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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

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# FORM 10-KSB

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(Mark One)


|x |  | ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
the fiscal year ended December 31, 2005
|- |  | -------------------------------------------------------------------------------------------------------------------------

|o |  | TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------

Commission File Number:
000-08149

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SCANNER TECHNOLOGIES
CORPORATION (Name of small business
issuer in its charter)

|New Mexico                                                     | 85-0169650                         
|-------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction of
incorporation or organization) | (I.R.S. EmployerIdentification No.)

14505 21st Avenue
North, Suite 220, Minneapolis, MN 55447 (Address of principal
executive offices, Zip code)

(763) 476-8271 (Issuers
telephone number)

Securities registered under Section
12(b) of the Exchange Act:  None

Securities registered under Section
12(g) of the Exchange Act:

Common Stock, no par
value(Title of class)

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Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.oYes
     xNo

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.     xYes
     oNo

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B 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-KSB
or any amendment to this Form 10-KSB.   o

Indicate  by check mark  whether the
 registrant  is a shell  company (as defined in Rule 12b-2 of the  Exchange Act).oYes
     xNo

The issuers revenues for its
most recent fiscal year were $1,595,912.

The aggregate market value of the
voting stock held by non-affiliates of the Company at February 22, 2006, was $3,105,578,
assuming that all executive officers, directors and 10% shareholders known to the
registrant are affiliates.

The Registrant had 12,216,068 shares
of Common Stock, no par value, outstanding as of February 22, 2006.

# DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the definitive Proxy to
be delivered to shareholders in connection with the 2006 Annual Meeting of Shareholders
are incorporated by reference into Part III.

Transitional Small
Business Disclosure Format (Check one) 
oYes
     xNo





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# SCANNER TECHNOLOGIES
CORPORATION FORM 10-KSBTable of Contents

|                     |                                                                                                                 
|-------------------- | ----------------------------------------------------------------------------------------------------------------
|PART I.              |                                                                                                                 
|                    
|Item 1.              | Description of Business.                                                                                        
|                    
|Item 2.              | Description of Property.                                                                                        
|                    
|Item 3.              | Legal Proceedings.                                                                                              
|                    
|Item 4.              | Submission of Matters to a Vote of Security Holders.                                                            
|                    
|PART II.             |                                                                                                                 
|                    
|Item 5.              | Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities. 
|                    
|Item 6.              | Managements Discussion and Analysis or Plan of Operation.                                                      
|                    
|Item 7.              | Financial Statements.                                                                                           
|                    
|Item 8.              | Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.                           
|                    
|Item 8A.             | Controls and Procedures.                                                                                        
|                    
|Item 8B.             | Other Information.                                                                                              
|                    
|PART III.            |                                                                                                                 
|                    
|Item 9.              | Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
|                    
|Item 10.             | Executive Compensation.                                                                                         
|                    
|Item 11.             | Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.                 
|                    
|Item 12.             | Certain Relationships and Related Transactions.                                                                 
|                    
|Item 13.             | Exhibits.                                                                                                       
|                    
|Item 14.             | Principal Accountant Fees and Services.                                                                         
|                    
|SIGNATURES           | 18                                                                                                              
|                    
|FINANCIAL STATEMENTS | F-1                                                                                                             
|                    
|EXHIBITS             | E-1                                                                                                             
|                    

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# Introductory Statement

This Annual Report on Form 10-KSB
includes forward-looking statements within the meaning of the Securities Exchange Act of
1934, as amended, or the Exchange Act. These statements are based on our beliefs and
assumptions and on information currently available to us. Forward-looking statements
include, among others, the information concerning possible or assumed future results of
operations of Scanner Technologies Corporation and its subsidiary (Scanner) set forth
under the heading Managements Discussion and Analysis or Plan of
Operation. Forward-looking statements also include statements in which words such as
may, will, should, could,
expect, anticipate, intend, plan,
believe, estimate, predict, potential, or
similar expressions are used. Forward-looking statements are not guarantees of future
performance. Our future results and shareholder values may differ materially from those
expressed in these forward-looking statements. We caution you not to put undue reliance on
any forward-looking statements included in this document.

# PART I

|ITEM 1. |  | DESCRIPTION
OF BUSINESS
|------- |  | -----------------------

# General Business
Development

In July 2002, Scanner Technologies
Corporation, a privately held Minnesota corporation formed in 1990 for the purpose of
inventing, developing and marketing vision inspection solutions for the semiconductor
industry, merged with Southwest Capital Corporation, a New Mexico corporation formed in
1964. Southwest Capital Corporation survived the merger and changed its name to Scanner
Technologies Corporation, which entity continued to operate the business of the Minnesota
corporation.

Our principal offices are located at
14505 21st Ave. N., #220, in Minneapolis, Minnesota. Outside of the U.S., we have an
office in Singapore, which is primarily engaged in sales of Scanner products. To comply
with local laws, the office in Singapore is operated by Scanners wholly-owned
subsidiary, Scanner Technologies Corporation International, a Minnesota corporation.

# Industry

Scanner invents, develops and markets
vision inspection products that are used in the semiconductor industry for the inspection
of integrated circuits.

Integrated circuits can be divided
into two general categories:

| | Leaded
devices: These are integrated circuits with fragile leads extending from the
perimeter of the package that provide the electrical interconnects between the integrated
circuit and the other components that constitute an electronic product.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ball
array devices: These are integrated circuits that have an array of small conductive
spheres, or balls, mounted to the bottom of the integrated circuit package. These balls
serve the same function as the leads in the first category.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Integrated circuits are designed to
be assembled to circuit substrates or printed circuit boards that are key components of
familiar products such as personal computers, cell phones, TVs, automotive
electronics, games, toys, DVD and CD players, satellites and avionics to name a few. Each
and every lead or ball must be accurately placed as defined by the integrated circuit
package specification to insure a reliable interface between the lead/ball and the circuit
substrate. Any misalignment, due to bent leads, imperfectly placed or damaged balls, or
missing balls will result in a defective product.

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The manufacture of integrated
circuits is a complex sequence of discrete steps that requires precise process controls
and verification through testing.

The last three steps prior to the
final Pack & Ship  1st Vision Inspection,
Electrical Test and 2nd Vision Inspection are the focus of our
design efforts. During the final stages of the manufacturing process, Singulation
Trim & Form Ball Attach and Electrical Test, the integrated circuits
can be damaged requiring the 1st Vision Inspection and 2nd Vision
Inspection.

# Scanner Products

Three-dimensional (3D)
Inspection Modules

Many manufacturers of integrated circuit
devices use robotic inspection systems with a pick and place mechanism to automatically
inspect and sort integrated circuits in the manufacturing process. Such an inspection
system uses machine vision technology to inspect both leaded and ball array devices to
ensure that the devices conform to the specifications, then sorts them into pass or fail
categories. The inspection system can also perform other operations such as inspecting the
nomenclature printed on the package of the integrated circuit and sealing the good parts
into tape. The 3D inspection modules developed and manufactured by Scanner form the
machine-vision element of such inspection systems.

Customers purchasing Scanners
modules are generally included in the following two groups:

| | Original
Equipment Manufacturers (OEM) which integrate our modules into robotic inspection systems
they produce for sale to end users; and
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | End
users themselves, i.e. the manufacturers and assemblers of integrated circuits.
| | -----------------------------------------------------------------------------------

Scanner has developed the following
core products as inspection modules:

| | UltraVim
Module, used for 3D inspections of leaded devices and 2D inspections of ball devices.
| | ----------------------------------------------------------------------------------------------

| | UltraVim
Plus Module, used for 3D inspections of leaded devices as well as of ball devices.
| | -------------------------------------------------------------------------------------------

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| | UltraMark,
used for the inspection of the nomenclature printed or etched on integrated circuits to
insure that the markings are correct and legible.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

The UltraVim Module and the UltraVim
Plus Module incorporate technology covered by patents owned by Scanner.

We believe that Scanners
inspection modules have the following competitive advantages when compared with similar
products offered by Scanners competitors:

- Scanners modules do not have to be adjusted for various users, thereby reducing the
operator skill required to operate the inspection system and, therefore, lowering the
associated labor rate to the end user.
- Scanners modules are easy to set up and do not require extensive training, thereby
reducing device changeover costs and lowering operator training and support costs to the
end user.
- Scanners modules make the high speed inspection of integrated circuits possible,
thereby increasing the manufacturing efficiency while reducing the total number of
machines required, which results in increased profits to the end user.
- The automatic calibration of Scanners modules insures accurate inspections resulting
in increased yields and profits to the customer and lowers the operator skill required to
maintain the equipment and the associated labor rate to end user.

Three-dimensional (3D)
Inspection Systems

In July 2002, Scanner introduced the
first in a series of products of three-dimensional inspection systems under the product
line name VisionFlex.

# Markets for
Scanners Products

According to the Semiconductor
Industry Association (SIA), global semiconductor sales rose to $227.5 billion in 2005, up
6.8% from the global revenue of $213.0 billion recorded in 2004. In February 2006, SIA
projected that worldwide sales of semiconductors grow by 7.9% in 2006 to $245 billion.
Consumer electronics products such as cellular phones, digital cameras, digital
televisions, and MP3 players were the principal drivers for the increased demand for
microchips, with sales of personal computers remaining strong, according to SIA.

According to the Capital Equipment
Consensus Forecast distributed in December 2005 by Semiconductor Equipment and Materials
International (SEMI), a trade association of semiconductor equipment and
material manufacturers, sales of semiconductor equipment for 2005 were expected to reach
$32.95 billion, a decline of approximately 11.2% from $37.08 in 2004. The final
manufacturing equipment segments were expected to experience the sharpest declines in
2005, with the market for assembly and packaging equipment declining by approximately 19%
to $1.99 billion and the market for equipment to test semiconductors declining by
approximately 17% to $5.27 billion. According to SEMI, capital spending in 2005 reflected
an anticipated decline following the high investment levels of 2004. Participants in
SEMIs forecast, which was based on interviews conducted with companies representing
a majority of the total sales volume for the global semiconductor equipment industry,
expect the market semiconductor equipment to experience a single-digit increase in 2006
and resume double-digit growth in 2007 and 2008, to reach $46.3 billion in 2008.

These predictions regarding both
semiconductor sales and sales of semiconductor equipment may prove to be incorrect,
however, and we can provide no assurances as to the performance of the worldwide
semiconductor equipment market.

