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

                                  FORM 10-KSB/A

[X]  AMENDMENT NO. 1 TO ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
     SECURITIES ACT OF 1934

                     For the fiscal year ended DECEMBER 31, 2005

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934

                     For the transition period from ____________ to ____________

                     Commission file number 333-87224

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

                 NEVADA                                98-0372780
     -------------------------------      ------------------------------------
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

     1077 BUSINESS CENTER CIRCLE,
       NEWBURY PARK, CALIFORNIA                           91320
----------------------------------------               ----------
(Address of principal executive offices)               (Zip Code)

Issuer's telephone number (805) 480-1994

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

                                                Name of each exchange on
          Title of each class                       which registered
                  None.                                   N/A
          -------------------                   ------------------------

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

                                      None.
                                ----------------
                                (Title of class)
<PAGE>

          Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act                                   [X](*)

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

          Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.                                    [X](**)

          Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).                       Yes [ ] No [X]

          State issuer's revenues for its most recent fiscal year. $2,122,349

          State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. $7,768,164 as of
September 7, 2006

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 54,173,745 shares of common
stock as of September 7, 2006

                       DOCUMENTS INCORPORATED BY REFERENCE

          If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part *, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990). N/A

          Transitional Small Business Disclosure Format
(Check one): Yes [ ] No [X]

----------
(*) We were not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act for the fiscal year ended December 31, 2005 because (i)
our registered common stock was registered under the Securities Act during the
fiscal year ended December 31, 2005 and was not registered under the Exchange
Act, (ii) we did not have any registration statement that became effective
during the fiscal year ended December 31, 2005 and (iii) we had less than 300
shareholders of record at the beginning of the fiscal year ended December 31,
2005. Although we were not required to do so, we voluntarily filed such reports
with the Securities and Exchange Commission during such period. On March 24,
2006 we filed a registration statement on Form 10-SB to register our common
stock pursuant to the Exchange Act, which we subsequently withdrew pursuant to
the request of the Securities and Exchange Commission until our registration
statement on Form SB-2, for which an amendment was last filed on May 1, 2006, is
declared effective. Once our registration statement on Form SB-2 is declared
effective, we plan to file another registration statement on Form 10-SB to
register our common stock pursuant to the Exchange Act. Once our registration
statement on Form 10-SB is effective, we will be subject to the filing
requirements of the Securities Exchange Act.

(**) We did not have any equity securities registered pursuant to Section 12 of
the Exchange Act during the fiscal year ended December 31, 2005. As such, our
directors, officers and beneficial owners of more than 10 percent of any class
of equity securities were not required to comply with Section 16(a) of the
Exchange Act. Accordingly, disclosure of delinquent filers in response to Item
405 of Regulation S-B is inapplicable.
<PAGE>

                                EXPLANATORY NOTE

          We are filing this amended annual report on Form 10-KSB/A for the
fiscal year ended December 31, 2005 to restate our audited consolidated
financial statements at December 31, 2005 and for the period ended December 31,
2005 in order to: (i) properly account for the fair value of derivative
liabilities resulting from the issuance of freestanding warrants and
registration rights granted in connection with the issuance of such warrants
(the effect of this restatement is described further in Note 14 to the
Consolidated Financial Statements included herein) and (ii) adjust revenues
related to a one-time license fee received from a customer (revenues pertaining
to the amount received are recognized evenly over the life of the agreement (the
effect of this adjustment is described further in Note 14 to the Consolidated
Financial Statements included herein)). We have also amended the cover page in
order to update certain disclosures contained therein.

          The following Items of this amended annual report on Form 10-KSB/A for
the fiscal year ended December 31, 2005 are amended and restated herein:

          Cover Page:

          o    Disclosure relating to our obligation to file reports required to
               be filed by Section 13 or 15(d) of the Securities Exchange Act
               has been updated to reflect the current status of the
               registration process of our equity securities under the Exchange
               Act.

          Part I:

          o    Item 1. Description of Business--Capitalization;

          Part II:

          o    Item 6. Management's Discussion and Analysis;

          o    Item 7. Financial Statements; and

          Exhibits:

          o    Exhibits--Exhibits 31.1, 31.2, 32.1 and 32.2--currently-dated
               certifications from our President and Chief Executive Officer and
               Treasurer and Vice President of Finance and Administration, as
               required by Section 302 and 906 of the Sarbanes-Oxley Act of
               2002.

The remaining Items are unaffected by the aforementioned restatements, have not
been updated from the disclosure originally contained in our annual report on
Form 10-KSB for the fiscal year ended December 31, 2005 filed with the
Securities and Exchange Commission on March 24, 2006 and are not reproduced in
this Form 10-KSB/A. This amended annual report on Form 10-KSB/A for the fiscal
year ended December 31, 2005 does not reflect events occurring after the filing
of the annual report on Form 10-KSB filed with the Commission on March 24, 2006,
nor does it modify or update the disclosures contained in the annual report on
Form 10-KSB filed with the Commission on March 24, 2006, other than as described
above.

                                       1
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2005. The
figures in the table are derived from our audited financial statements and
should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this annual report. All information below
excludes any securities issued subsequent to December 31, 2005.

                                December 31, 2005
                                    (Restated)

       Long-term debt............................................$194,444
       Stockholders' deficit:
         Common stock; $0.001 par value; 200,000,000
          Shares authorized; 54,098,745 shares issued
          and outstanding.........................................$54,099
         Additional paid-in capital............................$8,495,429
         Accumulated deficit..................................($7,687,157)
       Total Stockholders' deficit...............................$862,371
       Total capitalization....................................$1,056,815

                                     PART II

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

You should read the following discussion and analysis of our financial condition
and results of operations together with the financial statements and the related
notes appearing in this annual report. The following discussion and other parts
of this annual report contain forward-looking statements that involve risks and
uncertainties. Forward-looking statements can be identified by words such as
"anticipates," "expects," "believes," "plans," and similar terms. Our actual
results could differ materially from any future performance suggested in this
annual report as a result of various factors. All forward-looking statements are
based on information currently available to us and we assume no obligation to
update such forward-looking statements, except as required by law. Service
marks, trademarks and trade names referred to in this annual report are the
property of their respective owners.

As a result of the mergers whereby Electronic Sensor Technology, L.P. became a
wholly-owned indirect subsidiary of Electronic Sensor Technology and the
subsequent termination of Bluestone's prior operations, our business plan has
been altered to focus on the product operations previously conducted by
Electronic Sensor Technology, L.P. Following the mergers, our revenues were
expected to be, and have been, derived principally from the sale of the zNose(R)
products.

CRITICAL ACCOUNTING POLICIES

Electronic Sensor Technology records revenue from direct sales of products to
end-users when the products are shipped, collection of the purchase price is
probable and Electronic Sensor Technology has no significant further obligations
to the customer. Costs of remaining insignificant obligations of Electronic
Sensor Technology, if any, are accrued as costs of revenue at the time of
revenue recognition. Cash payments received in advance of product or service
revenue are recorded as deferred revenue.

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

                                       2
<PAGE>

Electronic Sensor Technology reviews long-lived assets, such as property and
equipment, to be held and used or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. At December 31, 2005 no assets were impaired.

We account for liquidated damages pursuant to Emerging Issue Task Force ("EITF")
05-04, View C, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument", subject to EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Pursuant to EITF 05-04, View C, liquidated damages payable
in cash or stock are accounted for as a separate derivative, which requires a
periodical valuation of its fair value and a corresponding recognition of
liabilities associated with such derivative. We also account for our embedded
conversion features and freestanding warrants pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires a
periodic valuation of their fair value and a corresponding recognition of
liabilities associated with such derivatives. The recognition of derivative
liabilities related to the issuance of shares of common stock is applied first
to the proceeds of such issuance, at the date of issuance, and the excess of
derivative liabilities over the proceeds is recognized as other expense in the
accompanying consolidated financial statements. The recognition of derivative
liabilities related to the issuance of convertible debt is applied first to the
proceeds of such issuance as a debt discount, at the date of issuance, and the
excess of derivative liabilities over the proceeds is recognized as other
expense in the accompanying consolidated financial statements. Any subsequent
increase or decrease in the fair value of the derivative liabilities is
recognized as other expense or other income, respectively. The valuation of such
derivatives requires significant judgment. We exercise our judgment in
determining the maximum liabilities associated with such derivatives as well as
the expected volatility related to their fair value. We base our estimate of the
maximum liabilities on our interpretation of the agreements related the
derivatives.

