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

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# FORM 10-QSB

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(Mark One)

x    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

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

Commission File Number: 000-08149

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SCANNER TECHNOLOGIES CORPORATION
(Exact name of small business issuer as specified in its charter)

New Mexico
(State or other jurisdiction ofincorporation or organization)
85-0169650
(IRS Employer Identification No.)


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

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

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

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

The Issuer had 12,216,068 shares of Common Stock, no par value, outstanding
as of October 31, 2005.

Transitional Small Business Disclosure Format (Check one):   
YesoNox







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SCANNER TECHNOLOGIES CORPORATION

FORM 10-QSB

Table of Contents

|              |  | Page                                                       
|------------- |  | -----------------------------------------------------------
|PART I.       |  | FINANCIAL INFORMATION                                      
|Item 1.       |  | Financial Statements                                       
|Item 2.       |  | Managements Discussion and Analysis or Plan of Operation  
|Item 3.       |  | Controls and Procedures                                    
|             
|PART II.      |  | OTHER INFORMATION                                          
|Item 1.       |  | Legal Proceedings                                          
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds
|Item 3.       |  | Defaults Upon Senior Securities                            
|Item 4.       |  | Submission of Matters to a Vote of Security Holders        
|Item 5.       |  | Other Information                                          
|Item 6.       |  | Exhibits                                                   
|SIGNATURE     |  | 17                                                         
|EXHIBIT INDEX |  | 18                                                         

2

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Table of Contents

PART I.   FINANCIAL INFORMATION

|Item 1. |  | Financial Statements
|------- |  | --------------------

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

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

See notes to condensed consolidated financial statements.

3

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Table of Contents

SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                             | September 30,2005 |  | December 31,2004
|------------------------------------------------------------ | ----------------- |  | ----------------
|
|ASSETS                                                       |                   |  |                 
|CURRENT ASSETS                                               |                   | 
|Cash and cash equivalents                                    |                   |  | $               
|Accounts receivable, less allowance of $40,000               |                   |  |                 
|Inventories, less allowances of $138,000 and $63,000         |                   |  |                 
|Prepaid expenses                                             |                   |  |                 
|                                                             |                   |  |                 
|TOTAL CURRENT ASSETS                                         |                   |  |                 
|                                                            
|PROPERTY AND EQUIPMENT, net                                  |                   |  |                 
|                                                            
|PATENT RIGHTS, net                                           |                   |  |                 
|                                                            
|OTHER                                                        |                   |  |                 
|                                                             |                   |  |                 
|                                                            
|                                                             |                   |  | $               
|                                                             |                   |  |                 
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                         |                   | 
|CURRENT LIABILITIES                                         
|Bank line of credit                                          |                   |  | $               
|Accounts payable                                             |                   |  |                 
|Accrued expenses                                             |                   |  |                 
|                                                             |                   |  |                 
|TOTAL CURRENT LIABILITIES                                    |                   |  |                 
|                                                             |                   |  |                 
|                                                            
|COMMITMENTS AND CONTINGENCIES                                |                   | 
|                                                            
|STOCKHOLDERS EQUITY                                        
|Preferred stock, no par value, 50,000,000 shares authorized; |                   | 
|no shares issued and outstanding                             |                   |  |                 
|Common stock, no par value, 50,000,000 shares authorized;   
|12,216,068 and 11,991,068 shares issued and outstanding      |                   |  |                 
|Warrants                                                     |                   |  |                 
|Stock options                                                |                   |  |                 
|Deferred financing costs, net                                |                   |  |                 
|Note receivable for common stock                             |                   |  |                 
|Accumulated deficit                                          |                   |  |                 
|                                                             |                   |  |                 
|                                                             |                   |  |                 
|                                                             |                   |  |                 
|                                                            
|                                                             |                   |  | $               
|                                                             |                   |  |                 

See notes to condensed consolidated financial statements.