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As shown in the flow chart above, the
first vision inspection in a standard assembly process is followed by the electrical test
that is in turn followed by a second vision inspection. During the electrical test, the
leads/balls of the integrated circuit must make physical contact with the tester which
carries the risk of damaging the integrated circuit itself. This risk makes the second
vision inspection necessary to ensure that the integrated circuit complies with the device
specifications before shipment. A portion of our sales are derived from the integration of
the UltraVim or the UltraVim Plus Module into existing test handlers, thereby eliminating
the need for the stand-alone second vision inspection.

# Sales and Marketing

Scanner sells its products through
direct sales offices in San Jose, California and Singapore and, in key geographical
markets, through sales representatives throughout the world. For Japan, Scanner has a
distributor agreement with Yamatake Honeywell.

# Manufacturing

Scanner designs its own products and
out-sources the manufacturing of parts. Our research and development, engineering and
designing operations, as well as the system assembly, are located at the facility in
Tempe, Arizona. The vision inspection modules that are sold to our OEM customers or built
into the systems we are currently manufacturing are assembled at our facility in
Minneapolis, Minnesota.

# Competition

The market for the inspection of
integrated circuits is highly competitive. Numerous companies, several of them public
companies with greater financial resources and a longer operating history, compete with us
for market share. Competitors are, among other companies, ICOS Vision Systems Corp. N.V.
and Robotic Vision Systems, Inc.

# Proprietary Rights

We hold twelve U.S. patents for
Scanners innovative technologies and additional patents are pending in the United
States and strategic countries worldwide. The patents essential for our product
development and manufacturing will expire from May 2017 through January 2018. In 2000,
Scanner initiated a lawsuit against ICOS Vision Systems Corp. N.V., a Belgian corporation,
for patent infringement. See Legal Proceedings. A trial with respect to this
lawsuit was completed in March 2005, and, as of February 22, 2006, we are awaiting the
courts ruling. We are reviewing the possibility of licensing our technologies to
third parties to provide additional revenues.

# Dependence on Few Major
Customers

Approximately 91% of our revenues in
2005 were from four customers. They included Manufacturing Integration Technology Ltd.
(57%), Kanematsu USA Inc. (13%), Ismeca Malaysia SDN BHD (11%) and Yamatake & Co.,
Ltd. (10%).

# Employees

As of December 31, 2005, Scanner
employed five people at our manufacturing facility in Tempe, Arizona, six people at our
facility in Minneapolis, Minnesota, and three people in our other offices in San Jose,
California, and Singapore. Three of these employees work in manufacturing, one works in
sales and marketing, two provide professional services such as training and general
product assistance, three work

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in product development and five
provide general administrative services. All of Scanners employees are working
full-time. Scanners relationship with its employees is good.

|ITEM 2. |  | DESCRIPTION OF PROPERTY
|------- |  | -----------------------

We lease manufacturing and administrative facilities in Minneapolis,
Minnesota and Tempe, Arizona and also maintain sales offices in San Jose, California and Singapore. We have leases for the
Minneapolis, Tempe and Singapore facilities, which leases require monthly base rents plus increases for operating expenses and/or
property taxes and expire March 31, 2007, February 28, 2007 and September 30, 2006, respectively. Approximate future minimum lease
payments are $111,200 and $20,100 in 2006 and 2007 (through the end of the current lease terms), respectively. We are closing our
Singapore office effective March 1, 2006 after concluding that we can effectively serve our customers in the region at a
lower cost without the office. We believe that our existing facilities are adequate to meet our current needs and that suitable
additional or alternative space will be available in the future on commercially reasonable terms.

|ITEM 3. |  | LEGAL
PROCEEDINGS
|------- |  | -----------------

In 2000, the Company instituted a
lawsuit against ICOS Vision Systems Corp. N.V., a Belgian corporation (ICOS)
for infringement of two of its patents. The patents relate to three-dimensional ball array
inspection apparatus and method. In June 2003, the Company reached a settlement with ICOS
concerning one-illumination source inspection systems. Pursuant to the settlement
agreement, ICOS made a one-time payment of $400,000 to the Company in 2003 to settle all
issues with regard to these one-light source inspections systems. The U. S. District Court
for the Southern District of New York found no infringement with regard to the
two-illumination source devices that ICOS sold. The Company agreed to the settlement
agreement with respect to one-light source devices in order to allow it to immediately
appeal the courts ruling concerning inspection systems involving two-light sources,
eliminating the need, delay and expense of a trial with regard to these systems at this
stage. On April 23, 2004, the United States Court of Appeals ruled in the Companys
favor with regard to the two-illumination source devices, finding that the claim terms
 an illumination apparatus and illuminating in the Companys
patents encompass one or more illumination sources and overturned the District
Courts entry of summary judgment of no infringement. A trial, to be decided by the
judge, was held in March 2005 in the District Court regarding the Companys ongoing
litigation with ICOS. Scanners prayer for relief includes requests for damages in
the form of lost profits, a trebling of damages pursuant to 35 USC 284 and attorneys
fees and costs. In its answer to the complaint, ICOS included counterclaims alleging
various forms of unfair competition as well as seeking a declaration that the patents are
invalid and not infringed. In addition, ICOS is requesting attorneys fees and costs.
The judge has not issued a decision on the case as of February 22, 2006. The Company
intends to continue to vigorously enforce its patent rights and expects to incur
significant additional expenses to pursue its claims. The Company believes that any
unfavorable decision will not have a material adverse effect on its consolidated financial
statements. Some of the proceeds received or to be received by Scanner in connection with
the foregoing lawsuit or subsequent litigation with respect to patent litigation will be
distributed to Elwin M. Beaty and David P. Mork, officers of the Company, in accordance
with employment agreements.

In July 2005, ICOS Vision Systems
Corp. N.V. and ICOS Vision Systems, Inc. (collectively, ICOS) filed a lawsuit
against the Company in the U.S. District Court for the Southern District of New York. ICOS
is seeking a declaratory judgment with respect to certain patents held by Scanner finding
that ICOS does not infringe such patents and that such patents are invalid. ICOS is also
seeking a declaratory judgment finding that U.S. companies that purchase electronic
components such as Ball Grid Array devices inspected on ICOS systems in foreign countries
are not liable as infringers of such patents and injunctive relief enjoining Scanner from
threatening such purchasers with claims of infringement. ICOS is seeking damages of
unspecified amounts, as well as costs, expenses and attorneys fees. The Company

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believes that this lawsuit is without
merit and intends to vigorously defend itself and the Companys intellectual property
rights.

In 2002, the Company brought suit
against two law firms that previously represented the Company in the patent litigation
described above. The Company demanded a full and complete accounting for the fees and
expenses charged by these firms in connection with the patent litigation. The Company paid
the law firms the total amount of $558,652 in legal fees and costs. The law firms claimed
that the Company owed them an additional $402,984. The trial took place in December 2003.
In January 2004, the court decided that the number of hours billed by the law firms was
grossly excessive and, therefore, reduced the amount still payable to the law firms by
$322,432. At December 31, 2003, the entire amount requested by the law firms of $402,984
was included in accounts payable in the consolidated balance sheet. Scanner reflected the
reduction in accounts payable and recorded other income in its consolidated financial
statements for the year ended December 31, 2004.

In July 2005, American Arium
(Arium), a Delaware corporation with a principal office located in Tustin,
California, filed a lawsuit against the Company in the U.S. District Court for the Central
District of California. Arium is seeking a declaratory judgment with respect to certain
patents held by Scanner finding that Arium does not infringe such patents and that such
patents are invalid. Arium is also seeking injunctive relief enjoining Scanner from
threatening Arium and its customers with claims of infringement. Arium is seeking its
costs, expenses and attorneys fees. The Company believes that this lawsuit is
without merit and intends to vigorously defend itself and the Companys intellectual
property rights.

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

No matters were submitted to a vote
of security holders during the fourth quarter of 2005.

# PART II

|ITEM 5. |  | MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
|------- |  | --------------------------------------------------------------------------------------------------------------

# Dividends

The Company has never paid cash
dividends on its Common Stock and does not intend to do so in the foreseeable future. The
Company currently intends to retain its earnings for the operation and expansion of its
business. The Companys continued need to retain earnings for operations and
expansion is likely to limit the Companys ability to pay future cash dividends.

# Market Information

The Companys Common Stock is
currently quoted on the National Association of Securities Dealers, Inc. Over-the-Counter
Bulletin Board (OTCBB) under the symbol SCNI. The following table
sets forth, for the period from January 1, 2004 through December 31, 2005, the range of
high and low bid information for the Companys Common Stock is as reported on the
OTCBB. The prices represent quotations between dealers without adjustment for retail
markups, markdowns, or commissions and may not represent actual transactions.

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|               |  | 2005 |  | 2004
|-------------- |  | ---- |  | ----
|
|First Quarter  |  |      |  | 3.15
|Second Quarter |  |      |  | 2.78
|Third Quarter  |  |      |  | 1.25
|Fourth Quarter |  |      |  | .65 

The shares of Common Stock are
subject to various governmental or regulatory body rules, including the Securities Act of
1933 and regulations thereto, the Securities Act of 1934 and regulations thereto, and
rules promulgated by NASD, which may affect the liquidity of the shares.

# Holders

There were approximately 900 holders
of record of the Companys Common Stock as of December 31, 2005.

# Sales of Unregistered
Securities

None.

|ITEM 6. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|------- |  | ---------------------------------------------------------

# General

The Company generates revenues from
the sale of machine-vision inspection products used in the semiconductor industry for the
inspection of integrated circuits. The products include machine-vision modules sold to
original equipment manufacturers that use the modules as a component of inspection systems
they sell to end users, as well as complete machine-vision inspection systems that the
Company sells to end users. Because the Company sells relatively few of its products each
year, the Companys business is characterized by uneven quarterly results that are
dependent on the timing of sales and revenue recognition.

During recent years, the
Companys operations were adversely affected by a lack of demand in the semiconductor
marketplace, which caused many of the Companys potential customers to cease or defer
purchases of capital equipment such as the inspection equipment offered by the Company.
According to information provided by Semiconductor Equipment and Materials International
(SEMI), a trade association of semiconductor equipment and material
manufacturers, sales of semiconductor equipment for 2005 were expected to total $32.95
billion, a decline of approximately 11.2% from sales levels in 2004. SEMI expects the
market semiconductor equipment to recover in 2006 and to increase by double-digits in 2007
and 2008, to reach approximately $46.63 billion in 2008. The Company believes the general
improvement in industry conditions contributed to the improvement in the Companys
operations in 2004, whereas operations in 2005 were adversely affected by a lack of demand
in the semiconductor marketplace. The Company will continue to be subject to the cyclical
nature of the semiconductor marketplace.