Accounts receivable are reported at net realizable value. We have established an
allowance for doubtful accounts based upon factors pertaining to the credit risk
of specific customers, historical trends, and other information. Delinquent
accounts are written-off when it is determined that the amounts are
uncollectible.

Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory using the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions.

We are required to estimate our income taxes in each of the jurisdictions in
which we operate as part of the process of preparing our consolidated financial
statements. SFAS No. 109, "Accounting for Income Taxes", requires a valuation
allowance to reduce the deferred tax assets reported if, based on the weight of
the evidence, it is not more likely than not that some portion or all of the
deferred tax assets will be realized. Management reviews deferred tax assets
periodically for recoverability and makes estimates and judgments regarding the
expected geographic sources of taxable income, gains from investments, as well
as tax planning strategies in assessing the need for a valuation allowance. We
determined that a valuation allowance of approximately $900,000 relating to net
operating loss carryovers was necessary to reduce our deferred tax assets to the
amount that will more likely than not be realized. As a result, at December 31,
2005, the Company has no net deferred tax assets. If the estimates and
assumptions used in our determination change in the future, we could be required
to revise our estimates of the valuation allowances against our deferred tax
assets and adjust our provisions for additional income taxes. In the ordinary
course of global business, there are transactions for which the ultimate tax
outcome is uncertain, thus judgment is required in determining the worldwide
provision for income taxes. We provide for income taxes on transactions based on
our estimate of the probable liability. We adjust our provision as appropriate
for changes that impact our underlying judgments. Changes that impact provision
estimates include such items as jurisdictional interpretations on tax filing
positions based on the results of tax audits and general tax authority rulings.

PLAN OF OPERATIONS

Over the course of the next 12 months, we intend to execute our business plan
and focus our business development efforts in the following key areas:

     o    By diversifying our product offerings to enhance the usefulness of our
          solutions for customers who will have already adopted one or more
          products;

     o    By enhancing our product lines and developing new products to attract
          new customers; and

                                       3
<PAGE>

     o    By developing partnering relationships with wide-ranging sales and
          distribution channel leaders already serving our vertical market space
          in a way that assists them in developing new revenue streams and
          opportunities through improved technical and sales support and
          customer services.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2004

The following table sets forth certain items included in our Income Statements
(see Financial Statements and Notes) for the periods indicated:

<TABLE>
<CAPTION>
                                                          Year Ended
                                                         December 31,           Variation $    Variation %
                                                 ----------------------------     2005 vs        2005 vs
                                                      2005           2004           2004          2004(*)
                                                   (Restated)     (Restated)     (Restated)     (Restated)
                                                 -------------  -------------  -------------  -------------
In $
<S>                                              <C>            <C>               <C>                 <C>
REVENUES                                         $   2,122,349  $   1,076,749      1,045,600           0.97
COST OF SALES                                        1,302,602      1,039,280        263,322           0.25
    GROSS PROFIT                                       819,747         37,469        782,278          20.88

OPERATING EXPENSES:
  Research and development                             260,125              0        260,125             NM(**)
  Compensation                                         466,421         81,734        384,687           4.71
  Selling                                              653,092        161,546        491,546           3.04
  General and administrative                         1,522,451        225,229      1,297,222           5.76
                                                 -------------  -------------  -------------
    TOTAL OPERATING EXPENSES                         2,902,089        468,509      2,433,580           5.19
LOSS FROM OPERATIONS                                (2,082,342)      (431,040)    (1,651,302)         (3.83)

OTHER INCOME AND EXPENSE:
  Other income - derivative liabilities              7,577,929              0      7,577,929             NM
  Other expense - derivative liabilities            (2,401,358)             0     (2,401,358)            NM
  Gain (loss) on sale of property and equipment          9,287         (7,710)        16,997           2.20
  Interest expense                                    (324,540)      (164,133)      (160,407)         (0.98)
                                                 -------------  -------------  -------------
    TOTAL OTHER INCOME AND (EXPENSE)                 4,861,318       (171,843)     5,033,161          29.29
NET (LOSS) INCOME                                $   2,778,976  $    (602,883)     3,381,859           5.61
                                                 =============  =============  =============  =============
</TABLE>

----------
(*)Expressed as a decimal
(**)NM = not meaningful

                                        4
<PAGE>

The following table sets forth, as a percentage of revenues, certain items
included in our Income Statements (see Financial Statements and Notes) for the
periods indicated:

                                 Year Ended
                                December 31,
                            --------------------
                               2005       2004
                            ----------  --------
                            (Restated)  (Restated)
As a % of revenues
REVENUES                           100%      100%
COST OF SALES                       61%       97%
GROSS PROFIT                        39%        3%
OPERATING EXPENSES                 137%       44%
(LOSS) FROM OPERATIONS             (98%)     (41%)
OTHER INCOME AND (EXPENSE)         229%      (16%)
NET (LOSS) INCOME                  131%      (57%)

Revenues primarily consists of the sale of our zNose products. Our increase in
revenues during 2005, when compared to 2004, is primarily attributable to an
increase of volume of shipments of zNose units from 28 units during 2004 to 56
units during 2005.

Cost of Sales primarily consists of manufacturing costs. The increase in cost of
sales during 2005 when compared to 2004 is primarily attributable to an increase
in our number of units shipped, offset by a decrease in idle labor hours during
2005 when compared to 2004. We believe that our per unit manufacturing costs
will continue to decline as we increase the number of units sold per quarter,
due to economies of scale.

Research and development expenses primarily consists of salaries and related
benefits, material and supplies associated with our efforts in developing and
enhancing our products. The increase in our research and development expenses
during 2005 is primarily attributable to an increase in salaries and related
benefits resulting from the hiring of personnel whose time is devoted to the
development and enhancement of our products.

Compensation expenses primarily consists of salaries and related benefits of our
general and administrative personnel. The increase in compensation expenses
during 2005 when compared to 2004 is primarily attributable to an increase in
personnel to support the growth of our operations.

Selling expenses primarily consists of salaries, commissions and related
benefits associated with our selling and marketing efforts The increase in
selling expenses during 2005 when compared to 2004 is primarily attributable to
an increase in employees associated with sales efforts as well expanded sales
activities.

General and administrative expenses primarily consists of costs incurred in
connection with the reverse merger as well professional fees associated with
being a publicly-traded company. Our increase in general and administrative
expenses during 2005 when compared to 2004 results from professional fees
associated with the reverse merger, which occurred during 2005, as well as an
increase of professional fees related to being publicly-traded, which also began
in 2005. The costs incurred in connection with the reverse merger totaled
approximately $635,000, which consisted of approximately $310,000 in legal fees,
$143,000 in investment banking and consultant fees and $182,000 in public
relations firm fees.

Other income-derivative liabilities primarily consists of the decrease in the
fair value of derivative liabilities between the date of issuance of such
derivatives and our year-end. The increase in other income during 2005 when
compared to 2004 is primarily attributable to a decrease in the fair value of
derivative liabilities, between measurement date, recognized during 2005. No
such derivatives were issued during 2004.

                                       5
<PAGE>

Other expense-derivative liabilities primarily consists of the recognition of
derivative liabilities we issued during 2005. No such derivatives were issued
during 2004.

Interest expense primarily consists of debt discount amortization and interest
on certain debt. The increase in interest discount during 2005 when compared to
2004 is primarily attributable to the recognition of debt discount associated
with the issuance of convertible debentures in December 2005, offset by a
decrease on certain loans payable which were satisfied in February 2005.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents amounted to approximately $4.2 million at December
31, 2005.

