|UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-QSB




(Mark One)
|----------------------------------------------------------------------------------------------------

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

For the quarterly period ended
September 30, 2003

|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|---- |  | ----------------------------------------------------------------------------------------

Commission file number: 000-08149

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

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

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

|(763) 476-8271(Registrants
telephone number, including area code)
|------------------------------------------------------------------

|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 Issuer was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [  ]


The Issuer had 10,426,465 shares of Common Stock
no par value outstanding as of October 31, 2003.

Transitional Small Business Disclosure Format (Check
One): Yes [  ] No [X]
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1

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SCANNER TECHNOLOGIES
CORPORATION

FORM 10-QSB

Table of Contents

|              |                                                           |   
|------------- | --------------------------------------------------------- | --
|PART I        | FINANCIAL INFORMATION                                     | 3 
|Item 1        | Financial Statements                                      | 3 
|Item 2        | Management's Discussion and Analysis or Plan of Operation | 11
|Item 3        | Controls and Procedures                                   | 16
|PART II       | OTHER INFORMATION                                         | 17
|Item 1        | Legal Proceedings                                         | 17
|Item 2        | Changes in Securities                                     | 17
|Item 3        | Defaults Upon Senior Securities                           | 17
|Item 4        | Submissions Of Matters To A Vote of Security Holders      | 17
|Item 5        | Other Information                                         | 17
|Item 6        | Exhibits and Reports on Form 8-K                          | 17
|SIGNATURE     |                                                           | 17
|EXHIBIT INDEX

2

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SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

|                                        | Three Months Ended
September 30, | Nine Months Ended
September 30, |  
|--------------------------------------- | -------------------------------- | ------------------------------- | -
|                                        |                                  |                                 |  
|
|                                        |                                  |                                 |  
|REVENUES                                |                                  |                                 | $
|COST OF GOODS SOLD                      |                                  |                                 |  
|                                        |                                  |                                 |  
|GROSS PROFIT                            |                                  |                                 |  
|                                        |                                  |                                 |  
|OPERATING EXPENSES                      |                                  |                                
|Selling, general and administrative     |                                  |                                 |  
|Research and development                |                                  |                                 |  
|Legal fees                              |                                  |                                 |  
|                                        |                                  |                                 |  
|                                        |                                  |                                 |  
|                                        |                                  |                                 |  
|LOSS FROM OPERATIONS                    |                                  |                                 |  
|OTHER INCOME (EXPENSE)                  |                                  |                                
|Other income (expense), net             |                                  |                                 |  
|Interest expense                        |                                  |                                 |  
|                                        |                                  |                                 |  
|LOSS BEFORE INCOME TAXES                |                                  |                                 |  
|INCOME TAXES (BENEFIT)                  |                                  |                                 |  
|                                        |                                  |                                 |  
|NET LOSS                                |                                  |                                 | $
|                                        |                                  |                                 |  
|NET LOSS PER SHARE - BASIC  AND DILUTED |                                  |                                 | $
|                                        |                                  |                                 |  
|WEIGHTED AVERAGE SHARES  OUTSTANDING -  |                                  |                                
|BASIC AND DILUTED                       |                                  |                                 |  

See notes to condensed consolidated
financial statements.

3

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SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                             | December 31,
2002 | September 30,
2003
|------------------------------------------------------------ | ----------------- | ------------------
|                                                             |                   |                   
|
|ASSETS                                                       |                   |                   
|CURRENT ASSETS                                               |                   |                   
|Cash and cash equivalents                                    |                   |                   
|Accounts receivable, less allowance of $40,000               |                   |                   
|Income taxes receivable                                      |                   |                   
|Inventory, less allowances of $32,000 and $61,000            |                   |                   
|Prepaid expenses                                             |                   |                   
|                                                             |                   |                   
|TOTAL CURRENT ASSETS                                         |                   |                   
|PROPERTY AND EQUIPMENT, net                                  |                   |                   
|PATENTS RIGHTS, net                                          |                   |                   
|OTHER                                                        |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   
|LIABILITIES AND STOCKHOLDERS' EQUITY                         |                   |                   
|CURRENT LIABILITIES                                          |                   |                   
|Bank line of credit                                          |                   |                   
|Notes payable to related parties                             |                   |                   
|Accounts payable                                             |                   |                   
|Accrued expenses                                             |                   |                   
|Customer deposits                                            |                   |                   
|                                                             |                   |                   
|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;    |                   |                   
|10,000,982 and 10,426,465 shares issued and outstanding      |                   |                   
|Warrants                                                     |                   |                   
|Deferred financing costs, net                                |                   |                   
|Notes receivable for common stock                            |                   |                   
|Accumulated deficit                                          |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   
|                                                             |                   |                   