In addition to general trends in the
semiconductor marketplace, the Company must compete for sales with other providers of
machine-vision inspection equipment, most of whom are larger, better financed and offer a
broader selection of products. The Company must compete on the basis of price, product
performance including speed and size of defects detected, ease of use and technological
advancement. The Company must continue research and development to improve existing
products and introduce new products in order to compete effectively with other providers
of inspection equipment.

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The Companys working capital
position decreased in 2005 primarily due to the net effect of the operating loss offset by
the cash proceeds from the exercise of stock options and warrants. The Company believes
that its working capital at December 31, 2005 is adequate for at least the next twelve
months of operations and does not currently anticipate a need for additional financing.

# Critical Accounting
Policies and Estimates

The discussion and analysis of
financial condition and results of operations is based upon the consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. The
Company evaluates, on an on-going basis, its estimates and judgments, including those
related to bad debts, excess inventories, warranty obligations, income taxes,
contingencies and litigation. Its estimates are based on historical experience and
assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes the following
critical accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.

- Revenue recognition;
- Allowances for doubtful accounts and excess and obsolete inventories;
- Patent rights;
- Accounting for income taxes;
- Accounting and valuation of options and warrants.

Revenue is earned primarily through
sales of vision inspection products to distributors and to third party customers. For
sales to distributors, revenue is recognized upon shipment as the distributors have no
acceptance provisions and title passes at shipment. For sales to third party customers,
title passes at shipment; however, the customer has certain acceptance provisions relating
to installation and training. These provisions require the Company to defer revenue
recognition until the equipment is installed and the customers personnel are
trained. As a result, revenue is recognized for third party customers once the product has
been shipped, installed and customer personnel are trained. This process typically is
completed within two weeks to a month after shipment.

Accounts receivable arise from the
normal course of selling products on credit to customers. An allowance for doubtful
accounts has been provided for estimated uncollectable accounts. Accounts receivable
balances, historical bad debts, customer concentrations, customer creditworthiness,
current economic trends and changes in customer payment terms and practices are analyzed
when evaluating the adequacy of the allowance for doubtful accounts. Individual accounts
are charged against the allowance when collection efforts have been exhausted.

Inventories are stated at the lower
of cost or market with cost determined on the first-in, first-out method. The Company has
provided an allowance for estimated excess and obsolete inventories equal to the
difference between the cost of inventories and the estimated fair value based on
assumptions about future demand and market conditions.

Patent rights are stated at cost less
accumulated amortization. Amortization is provided using the straight-line method over six
years. Patent rights are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be recoverable.
This evaluation

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is performed at least annually. An
impairment loss is recognized when estimated cash flows to be generated by those assets
are less than the carrying value of the assets. When impairment loss is recognized, the
carrying amount is reduced to its estimated fair value, based on appraisals or other
reasonable methods to estimate value.

The Company is taxed as a domestic
U.S. corporation under the Internal Revenue Code. Deferred income tax assets and
liabilities are recognized for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Deferred income tax
assets and liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using currently enacted tax rates in
effect for the years in which the differences are expected to reverse. Deferred tax assets
are evaluated and a valuation allowance is established if it is more likely than not that
all or a portion of the tax asset will not be utilized.

The Company accounts for its
stock-based employee compensation plan in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
whereby the difference between the exercise price and the fair market value on the date of
grant is recognized as compensation expense. Under the intrinsic value method of
accounting, no compensation expense is recognized in the Companys consolidated
statement of operations when the exercise price of the Companys employee/director
stock option and warrant grants equals the market price of the underlying common stock on
the date of grant, and the measurement date of the option or warrant grant is certain. The
measurement date is certain when the date of grant is fixed and determinable. Compensation
cost for employee/director stock options and warrants is measured as the excess, if any,
of the quoted market price of the Companys stock at the date of grant over the
amount that the employee/director is required to pay for the stock. Options and warrants
to non-employees are accounted for as required by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company
provides pro forma disclosures required by SFAS No. 123 for options and warrants granted
to employees/directors.

The Company estimates the fair value
of warrants at the grant date using the Black-Scholes-Merton option pricing model. The
model takes into consideration weighted average assumptions related to the following:
risk-free interest rate; expected life years; expected volatility; and expected dividend
rate.

# Liquidity and Capital
Resources

In 2005, the Company renewed its
previous line of credit through October 1, 2006. The line was decreased by $200,000 from
$700,000 to $500,000 with an interest rate at prime (7.25% at December 31, 2005) and the
Company provided the bank with a security interest in its general business assets. The
line is guaranteed by four individual stockholders who received three-year warrants to
purchase 250,000 shares of common stock at $.70 per share for their financial support. The
Companys outstanding indebtedness under the line was $490,000 at December 31, 2005.

In 2005, the Company received
$398,500 from the exercise of stock options and warrants.

The Company believes that its working
capital at December 31, 2005 is adequate for at least the next twelve months of operations
and does not currently anticipate a need for additional financing.

11

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At December 31, 2005, the
Companys obligations and commitments to make future payments under debt and lease
agreements are as follows:

|                 |  | Payment due by Year
|---------------- |  | -------------------
|
|                 |  |                    
|Line of credit   |  |                    
|Operating leases |  |                    
|                 |  |                    
|Total            |  |                    
|                 |  |                    

Net cash used by operating activities
totaled $675,654 and $592,856 in 2005 and 2004, respectively. Negative operating cashflows
in 2005 resulted primarily from the net loss of $1,892,617 being offset by net non-cash
adjustments of $174,920 relating to stock option compensation expense and to depreciation
and amortization and by net changes in operating assets and liabilities of $1,042,043
relating primarily to decreases in accounts receivable, inventories, accounts payable and
accrued expenses. Negative operating cashflows in 2004 resulted primarily from the net
income of $1,052,724 being offset by net non-cash adjustments of $59,538 relating to a
lawsuit settlement and to depreciation and amortization and by net changes in operating
assets and liabilities of $1,586,042 relating primarily to accounts receivable and
inventories.

Net cash used by investing activities
totaled $9,737 and $25,266 in 2005 and 2004, respectively. The funds were used to purchase
property and equipment.

Net cash provided by financing
activities totaled $398,500 and $1,903,463 in 2005 and 2004, respectively. The financing
activities in 2005 related to the proceeds from the exercise of stock options and
warrants. In 2004, positive financing cashflows related primarily to the net proceeds from
the sale of common stock and warrants, the exercise of warrants, and payments received on
notes receivable for common stock aggregating $2,227,803 offset changes in borrowings
under the line of credit and by payments on notes payable aggregating $324,340.

# Results of Operations

Year Ended December 31, 2005
Compared to Year Ended December 31, 2004

Revenues for the year ended December
31, 2005 were $1,595,912 compared to $5,834,005 for the year ended December 31, 2004. The
sales decrease in 2005 relates primarily to decreased sales of the Companys robotic
inspection systems to end users and a decrease in the purchases of capital equipment by
customers in the semiconductor industry.

Cost of goods sold decreased by
$1,028,591 to $723,744 in the year ended December 31, 2005, from $1,752,335 in 2004. Cost
of goods sold as a percentage of sales increased by 15.3% to 45.3% in 2005 compared to
30.0% in 2004. In 2005, material cost increased 1.4% as a percent of sales, primarily
because of the change in the sales mix. This increase in material cost was supplemented by
an increase in manufacturing costs as a percentage of sales primarily because of the large
decrease in sales, which caused fixed manufacturing costs to be spread over a smaller
base.

Selling, general and administrative
expenses decreased by $255,975 to $1,899,034 for the year ended December 31, 2005,
compared to $2,155,009 in the prior year. The decrease in expenses related primarily to
decreased marketing expenses of approximately $259,000 consisting primarily of
commissions, royalties and travel expenses and to reduced salaries and related expenses of
approximately $94,000 because of fewer personnel offset by increases in professional fees
of approximately $81,000, relating to accounting fees, directors fees and to the
Companys public relations and financing activities and an increase of approximately
$62,000 in stock option compensation.

Research and development expenses
were $146,937 in the year ended December 31, 2005 compared to $504,962 for the year ended
December 31, 2004. The research and development activities related to the Companys
development and improvement of its own line of robotic inspection systems for sale to end

12

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Table of Contents

users. The decrease in
expenses related primarily to reduced salaries and related costs of
approximately $244,000 because of fewer personnel and to reduced developments
costs of approximately $110,000. The development process is continuing.

Legal fees increased by $186,540 to
$662,401 in the year ended December 31, 2005, from $475,861 in 2004. A significant portion
of the legal fees in both periods related to the patent infringement claims brought by the
Company against a competitor, which claims went to trial in March 2005.

Other income (expense) was ($54,513)
in the year ended December 31, 2005, compared to $108,486 in 2004. In 2004, the Company
won a lawsuit relating to fees and expenses charged by two law firms previously handling
their patent infringement claim. The court ruled that the legal fees and expenses billed
by the firms were excessive in the amount of $322,432. This amount, which was included in
accounts payable at December 31, 2003, was recorded as other income in 2004. Interest
expense decreased by $164,113 to $62,881 for the year ended December 31, 2005 compared to
$226,994 in the prior year. The decrease was due primarily to the difference in
amortization of the warrant costs related to the lines of credit.

The Company recognized no income tax
benefit to offset the loss before income taxes in the year ended December 31, 2005, as no
tax benefit was available to the Company. The Company recognized no federal income tax
expense to offset the income before income taxes in the year ended December 31, 2004
because the income was offset by operating loss carryforwards. The income taxes provided
of $1,900 and $1,600, in 2005 and 2004, respectively, represented state taxes.

The net loss for the year ended
December 31, 2005 was ($1,892,617) ($0.16 per share  basic and diluted), compared to
net income of $1,052,724 ($0.10 basic and $0.08 diluted per share), in 2004. The change
was primarily the result of a decreased gross profit of $3,209,502, and decreased
nonoperating income of $162,999, offset by decreased expenses of $427,460.

Year Ended December 31, 2004
Compared to Year Ended December 31, 2003

Revenues for the year ended December
31, 2004, were $5,834,005 compared to $2,833,338 for the year ended December 31, 2003. The
sales increase in 2004 relates primarily to increased sales of the Companys robotic
inspection systems to end users and an increase in the purchases of capital equipment by
customers in the semiconductor industry.