4

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Table of Contents

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

|                                                                                     | Nine Months Ended September 30,
|------------------------------------------------------------------------------------ | -------------------------------
|
|OPERATING ACTIVITIES                                                                 |                                
|Net income (loss)                                                                    |                                
|Adjustments to reconcile net income (loss) to net cash used by operating activities:
|Depreciation                                                                         |                                
|Amortization of patent rights                                                        |                                
|Stock option compensation expense                                                    |                                
|Amortization of deferred financing costs                                             |                                
|Lawsuit settlement                                                                   |                                
|Changes in operating assets and liabilities:                                        
|Accounts receivable                                                                  |                                
|Inventories                                                                          |                                
|Prepaid expenses and other                                                           |                                
|Accounts payable                                                                     |                                
|Accrued expenses                                                                     |                                
|Customer deposits                                                                    |                                
|                                                                                     |                                
|Net cash used by operating activities                                                |                                
|                                                                                     |                                
|                                                                                    
|INVESTING ACTIVITY                                                                  
|Purchases of property and equipment                                                  |                                
|                                                                                     |                                
|                                                                                    
|FINANCING ACTIVITIES                                                                
|Net payments on bank line of credit                                                  |                                
|Payments on notes payable                                                            |                                
|Proceeds from the exercise of warrants and stock options                             |                                
|Net proceeds from the sale of common stock and warrants                              |                                
|Proceeds from notes receivable for common stock                                      |                                
|                                                                                     |                                
|Net cash provided by financing activities                                            |                                
|                                                                                     |                                
|                                                                                    
|NET INCREASE 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 financing activities:                                                        |                                
|Warrants exercised and expired                                                       |                                
|Stock options exercised                                                              |                                
|Warrants issued in connection with line of credit for deferred financing costs       |                                
|Notes receivable issued for purchase of common stock                                 |                                
|Warrants issued in connection with the sale of common stock and warrants             |                                

See notes to condensed consolidated financial statements.

5

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Table of Contents

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

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

| | 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 and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the financial statements and footnotes for the
year ended December 31, 2004 included in our Annual Report on Form 10-KSB.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

6

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Table of Contents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| | The Company has a stock-based employee compensation plan
consisting of stock options and warrants. The Company has not adopted Statement of Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation or SFAS No.
123R which expense stock options and continues to apply the intrinsic value method under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee/director
stock options and warrants. Accordingly, any compensation cost for stock options and warrants is measured as the excess, if any,
of the fair market value of the Companys stock at the measurement date over the employees/directors option and
warrant exercise price. Any resulting compensation expense is amortized ratably over the related vesting period. Options and
warrants to non-employees are accounted for as required by SFAS No. 123. The Company issued 70,000 stock options to non-employees
in the third quarter of 2005. The options had a fair value of $29,103 as determined by the Black-Scholes option pricing model.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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Table of Contents

| | Although the Company has elected to follow APB Opinion No. 25,
SFAS No. 123 requires pro forma disclosures of net income (loss) and per share disclosures as if the Company had accounted for its
stock options and warrants under that statement. The fair value of each option and warrant grant was estimated on the grant date
using the Black-Scholes option pricing model with the following assumptions:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | 2005 |  | 2004
|----------------------------------------------------------- | ---- |  | ----
|Risk-free interest rates                                    |      |  |     
|Dividend yields                                             |      |  |     
|Volatility factors of expected market price of common stock |      |  |     
|Weighted average expected life                              |      |  |     

| | The following table illustrates the effect on net income (loss)
and per share amounts as if the Company had applied the fair value provisions of SFAS No. 123 to stock-based employee compensation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|-------------------------------------------- | ------------------------------- |  | ------------------------------
|
|Net income (loss):                           |                                 |  |                               
|As reported                                  |                                 |  | $                             
|Warrant and stock  option  amortization cost |                                 |  |                               
|                                             |                                 |  |                               
|Pro forma                                    |                                 |  | $                             
|                                             |                                 |  |                               
|                                            
|Net income (loss) per share  basic:        
|As reported                                  |                                 |  | $                             
|Warrant and stock option amortization cost   |                                 |  |                               
|                                             |                                 |  |                               
|Pro forma                                    |                                 |  | $                             
|                                             |                                 |  |                               
|                                            
|Net income (loss) per share  diluted:      
|As reported                                  |                                 |  | $                             
|Warrant and stock option amortization cost   |                                 |  |                               
|                                             |                                 |  |                               
|Pro forma                                    |                                 |  | $                             
|                                             |                                 |  |                               

| | In all prior periods, the expected volatility used by the Company to
determine the fair value of options and warrants at date of grant for the pro forma disclosures was 0% because the Companys
stock was thinly traded. The fair value calculation has been changed to reflect the volatility shown in the above table at date of
grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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Table of Contents