During 2005, we used approximately $3.0 million in our operating activities
which is the result of the following:

     o    A net income of approximately $2.8 million adjusted for:

          o    the recognition of derivative liabilities of $2.4 million
               resulting from the issuance of such derivatives (convertible
               debentures and warrants) and a decrease in the fair value of the
               derivative liabilities of approximately $7.6 million.

     o    An increase in accounts receivables, inventories, and accounts payable
          and accrued expenses of approximately $435,000, $459,000, and
          $266,000, respectively, resulting from increased revenues, increased
          production to meet the increased demand of our products and a general
          increase in of our expenses associated with our growth.

During 2005, we used approximately $1.0 million in investing activities by
purchasing a certificate of deposit of approximately $919,000 to satisfy the
collateral requirement of our line of credit and by incurring capital
expenditures of approximately $127,000.

During 2005, we generated approximately $8.1 million in financing activities by
generating proceeds of approximately $7,000,000 and $3.8 million from the
issuance of our convertible debentures and our shares of common stock,
respectively, offset by the repayment of our line of credit of approximately
$2.0 million and by paying financing costs of approximately $593,000.

As a result of the mergers, as of February 1, 2005, we assumed certain
liabilities and obligations of Electronic Sensor Technology, L.P. Total
liabilities assumed pursuant to the mergers were approximately $2.2 million,
including approximately (1) $1.8 million owed under a revolving line of credit
with East West Bank, (2) $212,000 of accounts payable and accrued expenses and
(3) $35,000 of other current liabilities. The outstanding loan for $1.8 million
with East West Bank accrued interest at the prime rate as reported in the Wall
Street Journal plus one-half point (0.5%) and was paid off on December 9, 2005.
The original maturity date of the East West Bank line of credit was December 31,
2005, which was extended to February 28, 2006 in order to provide additional
time for processing a pending renewal of the line of credit. East West Bank has
extended a reduced line of credit of $500,000 (based on projected cash flow
requirements for the coming year) with a maturity date of March 31, 2007 and
with an annual interest rate of 7.75%. The loan will be collateralized by all
assets of Electronic Sensor Technology. As part of such collateral, we will also
pledge a certificate of deposit of $250,000 to East West Bank. The loan
documents are currently being processed and we expect to execute them as soon as
they are approved by our Board of Directors.

During 2004, we used approximately $167,000 in our operating activities which is
the result of the following:

Our net loss of approximately $603,000 adjusted for:

     o    a decrease in our accounts receivable and accounts payable amounting
          to approximately $363,000 and $66,000, respectively, resulting from a
          shorter average collection time on accounts receivable and more timely
          payments on accounts payable as well as an increase in inventories and
          deferred revenues of approximately $88,000 and $192,000, respectively,
          to meet the increased demand of our products and receipt of a one-time
          license fee from a customer to be amortized to revenues in equal
          installments over the terms of the license agreement.

During 2004, we incurred capital expenditures of approximately $35,000.

                                       6
<PAGE>

During 2004, we financed our operations and capital expenditures by issuing
shares of our common stock generating proceeds of $200,000 and repaying
partners' loan of $120,000.

Although Electronic Sensor Technology possesses a bank operating line of credit,
there can be no assurance that these proceeds together with the net proceeds of
the debentures issued in December 2005 will be adequate for our capital needs.
There can be no assurance that any required or desired financing will be
available through any other bank borrowings, debt, or equity offerings, or
otherwise, on acceptable terms. If future financing requirements are satisfied
through the issuance of equity securities, investors may experience significant
dilution in the net book value per share of common stock. There is no guarantee
that a market will exist for the sale of our shares.

Our primary capital needs are to fund our growth strategy, which includes
creating a sales and marketing staff for the marketing, advertising and selling
of the zNose(R) family of chemical detection products, increasing distribution
channels both in the U.S. and foreign countries, introducing new products,
improving existing product lines and development of a strong corporate
infrastructure. We do not believe that we will have to incur significant capital
expenditures in the near future in order to meet our growth strategy goals.

As of December 31, 2005, our cash balance and working capital, adjusted for
derivative liabilities were $4,219,921 and $5,991,467, respectively. Our current
monthly cash burn rate is approximately $250,000 and we do not anticipate any
extraordinary cash payments that we will have to make in the near future until
the first principal payment of approximately $780,000 is due on the convertible
debentures that we issued on December 7, 2005, which such payment is to be made
on January 1, 2008. Based on our current monthly cash burn rate, we believe that
we will not require any financing until the second half of 2007, at the
earliest. Accordingly, we believe that we will be able to continue as a going
concern for at least the next twelve months.

SEASONALITY AND QUARTERLY RESULTS

We do not foresee any seasonality to our revenues or our results of operations.

INFLATION

Although we currently use a limited number of sources for most of the supplies
and services that we use in the manufacturing of our vapor detection and
analysis technology, our raw materials and finished products are sourced from
cost-competitive industries. While prices for our raw materials may vary
significantly based on market trends, we do not foresee any material
inflationary trends for our product sources.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

                                       7
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS.

                              FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                F-1

Consolidated Balance Sheet as of December 31, 2005                     F-2

Consolidated Statements of Operations for the Year Ended
 December 31, 2005                                                     F-3

Consolidated Statement of Changes in Stockholders' Deficit for the
 Period from January 1, 2004 to December 31, 2005                      F-4

Consolidated Statements of Cash Flows for the Year
 Ended December 31, 2005                                               F-5

Notes to Financial Statements                                          F-6

                                       8
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Electronic Sensor Technology, Inc.

          We have audited the accompanying balance sheet of Electronic Sensor
Technology, Inc. as of December 31, 2005 and the related consolidated statements
of operations, changes in stockholders' deficit and cash flows for the years
ended December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

          In our opinion, the financial statements referred to above present
fairly, the consolidated financial position of Electronic Sensor Technology,
Inc., as of December 31, 2005 and the consolidated results of its operations and
its cash flows for the years ended December 31, 2005 and 2004 in conformity with
accounting principles generally accepted in the United States of America.

          As discussed in Note 14 to the accompanying financial statements, the
Company has restated its financial statements as of and for the year ended
December 31, 2005 to reflect additional non-operating gains and losses, the
classification of embedded conversion features, warrants and liquidated damages
as derivative liabilities and to adjust revenues related to a one-time licensing
fee.

                                                    /s/ Sherb & Co., LLP
                                                    Sherb & Co., LLP
                                                    Certified Public Accountants

New York, New York
February 20, 2006

With respect to Note 14, the date is July 12, 2006

                                       F-1
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005
                                     ASSETS
                                   (Restated)

CURRENT ASSETS:
  Cash and cash equivalents                                  $    4,219,921
  Certificate of deposit-restricted                                 918,678
  Accounts receivable, net of allowance
   for doubtful accounts of $20,577                                 465,776
  Prepaid expenses                                                   69,936
  Inventories                                                       939,622
                                                             --------------
    TOTAL CURRENT ASSETS                                          6,613,933
                                                             --------------
DEFERRED FINANCING COSTS, net of amortization of $17,297            711,062
PROPERTY AND EQUIPMENT, net of accumulated
 depreciation of $917,010                                           112,548
SECURITY DEPOSITS                                                    12,817
                                                             --------------
                                                             $    7,450,360
                                                             ==============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                             480,799
  Deferred revenues                                                 141,667
  Derivative liabilities                                          5,771,079
                                                             --------------
    TOTAL CURRENT LIABILITIES                                     6,393,545
                                                             --------------
CONVERTIBLE DEBENTURES, net of unamortized discount
 of $6,805,556                                                      194,444
                                                             --------------
    TOTAL LIABILITIES                                             6,587,989
                                                             --------------
STOCKHOLDERS' DEFICIT:
  Preferred stock, $.001 par value 50,000,000 shares
   authorized, none issued and outstanding                                -
  Common stock, $.001 par value, 200,000,000 shares
   authorized, 54,098,745 issued and outstanding                     54,099
  Additional paid-in capital                                      8,495,429
  Accumulated deficit                                            (7,687,157)
                                                             --------------
    TOTAL STOCKHOLDERS' DEFICIT                                     862,371
                                                             --------------
                                                             $    7,450,360
                                                             ==============

