculated
on a stand alone basis and are recorded as a payable to or receivable from our
parent, which files a consolidated tax return including our accounts.

Contractual Obligations

The Company has no raw material contracts exceeding one
year in duration. In addition, the Company leases production, warehouse and
corporate office space as well as certain equipment under non-cancelable
operating lease agreements. All building leases have renewal options and all
include cost of living adjustments. No employees have employment agreements. The
following table summarizes the estimated annual obligations.

|                          | Payments due by period
|------------------------- | ----------------------
|Contractual Obligations   | Total                 
|Capital Lease Obligations | $ 198                 
|Operating Leases          | $3,436                
|Total                     | $3,634                

Liquidity and Capital Resources

(Amounts in thousands)

We had cash and cash equivalents at June 30, 2004 and
December 31, 2003 of approximately $3,400 and $2,300 respectively.

Our primary source of liquidity as of June 30, 2004
consisted of cash and cash equivalents of approximately $3,400. During the
second quarter of 2004, we used approximately $33 in cash. The slight increase
in the use of cash was primarily due to an increase in inventory, lower accounts
payable and accrued expenses which were offset by higher net income and reduced
accounts receivable as a result of increased collections. For the six months
ended June 30, 2004 we generated $1,650 in cash from operations, compared to
$442 in the same 2003 period. This was primarily due to increased cash
collections associated the higher sales. In addition increased income taxes led
to a reduction in receivable from Parent. Our inventory balances increased 18%
in the six months ended June 30, 2004, as a result of increased sales and in
support of new product introductions. In light of this, we expect a modest
increase in inventory during the balance of 2004.

Available bank borrowings were $6,100, all of which were
unused at June 30, 2004. The Company's revolving line of credit was renewed
through June 30, 2005.

We believe that our existing cash and cash equivalent
balances and anticipated cash flows from operations will be sufficient to meet
our operating and capital requirements for at least the next 12 months.
However, revenues could decline below our expectations resulting in insufficient
cash flow from operations or we may require additional financing to fund new
product development, strategic investments in new markets, and strategic
acquisitions. As a result, we could be required, or could elect, to raise
additional funds during that period and we may need to raise additional capital
in the future. Additional capital may not be available at all, or may only be
available on terms unfavorable to us. With the exception of operating leases, we
have not entered into any off-balance sheet financing arrangements, we have not
established any variable interest entities, we do not have any unconditional
purchase obligations, nor do we have non-cancelable commitments for capital
expenditures

Critical Accounting Policies

There were no material changes in any of our critical accounting
estimates or judgments during the second quarter of 2004.

Revenue Recognition

A majority of our sales are through third party
distributors, system integrators and original equipment manufacturers. 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 post contract 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.

Sales agreements with our distributors provide stock
rotation rights to our distributors and price allowance rights to certain
distributors for products sold to specific customers approved by the Company in
advance. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 48, paragraph 6, we record revenue upon shipment to distributors because at the time of shipment, we can
reasonably estimate returns and price allowances based on historical
experience. Estimated accruals for
stock rotation and price allowance are recorded at the time of shipment as
reductions of sales. Price allowances are accrued as a voluntary sales incentive
in accordance with Emerging Issues Task Force (EITF) 01-09. Therefore, price
allowances are accrued at the later of the date of revenue recognition or when
the sales incentive is offered to the distributor.

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. As of June 30, 2004, the
Company had $55,000 in deferred revenue.

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 and intangible assets, 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. Approximately half of our intangible assets result from the acquisition
of MSD, which is part of our SPG segment. As of June 30, 2004, we have
determined that the recorded value of our intangible assets were fully
recoverable. We will continue to assess the fair value of our intangible assets
including those associated with MSD.

Business Factors

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. Our operating results may fluctuate for many reasons, including but
not limited to:

- variations in the timing and size of, or cancellations or reductions of,
customer orders and shipments;
- variations in the availability, cost and quality of components from our
suppliers, particularly from our single source suppliers and suppliers of scarce
components;
- competitive factors, including pricing, availability and demand for
competing products;
- constraints on our manufacturing capacity;
- variability of the product development and sales cycle with our customers;
- variations in our manufacturing yields and other factors affecting our
manufacturing costs;
- changes in our sales prices;
- changes in the mix of products with different gross margins;
- failure to meet milestones under any significant development contracts;
- obsolescence of our component inventories;
- hiring and loss of personnel, particularly in manufacturing, research and
development and sales and marketing;
- product defect claims and associated warranty
expenses; and
- changes in the overall economic conditions that
we, our customers, and our suppliers experience.

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 indicators of our overall performance.

The market for our products is highly competitive.

The market for automation safeguarding and specialty
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. 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 have serious
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.

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
negative 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 negatively 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 negative effect on our business, financial
condition, and results of operations.



Item 3. 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 4. CONTROLS AND PROCEDURES.

(a) 	As of the end of the period covered by this
report, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) 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) 	There have been no significant changes in our
internal control over financial reporting or in other factors that could
significantly affect internal control over financial reporting subsequent to the
date we carried out our evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

Items 1 through 3 and 5 are not applicable for this reporting period.



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

At the Annual Meeting of shareholders held on May 27,
2004, the shareholders re-elected the following to the Board of Directors,
Anthony R. Lazzara: 9,494,042 shares for, Joseph J. Lazzara: 9,494,342 shares
for, James A. Lazzara: 9,493,942 shares for, James A. Ashford: 9,494,182 shares
for, Carl H. Frei: 9,534,940 shares for, Bernard L. Ploshay: 9,494,742 shares
for and Richard S. Baldwinson: 9,534,840 shares for.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K.

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



|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 24.1 - | Power of Attorney is incorporated by reference to the Registrant's Form 10-K
for the year ended December 31, 2003, Exhibit 24.1.                      
|Exhibit 31 -   | Section 302 Certification of Chief Executive and Chief Financial Officers
       PDF                                                                  
|Exhibit 32 -   | Section 906 Certification of Chief Executive and Chief Financial Officers
       PDF                                                                  

(b)

A Report on Form 8-K was filed  on April 30, 2004
furnishing the First Quarter Earnings Release of Scientific Technologies
Incorporated to the Securities and Exchange Commission.

A Report on Form 8-K was filed
on June 7, 2004
reporting the dismissal of PricewaterhouseCoopers and the appointment of BDO
Seidman, LLP as independent accountants of the Company.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

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

|Date: August 16, 2004 |  | /s/Joseph J. Lazzara  
                  Joseph J. Lazzara
                  President and Chief Executive Officer
                  (Principal Executive Officer)
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: August 16, 2004 |  | /s/ Richard O. Faria  
                  Richard O. Faria
                  Vice-President and Chief Financial Officer
                  (Principal Financial Officer)
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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