Cost of goods sold increased by
$924,650 to $1,752,335 in the year ended December 31, 2004, from $827,685 in 2003. Cost of
goods sold as a percentage of sales increased by 0.8% to 30.0% in 2004 compared to 29.2%
in 2003. In 2004, material cost increased 1.5% as a percent of sales. This increase in
material cost was offset by a decrease in manufacturing costs as a percentage of sales
primarily because of the large increase in sales, which caused fixed manufacturing costs
to be spread over a larger base.

Selling, general and administrative
expenses increased by $821,177 to $2,155,009 for the year ended December 31, 2004,
compared to $1,333,832 in the prior year. The increase in expenses related primarily to
increases of approximately $500,000 in salaries and related items, as a result of
increased personnel, and increases in marketing expenses, primarily commissions and
travel, of approximately $163,700.

Research and development expenses
were $504,962 in the year ended December 31, 2004 compared to $530,362 for the year ended
December 31, 2003. The research and development activities related to the Companys
development of its own line of robotic inspection systems for sale to end users was in its
early stages in 2003. The decrease related primarily to reduced personnel costs of
approximately $65,600.

13

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Legal fees increased by $85,346 to
$475,861 in the year ended December 31, 2004, from $390,515 in 2003. A significant portion
of the legal fees in both periods related to the patent infringement claims brought by the
Company against a competitor.

Other income (expense) was $108,486
in the year ended December 31, 2004, compared to ($212,711) in 2003. In 2004, the Company
won a lawsuit relating to fees and expenses charged by two law firms previously handling
their patent infringement claim. The court ruled that the legal fees and expenses billed
by the firms were excessive in the amount of $322,432. This amount, which was included in
accounts payable at December 31, 2003, was recorded as other income in 2004. In 2003, the
Company settled a portion of its litigation relating to its patent infringement claim for
$400,000. In connection with the settlement and a prior agreement, the Company paid its
President $160,000. The net amount of $240,000 is included in other income in 2003.
Interest expense was $226,116 lower in 2004 than it was in 2003, due primarily to the
amortization of the warrant valuation related to the renewal of the line of credit in
2003.

The Company recognized no federal
income tax expense to offset the income before income taxes in the year ended December 31,
2004 because the income was offset by utilized operating loss carryforwards. The Company
recognized no income tax benefit to offset the loss before income taxes in the year ended
December 31, 2003, as no tax benefit was available to the Company. The $1,600 of taxes
provided in the year ended December 31, 2004 represented state taxes.

The net income for the year ended
December 31, 2004 was $1,052,724 ($0.10 basic and $0.08 diluted per share), compared to a
net loss of $464,567 ($0.05 per share), in 2003. The change was primarily the result of an
increased gross profit of $2,076,017, increased nonoperating income of $321,197 and
reduced income taxes of $1,200, offset by increased expenses of $881,123.

|ITEM 7. |  | FINANCIAL STATEMENTS
|------- |  | --------------------

The Companys financial
statements and the report of Lurie Besikof Lapidus & Company, LLP, independent
auditors, referred to in the Index to Financial Statements appear elsewhere in this Form
10-KSB on the pages set forth.

INDEX TO FINANCIAL
STATEMENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|                                                       
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1       
|                                                       
|CONSOLIDATED FINANCIAL STATEMENTS                       |           
|Consolidated balance sheets                             | F-2       
|                                                       
|Consolidated statements of operations                   | F-3       
|                                                       
|Consolidated statements of stockholders equity         | F-4       
|                                                       
|Consolidated statements of cash flows                   | F-5       
|                                                       
|Notes to consolidated financial statements              | F-6  F-17

14

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|ITEM 8. |  | CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | -----------------------------------------------------------------------------------

Not applicable.

|ITEM 8A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

As of the end of the period covered
by this report, the Company carried out an evaluation, under the supervision and with
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, regarding the effectiveness of the design
and operation of the Companys disclosure controls and procedures pursuant to Rules
13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer, concluded
that the Companys disclosure controls and procedures are effective to ensure that
information that is required to be disclosed by the Company in reports that it files under
the Exchange Act is recorded, processed, summarized and reported within the time period
specified in the rules of the Securities Exchange Commission. The Companys
disclosure controls and procedures include controls and procedures designed to ensure that
information is accumulated and communicated to the Companys management, including
its Chief Executive Officer and its Chief Financial Officer. There were no changes in the
Companys internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

The Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, does not
expect that the disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. The design of any system of controls also is based in part
upon assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

Due to the lack of sufficient
accounting personnel, there was an ineffective segregation of duties in the preparation of
the financial statements to prevent or detect errors. This control deficiency could result
in material misstatements to annual or interim financial statements that would not be
prevented or detected if left unremediated. Accordingly, management determined that this
control deficiency constitutes a material weakness. Because of this material weakness,
management believes that, as of December 31, 2005, we did not maintain effective internal
control over financial reporting based on the criteria proposed by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

|ITEM 8B. |  | OTHER INFORMATION
|-------- |  | -----------------

None.

15

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Table of Contents

# PART III

|ITEM 9. |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
|------- |  | ---------------------------------------------------------------------------------------------------------------

The information required by Item 9
regarding the Companys directors and executive officers is incorporated by reference
to the Companys proxy or information statement for its 2006 Annual Meeting of
Shareholders under the captions Determination of Number and Election of
Directors, Corporate Governance and Executive Officers of the
Company.

The information relating to
compliance with Section 16(a) of the Exchange Act is incorporated by reference to the
Companys proxy or information statement for its 2006 Annual Meeting of Shareholders
under the caption Section 16(a) Beneficial Ownership Compliance.

|ITEM 10. |  | EXECUTIVE COMPENSATION
|-------- |  | ----------------------

The information required by Item 10
is incorporated by reference to the Companys proxy or information statement for its
2006 Annual Meeting of Shareholders under the captions Executive Compensation
and Corporate Governance  Compensation to Directors.

|ITEM 11. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------

The information required by Item 11
with respect to security ownership of certain individuals is incorporated by reference to
the Companys proxy or information statement for its 2006 Annual Meeting of
Shareholders under the caption Security Ownership of Certain Beneficial Owners and
Management.

# Equity Compensation Plans

The following table provides
information concerning the Companys equity compensation plans as of December 31,
2005.

|                                                               | Number of securities to be
issued upon exercise ofoutstanding options,warrants and rights | Weighted average
exercise price ofoutstanding options,warrants and rights | Number of securities remaining
available for future issuanceunder equity compensationplans (excluding securities
reflected in column (a))
|-------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|                                                               | (a)                                                                                       | (b)                                                                       | (c)                                                                                                                                      
|Equity compensation plans approved by security holders         | 1,867,000                                                                                 | $ .75                                                                     | 363,000                                                                                                                                  
|Equity compensation plans not approved by security holders (1) | 40,000                                                                                    | $2.94                                                                     | 0                                                                                                                                        
|TOTAL                                                          | 1,907,000                                                                                 | $ .79                                                                     | 363,000                                                                                                                                  

(1)  
          This plan consists of five-year warrants issued to two individuals in connection
          with their election as outside directors on December 27, 2004, which warrants
          were immediately exercisable.

16

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|ITEM 12. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- |  | ----------------------------------------------

The information required by Item 12
is incorporated by reference to the Companys proxy or information statement for its
2006 Annual Meeting of Shareholders under the caption Certain Relationships and
Related Transactions.

|ITEM 13. |  | EXHIBITS
|-------- |  | --------

See Exhibit Index following the
financial pages of this report.

|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- |  | --------------------------------------

The information required by Item 14
is incorporated by reference to the Companys proxy or information statement for its
2006 Annual Meeting of Shareholders under the caption Ratification of Appointment of
Independent Accounting Firm.

17

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# SIGNATURES

Pursuant to the requirements of
Section 13 or 15 (d) 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.

|      | SCANNER TECHNOLOGIES CORPORATION                      
|----- | ------------------------------------------------------
|     
|DATE: | February 28, 2006                                     
|      | Elwin M. Beaty                                        
|      | Chief Executive Officer
   and Chief Financial Officer

(Power of Attorney)

Each person whose signature appears
below constitutes and appoints Elwin M. Beaty and David P. Mork as his or her true and
lawful attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all capacities,
to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.

|DATE: | February 28, 2006                                                                                                                               | /s/ Elwin M. Beaty      
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------
|      | Elwin M. Beaty                                                                                                                                 
|      | Chief Executive Officer, Chief Financial Officer   and Director
(Principal executive officer and principal
   financial and accounting officer)
|     
|DATE: | February 28, 2006                                                                                                                               | /s/ David P. Mork       
|      | David P. Mork                                                                                                                                  
|      | Senior Vice President and Director                                                                                                             
|     
|DATE: | February 28, 2006                                                                                                                               | /s/ Betsy Brenden Radtke
|      | Betsy Brenden Radtke                                                                                                                           
|      | Director                                                                                                                                       
|     
|DATE: | February 28, 2006                                                                                                                               | /s/ Michael A. Thorsland
|      | Michael A. Thorsland                                                                                                                           
|      | Director                                                                                                                                       

3236166/2

18

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and StockholdersScanner Technologies CorporationMinneapolis, Minnesota

We have audited the accompanying
consolidated balance sheets of Scanner Technologies Corporation and Subsidiary as of
December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Scanner Technologies Corporation and Subsidiary as of December 31,
2005 and 2004, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United
States of America.

|/s/ | Lurie Besikof Lapidus & Company LLPLurie
Besikof Lapidus & Company LLP
|--- | ----------------------------------------------------------------------

Minneapolis, MinnesotaFebruary
10, 2006

F-1

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS

|                                                                      |  | December 31,
|--------------------------------------------------------------------- |  | ------------
|
|                                                                      |  |             
|ASSETS                                                                |  |             
|CURRENT ASSETS                                                        |  |             
|Cash and cash equivalents                                             |  |             
|Accounts receivable, less allowances of $18,000 and $40,000           |  |             
|Inventories                                                           |  |             
|Prepaid expenses                                                      |  |             
|                                                                      |  |             
|TOTAL CURRENT ASSETS                                                  |  |             
|                                                                     
|PROPERTY AND EQUIPMENT, net                                           |  |             
|                                                                     
|PATENT RIGHTS, less accumulated amortization of $210,983 and $149,232 |  |             
|                                                                     
|OTHER                                                                 |  |             
|                                                                      |  |             
|                                                                     
|                                                                      |  |             
|                                                                      |  |             
|                                                                     
|LIABILITIES AND STOCKHOLDERS EQUITY                                  |  |             
|CURRENT LIABILITIES                                                   |  |             
|Bank line of credit                                                   |  |             
|Accounts payable                                                      |  |             
|Accrued expenses                                                      |  |             
|                                                                      |  |             
|TOTAL CURRENT LIABILITIES                                             |  |             
|                                                                      |  |             
|                                                                     
|COMMITMENTS AND CONTINGENCIES                                         |  |             
|                                                                     
|STOCKHOLDERS EQUITY                                                  |  |             
|Preferred stock, no par value, 50,000,000 shares authorized;          |  |             
|no shares issued and outstanding                                      |  |             
|Common stock, no par value, 50,000,000 shares authorized;             |  |             
|12,216,068  and 11,991,068 shares issued and outstanding              |  |             
|Warrants                                                              |  |             
|Stock options                                                         |  |             
|Deferred financing costs, net                                         |  |             
|Note receivable for common stock                                      |  |             
|Accumulated deficit                                                   |  |             
|                                                                      |  |             
|                                                                      |  |             
|                                                                      |  |             
|                                                                     
|                                                                      |  |             
|                                                                      |  |             

See notes to consolidated financial
statements.