                 See notes to consolidated financial statements

                                       F-2
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                               Year Ended
                                                              December 31,
                                                      --------------------------
                                                          2005           2004
                                                      ------------   -----------
                                                       (Restated)     (Restated)
<S>                                                  <C>             <C>
REVENUES                                              $  2,122,349   $ 1,076,749
COST OF SALES                                            1,302,602     1,039,280
                                                      ------------   -----------
  GROSS PROFIT                                             819,747        37,469
                                                      ------------   -----------

OPERATING EXPENSES:
  Research and development                                 260,125             -
  Compensation                                             466,421        81,734
  Selling                                                  653,092       161,546
  General and administrative                             1,522,451       225,229
                                                      ------------   -----------
    TOTAL OPERATING EXPENSES                             2,902,089       468,509
                                                      ------------   -----------
LOSS FROM OPERATIONS                                    (2,082,342)     (431,040)
                                                      ------------   -----------

OTHER INCOME AND EXPENSE:
  Other income - derivative liabilities                  7,577,929             -
  Other expense - derivative liabilities                (2,401,358)            -
  Gain (loss) on sale of property and equipment              9,287        (7,710)
  Interest expense                                        (324,540)     (164,133)
                                                      ------------   -----------
    TOTAL OTHER INCOME AND (EXPENSE)                     4,861,318      (171,843)
                                                      ------------   -----------
NET (LOSS) INCOME                                     $  2,778,976   $  (602,883)
                                                      ============   ===========
  Earnings (loss) per share, basic                    $       0.05   $     (0.01)
                                                      ============   ===========
  Weighted average number of shares, basic              53,636,560    53,525,865
                                                      ============   ===========
  Earnings (loss) per share, diluted                  $       (.04)  $     (0.01)
                                                      ============   ===========
  Weighted average number of shares, diluted            53,636,560    53,525,865
                                                      ============   ===========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-3
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                   (Restated)
<TABLE>
<CAPTION>

                                       Common Stock           Preferred Stock    Additional                         Total
                                -------------------------   ------------------    Paid-In       Accumulated     Stockholders'
                                   Shares        Amount      Shares    Amount     Capital         Deficit          Deficit
                                ------------   ----------   --------  --------  ------------   -------------   ---------------
<S>                             <C>            <C>          <C>       <C>       <C>            <C>             <C>
BALANCE - January 1, 2004         81,279,000   $   81,279          -  $      -  $  4,500,000   $  (9,863,250)    $  (5,281,971)
  Sale of Partnership interest
   - Class C                               -            -          -         -       200,000               -           200,000
  Note payable related party -
   interest waived                         -            -          -         -        63,774               -            63,774
  Net loss                                 -            -          -         -             -        (602,883)         (602,883)
                                ------------   ----------   --------  --------  ------------   -------------   ---------------

BALANCE - December 31, 2004       81,279,000       81,279          -         -     4,763,774     (10,466,133)       (5,621,080)
  Cancellation of common stock   (54,279,147)     (54,279)         -         -        54,279               -                 -
  Notes payable converted to
   common stock                    1,272,000        1,272          -         -     1,270,728               -         1,272,000
  Reverse acquisition                      -            -          -         -       (89,325)              -           (89,325)
  Sale of common stock             3,985,000        3,985          -         -        (3,985)              -                 -
  Deferred compensation
   contributed to capital                  -            -          -         -       934,957               -           934,957
  Officers loans converted to
   common stock                    1,198,630        1,199          -         -     1,197,431               -         1,198,630
  Issuance of shares for
   services                          130,000          130          -         -        74,820               -            74,950
  Accrued interest converted
   to common stock                   313,262          313          -         -       312,950               -           313,263
  Common stock issued for
   acquisition of EST             20,200,000       20,200          -         -       (20,200)              -                 -
  Net income                               -            -          -         -             -       2,778,976         2,778,976
                                ------------    ---------   --------  --------  ------------   -------------   ---------------
BALANCE - December 31, 2005       54,098,745    $  54,099          -  $      -  $  8,495,429   $  (7,687,157)    $     862,371
                                ============    =========   ========  ========  ============   =============   ===============
</TABLE>

                 See notes to consolidated financial statements.

                                       F-4
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                 Year Ended
                                                                                December 31,
                                                                      --------------------------------
                                                                            2005            2004
                                                                         (Restated)      (Restated)
                                                                      ---------------  ---------------
<S>                                                                   <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                   $     2,778,976  $      (602,883)
  Adjustments to reconcile net income (loss) to net cash provided by
    (used in) operating activities:
    Depreciation and amortization                                              21,300           11,223
    Issuance of shares for services                                            74,950                -
    Recognition of derivative liabilities                                   2,401,358                -
    Amortization of debt discount                                             194,444                -
    Amortization of deferred financing costs                                   17,297                -
    Notes payable related party - interest waived                                   -           63,774
    Decrease in fair value of derivative liability                         (7,577,929)               -
  Changes in assets and liabilities:
    Accounts receivable                                                      (435,089)         363,042
    Inventories                                                              (458,974)         (87,544)
    Prepaid expenses                                                          (55,679)           2,312
    Security deposits                                                             140                -
    Accounts payable and accrued expenses                                     266,578          (66,120)
    Deferred revenues                                                         (50,000)         191,667
    Due to related party                                                      (60,000)         (40,910)
    Interest payable                                                          (26,961)           4,364
    Other current liabilities                                                 (35,665)          (6,773)
                                                                      ---------------  ---------------
Net cash provided by (used in) operating activities                        (2,945,254)        (167,848)
                                                                      ---------------  ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of property and equipment                                 43,933           12,198
  Purchase of certificate deposit                                            (918,678)
  Purchase of property and equipment                                         (126,582)         (35,113)
                                                                      ---------------  ---------------
   Net cash (used in) investing activities                                 (1,001,327)         (22,915)
                                                                      ---------------  ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in line of credit                                    (1,969,137)          17,000
  Repayment of partners' loans payable                                       (110,000)        (120,000)
  Proceeds from issuance of common stock                                    3,811,708          200,000
  Proceeds from convertible debenture                                       7,000,000                -
  Payment of deferred financing costs                                        (592,500)               -
                                                                      ---------------  ---------------
Net cash provided by financing activities                                   8,140,071           97,000
                                                                      ---------------  ---------------
NET INCREASE (DECREASE) IN CASH                                             4,193,491          (93,763)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 26,430          119,968
                                                                      ---------------  ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                              $     4,219,921  $        26,205
                                                                      ===============  ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid during the period for:
  Interest                                                            $       102,928  $        87,284
                                                                      ===============  ===============
  Taxes                                                               $             -  $             -
                                                                      ===============  ===============
NON-CASH INVESTING AND FINANCING ACTIVITIES
  Notes payable, loans payable and accrued expenses converted
   into Common stock and additional paid-in capital                   $     3,718,849  $             -
                                                                      ===============  ===============
  Fair value of derivative liability recorded as debt
   discount on convertible debentures                                 $     7,000,000  $             -
                                                                      ===============  ===============
  Fair value of derivative liability recorded as
   deferred financing costs                                           $       135,859                -
                                                                      ===============  ===============
</TABLE>

                       See notes to consolidated financial statements.

                                       F-5
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

(1) Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Electronic Sensor Technology, Inc. (the "Company") (formerly Bluestone Ventures,
Inc.) develops and manufactures electronic devices used for vapor analysis. It
markets its products through distribution channels in over 20 countries.

Basis of Consolidation

The accompanying financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. Bluestone Ventures, Inc. ("Bluestone")
executed an Agreement and Plan of Merger ("Merger Agreement") by and among
Bluestone, Amerasia Technology, Inc., ("Amerasia"), holder of approximately 55%
of the partnership interests of Electronic Sensor Technology, L.P., ("EST"), L &
G Sensor Technology, L.P., ("L&G"), holder of approximately 45% of the
partnership interests of EST, Amerasia Acquisition Corp., ("AAC") a wholly-owned
subsidiary of Bluestone, and L & G Acquisition Corp., ("LAC") a wholly owned
subsidiary of Bluestone on January 31, 2005. Under the Merger Agreement (i) AAC
merged with and into Amerasia such that Amerasia became a wholly-owned
subsidiary of Bluestone, (ii) LAC merged with and into L&G such that L&G became
a wholly-owned subsidiary of Bluestone, (iii) as a result of the merger of (i)
and (ii), Bluestone indirectly acquired all of the partnership interests of EST
and (iv) Bluestone issued 20,000,000 shares of its common stock to the
shareholders of Amerasia and L&G. This merger has been treated as a purchase
only of the partnership interests of Electronic Sensor Technology L.P.