See notes to condensed consolidated
financial statements.

4

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARY                CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS                                   (unaudited)

|                                                                            | Nine Months Ended
September 30, | 
|--------------------------------------------------------------------------- | ------------------------------- | 
|                                                                            |                                 | 
|
|                                                                            |                                 | 
|OPERATING ACTIVITIES                                                        |                                 | 
|Net loss                                                                    |                                 | 
|Adjustments to reconcile net loss to net cash used by operating activities: |                                 | 
|Depreciation                                                                |                                 | 
|Amortization of patent rights and deferred financing costs                  |                                 | 
|Interest expense added to related party debt principal                      |                                 | 
|Deferred taxes                                                              |                                 | 
|Deferred stock option compensation                                          |                                 | 
|Changes in operating assets and liabilities:                                |                                 | 
|Accounts receivable                                                         |                                 | 
|Income taxes receivable                                                     |                                 | 
|Inventory                                                                   |                                 | 
|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 proceeds on bank line of credit                                         |                                 | 
|Proceeds from related party debt                                            |                                 | 
|Payments on related party debt                                              |                                 | 
|Proceeds from sale of common stock and exercise of warrants                 |                                 | 
|Refund of stock options issued for cash                                     |                                 | 
|                                                                            |                                 | 
|Net cash provided by financing activities                                   |                                 | 
|                                                                            |                                 | 
|                                                                            |                                 | 
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |                                 | 
|                                                                            |                                 | 
|CASH AND CASH EQUIVALENTS                                                   |                                 | 
|Beginning of period                                                         |                                 | 
|                                                                            |                                 | 
|                                                                            |                                 | 
|End of period                                                               |                                 | 
|                                                                            |                                 | 
|                                                                            |                                 | 
|Supplemental Disclosures of Cash Flow Information:                          |                                 | 
|Cash paid for:                                                              |                                 | 
|Interest                                                                    |                                 | 
|Income taxes                                                                |                                 | 
|                                                                            |                                 | 
|Noncash operating, financing and investing activities:                      |                                 | 
|Warrants issued in connection with line of credit                           |                                 | 
|Warrants exercised                                                          |                                 | 
|Notes receivable issued for purchase of common stock                        |                                 | 
|Unearned compensation forgiven and transferred to capital                   |                                 | 
|Deferred tax asset related to forgiven unearned compensation                |                                 | 
|Valuation of stock options exercised and cancelled                          |                                 | 
|Unamortized deferred stock option compensation on cancelled options         |                                 | 
|Note payable to related party issued for patent costs                       |                                 | 
|Accrued license fees transferred to note payable to related party           |                                 | 
|Officer loan offset against note payable to related party                   |                                 | 
|Deficiency of Southwest Capital at date of merger                           |                                 | 

See notes to condensed consolidated
financial statements.