F-2

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |  | Year Ended December 31,
|--------------------------------------------- |  | -----------------------
|
|                                              |  |                        
|                                             
|REVENUES                                      |  |                        
|                                             
|COST OF GOODS SOLD                            |  |                        
|                                              |  |                        
|                                             
|GROSS PROFIT                                  |  |                        
|                                              |  |                        
|                                             
|OPERATING EXPENSES                            |  |                        
|Selling, general and administrative           |  |                        
|Research and development                      |  |                        
|Legal fees                                    |  |                        
|                                              |  |                        
|                                              |  |                        
|                                              |  |                        
|                                             
|INCOME (LOSS) FROM OPERATIONS                 |  |                        
|                                             
|OTHER INCOME (EXPENSE)                        |  |                        
|Other income, net                             |  |                        
|Interest expense                              |  |                        
|                                              |  |                        
|                                             
|INCOME (LOSS) BEFORE INCOME TAXES             |  |                        
|                                             
|INCOME TAXES                                  |  |                        
|                                              |  |                        
|                                             
|NET INCOME (LOSS)                             |  |                        
|                                              |  |                        
|                                             
|NET INCOME (LOSS) PER SHARE - BASIC           |  |                        
|                                              |  |                        
|                                             
|NET INCOME (LOSS) PER SHARE - DILUTED         |  |                        
|                                              |  |                        
|                                             
|WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC   |  |                        
|                                             
|WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED |  |                        

See notes to consolidated financial statements.

F-3

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                                                    |  |  |  |            |  |   |           |  |   |          |   |   |         |  
|--------------------------------------------------------------------------------------------------- |  |  |  | ---------- |  | - | --------- |  | - | -------- | - | - | ------- | -
|
|
|                                                                                                    |  |  |  |            |  |   |           |  |   |          |   |   |         |  
|                                                                                                   
|BALANCE AT DECEMBER 31, 2003                                                                        |  |  |  | 10,426,459 |  | $ | 4,128,528 |  | $ | 411,561  |   | $ |        |  
|                                                                                                   
|Net income                                                                                          |  |  |  |           |  |   |          |  |   |         |   |   |        |  
|                                                                                                   
|Common stock and warrants issued for
cash, net of $126,655 cash and $23,087 warrants offering costs |  |  |  | 1,150,000  |  |   | 768,088   |  |   | 600,257  |   |   |        |  
|                                                                                                   
|Warrants exercised                                                                                  |  |  |  | 414,609    |  |   | 887,011   |  |   | (148,653 | ) |   |        |  
|                                                                                                   
|Cash received for notes receivable                                                                  |  |  |  |           |  |   |          |  |   |         |   |   |        |  
|                                                                                                   
|Amortization of deferred financing costs                                                            |  |  |  |           |  |   |          |  |   |         |   |   |        |  
|                                                                                                    |  |  |  |            |  |   |           |  |   |          |   |   |         |  
|                                                                                                   
|BALANCE AT DECEMBER 31, 2004                                                                        |  |  |  | 11,991,068 |  |   | 5,783,627 |  |   | 863,165  |   |   |        |  
|                                                                                                   
|Net loss                                                                                            |  |  |  |           |  |   |          |  |   |         |   |   |        |  
|                                                                                                   
|Stock options:                                                                                      |  | 
|Issued                                                                                              |  |  |  |           |  |   |          |  |   |         |   |   | 62,103  |  
|Exercised                                                                                           |  |  |  | 70,000     |  |   | 121,500   |  |   |         |   |   | (33,000 | )
|                                                                                                   
|Warrants:                                                                                           |  | 
|Issued                                                                                              |  |  |  |           |  |   |          |  |   | 80,787   |   |   |        |  
|Exercised                                                                                           |  |  |  | 155,000    |  |   | 397,761   |  |   | (87,761  | ) |   |        |  
|Expired                                                                                             |  |  |  |           |  |   | 131,663   |  |   | (131,663 | ) |   |        |  
|                                                                                                   
|Amortization of deferred financing costs                                                            |  |  |  |           |  |   |          |  |   |         |   |   |        |  
|                                                                                                    |  |  |  |            |  |   |           |  |   |          |   |   |         |  
|                                                                                                   
|BALANCE AT DECEMBER 31, 2005                                                                        |  |  |  | 12,216,068 |  | $ | 6,434,551 |  | $ | 724,528  |   | $ | 29,103  |  
|                                                                                                    |  |  |  |            |  |   |           |  |   |          |   |   |         |  

See notes to consolidated financial statements.

F-4

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                     |  | Year Ended December 31,
|------------------------------------------------------------------------------------ |  | -----------------------
|
|                                                                                     |  |                        
|OPERATING ACTIVITIES                                                                 |  |                        
|Net income (loss)                                                                    |  |                        
|Adjustments to reconcile net income (loss) to net cash used by operating activities: |  |                        
|Depreciation                                                                         |  |                        
|Amortization of patent rights                                                        |  |                        
|Amortization of deferred financing costs                                             |  |                        
|Stock options compensation expense                                                   |  |                        
|Reduction of lawsuit settlement payable                                              |  |                        
|Changes in operating assets and liabilities:                                         |  |                        
|Accounts receivable                                                                  |  |                        
|Inventories                                                                          |  |                        
|Prepaid expenses and other                                                           |  |                        
|Accounts payable                                                                     |  |                        
|Accrued expenses                                                                     |  |                        
|Customer deposits                                                                    |  |                        
|                                                                                     |  |                        
|Net cash used by operating activities                                                |  |                        
|                                                                                     |  |                        
|INVESTING ACTIVITY                                                                   |  |                        
|Purchases of property and equipment                                                  |  |                        
|                                                                                     |  |                        
|FINANCING ACTIVITIES                                                                 |  |                        
|Net payments on bank line of credit                                                  |  |                        
|Payments on notes payable                                                            |  |                        
|Proceeds from exercise of warrants and stock options                                 |  |                        
|Net proceeds from sale of common stock and warrants                                  |  |                        
|Proceeds from notes receivable for common stock                                      |  |                        
|                                                                                     |  |                        
|Net cash provided by financing activities                                            |  |                        
|                                                                                     |  |                        
|                                                                                    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 |  |                        
|                                                                                    
|CASH AND CASH EQUIVALENTS                                                            |  |                        
|Beginning of year                                                                    |  |                        
|                                                                                     |  |                        
|End of year                                                                          |  |                        
|                                                                                     |  |                        
|                                                                                    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                   |  |                        
|Cash paid for:                                                                       |  |                        
|Interest                                                                             |  |                        
|Income taxes                                                                         |  |                        
|                                                                                    
|Noncash financing activities:                                                        |  |                        
|Warrants issued in connection with line of credit for deferred financing costs       |  |                        
|Notes receivable issued for purchase of common stock                                 |  |                        
|Warrants issued in connection with sale of stock and warrants                        |  |                        

See notes to consolidated financial statements.

F-5

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Table of Contents

SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

|1. | Basis
of Presentation and Significant Accounting Policies 
|-- | -----------------------------------------------------------

| | Nature of
Business
| | ------------------

| | The Company invents, develops and markets vision inspection products that are
used in the semiconductor industry for the inspection of integrated circuits.
The Companys customer base is small in numbers and global in location.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Principles of
Consolidation
| | ---------------------------

| | The consolidated
financial statements include the accounts of Scanner Technologies Corporation and its
wholly owned subsidiary, Scanner Technologies Corporation International, incorporated in
the United States and registered in Singapore. All significant intercompany balances and
transactions have been eliminated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue Recognition
| | -------------------

| | Revenue is
earned primarily through sales of vision inspection products to distributors and to third
party customers. For sales to distributors, revenue is recognized upon shipment as the
distributors have no acceptance provisions and title passes at shipment. For sales to
third party customers, title passes at shipment; however, the customer has certain
acceptance provisions relating to installation and training. These provisions require the
Company to defer revenue recognition until the equipment is installed and the customers personnel
are trained. As a result, revenue is recognized for third party customers once the
product has been shipped and installed and customer personnel are trained. This process
typically is completed within two weeks to a month after shipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimates
| | ---------

| | The preparation
of these consolidated 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 and disclosures in the consolidated
financial statements and accompanying notes. Actual results could differ from those
estimates. Significant management estimates relate to the valuation allowance on deferred
tax assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash Equivalents
| | ----------------

| | All highly
liquid investments purchased with an original maturity of three months or less are
considered to be cash equivalents.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Accounts Receivable
| | -------------------

| | Accounts receivable
arise from the normal course of selling products on credit to customers. An allowance for
doubtful accounts has been provided for estimated uncollectable accounts. Accounts
receivable balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment terms and
practices are analyzed when evaluating the adequacy of the allowance for doubtful
accounts. Individual accounts are charged against the allowance when collection efforts
have been exhausted.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-6