For accounting purposes, the transaction was treated as a recapitalization of
EST and accounted for as a reverse acquisition. Prior to the merger, Bluestone
was a non-operating public shell and EST was a privately-held operating limited
partnership. Accordingly, the accompanying financial statements include the
accounts of EST for the period from January 1, 2004 to December 31, 2005 and the
accounts of Bluestone from February 1, 2005 to December 31, 2005.

Cash and Cash Equivalents

The Company considers highly liquid financial instruments with maturities of
three months or less at the time of purchase to be cash equivalents. The Company
did not have any cash equivalents at December 31, 2005.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, certificate of deposit,
accounts receivables, accounts payable and accrued expenses approximate their
fair value due to their short-term maturities. The fair value of the convertible
debentures amounts to $7,000,000, based on the Company's incremental borrowing
rate. The carrying value of the derivative liability associated with the
convertible debentures represents its fair value.

Concentration of Credit Risks

The Company is subject to concentrations of credit risk primarily from cash and
cash equivalents and accounts receivable. The Company maintains accounts with
financial institutions, which at times exceeds the insured limit of
approximately $100,000. The Company minimizes its credit risks associated with
cash by periodically evaluating the credit quality of its primary financial
institutions. The Company's accounts receivables are due from distributors in
all other countries in which it markets its products. The Company does not
require collateral to secure its accounts receivables. Three of the Company's
customers accounted for approximately 36%, 16% and 16%, respectively, of its net
accounts receivable at December 31, 2005. No other customers accounted for more
than 10% of its net accounts receivables.

Product Concentration Risk

Substantially all of the Company's revenues derive from the sale of electronic
devices used for vapor analysis.

                                       F-6
<PAGE>

Customer Concentration Risk

One of the Company's customers accounted for 29% of its revenues during 2005 and
two of the Company's customers accounted for 20% and 10%, respectively of its
revenues during 2004. No other customers accounted for more than 10% of its
revenues.

Inventories

Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory using the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. The Company writes down inventory
during the period in which such products are no longer marketable in any of
their markets due to governmental regulations as well as inventory which matures
within the next three months.

Property and Equipment

Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of five years. Maintenance
and repairs are charged to expense as incurred. Significant renewals and
betterments are capitalized.

Property and equipment consist of the following as of December 31, 2005:

Machinery and equipment                                  $  777,017
Leasehold improvements                                       39,500
Office furniture and equipment                              213,041
                                                         ----------
                                                          1,029,558
Accumulated depreciation                                   (917,010)
                                                         ----------
                                                         $  112,548
                                                         ==========

Depreciation expense amounted to approximately $21,000 and $11,000 during 2005
and 2004, respectively.

Deferred Financing Costs

Deferred financing costs consists of direct costs incurred by the Company in
connection with the issuance of its convertible debentures. The direct costs
include cash payments and fair value of warrants issued to the placement agent
which secured the financing. Deferred financing costs are amortized over the
term of the related convertible debentures using the effective interest rate
method.

Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or the
entire deferred tax asset will not be realized.

Use of Estimates

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the realization of receivables and the valuation of the derivative
liability. Actual results may differ from these estimates.

                                       F-7
<PAGE>

Basic and Diluted Earnings per Share

Basic earnings per share is calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share is computed using the weighted-average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants embedded conversion features (calculated
using the reverse treasury stock method). The outstanding options, warrants and
shares equivalent issuable pursuant to embedded conversion features amounted to
45,612,115 and 0 at December 31, 2005 and 2004, respectively. The outstanding
options, warrants and shares equivalent issuable pursuant to embedded conversion
features and warrants at December 31, 2004 are excluded from the loss per share
computation for that period due to their antidilutive effect. The Company
adjusted the numerator for any changes in income or loss that would result if
the contract had been reported as an equity instrument for accounting purposes
during 2005. However, the Company did not adjust the numerator for interest
charges during 2005 on the convertible debentures because it would have been
anti-dilutive.

The following sets forth the computation of basic and diluted earnings per share
for the year ended December 31:

<TABLE>
<CAPTION>
                                                                                            2005           2004
                                                                                         (Restated)     (Restated)
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Numerator:
  Net (loss) income                                                                    $  2,778,976    $   (602,883)
Net other income (expense) associated with derivative contracts                           5,176,571               -
Net loss for diluted earnings per share purposes                                       ($ 2,397,595)   ($   602,883)
                                                                                       ============    ============
Denominator:
  Denominator for basic earnings per share - Weighted average shares outstanding         53,636,560      53,525,865
  Effect of dilutive warrants, embedded conversion features and liquidated damages                -               -
                                                                                       ------------    ------------
  Denominator for diluted earnings per share - Weighted average shares outstanding       53,636,560      53,525,865
                                                                                       ============    ============
Basic earnings (loss) per share                                                        $       0.05    $      (0.01)
                                                                                       ============    ============
Diluted earnings (loss) per share                                                      $      (0.04)   $      (0.01)
                                                                                       ============    ============
</TABLE>

Stock-Based Compensation

The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants as if the fair-valued based method defined in SFAS
No. 123 had been applied. The Company accounts for stock options and stock
issued to non-employees for goods or services in accordance with the fair value
method of SFAS 123.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2005 consist primarily of
vendor payables.

DEFERRED REVENUES

Deferred revenues at December 31, 2005 amounted to $141,667. The deferred
revenues consist of a one-time licensing fee received by the Company during 2004
and is recognized over the term of the agreement which is five years. The
Company recognized revenues of $50,000 and $58,333 pursuant to this agreement
during 2005 and 2004, respectively.

                                       F-8
<PAGE>

Derivative Liabilities

The Company accounts for its liquidated damages granted pursuant to a separate
registration rights agreement pursuant to Emerging Issue Task Force ("EITF")
05-04, View C, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument", subject to EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Pursuant to EITF 05-04, View C, liquidated damages payable
in cash or stock are accounted for as a separate derivative, which requires a
periodical valuation of its fair value and a corresponding recognition of
liabilities associated with such derivative.

The Company accounts for liquidated damages granted pursuant to registration
rights which are not included in a separate registration right agreement as a
combined unit with the warrants which are contemporaneously issued with the
registration rights pursuant to SFAS 133 "Accounting for Derivative and Hedging
Activities" and EITF 00-19.

The Company accounts for its embedded conversion features and freestanding
warrants pursuant to SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires a periodic valuation of their fair value, at
issuance and at each subsequent balance sheet date, and a corresponding
recognition of liabilities associated with such derivatives. The recognition of
derivative liabilities related to the issuance of shares of common stock is
applied first to the proceeds of such issuance, at the date of issuance, and the
excess of derivative liabilities over the proceeds is recognized as other
expense in the accompanying consolidated financial statements. The recognition
of derivative liabilities related to the issuance of convertible debt is applied
first to the proceeds of such issuance as a debt discount, at the date of
issuance, and the excess of derivative liabilities over the proceeds is
recognized as other expense in the accompanying consolidated financial
statements. Any subsequent increase or decrease in the fair value of the
derivative liabilities, which are measured at the balance sheet date, are
recognized as other expense or other income, respectively.

Embedded conversion features represent embedded derivatives which are separated
from their host and accounted for as derivatives. An embedded derivative
instrument may consist of:

     1)   The underlying is an interest rate that alters net interest payments
          such that they could at least double the investor's initial rate of
          return on the host contract, such as an interest bearing debenture,
          and that is at least twice what would otherwise be the market return
          for a contract that has the same terms as the host contract and that
          involves a debtor with similar credit quality;

     2)   The underlying is a an debt instrument which provides for non-standard
          anti-dilution provisions upon conversion of a debt instrument into
          equity, such as anti-dilution provisions which reset to a lower
          conversion price than initially stated in the debt instrument in the
          event of a subsequent financing with a lower effective price which
          classify the debt instrument as non-conventional debt;

     3)   The underlying is a debt instrument which provides for variable number
          of shares upon conversion of a debt instrument into equity;

     4)   The underlying is an instrument which provides for acceleration of the
          repayment of a principal on a debt instrument that requires principal
          repayments if the debt involves a substantial premium and the
          acceleration is only contingently exercisable and is not indexed to
          interest rates or credit risk.