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

| | Basic net income (loss) per share is computed by dividing the net
income (loss) by the weighted-average common shares outstanding for the reported period. Diluted net income (loss) per share
reflects the potential dilution that could occur if holders of warrants and options that are not antidilutive converted their
holdings into common stock. The dilutive effect of options and warrants included 1,977,841 and 1,565,321 additional shares in the
three and nine months ended September 30, 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options and warrants to purchase 5,275,749 and 1,158,125 shares of
common stock with a weighted average exercise price of $1.86 and $2.95 were excluded from the diluted computation for the three
months ended September 30, 2005 and 2004, respectively, because they were antidulitive. Options and warrants to purchase 5,327,982
and 933,267 shares of common stock with a weighted average exercise price of $1.90 and $2.71 were excluded from the diluted
computation for the nine months ended September 30, 2005 and 2004, respectively, because they were antidulitive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Bank Line of Credit 
|-- |  | ---------------------

| | On August 1, 2005, the Company renewed its previous line of credit
through October 1, 2006. The line was decreased by $200,000 from $700,000 to $500,000 with an interest rate at prime (6.75% at
September 30, 2005), and the Company provided the bank with a security interest in its general business assets. The line is
guaranteed by four individuals, all of whom are shareholders, who received three-year warrants to purchase an aggregate of 250,000 shares of common stock at $.70
per share for their financial support. The warrants issued to the guarantors had a market value of $80,787 as determined by the
Black-Scholes option pricing model. The $80,787 was recorded as deferred financing costs. These costs are amortized over the term
of the line of credit, and the net unamortized balance is offset against stockholders equity. The Companys outstanding
indebtedness under the line was $490,000 at September 30, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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| | In 2000, the Company instituted a lawsuit against ICOS Vision
Systems Corp. N.V., a Belgian corporation (ICOS) for infringement of two of its patents. The patents relate to
three-dimensional ball array inspection apparatus and methods. In June 2003, the Company reached a settlement with ICOS concerning
one-illumination source inspection systems. In 2003, pursuant to the settlement agreement, ICOS 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 District Court found no
infringement with regard to the two-illumination source devices that ICOS sold. The Company agreed to the settlement agreement
with respect to one-light source devices in order to allow it to immediately appeal the courts ruling concerning inspection
systems involving two-light sources, eliminating the need, delay and expense of a trial with regard to these systems at this
stage. In connection with the settlement, the Company paid its President $160,000 pursuant to the agreement noted above. The
Company recorded the $400,000 settlement less the $160,000 paid to its President in other income in its consolidated financial
statements for the year ended December 31, 2003. On April 23, 2004, the United States Court of Appeals ruled in the Companys
favor with regard to the two-illumination source devices, finding that the claim terms an illumination apparatus and
illuminating in the Companys patents encompass one or more illumination sources and overturned the District
Courts entry of summary judgment of no infringement. A trial, to be decided by the judge, was held in March 2005 in the U.
S. District Court for the Southern District of New York regarding the Companys ongoing litigation with ICOS. Scanners
prayer for relief includes requests for damages in the form of lost profits, a trebling of damages pursuant to 35 USC 284, and
attorneys fees and costs. In its answer to the complaint, ICOS included counterclaims alleging various forms of unfair
competition as well as seeking a declaration that the patents are invalid and not infringed. In addition, ICOS is requesting
attorneys fees and costs. It is not known when the judge will issue his decision on the case. The Company intends to
continue to vigorously enforce its patent rights and expects to incur significant additional expenses in 2005 to pursue its
claims.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In July 2005, ICOS Vision Systems Corp. N.V. and ICOS Vision
Systems, Inc. (collectively, ICOS) filed a lawsuit against the Company in the U.S. District Court for the Southern
District of New York. ICOS is seeking a declaratory judgment with respect to certain patents held by Scanner finding that ICOS
does not infringe such patents and that such patents are invalid. ICOS is also seeking a declaratory judgment finding that U.S.
companies that purchase electronic components such as Ball Grid Array devices inspected on ICOS systems in foreign countries are
not liable as infringers of such patents and injunctive relief enjoining Scanner from threatening such purchasers with claims of
infringement. ICOS is seeking damages of unspecified amounts, as well as costs, expenses and attorneys fees. The Company
believes that this lawsuit is without merit and intends to vigorously defend itself and the Companys intellectual property
rights.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In July 2005, American Arium (Arium), a Delaware
corporation with a principal office located at 14811 Myford Road, Tustin, California, filed a lawsuit against the Company in the
U.S. District Court for the Central District of California. Arium is seeking a declaratory judgment with respect to certain
patents held by Scanner finding that Arium does not infringe such patents and that such patents are invalid. Arium is also seeking
injunctive relief enjoining Scanner from threatening Arium and its customers with claims of infringement. Arium is seeking its
costs, expenses and attorneys fees. The Company believes that this lawsuit is without merit and intends to vigorously defend
itself and the Companys intellectual property rights.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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Table of Contents