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Table of Contents

| | Fair Value
of Financial Instruments
| | -----------------------------------

| | The carrying
amounts of financial instruments consisting of cash and cash equivalents, accounts
receivable, bank line of credit, accounts payable and accrued expenses approximate their
fair values.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventories
| | -----------

| | Inventories are
stated at the lower of cost or market with cost determined on the first-in, first-out
method. The Company has provided an allowance for estimated excess and obsolete
inventories equal to the difference between the cost of inventories and the estimated
fair value based on assumptions about future demand and market conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Property and
Equipment
| | ----------------------

| | Property and
equipment are stated at cost less accumulated depreciation. Depreciation is provided
using accelerated methods. Leasehold improvements are amortized using the straight-line
method over the shorter of the useful life or lease term.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Patent Rights
| | -------------

| | Patent rights
are stated at cost less accumulated amortization. Amortization is provided using the
straight-line method over six years, the deemed useful lives of the patents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-Lived Assets
| | -----------------

| | All long-lived
assets are reviewed for impairment when events or changes in circumstances indicate that
the carrying amounts of such assets may not be recoverable. This evaluation is performed
at least annually. An impairment loss is recognized when estimated undiscounted cash
flows to be generated by those assets are less than the carrying value of the assets.
When an impairment loss is recognized, the carrying amount is reduced to its estimated
fair value, based on appraisals or other reasonable methods to estimate value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product Warranty
| | ----------------

| | An
accrual is provided for estimated incurred but unidentified product warranty
issues based on historical activity. The warranty accrual and related expenses
were not significant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting for
Stock-Based Compensation
| | ---------------------------------------

| | The Company
has a stock-based employee compensation plan consisting of stock options and warrants.
The Company accounts for it stock-based employee compensation plan in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, whereby the difference between the exercise price and
the fair market value on the date of grant is recognized as compensation expense. Under
the intrinsic value method of accounting, no compensation expense is recognized in the
Companys Consolidated Statement of Operations when the exercise price of the Companys
employee/director stock option and warrant grants equals the market price of the
underlying common stock on the date of grant, and the measurement date of the option or
warrant grant is certain. The measurement date is certain when the date of grant is fixed
and determinable. Compensation cost for employee/director stock options and warrants is
measured as the excess, if any, of the quoted market price of the Companys stock at
the date of grant over the amount that
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7

---

Table of Contents

| | the employee/director
is required to pay for the stock. Compensation expense of $33,000 was recognized in 2005
as the vesting date on certain stock options granted in 2004 was accelerated in 2005 and
the market price of the Companys stock at that time exceeded the exercise price of
the stock options. Options and warrants issued to non-employees/non-directors are
accounted for as required by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS No.
123 established a fair value method of accounting for stock-based compensation plans.
Companies that elect to account for stock-based compensation plans in accordance with APB
No. 25 are required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value method as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                            |  | Year Ended December 31,
| | ------------------------------------------ |  | -----------------------
|
| |                                            |  |                        
| | Net income (loss):                         |  |                        
| | As reported                                |  |                        
| | Stock option and warrant amortization cost |  |                        
| |                                            |  |                        
| | Pro forma                                  |  |                        
| |                                            |  |                        
|
| | Net income (loss) per share - basic:       |  |                        
| | As reported                                |  |                        
| | Stock option and warrant amortization cost |  |                        
| |                                            |  |                        
| | Pro forma                                  |  |                        
| |                                            |  |                        
|
| | Net income (loss) per share - diluted:     |  |                        
| | As reported                                |  |                        
| | Stock option and warrant amortization cost |  |                        
| |                                            |  |                        
| | Pro forma                                  |  |                        
| |                                            |  |                        

| | Income Taxes
| | ------------

| | The Company
is taxed as a domestic U.S. corporation under the Internal Revenue Code. Deferred income
tax assets and liabilities are recognized for the expected future tax consequences of
events that have been included in the consolidated financial statements or tax returns.
Deferred income tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using currently
enacted tax rates in effect for the years in which the differences are expected to
reverse. Deferred tax assets are evaluated and a valuation allowance is established if it
is more likely than not that all or a portion of the tax asset will not be utilized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Credit Risk
| | -----------

| | The Company
maintains cash and cash equivalents in bank accounts which may exceed federally insured
limits. The Company has not experienced any losses on such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant concentrations
of credit risk exist in accounts receivable, which are due from customers located
primarily in the Far East and the United States.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8

---

Table of Contents

| | Net Income
(Loss) Per Share
| | ---------------------------

| | Basic net
income (loss) per share is computed by dividing the net income (loss) by the
weighted-average common shares outstanding during the year. Diluted net income (loss) per
share reflects the potential dilution that could occur if holders of warrants and options
that are not antidulitive converted their holdings into common stock. The dilutive effect
of warrants and options included 1,518,256 additional shares for the year ended December
31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options and
warrants to purchase 5,077,834 and 1,259,469 shares of common stock with a weighted
average exercise price of $1.77 and $2.80 were excluded from the diluted computation for
the years ended December 31, 2005 and 2004, respectively, because they were antidilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently Issued
Accounting Pronouncements
| | -----------------------------------------

| | In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research Bulletin No. 43. The
amendment clarifies that abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) should be recognized as current period charges and
requires the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after the date SFAS
No. 151 was issued.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 123R, Share-Based Paymentan amendment
of FASB Statement No. 123, (SFAS No. 123R) which requires companies to recognize in
the statement of operations the grant-date fair value of stock options and other
equity-based compensation issued to employees. SFAS No. 123R is effective for companies
filing under Securities and Exchange Commission (SEC) Regulation SB as of the beginning of
the first interim or annual period that begins after December 15, 2005, which for the
Company will be its first quarter of its year ending December 31, 2006. The Company will
use the modified prospective transition method. Under the modified prospective method,
awards that are granted, modified or settled after the date of adoption will be measured
and accounted for in accordance with SFAS No. 123R. Compensation cost for awards granted
prior to, but not vested, as of the date SFAS No. 123R is adopted would be based on the
grant date attributes similar to those originally used to value those awards for the pro
forma purposes under SFAS No. 123. The adoption of SFAS No. 123R is estimated to reduce
the results of operations in 2006 by approximately $70,000. This estimate is based on the
number of stock options and warrants currently outstanding and could change based on the
actual number of stock options and warrants granted, forfeited or modified in 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB No. 29 (SFAS No. 153). This Statement eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is effective
for fiscal years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No.
153 was issued.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the SEC released Staff Accounting Bulletin (SAB) No. 107, Share-Based
Payments. The interpretations in SAB No. 107 express views of the SEC staff
regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, and
provide the
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

Table of Contents

| | staffs
views regarding the valuation of share-based payment arrangements for public companies. In
particular, SAB No. 107 provides guidance related to share-based payment transactions with
non-employees, valuation methods (including assumptions such as expected volatility and
expected term), the classification of compensation expense, non-GAAP financial measures,
first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation
cost related to share-based payment arrangements, accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123R, modification of employee
share options prior to adoption of SFAS No. 123R and disclosures in Managements
Discussion and Analysis subsequent to adoption of SFAS No. 123R. SAB No. 107 requires
stock-based compensation be classified in the same expense lines as cash compensation is
reported for the same employees. The Company will apply the principles of SAB No. 107 in
conjunction with its adoption of SFAS No. 123R.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa
replacement of APB No. 20 and SFAS No. 3. SFAS No. 154 replaces APB No. 20,
Accounting Changes, and SFAS No. 3 Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for
and reporting of a change in accounting principle. APB No. 20 previously required that
most voluntary changes in accounting principle be recognized by including the cumulative
effect of changing to the new accounting principle in net income of the period of the
change. SFAS No. 154 requires retrospective application to prior periods financial
statements of changes in accounting principle applied as if that principle had always been
used or as the adjustment of previously issued financial statements to reflect a change in
the reporting entity. SFAS No. 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as
a change in accounting estimate effected by a change in accounting principle. SFAS No. 154
is effective for changes and error corrections made in fiscal years beginning after
December 15, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
adoption of SFAS Nos. 154, 153 and 151 is expected to have no material impact on the
Companys consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------

|2. | Inventories 
|-- | -------------

| | Inventories consisted
of the following:
| | ---------------------------------------

|                                                       |  | December 31, |   |          
|------------------------------------------------------ |  | ------------ | - | ---------
|
|                                                       |  |              |   |          
|Finished goods                                         |  |              | $ | 400,071  
|Subassemblies                                          |  |              |   | 316,373  
|Raw materials, less allowances of $152,000 and $63,000 |  |              |   | 903,583  
|                                                       |  |              |   |          
|                                                       |  |              | $ | 1,620,027
|                                                       |  |              |   |          

F-10

---

Table of Contents

|3. | Property
and Equipment 
|-- | ------------------------

| | Property and
equipment consisted of the following:
| | --------------------------------------------------

|                              |  |  |   |        
|----------------------------- |  |  | - | -------
|
|
|                              |  |  |   |        
|Furniture and fixtures        |  |  | $ | 153,905
|Machinery and equipment       |  |  |   | 70,595 
|Leasehold improvements        |  |  |   | 20,866 
|                              |  |  |   |        
|                              |  |  |   | 245,366
|Less accumulated depreciation |  |  |   | 215,603
|                              |  |  |   |        
|                              |  |  | $ | 29,763 
|                              |  |  |   |        

|4. | Bank
Line of Credit 
|-- | ---------------------

| | On
August 1, 2005, the Company renewed its previous bank line of credit through October 1,
2006. The line was decreased from $700,000 to $500,000 with an interest rate at prime
(7.25% and 5.25% at December 31, 2005 and 2004, respectively), and the Company provided
the bank with a security interest in its business assets. The line is guaranteed by four
individual stockholders, who received three-year warrants to purchase an aggregate of
250,000 shares of common stock at $.70 per share for their financial support. The warrants
issued to the guarantors had a market value of $80,787 as determined by the
Black-Scholes-Merton option pricing model. The $80,787 was recorded as deferred financing
costs. These costs are amortized over the term of the line of credit, and the net
unamortized balance is offset against stockholders equity. The Companys
outstanding indebtedness under the line was $490,000 at December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
former bank line of credit was guaranteed by five individuals who received, in 2004,
three-year warrants to purchase 175,000 shares of common stock at $3.50 per share for
their financial support. The warrants had no market value as determined by the
Black-Scholes-Merton option pricing model.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Stockholders Equity

|-- | ----------------------

| | Private Placement
Offerings
| | ---------------------------

| | On
August 17, 2004, the Company issued 1,150,000 units (each consisting of one share of
common stock and a five year warrant to purchase one share of common stock at $2.90 per
share) for $1.30 per unit to an investor in a private placement. The common stock issued
in this private placement was valued at $917,830 and the warrants were valued at $577,170
using the Black-Scholes-Merton option pricing model. In connection with the private
placement, the Company also issued a five-year warrant to purchase 46,000 shares of common
stock at $2.90 per share to a selling agent and incurred expenses of $126,655. This
warrant was valued at $23,087 using the Black-Scholes-Merton option pricing model.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock Options
| | -------------

| | In
2004, the Companys Board of Directors adopted and the shareholders approved the 2004
Equity Incentive Plan. The Plan, as amended in 2005, authorizes the granting of
nonqualified or incentive stock options and restricted stock to officers, directors,
consultants, advisors and employees for up to 2,300,000 shares of common stock. Vesting
and award terms are at the
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---