Freestanding warrants may be recorded as derivative liabilities if they allow
for net-cash settlement or if they give the counterparty a choice of net-cash or
physical settlement or would not qualify for the following conditions for equity
classification, among others:

     1)   The Company does not have sufficient authorized and unissued shares
          available to settle the contract after considering all other
          commitments that may require the issuance of stock during the maximum
          period the derivative contract could remain outstanding;

     2)   The contract does not contain an explicit limit on the number of
          shares to be delivered in a share settlement;

                                       F-9
<PAGE>

     3)   The contract provides for cash payments to the counterparty in the
          event the Company fails to make timely filings with the SEC.

In June 2005, the Financial Accounting Standard Board issued EITF 05-04. EITF
05-04 addresses the question as to whether liquidated damages pursuant to a
registration rights agreement should be combined as a unit with the underlying
financial instruments and be evaluated as a single instrument. EITF 05-04 does
not reach a consensus on this matter and allows for the treatment as a combined
unit (Views A and B) as well as separate freestanding financial instruments
(View C). On September 15, 2005, the FASB staff postponed further discussion of
EITF 05-04. As of May 31, 2006, the FASB still has not rescheduled EITF 05-04
for further discussion.

In connection with the issuance of a convertible debentures and related
warrants, we granted liquidated damages pursuant to a separate registration
right agreement. The Company adopted View C of EITF 05-04. Accordingly, the
liquidated damages pursuant to this registration right agreement were evaluated
as a stand alone financial instrument. This treatment did not have a significant
different effect than if the Company would have adopted View A or B, because the
classification of the warrants and certain embedded features of the convertible
debentures were classified as derivative liabilities. The Company believes that
should the FASB staff reach a consensus on EITF 05-04 and select combined
treatment (View A or B), the embedded conversion features and the warrants will
have to be evaluated as a combined unit with the liquidated damages pursuant to
the registration rights agreement, and accordingly, be evaluated as derivative
liabilities. The Company does not believe that its measurement of the derivative
liabilities under View A or View B would significantly differ from its
measurement of the derivative liabilities under View C in these circumstances.

The classification of each contract (e.g., embedded conversion feature,
liquidated damage, freestanding warrant) is reassessed at each balance sheet
date. If the classification required under EITF 00-19 changes as a result of
events during the period (if, for example, as a result of issuing an instrument
which is convertible into an undeterminable amount of shares we cannot ascertain
that we have a sufficient amount of authorized but unissued shares to satisfy
the maximum number of shares that could be required to net-share settle the
contract), the contract is reclassified as of the date of the event that caused
the reclassification. If a contract is reclassified from permanent or temporary
equity to an asset or liability, the change in fair value of the contract during
the period the contract was classified as equity is accounted for as an
adjustment to stockholders' equity. The contract is subsequently marked to fair
value through earnings. If a contract is reclassified from an asset or a
liability to equity, gains or losses recorded to account for the contract at
fair value during the period that the contract was classified as asset or
liability is not reversed.

Additionally, because there is no explicit number of shares that are to be
delivered upon satisfaction of the liquidated damages, the Company is unable to
assert that it had sufficient authorized and unissued shares to settle the
liquidated damages. Accordingly, all of the Company's previously issued and
outstanding instruments, such as warrants and options as well as those issued in
the future, would be classified as liabilities as well, effective with the
granting of the registration rights

Research and Development

Research and development costs are charged to operations as incurred and
consists primarily of salaries and related benefits, raw materials and supplies.

Segment reporting

The Company operates in one segment, manufacturing of electronic devices used
for vapor analysis. The Company's chief operating decision-maker evaluates the
performance of the Company based upon revenues and expenses by functional areas
as disclosed in the Company's statements of operations.

Recent Pronouncements

In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-Based Payment".
This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion

                                       F-10
<PAGE>

No. 25 "Accounting for Stock Issued to Employees". The provisions of this
Statement will be effective for the Company beginning in the first quarter of
2006. The Company is currently evaluating the impact this new Standard will have
on its financial position, results of operations or cash flows.

Revenue Recognition

The Company records revenue from direct sales of products to end-users when the
products are shipped, collection of the purchase price is probable and the
Company has no significant further obligations to the customer. Costs of
remaining insignificant Company obligations, if any, are accrued as costs of
revenue at the time of revenue recognition. Cash payments received in advance of
product or service revenue are recorded as deferred revenue.

Shipping and Handling

The Company accounts for shipping and handling costs as a component of "Cost of
Sales".

Inventories

Inventories are comprised of raw materials, work in process, and finished goods.
Inventories are stated at the lower of cost or market and are determined using
the first-in, first-out method.

Use of Estimates

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

Fair Value of Financial Instruments

The fair value of certain financial instruments, including accounts receivable,
accounts payable and accrued liabilities, approximates their carrying value due
to the short maturity of these instruments.

Long-lived Assets

The Company reviews long-lived assets, such as property and equipment, to be
held and used or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. At December 31, 2005 no assets were impaired.

EXTINGUISHMENT OF DEBT

During 2004, the Company recognized a gain on extinguishment of debt which
lapsed pursuant to statute of limitations. The debt was associated with general
and administrative expenses previously provided by a vendor. The gain amounted
to approximately $57,000. The gain was classified as an operating activity.

(2) Inventory

Inventory at December 31, 2005 consist of the following:

Finished goods                               $  260,517
Work-in-process                                 464,610
Raw materials                                   214,495
                                             ----------
                                             $  939,622
                                             ==========

                                       F-11
<PAGE>

(3) Convertible debentures

During December 2005, we issued in a private offering $7,000,000 aggregate
principal amount of convertible debentures due December 7, 2009. The convertible
debentures are convertible at a variable conversion price, which is the lesser
of $0.4544 or 90% of the average of the volume weighted average price for the 20
consecutive trading days immediately prior to the conversion date. The
convertible debentures are convertible at any time on or prior to the maturity
date at the option of the debenture holder. We received $7,000,000 in cash as
consideration. The convertible debentures bear interest at 8%, payable in cash
or stock, at the Company's options, and are required to be redeemed in 9 equal
quarterly payments commencing January 1, 2008.

In connection with the issuance of the convertible debentures, the Company
issued five-year warrants to purchase 12,130,314 shares of common stock at an
exercise price of $0.4761 per share. Furthermore, the Company granted liquidated
damages pursuant to a registration rights agreement.

The convertible debentures and related agreements provide, among other things,
for:

     1)   Liquidated damages amounting to 2% per month of the outstanding
          principal amount, payable in cash or stock, to the debenture holders
          in the event that a registration statement covering the shares
          underlying the convertible debentures is not declared effective within
          150 days of the date the debentures were issued. The liquidated
          damages are payable in cash monthly or in unpaid, bear interest at 18%
          per annum. If unpaid by January 1, 2008 and thereafter, they may be
          converted in shares of common stock at the same prevailing rate as the
          remaining principal amount of the convertible debentures;

     2)   Default interest rate of 18% and a default premium of 30% of the
          principal amount of the debentures, payable in cash or stock. Events
          of default include, among other things, if a payment, whether cash or
          stock is not paid on time and cured within three days, if the
          Company's common stock is not quoted for trading for at least five
          trading days, if a registration is not effective within 180 days after
          December 5, 2005. The default interest rate and the default premium
          may be converted in shares of common stock at the same prevailing rate
          as the remaining principal amount of the convertible debentures;

     3)   A reset feature of the conversion price in the event of a subsequent
          equity or convertible financing with an effective price lower than the
          debenture conversion price, whereby the aforementioned variable
          conversion price of the convertible debentures is adjusted to the new
          lower effective price of the subsequent equity or convertible
          financing;

     4)   A prepayment premium amounting to 30% of the principal balance of the
          convertible debentures in the event that the Company, at its sole
          option, prepays the convertible debentures before its due date. The
          prepayment is payable in cash only; and

     5)   The warrants require that the Company reimburse any holder of a
          warrant in respect of any trading loss resulting from the failure of
          the Company to timely deliver shares issued pursuant to the exercise
          of warrants. This compensation may be paid in shares of common stock
          or cash. The exercise price of the warrants, which is $0.4761 per
          share at the date of the agreement, may be reduced to $0.001 per
          share, at a monthly rate $0.03 per share if the registration statement
          we are required to file at the request of the warrant holders with
          respect to the common stock underlying the warrants is not declared
          effective within six months of the date of issuance of the warrants.