5

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SCANNER TECHNOLOGIES
CORPORATION AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements(unaudited)

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

| | The
accompanying condensed consolidated financial statements account for the merger between
Scanner Technologies Corporation (Scanner) and Southwest Capital Corporation (Southwest)
as a capital transaction in substance (and not a business combination of two operating
entities) that would be equivalent to Scanner issuing securities to Southwest in exchange
for the net monetary liabilities of Southwest, accompanied by a recapitalization (See
Note 2). The combined entity of Scanner and its subsidiary and Southwest are referred to
as the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
for interim financial information. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair presentation
have been included. Operating results for the three-month and nine-month periods ended
September 30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. For further information, refer to the financial
statements and footnotes for the year ended December 31, 2002 included in our Annual
Report on Form 10KSB.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | The
condensed 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 test equipment to third party customers and also to
a distributor. For sales to the distributor, revenue is recognized upon shipment as the
distributor has 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. The Company provides the training but does not install the equipment. 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
Estimates
| | --------------------

| | The
preparation of these condensed 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
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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| | condensed
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 and payables for legal fees (See Note 3).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | The
Company considers all highly liquid debt instruments purchased with a maturity of three
months or less 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, 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventory
| | ---------

| | Inventory
is 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 obsolescence for estimated excess and
obsolete inventory equal to the difference between the cost of inventory 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 straight-line over the
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. Patent
rights are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. Determination of
recoverability is based on an estimate of discounted future cash flows from the use of
the asset. Measurement of an impairment loss for patent rights that management expects to
use is based on the fair value of the assets as established using a discounted cash flow
model.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company provides an accrual for estimated incurred but unidentified product warranty
issues based on historical activity. The warranty accrual and related expenses were not
significant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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

| | The
Company accounts for employee stock options under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and provides the disclosures
required by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. Options and warrants
to non-employees are accounted for as required by SFAS No. 123.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
and Warrants Valuation
| | ------------------------------

| | The
Company estimates the fair value of options and warrants at the grant date using the
Black-Scholes option pricing model. The model takes into consideration weighted average
assumptions related to the following: risk-free interest rate; expected live years;
expected volatility; and expected dividend rate. Since the Companys stock is thinly
traded; therefore, volatility is set at 0% as permitted by SFAS 123. The costs associated
with the valuation of the warrants issued in connection with the line of credit are
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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company is taxed as a domestic U.S. corporation under the Internal Revenue Code. Income
taxes are accounted for under SFAS No. 109, Accounting for Income Taxes.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.
Income tax benefit is the current tax refundable for the period and the change during the
period in deferred tax assets and liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Net
Loss Per Share
| | ------------------

| | Basic
net loss per share is computed by dividing the net loss by the weighted-average common
shares outstanding during the reporting period. Diluted net loss per share normally
includes common stock equivalents (options and warrants), but were excluded since their
effect was antidulitive.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
and warrants to purchase 3,312,124 and 1,808,429 shares of common stock with a weighted
average exercise price of $1.52 and $1.18 were excluded from the diluted computation for
the three months ended September 30, 2003 and 2002, respectively, because they were
antidulitive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
 and warrants to purchase 2,885,511 and 2,303,095 shares of common stock with a
weighted average exercise price of $1.41 and $1.27 were excluded from the diluted
computation for the nine months ended September 30, 2003 and 2002, respectively, because
they were antidulitive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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|2. |  | Merger
and Reorganization 
|-- |  | ---------------------------