|Item 2. |  | Managements Discussionand 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 (Exchange Act). These statements are
based on our beliefs and assumptions and on information currently available to us. Forward-looking statements include, among
others, the information concerning possible or assumed future results of operations of Scanner Technologies Corporation and its
subsidiary (Scanner) set forth under the heading Managements Discussion and Analysis or Plan of Operation.
Forward-looking statements also include statements in which words such as may, will, should,
could, expect, anticipate, intend, plan, believe,
estimate, predict, potential, or similar expressions are used. Forward-looking statements are
not guarantees of future performance and are subject to various risks and uncertainties that may cause our future results and
shareholder values to 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 generates revenues from the sale of machine-vision
inspection products used in the semiconductor industry for the inspection of integrated circuits. The products include
machine-vision modules sold to original equipment manufacturers that use the modules as a component of inspection systems they
sell to end users, as well as complete machine-vision inspection systems that the Company sells to end users. Because the Company
sells relatively few of its devices each year, the Companys business is characterized by uneven quarterly results that are
dependent on the timing of sales and revenue recognition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During recent years and particularly in 2005, the Companys
operations were adversely affected by a lack of demand in the semiconductor marketplace, which caused many of the Companys
potential customers to cease or defer purchases of capital equipment such as the inspection equipment offered by the Company.
According to information provided by Semiconductor Equipment and Materials International (SEMI), a trade association
of semiconductor equipment and material manufacturers, sales of semiconductor equipment for 2004 totaled $37.11 billion, but are
expected to decline in 2005 to a total of $32.63 billion. SEMI expects the market for semiconductor equipment to bounce back in
2006 and to increase by 8.17% to $35.28 billion, before growing 10.16% in 2007, to $38.86 billion. The Company believes the
general improvement in industry conditions contributed to the improvement in the Companys operations in 2004, whereas
operations in 2005 are adversely affected by a lack of demand in the semiconductor marketplace. The Company will continue to be
subject to the cyclical nature of the semiconductor marketplace.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In addition to general trends in the semiconductor marketplace,
the Companys sales in 2005 have been adversely affected by increased competitive pressures from other providers of
machine-vision inspection equipment, most of whom are larger, better financed and offer a broader selection of products. Many
customers prefer to reduce the number of suppliers they work with by purchasing from larger suppliers offering a broader range of
products from one company. The Company must also compete on the basis of price, product performance including speed and size of
defects detected, ease of use and technological advancement. During 2003, the Company commenced sales of its VisionFlex inspection
systems. The Company must continue research and development to improve existing products and introduce new products in order to
compete effectively with other providers of inspection equipment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company is reviewing the possibility of licensing its
technologies to third parties to provide additional revenues. There is, however, no assurance that the Company will be successful
in obtaining licenses on financially advantageous terms, and the Company may need to initiate lawsuits, and incur legal fees and
other costs, to force potential licensees to acknowledge the Companys proprietary rights and enter into appropriate
licenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Companys working capital position improved in 2004
primarily due to profitable operations and to the sale of common stock and warrants in a private placement, the exercise of
warrants and the payments of notes receivable for common stock. During the nine months ended September 30, 2005, the working
capital position decreased primarily due to the net effect of the operating loss offset by the cash proceeds from the exercise of
stock options and warrants. The Company believes that its working capital at September 30, 2005 is adequate for at least the next
twelve months of operations and does not currently anticipate a need for additional financing.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Revenue recognition;
|- |  | --------------------

| |  | Allowances for doubtful accounts and excess and obsolete inventories;
|- |  | ---------------------------------------------------------------------

| |  | Patent rights;
|- |  | --------------

| |  | Accounting for income taxes;
|- |  | ----------------------------

| |  | Accounting and valuation of options and warrants;
|- |  | -------------------------------------------------