In connection with the issuance of the convertible debentures, we issued 485,213
warrants to a company in partial consideration for financial advisory services,
as well as paid $490,000 to this company. The warrants have the same terms as
those granted to the debenture holders. The fair value of the warrants at the
date of issuance amounted to approximately $136,000. We also incurred
approximately $102,500 in additional professional fees relating to the issuance
of the convertible debentures and warrants. The payments of professional fees
and the fair value of the warrants, aggregating approximately $729,000 have been
recorded as deferred financing costs. The deferred financing costs are amortized
over the term of the convertible debentures. The amortization of deferred
financing costs amounted to $17,000 during 2005.

See Note 4- Derivative Liabilities for further information on the accounting and
measurement of the derivative liabilities associated with the issuance of the
convertible debentures and related agreements.

                                       F-12
<PAGE>

We recognized a debt discount of $7,000,000 at the date of issuance of the
convertible debentures and the excess amount has been recorded as liability and
a corresponding increase to other expense. The debt discount is recognized over
the term of the convertible debentures.

The interest expense, including the amortization of debt discount but excluding
charges related to the recognition of derivative liability amounted to
approximately $238,000 during 2005.

(4) Derivative Liabilities

FEBRUARY 2005 TRANSACTION

During February 2005, we recognized derivative liabilities of approximately $6.0
million pursuant to the issuance of 3,985,000 freestanding warrants and granting
certain registration rights which provided for liquidated damages in the event
of failure to timely register the shares in connection with the issuance of
shares of common stock and the related warrants.

There are no liquidated damages provided for untimely effectiveness of shares
pursuant to piggy-back registration rights. The Company intends to register all
shares and warrants pursuant to the subscriber piggy-back registration rights.

The agreement under which the warrants were issued and the registration rights
were granted provided for liquidated damages pursuant to demand registration
rights in the event of failure to timely register the shares in connection with
the issuance of shares of common stock and the related warrants. The demand
registration rights of these investors are such that if the Company fails to
register the investors shares, including the shares underlying the warrants, the
Company will pay a cash penalty amounting to 1% of the amount invested per
month, $39,850, if the registration statement is not filed within 60 days of
demand or is not declared effective within 150 days from the date of initial
filing. The maximum liability associated with the liquidated damages amount to
49% of the gross proceeds associated with the issuance of shares of common
stock, which amounts to $1,952,650. The percentage of liquidated damages amounts
to the difference between 60 months, which is the inherent time limitation under
which the underlying shares would be free-trading (three year term and two year
holding period) and 11 months, which is the grace period for registering the
shares (no demand permitted for four months, two-month period to file and
five-month period to become effective), times the penalty percentage, which is
1%. The Company believes that the likelihood that it will incur any liabilities
resulting from the liquidated damages pursuant to the demand registration rights
is remote considering that it will register the shares and the shares underlying
the warrants pursuant to piggy-back registration rights, which do not contain
liquidated damages.

Because the registration rights were not granted under a separate registration
rights agreements, we considered those features in evaluating whether the
associated warrants should be classified as derivative liabilities. Considering
that the amount of the maximum penalty is 49%, the Company cannot conclude that
that this discount represents a reasonable approximation of the difference
between registered and unregistered shares under paragraph 16 of EITF 00-19.
Accordingly, the warrants issued in connection with the February 2005
transaction are considered derivative liabilities.

The fair value of the warrants issued in connection with the February 2005
transaction at the date of issuance of the warrants and the granting of
registration rights and at December 31, 2005 is as follows:

                                     At issuance         At December 31, 2005
                                  -----------------    ------------------------
Freestanding warrants                 $6,017,350                 $ -

The Company used the following assumptions, using the Black Scholes Model to
measure the identified derivatives as follows:

                                       F-13
<PAGE>

Freestanding warrants

                                     At issuance        At December 31, 2005
                                  -----------------    -----------------------
Market price:                                 $2.40                      $0.34
Exercise price:                               $1.00                      $1.00
Term:                                       3 years                 2.08 years
Volatility:                                      39%                        39%
Risk-free interest rate:                       2.78%                      4.39%
Number of warrants:                       3,985,000                  3,985,000

DECEMBER 2005 TRANSACTION

During December 2005, in connection with the issuance of the convertible
debentures, the Company determined that the conversion feature of the
convertible debentures represents an embedded derivative since the debentures
are convertible into a variable number of shares upon conversion. Because there
is no explicit number of shares that are to be delivered upon satisfaction of
the convertible debentures and that there is no cap on the number of shares to
be delivered upon expiration of the contract to a fixed number, the Company is
unable to assert that it had sufficient authorized and unissued shares to settle
its obligations under the convertible debentures and therefore, net-share
settlement is not within the control of the Company. Accordingly, the
convertible debentures are not considered to be conventional debt under EITF
00-19 and the embedded conversion feature must be bifurcated from the debt host
and accounted for as a derivative liability.

The embedded conversion features are as follows:

Default Interest Rate and Premium: The default interest rate is 18% while the
stated rate of the convertible debentures is 8%. Additionally, the Company is
liable to pay for a premium amounting to 30% of the principal amount of the
convertible debentures in the event of default. This embedded derivative could
at least double the investor's initial rate of return on the host contract and
could also result in a rate of return that is at least twice what otherwise
would be the market return for a contract that has the same terms as the host
contract and that involves a debtor with a similar credit quality. Furthermore,
the default interest rate may be triggered by certain events of defaults which
are not related to credit-risk-related covenants or the Company's
creditworthiness (e.g., if a registration statement is not effective within 180
days after December 5, 2005). The default provisions are effective upon the
event of default and at the holders' option. The holders have not notified the
Company of an event of default.

Reset Feature Following Subsequent Financing: the debenture provides for a reset
feature of the conversion price in the event of a subsequent equity or
convertible financing with an effective price lower than the debenture
conversion price, whereby the aforementioned variable conversion price of the
convertible debentures is adjusted to the new lower effective price of the
subsequent equity or convertible financing , which amounts to 10% of the shares
issuable pursuant to the convertible debentures, which is the effective discount
to market value we would offer in the event we provide for a subsequent private
placement financing. This reset does not constitute a standard anti-dilution
provision and is indexed to an underlying other than an interest rate or credit
risk.

Conversion Rate: The convertible debentures are convertible at a variable
conversion price, which is the lesser of $0.4544 or 90% of the average of the
volume weighted average price for the 20 consecutive trading days immediately
prior to the conversion date. The convertible debentures are convertible at any
time on or prior to the maturity date at the option of the debenture holder. The
implied conversion embedded feature amounts to a conversion discount of 10% to
market.

The Company believes that the aforementioned embedded derivatives meet the
criteria of SFAS 133, including Implementation issue No. B16 and EITF 00-19,
when appropriate, and should be accounted for as derivatives with a
corresponding value recorded as a liability.

In connection with the issuance of the convertible debentures, the Company
issued warrants to the debenture holders. The related warrants require that the
Company reimburse any holder of a warrant in respect of any trading loss
resulting from the failure of the Company to timely deliver shares issued
pursuant to the exercise of warrants. This compensation may be paid in shares of
common stock or cash. Accordingly, we have accounted for such warrants as
derivatives.