| | On
January 16, 2002, the Company executed an Agreement and Plan of Reorganization with
Southwest Capital Corporation (Southwest), a public company with no operations. The
agreement provided for the Company to merge into Southwest, with Southwest continuing as
the surviving corporation under the name of Scanner Technologies Corporation. On July 31,
2002, the Company completed its merger with Southwest pursuant to which the Company was
merged with and into Southwest. This merger was treated as a recapitalization.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the effective date of the merger each of the 7,568,196 shares of Scanners common
stock outstanding was converted into the right to receive 1.057 shares of the surviving
companys common stock and a five-year warrant to purchase 0.2642 shares of the
surviving companys common stock. The warrants are exercisable immediately at an
exercise price of $1.00 per share. The conversion ratio was based on the total amount of
Scanners common stock outstanding at the effective date of the merger. As a result,
the surviving company issued an additional 7,999,594 shares of its common stock and
warrants to purchase 1,999,543 shares of common stock. Each share of common stock of
Southwest issued and outstanding, 2,001,388 shares, remained issued and outstanding and
unaffected by the merger. Southwest had a deficiency in assets of $27,019 at the date of
the merger.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the time of the merger, Scanner had outstanding warrants to purchase 225,000 shares of
its common stock at $2.75 per share. These warrants were converted into warrants to
purchase a total of 59,445 units of the surviving companys securities at $10.80 per
unit, each unit consisting of four shares of the surviving companys common stock
and a five-year warrant immediately exercisable to purchase one share of the surviving
companys common stock at $1.00 per share. At the time of the merger, the Articles
of Incorporation were amended to authorize preferred stock, increase the number of shares
the Company is authorized to issue and to change the common stock from $.01 par value to
no par value stock.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
the consummation of the merger of Scanner into Southwest, the Company became the owner of
the licensed know-how in exchange for a secured note payable to the licensor
(officer/stockholder) for $1.00 and all expenses incurred for securing and maintaining
the intellectual property patent rights, totaling $370,505. The exclusive license
agreement, which was terminated, covered the operation, manufacturing, testing and
selling of Scanner products. The agreement required a fee of 5% of the Companys
sales. License expense was $10,741 and $38,773 for the three and nine months ended
September 30, 2002, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information for prior periods is not presented since the effect is insignificant.
| | -------------------------------------------------------------------------------------------

|3. |  | 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 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 would 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 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
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

| | 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. The unearned compensation forgiven ($1,254,575) less
the related deferred tax benefit ($436,000) was recorded as additional paid-in capital in
stockholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 to him 20% of the
remaining proceeds, if any, Scanner receives out of any subsequent litigation as
described above involving the licensed patents, and that remain 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 a Belgian corporation for infringement of
two of its patents. The patents related to three-dimensional ball array inspection
apparatus and method. Discovery was completed in the case and a so-called Markman hearing
was held in November 2001. In June 2003, the Company and the Belgian corporation reached
a settlement concerning one illumination source inspection systems. Pursuant to the
settlement agreement, the Belgian corporation made a one-time payment of $400,000 to the
Company to settle all issues with regard to these one light source inspection systems.
The court found no infringement with regard to the two illumination source devices that
the Belgian corporation sold. The Company agreed to the settlement agreement 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. The Company intends to continue to vigorously
enforce its patent rights and expects to incur significant additional expenses in 2003 to
pursue their appeal. The Company believes that any unfavorable decision will not have a
material or adverse effect on the consolidated financial statements. In connection with
the settlement, the Company paid its President $160,000 pursuant to the agreement noted
above. The $400,000 settlement less the $160,000 paid to the President is recorded at net
in other income in the condensed financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, the Company brought suit against two law firms that previously represented the
Company in the aforementioned patent litigation. The Company demanded a full and complete
accounting for the fees and expenses, the payment of which these firms demand in
connection with the patent litigation. The Company has paid the law firms $558,652 in
legal fees and costs. The law firms claim that the Company owes them an additional
$402,984. When the Company brought the patent suit, the law firms estimated that legal
fees and costs through the discovery stage of the patent litigation would be $447,000 to
$585,000. The Company, therefore, contends that it does not owe any further payments to
the defendants. At September 30, 2003 and December 31, 2002, the $402,984 is included in
accounts payable in the condensed consolidated balance sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Financing
Arrangements 
|-- |  | ------------------------

| | In
2003, the Company renewed its previous bank line of credit through May 1, 2004. The line
was increased from $900,000 to $1,300,000 with an interest rate at prime and the Company
provided the bank with a security interest in its general business assets. The new line
is guaranteed by individuals who received for their financial support (a) five-year
warrants to purchase 325,000 shares of the Companys common stock at $2.75 per share
and (b) thirty-day warrants to purchase an additional 325,000 shares of the Companys
common stock at $2.00 per
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