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

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

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

| | Patent rights are stated at cost less accumulated amortization.
Amortization is provided using the straight-line method over six years. Patent rights are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. This evaluation is performed
at least annually. An impairment loss is recognized when estimated cash flows to be generated by those assets are less than the
carrying value of the assets. When impairment loss is recognized, the carrying amount is reduced to its estimated fair value,
based on appraisals or other reasonable methods to estimate value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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| | The Company accounts for employee stock options and warrants under
Accounting Principles Opinion No. 25, Accounting for Stock Issued to Employees, and provides the disclosures required
by Statement of Financial 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 life years; expected volatility; and expected dividend rate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2004
| | ---------------------------------------------------------------------------------------

| | Sales for the three months ended September 30, 2005, were $355,280
compared to $1,348,646 for the three months ended September 30, 2004. The sales decrease in 2005 relates primarily to decreased
sales of the Companys robotic inspection systems to end users and a decrease in the purchases of capital equipment by
customers in the semiconductor industry.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost of goods sold decreased by $238,341 to $125,542 in the three
months ended September 30, 2005, from $363,883 for the same quarter in 2004. Cost of goods sold as a percentage of sales increased
by 8.3% to 35.3% in 2005 compared to 27.0% in 2004. In 2005, material cost decreased 1.2% as a percent of sales. This decrease in material cost was
offset by an increase in manufacturing costs as a percent of sales primarily because of the large decrease in sales, which caused
fixed manufacturing costs to be spread over a smaller base.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling, general and administrative expenses decreased by $153,866
to $385,802 for the three months ended September 30, 2005, compared to $539,668 in the same quarter of 2004. The decrease in
expenses related primarily to decreases in salaries and related expenses of approximately $62,000 because of fewer personnel and
decreases in marketing related expenses of approximately $92,000 offset by increases in stock option compensation of approximately
$29,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research and development expenses were $31,670 in the three months
ended September 30, 2005 compared to $88,066 for the three months ended September 30, 2004. The research and development
activities related to the Companys development and improvement of its own line of robotic inspection systems for sale to end
users. The decrease in expenses was related primarily to reduced personnel costs. The development process is continuing.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal fees decreased by $89,277 to $3,366 in the three months
ended September 30, 2005, from $92,643 in the same quarter of 2004. A significant portion of the legal fees in 2004 related to the
patent infringement claims brought by the Company against a competitor, which claims went to trial in March 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other expense was $17,741 in the three months ended September 30,
2005, compared to $12,181 in the same quarter of 2004. Interest expense was $7,312 higher in the third quarter of 2005 than it was
in the third quarter of 2004. Interest expense increased primarily due to amortization of the warrant costs related to the line of
credit.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company recognized no income tax benefit to offset the loss
before income taxes in the three months ended September 30, 2005, as no tax benefit was available to the Company. The Company
recognized no federal income tax expense to offset the income before income taxes in the three months ended September 30, 2004
because the income was offset by operating loss carryforwards.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The net loss for the three months ended September 30, 2005 was
$208,841, or $.02 per share, compared to net income of $252,205, or $.02 per share in the same quarter of 2004. The change was the
result of decreased gross profit of $755,025 and increased net other expense of $5,560 offset by decreased operating expenses of
$299,539.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2004
| | -------------------------------------------------------------------------------------