Table of Contents

| | discretion
of the Board of Directors or a committee appointed by the Board, but incentive stock
options cannot exceed ten years.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Stock option
activity was as follows:
| | -------------------------------------

|                               |  | Options |  | Weighted-Average
Exercise Price
|------------------------------ |  | ------- |  | -------------------------------
|
|
|
|
|                               |  |         |  |                                
|Outstanding, beginning of year |  |         |  | 734,000                        
|Granted                        |  |         |  | 1,253,000                      
|Exercised                      |  |         |  | (70,000                        
|Forfeited                      |  |         |  | (50,000                        
|                               |  |         |  |                                
|Outstanding, end of year       |  |         |  | 1,867,000                      
|                               |  |         |  |                                

| | Of
the options granted, the Company issued 70,000 and 49,000 stock options to non-employees
in 2005 and 2004, respectively. The options issued in 2005 and 2004 had a fair value of
$29,103 and $0, respectively, as determined by the Black-Scholes-Merton option pricing
model.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The weighted-average
grant date fair value for options granted was as follows:
| | ------------------------------------------------------------------------------

|                                      |  | Year Ended December 31,
|------------------------------------- |  | -----------------------
|
|
|                                      |  |                        
|Option price equals stock price       |  |                        
|Option price greater than stock price |  |                        
|                                      |  |                        
|                                      |  |                        
|                                      |  |                        

| | Stock options
outstanding and exercisable at December 31, 2005, are as follows:
| | -------------------------------------------------------------------------------

| |      | Outstanding |  |          
| | ---- | ----------- |  | ---------
|
| |      |             |  |          
| | $.45 |             |  | 813,000  
| | .50  |             |  | 440,000  
| | 1.20 |             |  | 229,000  
| | 1.32 |             |  | 330,000  
| | 1.50 |             |  | 15,000   
| | 2.00 |             |  | 40,000   
| |      |             |  |          
| |      |             |  | 1,867,000
| |      |             |  |          

| | Stock Warrants
| | --------------

| | The
Company issued warrants related to line of credit financing, services and issuances of
common stock.
| | --------------------------------------------------------------------------------------------------------

F-12

---

Table of Contents

| | In
2004, the Company issued three-year warrants to purchase an aggregate of 202,250 shares of
common stock at $3.50 per share to eleven individuals as an incentive to exercise
warrants, which warrants were exercised between June 23 and August 17, 2004. The newly
issued warrants had no market value as determined by the Black-Scholes-Merton option
pricing model. The Company also issued five-year warrants to purchase an aggregate of
40,000 shares of common stock at $2.94 per share to the two new directors of the Company.
The warrants had a market value of $18,730 as determined by the Black-Scholes-Merton
option pricing model. Since the warrants were issued to directors, they are included in
the Note 1 pro forma disclosure along with the employee incentive stock options.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2004, warrants to purchase 114,000 shares of common stock at $1.35 per share were
exercised in exchange for a 4.25% one year note receivable for $153,900, which was
extended for one more year in August 2005. The note is collateralized by the stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warrant activity
was as follows:
| | --------------------------------

|                               |  | Warrants |  | Weighted-Average
Exercise Price
|------------------------------ |  | -------- |  | -------------------------------
|
|
|
|                               |  |          |  |                                
|Outstanding, beginning of year |  |          |  | 4,769,932                      
|Issued                         |  |          |  | 250,000                        
|Exercised                      |  |          |  | (155,000                       
|Expired                        |  |          |  | (232,500                       
|                               |  |          |  |                                
|Outstanding, end of year       |  |          |  | 4,632,432                      
|                               |  |          |  |                                

| | The weighted-average
grant-date fair value for warrants issued was as follows:
| | ------------------------------------------------------------------------------

|                                       |  | 2005 |  | 2004   
|-------------------------------------- |  | ---- |  | -------
|
|                                       |  |      |  |        
|Warrant price less than stock price    |  |      |  |        
|                                       |  |      |  |       
|Warrant price equals stock price       |  |      |  |       
|Warrant price greater than stock price |  |      |  | 250,000
|                                       |  |      |  |        
|                                       |  |      |  | 250,000
|                                       |  |      |  |        

F-13

---

Table of Contents

| | Warrants outstanding
and exercisable at December 31, 2005, are as follows:
| | --------------------------------------------------------------------------

| |      | Outstanding
| | ---- | -----------
|
| |      |            
| | $.70 |            
| | 1.00 |            
| | 1.35 |            
| | 2.70 |            
| | 2.75 |            
| | 2.90 |            
| | 2.94 |            
| | 3.00 |            
| | 3.50 |            
| |      |            
| |      |            
| |      |            

| | Assumptions
| | -----------

| | The
fair value of options and warrants is estimated at grant date using the
Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            |  | Year Ended December 31,
|----------------------------------------------------------- |  | -----------------------
|
|                                                            |  |                        
|Risk free interest rates                                    |  |                        
|Dividend yields                                             |  |                        
|Volatility factors of expected market price of common stock |  |                        
|Weighted average expected life                              |  |                        

|6. | Income
Taxes 
|-- | --------------

| | The
income tax provisions of $1,900 and $1,600 for 2005 and 2004, respectively, represent
taxes currently payable.
| | ------------------------------------------------------------------------------------------------------------------

| | Income
tax computed at the U.S. federal statutory rate reconciled to the effective tax rate is as
follows:
| | ----------------------------------------------------------------------------------------------------------

|                                      |  | Year Ended December 31,
|------------------------------------- |  | -----------------------
|
|                                      |  |                        
|Taxes (benefit) at statutory tax rate |  |                        
|Effect of net operating loss          |  |                        
|Nondeductible interest expense        |  |                        
|Other                                 |  |                        
|                                      |  |                        
|                                      |  |                        
|                                      |  |                        

F-14

---

Table of Contents

| | Significant components
of net deferred tax assets are as follows:
| | -----------------------------------------------------------------

|                            |  | December 31,
|--------------------------- |  | ------------
|
|                            |  |             
|Deferred tax assets:        |  |             
|Operating loss carryovers   |  |             
|Tax credit carryovers       |  |             
|Other temporary differences |  |             
|Valuation allowance         |  |             
|                            |  |             
|Net deferred tax            |  |             
|                            |  |             

| | The
valuation allowance was provided as it is probable the deferred tax assets will not be
realized. The valuation allowance increased (decreased) $623,200 and $(409,500) in 2005
and 2004, respectively, primarily because of the Companys inability (ability) to
utilize net operating losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2005, the Company had approximately $1,820,000 in net operating loss and
$85,000 in general business credit carryovers, which began to expire in 2026 and 2022,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | State tax
effects are immaterial and not separately disclosed.
| | --------------------------------------------------------------

|7. | Employee
Benefit Plan 
|-- | -----------------------

| | The
Company maintains a 401(k) plan for its employees. The employees are allowed to contribute
to the Plan as provided under the law. Any matching contributions by the Company are at
the discretion of the Board of Directors. There were no matching contributions for the
years ended December 31, 2005 and 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | Commitments 
|-- | -------------

| | Operating Leases
| | ----------------

| | Facilities
are leased under operating leases expiring through 2007. The leases require monthly base
rents plus increases for operating expenses and/or property taxes as defined in the
leases. Rent expense for all leases was approximately $136,100 and $164,300 for 2005 and
2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Approximate future
minimum lease payments are as follows:
| | ---------------------------------------------------------

|Year |  | Amount
|---- |  | ------
|     |  |       
|2006 |  | $     
|2007 |  |       
|     |  |       
|     |  | $     
|     |  |       

F-15

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Table of Contents

| | Employment Agreements
| | ---------------------

| | The
Company has an employment agreement with its President and Chief Executive Officer at an
annual salary of $280,000. The agreement also contains a provision that requires the
Company to pay an amount equal to the annual salary if he is terminated without cause. The
agreement can be terminated by either party with a 30-day written notice to the other.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has an employment agreement with its Senior Vice President at an annual salary of
$156,000. The agreement also contains a provision that requires the Company to pay an
amount equal to one half the annual salary if he is terminated without cause. The
agreement can be terminated by either party with a 30-day written notice to the other.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | Major
Customers and Geographic Information 
|-- | --------------------------------------------

| | The
following table shows by major customer and by country the percentage of revenues for the
respective years and the percentage of receivables at December 31 of the respective years:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Major Customers
| | ---------------

| |                     |  | Year Ended December 31,
| | ------------------- |  | -----------------------
|
|
| | A  (Singapore)      |  |                        
| | B   (United States) |  |                        
| | C   (Malaysia)      |  |                        
| | D   (Japan)         |  |                        
| | E   (Taiwan)        |  |                        
| | F   (Korea)         |  |                        

| | Geographic Information
| | ----------------------

| |                                  |  | Year Ended December 31,
| | -------------------------------- |  | -----------------------
|
|
| | Singapore                        |  |                        
| | Malaysia                         |  |                        
| | Japan                            |  |                        
| | Taiwan                           |  |                        
| | United States                    |  |                        
| | Others outside the United States |  |                        
| | Korea                            |  |                        
| |                                  |  |                        
| |                                  |  |                        
| |                                  |  |                        

| | No significant
long-lived assets are located outside of the United States.
| | --------------------------------------------------------------------------