| | share.
Provided the guarantor paid cash for at least one half of the shares subject to their
thirty-day warrant, such guarantor was permitted to purchase the remainder of the shares
with a promissory note, collateralized by the shares purchased, payable one year from the
exercise date. The guarantors exercised all such warrants in exchange for aggregate cash
payments to the Company of $350,000 and one-year promissory notes issued to the Company
with an aggregate principal amount of $300,000. One of the promissory notes in the amount
of $25,000 was paid in August 2003. In connection with the exercise of their thirty-day
warrants, the guarantors were granted two-year warrants to purchase an additional 650,000
shares of the Companys common stock at $2.00 per share. All of the warrants issued
to the guarantors had a market value of $574,671 as determined by the Black-Scholes
Model. These costs, which are being amortized over the term of the line of credit, are
recorded as deferred financing costs and offset against stockholders equity in the
condensed consolidated balance sheet
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 10, 2003, the Company issued a $100,000 4.25% note payable to a related party in
exchange for cash. A director and stockholder of the Company is also a director and
stockholder of the entity to which the note is payable. The note is due April 8, 2004. A
warrant, which expires on April 11, 2006, to purchase 25,000 shares of the Companys
common stock at $2.75 per share was issued in connection with the note. The warrant had
no market value as determined by the Black-Scholes Model.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | Private
Placement Offering 
|-- |  | ----------------------------

| | Between
January 1, 2003 and September 30, 2003, the Company sold 100,000 shares of common stock
at $2.50 per share, for an aggregate amount of $250,000, under a private placement
offering. Warrants to purchase an additional 25,000 shares of common stock at $3.00 per
share were issued in connection with these sales. The warrants expire three years after
issuance and had no market value as determined by the Black-Scholes Model.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | Stock
Based Compensation 
|-- |  | --------------------------

| | If
the Company recognized stock option compensation expense based on fair value at date of
grant, consistent with the methods prescribed by SFAS No. 123, net loss and per share
disclosures would remain the same for the periods ended in 2003. For the periods ended in
2002, net loss and per share disclosures would change to the pro forma amounts below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Periods Ended September 30, 2002
|------------------------------------- | --------------------------------
|                                      |                                 
|
|                                      |                                 
|Net loss:                             |                                 
|As reported                           |                                 
|Pro forma                             |                                 
|Net loss per share basic and diluted: |                                 
|As reported                           |                                 
|Pro forma                             |                                 

|Item 2. |  | Managements Discussion and Analysis or Plan of Operation
|------- |  | ---------------------------------------------------------

| | This
Quarterly Report on Form 10-QSB 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 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,
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | GENERAL
| | -------

| | The
Companys revenues have been adversely affected by the continuing lack of demand in
the semiconductor marketplace, which has caused many potential customers to cease or
defer purchases of capital equipment such as that offered by the Company. Although the
Company has made efforts to manage expenses during this downturn, the Company is
confronted with working capital shortages due to ongoing operating expenses and the
Companys ongoing patent litigation. To address these working capital shortages, the
Company is attempting to raise additional equity capital through a private placement
offering and has extended and increased its bank line of credit. These efforts are
discussed in more detail below. Assuming the availability of sufficient working capital,
the Companys success will be dependent upon its ability to develop and
commercialize new products, meet the demands of its customers, respond quickly to changes
in its market and control expenses and cash usage.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with efforts to raise capital or obtain additional financing, the Company may
be obligated to issue additional shares of Common Stock or warrants or other rights to
acquire Common Stock on terms that will result in dilution to existing shareholders or
place restrictions on operations. The Company may also be unsuccessful in obtaining
additional equity capital or financing on any terms and in that event may be obligated to
cease operations and/or attempt to negotiate with its creditors to delay payments or
compromise the amounts of its indebtedness. If the Company is unable to reach
satisfactory arrangements with its creditors, the Company will responsibly evaluate
alternatives including the possibility of seeking protection from creditors under the
bankruptcy laws. Creditors may also take action that would force the Company into
proceedings under the bankruptcy laws.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | CRITICAL
ACCOUNTING POLICIES
| | ----------------------------

| | 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 inventory, 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 affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Revenue
recognition;
| |  | - |  | --------------------

| |  | o |  | Allowances
for doubtful accounts and excess and obsolete inventory;
| |  | - |  | -------------------------------------------------------------------

| |  | o |  | Patent
rights;
| |  | - |  | --------------

| |  | o |  | Accounting
for income taxes;
| |  | - |  | ----------------------------

| |  | o |  | Accounting
and valuation of options and warrants.
| |  | - |  | -------------------------------------------------