| | Sales for the nine months ended September 30, 2005, were
$1,310,618 compared to $4,350,589 for the nine months ended September 30, 2004. The sales decrease in 2005 relates primarily to
decreased sales of the Companys robotic inspection systems to end users and a decrease in the purchases of capital equipment
by customers in the semiconductor industry.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost of goods sold decreased by $614,062 to $591,808 in the nine
months ended September 30, 2005, from $1,205,870 in 2004. Cost of goods sold as a percentage of sales increased by 17.5% to 45.2%
in 2005 compared to 27.7% in 2004. In 2005, material cost increased 3.8% as a percent of sales. This increase was supplemented by
an increase in manufacturing costs as a percent of sales primarily because of the large decrease in sales, which caused fixed
manufacturing costs to be spread over a smaller base.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling, general and administrative expenses decreased by $152,798
to $1,479,258 for the nine months ended September 30, 2005, compared to $1,632,056 in the same period of 2004. The decrease in
expenses related primarily to decreased salaries and related expenses of approximately $110,000 because of fewer personnel and
reduced marketing related expenses of approximately $159,000 offset by increases in professional fees of approximately $83,000,
relating to Company marketing and financing activities and directors fees, and an increase of approximately $62,000 in stock
option compensation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research and development expenses were $109,430 the nine months
ended September 30, 2005 compared to $276,358 for the nine months ended September 30, 2004. The research and development
activities related to the Companys development and improvement of its own line of robotic inspection systems for sale to end
users. The decrease in expenses was related primarily to reduced personnel costs. The development process is continuing.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal fees increased by $408,007 to $633,178 in the nine months
ended September 30, 2005, from $225,171 in the same period of 2004. A significant portion of the legal fees in both periods
related to the patent infringement claims brought by the Company against a competitor, which claims went to trial in March 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other income (expense) was ($28,003) in the nine months ended
September 30, 2005, compared to $115,566 in the same period of 2004. In 2004, the Company won a lawsuit relating to fees and
expenses charged by two law firms previously handling its patent infringement claim. The court ruled that the legal fees and
expenses billed by the firms were excessive in the amount of $322,432. This amount, which was included in accounts payable at
December 31, 2003, was recorded as other income in the three months ended March 31, 2004. Interest expense was $184,448 lower in
the first nine months of 2005 than it was in the first nine months of 2004, due primarily to the difference in amortization of the
warrant valuation related to the lines of credit.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company recognized no income tax benefit to offset the loss
before income taxes in the nine months ended September 30, 2005, as no tax benefit was available to the Company. The Company
recognized no federal income tax expense to offset the income before income taxes in the nine months ended September 30, 2004
because the income was offset by operating loss carryforwards. The taxes provided in both periods represented minimum state taxes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The net loss for the nine months ended September 30, 2005 was
$1,532,959, or $.13 per share, compared to net income of $1,124,900, or $.11 per share in the same period of 2004. The change was
the result of decreased gross profit of $2,425,909, increased operating expenses of $88,281, decreased net other income of
$143,569 and increased income taxes of $100.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | LIQUIDITY AND CAPITAL RESOURCES (FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2005)
| | ------------------------------------------------------------------------------

| | On August 1, 2005, the Company renewed its previous line of credit
through October 1, 2006. The line was decreased by $200,000 from $700,000 to $500,000 with an interest rate at prime (6.75% at
September 30, 2005) and the Company provided the bank with a security interest in its general business assets. The line is
guaranteed by four individuals, all of whom are shareholders, who received three-year warrants to purchase an aggregate of 250,000 shares of common stock at $.70
per share for their financial support. The Companys outstanding indebtedness under the line was $490,000 at September 30,
2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company believes that its existing working capital will be
adequate to satisfy projected operating and capital requirements for the next 12 months.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net cash used by operating activities for the nine months ended
September 30, 2005 totaled $221,055. Negative operating cashflows resulted primarily from the net loss of $1,532,959 for the
period being offset by net non-cash adjustments of $135,695 relating primarily to stock option compensation expense and
depreciation and amortization and by net changes in operating assets and liabilities of $1,176,209 relating primarily to decreases
in receivables and inventories offset by a decrease in accounts payable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net cash used by investing activities for the nine months ended
September 30, 2005 totaled $7,607. The funds were used to purchase property and equipment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net cash provided by financing activities for the nine months
ended September 30, 2005 totaled $398,500. The amount relates to proceeds from the exercise of stock options and warrants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Due to the lack of sufficient accounting personnel, there was an
ineffective segregation of duties in the preparation of the financial statements to prevent or detect errors. This control
deficiency could result in material misstatements to annual or interim financial statements that would not be prevented or
detected if left unremediated. Accordingly, management determined that this control deficiency constitutes a material weakness.
Because of this material weakness, management believes that, as of September 30, 2005, we did not maintain effective internal
control over financial reporting based on the COSO criteria.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PART II  OTHER INFORMATION