|10. | Contingencies
and Uncertainty 
|--- | -------------------------------

| | In
an agreement dated April 19, 2002, the Companys President and Chief Executive
Officer (President) forgave the payment of his accrued salary of $1,254,575 and released
the Company, its successors, its officers and directors from any liability in connection
with the accrued salary. In exchange, the Company agreed that its President will receive
certain proceeds, if any, that Scanner may receive out of litigation involving patents
that Scanner had licensed. Under the agreement, the Company keeps 60% of any proceeds of
the currently ongoing litigation and pays its President 40% of such proceeds until the
Company has been reimbursed for all attorney fees
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | and other  expenses  incurred in connection  with the current
litigation, and its President has received the total of $1,254,575. If one party receives
all the amounts owing to such party before the other partys claim under this
provision is satisfied, the other party receives 100% of the proceeds until its claim is
satisfied. If any proceeds remain after such payment, the Companys President
receives 50% of such remainder. He also has a right to receive part of the proceeds, if
any, the Company may receive out of any subsequent litigation involving the licensed
patents. The Company keeps 60% of any such proceeds until its attorney fees and other
expenses incurred in connection with the current and any subsequent litigation have been
reimbursed, and its President receives 40% of any such proceeds until he has received a
total of $1,254,575 of the proceeds of the currently ongoing and any subsequent
litigation. If any proceeds of the subsequent litigation remain after such distribution,
the Company will pay 25% of such remaining proceeds to its President.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To
provide the Companys Senior Vice President with an incentive to continue his
employment with the Company, and to compensate him for compensation in recent years which
the Company believes was less than he might have received in a comparable position
elsewhere, the Senior Vice President was also a party to the agreement regarding the
distribution of litigation proceeds. The Company agreed to pay him 20% of the remaining
proceeds, if any, Scanner receives out of the current ongoing litigation, and 25% of the
remaining proceeds, if any, that Scanner may receive out of any future litigation
involving the licensed patents after the aforesaid payments to the Company and its
President have been made out of such proceeds.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2000, the Company instituted a lawsuit against ICOS Vision Systems Corp. N.V., a Belgian
corporation (ICOS) for infringement of two of its patents. The patents relate
to three-dimensional ball array inspection apparatus and method. In June 2003, the Company
reached a settlement with ICOS concerning one-illumination source inspection systems.
Pursuant to the settlement agreement, ICOS made a one-time payment of $400,000 to the
Company, in 2003 to settle all issues with regard to these one-light source inspections
systems. The U.S. District Court for the Southern District of New York found no
infringement with regard to the two-illumination source devices that ICOS sold. The
Company agreed to the settlement agreement with respect to one-light source devices in
order to allow it to immediately appeal the courts ruling concerning inspection
systems involving two-light sources, eliminating the need, delay and expense of a trial
with regard to these systems at this stage. On April 23, 2004, the United States Court of
Appeals ruled in the Companys favor with regard to the two-illumination source
devices, finding that the claim terms  an illumination apparatus and
illuminating in the Companys patents encompass one or more illumination
sources and overturned the District Courts entry of summary judgment of no
infringement. A trial, to be decided by the judge, was held in March 2005 in the District
Court regarding the Companys ongoing litigation with ICOS. Scanners prayer for
relief includes requests for damages in the form of lost profits, a trebling of damages
pursuant to 35 USC 284 and attorneys fees and costs. In its answer to the complaint,
ICOS included counterclaims alleging various forms of unfair competition as well as
seeking a declaration that the patents are invalid and not infringed. In addition, ICOS is
requesting attorneys fees and costs. The judge has not issued a decision on the case
as of February 10, 2006. The Company intends to continue to vigorously enforce its patent
rights and expects to incur significant additional expenses to pursue its claims. The
Company believes that any unfavorable decision will not have a material adverse effect on
its consolidated financial statements. Some of the proceeds received or to be received by
Scanner in connection with the foregoing lawsuit or subsequent litigation with respect to
patent litigation will be distributed to its President and Senior Vice President in
accordance with agreements noted previously.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In July
2005, ICOS Vision Systems Corp. N.V. and ICOS Vision Systems, Inc.
(collectively, ICOS) filed a lawsuit against the Company in the U.S. District
Court for the Southern District of
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | New
York. ICOS is seeking a declaratory judgment with respect to certain patents held by
Scanner finding that ICOS does not infringe such patents and that such patents are
invalid. ICOS is also seeking a declaratory judgment finding that U.S. companies that
purchase electronic components such as Ball Grid Array devices inspected on ICOS systems
in foreign countries are not liable as infringers of such patents and injunctive relief
enjoining Scanner from threatening such purchasers with claims of infringement. ICOS is
seeking damages of unspecified amounts, as well as costs, expenses and attorneys
fees. The Company believes that this lawsuit is without merit and intends to vigorously
defend itself and the Companys intellectual property rights.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, the Company brought suit against two law firms that previously represented the
Company in the patent litigation described above. The Company demanded a full and complete
accounting for the fees and expenses charged by these firms in connection with the patent
litigation. The Company paid the law firms the total amount of $558,652 in legal fees and
costs. The law firms claimed that the Company owed them an additional $402,984. The trial
took place in December 2003. In January 2004, the court decided that the number of hours
billed by the law firms was grossly excessive and, therefore, reduced the amount still
payable to the law firms by $322,432. At December 31, 2003, the entire amount requested by
the law firms of $402,984 was included in accounts payable in the consolidated balance
sheet. Scanner reflected the reduction in accounts payable and recorded other income in
its consolidated financial statements for the year ended December 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2005, American Arium (Arium), a Delaware corporation with a principal
office located in Tustin, California, filed a lawsuit against the Company in the U.S.
District Court for the Central District of California. Arium is seeking a declaratory
judgment with respect to certain patents held by Scanner finding that Arium does not
infringe such patents and that such patents are invalid. Arium is also seeking injunctive
relief enjoining Scanner from threatening Arium and its customers with claims of
infringement. Arium is seeking its costs, expenses and attorneys fees. The Company
believes that this lawsuit is without merit and intends to vigorously defend itself and
the Companys intellectual property rights.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

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Table of Contents

# EXHIBIT INDEX

# SCANNER TECHNOLOGIES
CORPORATION

# FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 2005

|ExhibitNumber |  | Description
|------------- |  | -----------

|3.1 |  |  | Amended
and Restated Articles of Incorporation of the Registrant  incorporated by reference
to Exhibit 2.3 to the Registrants Current Report on Form 8-K filed on August 15,
2002
|--- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  |  | Amended
and Restated Bylaws of the Registrantincorporated by reference to Exhibit 2.4 to
the Registrants Current Report on Form 8-K filed on August 15, 2002
|--- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  |  | License
Agreement dated November 16, 1990 between the Registrant, Elwin M. Beaty and
Elaine E. Beatyincorporated by reference to Exhibit 10.2 to the
Registrants Quarterly Report Form 10-QSB for quarter ended September 30,
2002
|---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  |  | Agreement dated April 19, 2002 among the Registrant, Elwin M. Beaty and David P. Mork
relating to forgiveness of salaryincorporated by reference to Exhibit 10.3 to the
Registrants Quarterly Report Form 10-QSB for quarter ended September 30, 2002
|---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  |  | Lease Agreement dated December 7, 2000 between Registrant and Carleton Investors, L.L.C.
relating to Registrants Arizona premisesincorporated by reference to Exhibit
10.4 to the Registrants Quarterly Report Form 10-QSB for quarter ended September 30,
2002
|---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  |  | Amendment to Lease dated December 15, 2003 and Second Amendment to Lease dated January 21,
2004 between Registrant and Carleton Investors, L.L.C. relating to Registrants
Arizona premisesincorporated by reference to Exhibit 10.5 to the Registrants
Annual Report Form 10-KSB for year ended December 31, 2003
|---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  |  | Amendment to Lease Agreement dated November 21, 2003 between Registrant and Parkers Lake
II Realty Corp. relating to Registrants Minnesota premisesincorporated by
reference to Exhibit 10.6 to the Registrants Annual Report Form 10-KSB for year
ended December 31, 2003
|---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  |  | Employment Agreement dated January 1, 2004 between the Company and Elwin M. Beatyincorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report Form
10-QSB for quarter ended June 30, 2004**
|---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  |  | Employment Agreement dated January 1, 2004 between the Company and David P. Morkincorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report Form
10-QSB for quarter ended June 30, 2004**
|---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  |  | Business Loan Agreement dated March 28, 2002 between the Company and Bremer Bank, N.A.incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report
Form 10-QSB for quarter ended September 30, 2004
|---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|ExhibitNumber |  | Description
|------------- |  | -----------

|10.9 |  |  | Promissory Note dated March 31, 2003 in favor of Bremer Bank, N.A., Commercial Security
Agreement dated March 31, 2003 between the Company and Bremer Bank, N.A. and Change in
Terms Agreement dated March 31, 2003 between the Company and Bremer Bank, N.A.incorporated by reference to Exhibit 10.3 to the Registrants Quarterly Report Form
10-QSB for quarter ended June 30, 2004
|---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  |  | Change in Terms Agreements dated June 22, 2004 and October 22, 2004 between the Company
and Bremer Bank, N.A.incorporated by reference to Exhibit 10.2 to the
Registrants Quarterly Report Form 10-QSB for quarter ended September 30, 2004
|----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  |  | 2004
Equity Incentive Planincorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated June 8, 2005**
|----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  |  | Form of incentive stock option agreement and nonqualified stock option agreement currently
used under the 2004 Equity Incentive Planincorporated by reference to Exhibit
10.12 to the Registrants Annual Report on Form 10-KSB for year ended December 31,
2004**
|----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  |  | Form of restricted stock agreement currently used under the 2004 Equity Incentive Planincorporated by reference to Exhibit 10.13 to the Registrants Annual Report
on Form 10-KSB for year ended December 31, 2004**
|----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  |  | Common Stock Purchase Warrant (20,000 shares) dated December 27, 2004 issued to Betsy
Brenden Radtkeincorporated by reference to Exhibit 10.14 to the Registrants
Annual Report on Form 10-KSB for year ended December 31, 2004**
|----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  |  | Common Stock Purchase Warrant (20,000 shares) dated December 27, 2004 issued to Michael A.
Thorslandincorporated by reference to Exhibit 10.15 to the Registrants
Annual Report on Form 10-KSB for year ended December 31, 2004**
|----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  |  | Change in Terms Agreement dated August 1, 2005 between the Company and Bremer Bank, N.A.incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report
on Form 10-QSB for quarter ended September 30, 2005
|----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1 |  |  | Subsidiary
 of  the  Registrantincorporated  by  reference  to  Exhibit  21 to  the  Registrants
Quarterly Report Form 10-QSB filed on November 14, 2002
|---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|23.1 |  | * | Consent
of Lurie Besikof Lapidus & Company, LLP
|---- |  | - | -----------------------------------------------

|31 |  | * | Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|-- |  | - | -----------------------------------------------------------------------

|32 |  | * | Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|-- |  | - | -----------------------------------------------------------------------

*Filed
herewith.      **
Management agreement or compensatory plan or arrangement.

E-2

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