12

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| | Revenue
is earned primarily through sales of test equipment to third party customers and also to
a distributor. For sales to the distributor, revenue is recognized upon shipment as the
distributor has 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. The Company provides the training but does not install the equipment. 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company maintains allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. Accounts receivable, 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. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances and charges against earnings may be required.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company writes down inventory for estimated excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated fair value based upon
assumptions about future demand and market conditions. Any significant unanticipated
changes in demand or competitive product developments could have a significant impact on
the value of the Companys inventory, and its reported results. If actual market
conditions are less favorable than those projected, additional inventory write-downs, and
charges against earnings may be required.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Patent
rights are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. Determination of
recoverability is based on an estimate of discounted future cash flows from the use of
the asset. Measurement of an impairment loss for patent rights that management expects to
use is based on the fair value of the asset as established using a discounted cash flow
model.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for income taxes using the asset and liability approach in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in operations in the period that
includes the enactment date. Additionally, 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 employee stock options under Accounting Principles Opinion No. 25,
Accounting for Stock Issued to Employees, and provides the disclosures
required by Statement of Financial Accounting Standards (SFAS) No 123, Accounting
for Stock-Based Compensation. Options and warrants to non-employees are accounted
for as required by SFAS No. 123.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of warrants at the grant date using the Black-Scholes
option pricing model. The model takes into consideration weighted average assumptions
related to the following: risk-free interest rate; expected live years; expected
volatility; and expected dividend rate. Since the Companys stock is thinly traded,
the Company is essentially a nonpublic entity. Therefore, volatility is set at 0% as
permitted by SFAS 123. The costs associated with the valuation of the warrants issued in
connection with the line of credit are
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | recorded
as deferred financing costs. These costs are being amortized over the term of the line of
credit, and the net unamortized balance is offset against stockholders equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | RESULTS
OF OPERATIONS
| | ---------------------

| | THREE
MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
| | ---------------------------------------------------------------------------------------

| | Sales
for the three months ended September 30, 2003, were $707,962 compared to $537,109 for the
three months ended September 30, 2002. The Companys revenues continue to be
adversely affected by the lack of demand in the semiconductor industry which has caused
reduced spending by semiconductor manufacturers for capital equipment such as that
offered by the Company. The sales increase in 2003 relates primarily to an improvement in
the purchases of capital equipment by customers in the semiconductor industry.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
of goods sold increased by $48,100 to $194,729 in the three months ended September 30,
2003, from $146,629 in 2002. Cost of goods sold as a percentage of sales increased by
0.2% to 27.5% in 2003 compared to 27.3% in 2002. In 2003, material cost increased as a
percent of sales. This increase was offset by a decrease in manufacturing costs as a
percent of sales which decrease was primarily the result of the increase in sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses decreased by $242,979 to $337,760 for the three
months ended September 30, 2003, compared to $580,739 in the prior period. The decrease
in expenses related primarily to decreases in professional costs, amortization of
deferred stock option compensation, marketing expenses and license fees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development expenses were $124,312 in the three months ended September 30, 2003
compared to $267,298 for the three months ended September 30, 2002. 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 2002. The
development process is continuing in 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal
fees decreased by $77,307 to $90,246 in the three months ended September 30, 2003, from
$167,553 in 2002. A significant portion of the legal fees in both periods related to the
patent infringement claim brought by the Company against a competitor.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
income (expense) was ($141,562) in the three months ended September 30, 2003, compared to
($2,342) in 2002. Interest expense was $139,591 higher in 2003 than it was in 2002, due
primarily to the $132,616 amortization of the warrant valuation related to the renewal of
the line of credit and additional debt outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net loss for the three months ended September 30, 2003 was $180,647, or $.02 per share,
compared to a net loss of $627,452, or $.07 per share, in 2002. The decrease in the net
loss was the result of an increase in gross margin of $122,753 and decreased operating
expenses of $463,272 offset by increased net nonoperating expenses of $139,220.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NINE
MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002
| | -------------------------------------------------------------------------------------