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

| | In July 2005, ICOS Vision Systems Corp. N.V. and ICOS Vision
Systems, Inc. (collectively, ICOS) filed a lawsuit against the Company in the U.S. District Court for the Southern
District of New York. ICOS is seeking a declaratory judgment with respect to certain patents held by Scanner finding that ICOS
does not infringe such patents and that such patents are invalid. ICOS is also seeking a declaratory judgment finding that U.S.
companies that purchase electronic components such as Ball Grid Array devices inspected on ICOS systems in foreign countries are
not liable as infringers of such patents and injunctive relief enjoining Scanner from threatening such purchasers with claims of
infringement. ICOS is seeking damages of unspecified amounts, as well as costs, expenses and attorneys fees. The Company
believes that this lawsuit is without merit and intends to vigorously defend itself and the Companys intellectual property
rights.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In July 2005, American Arium (Arium), a Delaware
corporation with a principal office located at 14811 Myford Road, Tustin, California, filed a lawsuit against the Company in the
U.S. District Court for the Central District of California. Arium is seeking a declaratory judgment with respect to certain
patents held by Scanner finding that Arium does not infringe such patents and that such patents are invalid. Arium is also seeking
injunctive relief enjoining Scanner from threatening Arium and its customers with claims of infringement. Arium is seeking its
costs, expenses and attorneys fees. The Company believes that this lawsuit is without merit and intends to vigorously defend
itself and the Companys intellectual property rights.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 2. |  | Unregistered Sales ofEquity Securities and Use of Proceeds
|------- |  | ----------------------------------------------------------

| | On August 1, 2005, the Company issued three-year warrants to
purchase an aggregate of 250,000 shares of common stock at $.70 per share. The warrants were issued to four individuals, all of whom are shareholders, who
guaranteed the Companys line of credit. The Company relied upon Section 4(2) of the Securities Act for exemptions for
transactions not involving a public offering.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On September 26, 2005, the Company issued stock options to certain
employees, including two officers, consultants and two outside directors to purchase an aggregate of 1,253,000 shares of common
stock of the Company. Options to purchase 513,000 common shares at $.45 per share vested immediately. Options to purchase 100,000
common shares at $.45 per share vest on January 1, 2006. Options to purchase 440,000 common shares at $.495 per share vest in two
increments, 40,000 vest immediately and 400,000 on January 1, 2006. Options to purchase 200,000 shares at $.45 per share vest in
two increments, on September 26, 2006 and September 26, 2007. The Company relied upon Section 4(2) of the Securities Act for
exemptions for transactions not involving a public offering as applicable; provided, however, that 186,000 of such options and
underlying shares were included on a Form S-8 Registration Statement previously filed by the Company, and the Company intends to
register the remaining options and shares prior to any exercise of such options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | None.
| | -----

|Item 4. |  | Submission of Mattersto a Vote of Security Holders
|------- |  | --------------------------------------------------

| | None.
| | -----

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

| | The Company entered into a Change in Terms Agreement (the
Amendment) dated August 1, 2005 with Bremer Bank, National Association (the Bank), which amends the
Business Loan Agreement dated March 28, 2002 between the Company and the Bank. The Amendment reduces the Companys line of
credit from $700,000 to $500,000 and extends the line of credit from August 1, 2005 to October 1, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 6. |  | Exhibits
|------- |  | --------

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

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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                                                                                                           
|------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------
|                         
|                         
|Dated:   November 7, 2005 | By: | /s/   Elwin M. Beaty                                                                                                                       
|                          |    
|                          |     | Elwin M. BeatyChief Executive Officer andChief 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, 2005

|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                   
|              
|10.1*          | Change in Terms Agreement dated August 1, 2005 between the Company and Bremer Bank, National Association.                                                                          
|              
|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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