| | Sales
for the nine months ended September 30, 2003, were $1,599,851 compared to $1,097,751 for
the nine months ended September 30, 2002. The Companys revenues continue to be
adversely affected by the lack of demand in the semiconductor industry which has caused
reduced spending by semiconductor manufactures for capital equipment such as that offered
by the Company. The sales increase in 2003 relates primarily to the sale in April 2003 of
the
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | Companys
first robotic inspection system to an end user and an improvement in the purchases of
capital equipment by customers in the semiconductor industry.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
of goods sold increased by $143,286 to $466,938 in the nine months ended September 30,
2003, from $323,652 in 2002. Cost of goods sold as a percentage of sales decreased by
0.3% to 29.2% in 2003 compared to 29.5% in 2002. In 2003, manufacturing expenses
decreased as a percent of sales primarily because of the increase in sales. This decrease
was offset by an increase in material cost as a percent of sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses decreased by $305,544 to $964,277 for the nine months
ended September 30, 2003, compared to $1,269,821 in the prior period. Decreases in
professional costs, amortization of deferred stock option compensation and license fees
were partially offset by increases in salaries and related expenses and amortization of
patent rights.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development expenses were $379,951 in the nine months ended September 30, 2003
compared to $628,511 for the nine months ended September 30, 2002. 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 2002. The
development process is continuing in 2003 with the first unit being sold in April 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal
fees decreased by $207,742 to $311,573 in the nine months ended September 30, 2003, from
$519,315 in 2002. A significant portion of the legal fees in both periods related to the
patent infringement claim brought by the Company against a competitor.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
income (expense) was ($68,444) in the nine months ended September 30, 2003, compared to
($1,829) in 2002. 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. Interest expense was $306,458 higher
in 2003 than it was in 2002. The increase relates primarily to the $265,233 amortization
of the warrant valuation related to the renewal of the line of credit and additional debt
outstanding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognized no income tax benefit to offset the loss before income taxes in the
nine months ended September 30, 2003, as no tax benefit is available to the Company. The
$2,800 of taxes provided in the nine months ended September 30, 2003 represented minimum
state taxes. A benefit of $72,700 was recognized in the nine months ended September 30,
2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net loss for the nine months ended September 30, 2003 was $594,132, or $.06 per share,
compared to a net loss of $1,572,677, or $.20 per share, in 2002. The decrease in the net
loss was the result of an increase in gross margin of $358,814 and decreased operating
expenses of $761,846 offset by increased net nonoperating expenses of $66,615 and by
increased income taxes of $75,500.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | LIQUIDITY
AND CAPITAL RESOURCES (FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003)
| | ------------------------------------------------------------------------------

| | The
Company is attempting to raise $1,500,000 of additional capital by offering shares of its
common stock and warrants to purchase common stock through an offering conducted in
reliance on an exemption from registration under the Securities Act of 1933, as amended
(the Offering). As of October 31, 2003, the Company had received proceeds of
$250,000 from investors in the Offering. As described above, there is no assurance that
the Company will be successful in its efforts to complete the Offering. If adequate funds
are not available or are not available on acceptable terms, the ability to take advantage
of unanticipated opportunities, develop or enhance products and services or otherwise
respond to competitive pressures would be significantly limited.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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| | In
2003, the Company renewed its previous bank line of credit through May 1, 2004. The line
was increased from $900,000 to $1,300,000 with an interest rate at prime and the Company
provided the bank with a security interest in its general business assets. The new line
is guaranteed by individuals who received for their financial support (a) five-year
warrants to purchase 325,000 shares of the Companys common stock at $2.75 per share
and (b) thirty-day warrants to purchase an additional 325,000 shares of the Companys
common stock at $2.00 per share. Provided the guarantor paid cash for at least one half
of the shares subject to their thirty-day warrant, that guarantor was permitted to
purchase the remainder of the shares with a promissory note, collateralized by the shares
purchased, payable one year from the exercise date. The guarantors exercised all such
warrants in exchange for aggregate cash payments to the Company of $350,000 and one-year
promissory notes issued to the Company with an aggregate principal amount of $300,000.
One of the promissory notes in the amount of $25,000 was paid in August 2003. In
connection with the exercise of their thirty-day warrants, the guarantors were granted
two-year warrants to purchase an additional 650,000 shares of the Companys common
stock at $2.00 per share. All of the warrants issued to the guarantors had a market value
of $574,671 as determined by the Black-Scholes Model. These costs, which are amortized
over the term of the line of credit, are recorded as deferred financing costs in the
condensed consolidated balance sheet
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that this line of credit, existing working capital and anticipated cash
flows from operations and equity investments will be adequate to satisfy projected
operating and capital requirements for the next year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
cash used by operating activities for the nine months ended September 30, 2003 totaled
$570,720. Negative operating cashflows resulted primarily from the net loss of $594,132
for the period which was offset by non-cash adjustments relating primarily to
depreciation and amortization of $343,465 and increased by net changes in operating
assets and liabilities of $320,053.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
cash used by investing activities for the nine months ended September 30, 2003 totaled
$12,575. The funds were used to purchase property and equipment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
cash provided by financing activities for the nine months ended September 30, 2003
totaled $560,809. Positive financing cashflows related to the proceeds from the sale of
common stock, new borrowings from a related party and increased borrowings under the line
of credit offset by payments on existing related party debt.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3. |  | 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 the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the evaluation, the Chief
Executive Officer and Chief Financial Officer, concluded that the Companys
disclosure controls and procedures are effective.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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PART II  OTHER INFORMATION

|Item 1. | Legal Proceedings
|------- | -----------------

| | None.
| | -----

|Item 2. | Changes
in Securities
|------- | ---------------------

| | In
the three months ended September 30, 2003, the Company sold 30,000 shares of its common
stock at $2.50 per share to four individuals through a private placement offering. The
shares were issued as follows: 20,000 in July 2003 and 10,000 in August 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
individuals purchasing the above common stock were issued three-year warrants to purchase
one share of common stock at $3.00 per share for each four shares purchased. Warrants to
purchase 7,500 common shares at $3.00 per share were issued in the three months ended
September 30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
above common stock and warrants were issued in reliance on the exemption from
registration provided by Rule 506 of Regulation D promulgated under Section 4(2) of the
Securities Act of 1933. The certificates representing the securities bear a restrictive
securities legend.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3. | Defaults
Upon Senior Securities
|------- | -------------------------------

| | None.
| | -----

|Item 4. | Submission
of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

| | None.
| | -----

|Item 5. | Other
Information
|------- | -----------------

| | None.
| | -----

|Item 6. | Exhibits
and Reports on Form 8-K
|------- | --------------------------------

| | Exhibits:
 See Exhibit Index on page following signature page.
| | --------------------------------------------------------------

| | Reports
on Form 8-K: None.
| | --------------------------

SIGNATURE

| | In
accordance with the requirements of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | Scanner Technologies Corporation                                                                                                                                                                                 
|------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date:  November 12, 2003 | By:/s/ Elwin M. Beaty                                                                                                                                                                                            
|                         | Its Chief Executive Officerand
                                                                               Chief Financial Officer
(Principal executive officer and principalfinancial and accounting officer)

17

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EXHIBIT INDEX

SCANNER TECHNOLOGIES
CORPORATION

FORM 10-QSB FOR QUARTER
ENDED SEPTEMBER 30, 2003

|Exhibit Number | 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                   
|11*            | Statement Regarding Computation of Earnings Per Share                                                                                                                             
|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.

18

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