                                       F-14
<PAGE>

In connection with the issuance of the convertible debentures, the Company
granted liquidated damages pursuant to registration rights. The liquidated
damages amount to 2% per month of the outstanding principal amount, payable in
cash or stock, to the debenture holders in the event that a registration
statement covering the shares underlying the convertible debentures is not
declared effective within 150 days of the date the debentures were issued. The
liquidated damages are payable in cash monthly or if unpaid, bear interest at
18% per annum. If unpaid by January 1, 2008 and thereafter, they may be
converted in shares of common stock at the same prevailing rate as the remaining
principal amount of the convertible debentures. Pursuant to View C of EITF 05-04
the liquidated damages are accounted for as a separate derivative. While the
liquidated damages may be settled in stock if unpaid by January 1, 2008, the
Company determined that it was more likely that they would be paid in cash
shortly after their occurrence and has used such assumption in measuring the
fair value of the derivative liability associated with the liquidated damages.
The maximum liability associated with the liquidated damages amount to 38% of
the gross proceeds associated with the issuance of the convertible debentures,
which amounts to $2,660,000.

Additionally, because there is no explicit number of shares that are to be
delivered upon satisfaction of the convertible debentures, the Company is unable
to assert that it had sufficient amount of authorized and unissued shares to
settle its obligations under the convertible debentures. Accordingly, all of the
Company's previously issued and outstanding instruments, such as warrants, as
well as those issued in the future, would be classified as liabilities as well,
effective with the issuance of the convertible debentures and until the Company
is able to assert that it has a sufficient amount of authorized and unissued
shares to settle its obligations under all outstanding instruments. At the date
of the issuance of the convertible debentures, the Company had 1,941,871
warrants outstanding which were classified as derivatives.

The fair value of the derivative liabilities at the date of issuance of the
convertible debentures and at December 31, 2005 are as follows:

                                   At Issuance          At December 31, 2005
                                  -------------        -----------------------
                                   (Restated)               (Restated)

Freestanding warrants             $   3,532,348        $    1,892,329
Embedded conversion features          3,463,542             3,654,412
Liquidated damages                      192,500               192,500
Other outstanding warrants              143,268                31,838

The Company used the following methodology to value the embedded conversion
features and liquidated damages:

It estimated the discounted cash flows payable by the Company, using
probabilities and likely scenarios, for event of defaults triggering the 30%
penalty premium and 18% interest accrual, subsequent financing reset, and
liquidated damages, such as the untimely effectiveness of a registration
statement. If the additional cash consideration was payable in cash or stock, it
determined the amount of additional shares would be issuable pursuant to its
assumptions. The Company will revisit the weight of probabilities and the
likelihood of scenarios at each measurement dates of the derivative liabilities,
which are the balance sheet dates.

The Company used the following assumptions to measure the identified
derivatives, using the Lattice valuation model, as follows:

Embedded conversion features

                                   At issuance          At December 31, 2005
                                  -------------        -----------------------
                                   (Restated)               (Restated)

Market price:                          $ 0.4880               $ 0.340
Conversion price:                      $ 0.4544               $ 0.306
Term:                                   4 years            3.92 years
Volatility:                                  39%                   39%
Risk-free interest rate:                   4.39%                 4.39%

Freestanding warrants

The derivative liability amounts to the fair value of the warrants issuable upon
exercise, assuming that the underlying shares will not be timely registered. We
computed the fair value of this embedded derivative using the Black Scholes
valuation model with the following assumptions:

                                       F-15
<PAGE>

                                   At issuance          At December 31, 2005
                                  -------------        -----------------------
                                   (Restated)               (Restated)

Market price:                           $ 0.488                $ 0.34
Exercise price:                         $ 0.300                $ 0.30
Term:                                   5 years            4.92 years
Volatility:                                  39%                   39%
Risk-free interest rate:                   4.39%                 4.39%

We adjusted the effective exercise price to reflect the contractual adjustment
assuming that the warrants will most likely be registered during the fourth
quarter of 2006.

Liquidated damages

The liquidated damages, payable in cash, are valued using the weighting
probabilities and likely scenarios to estimate the amount of liquidated damages
and were valued at approximately $193,000 at the date of the grant of the
registration rights and at December 31, 2005.

The aggregate fair value of the derivative liabilities associated with the
warrants, embedded conversion features, and liquidated damages in connection
with the issuance of the convertible debentures and related agreements amounted
to approximately $7.05 million at the date of issuance which exceeded the
principal amount of the convertible debentures by approximately $50,000. The
Company recognized $7,000,000 as debt discount and the excess amount has been
recorded as other expenses. Additionally, approximately $136,000 of the fair
value of the warrants was recorded as deferred financing costs.

The aggregate fair value of all derivative liabilities upon issuance of the
various debt and equity instruments amounted to $13.3 million, of which $10.7
million was allocated to the net proceeds of the issuance of common stock and
convertible debentures, $2.4 million was allocated to other expenses and
approximately $136,000 was allocated to deferred financing costs.

The decrease in fair value of the derivative liabilities between measurement
dates, which are the date of issuance of the various debt and equity instruments
and the balance sheet date, which is December 31, 2005 amounted to approximately
$7.6 million and has been recorded as other income.

(5) Line of Credit

In September 2004, the Company's subsidiary renewed its revolving line of credit
agreement for borrowings up to $1,800,000. The line of credit was assumed and
renewed by the Company. The line of credit matured in February 2006. Borrowings
under this agreement bear interest at prime, are guaranteed by certain related
parties and are collateralized with the assets of the Company and by the
certificate of deposit. No amounts were due under this line of credit at
December 31, 2005.

(6) Notes Payable - related parties

On September 12, 1999, the Company's subsidiary issued convertible promissory
notes to its general and limited partners' in consideration of $1,000,000. The
convertible promissory notes were due September 12, 2005 and were convertible at
the election of the holder into Class A Units or Class A Equivalents at a
conversion price of $2, on or after the maturity date. The notes bore interest
at a rate of 5% per annum. At December 31, 2004 interest due under these notes
was $265,000.

During 2004, the Company's subsidiary entered into notes payable to the general
partner amounting to $272,000. The notes bore interest at 5% per annum.

In January 2005 the notes payable to related parties of $1,272,000 plus accrued
interest of $313,262 were converted into 1,585,262 shares of common stock of the
Company.

(7) Partners' loans payable

The Company entered into short-term loans with three partners' of its subsidiary
prior to the merger. The notes were non-interest bearing and due on demand. The
loans were due upon successful closure of a private placement of new ownership
interests. In

                                       F-16
<PAGE>

January 2005 the loans payable to three partners of Electronic
Sensor Technology L.P., totaling $1,198,630 were converted into 1,198,630 shares
of common stock of the Company.

In September 2004, three partners' of its subsidiary lent additional funds to
the Partnership. The agreements were for borrowings up to $100,000, from each
partner, payable on March 31, 2005. Borrowings under these agreements bore
interest at prime and were guaranteed by the officers. At December 31, 2004 the
total amount outstanding for these loans was $110,000. The loans were paid off
in March 2005.

(8) Due to related party

The Company's subsidiary received funds from Amerasia Technology, Inc., a
related party, for various purposes during the normal course of business. The
amount due to Amerasia as of December 31, 2004 was $60,000 and was fully repaid
during 2005. The due to related party was non-interest bearing and payable on
demand.

(9) Accrued compensation due to officers

Three officers employed by the Company's subsidiary agreed to defer a portion of
their salaries until such time as it is financially able to meet these financial
obligations. During January 2005 the officers forfeited their accrued
compensation amounting to $934,957 which was recorded as additional paid-in
capital.

(10) Stockholders' Deficit

COMMON STOCK

Shares issued pursuant to private placement

The Company entered into various Subscription Agreements with certain investors
on January 31, 2005. Under these Subscription Agreements, the Company issued
3,985,000 shares of its common stock ("shares") and warrants to purchase
3,985,000 shares at $1.00 per share to certain investors for gross proceeds of
$3,985,000. The Company received the gross proceeds of the sale of these shares
on February 1, 2005. The Company received proceeds, net of financing costs, of
approximately $3,822,000.

Shares issued pursuant to the Mergers

By virtue of the Mergers, all shares of common stock of Amerasia were converted
into the right to receive shares of common stock of Bluestone at an exchange
ratio of 4.6223537 shares of Bluestone common stock for each share of Amerasia
common stock and all shares of common stock L&G were converted into the right to
receive shares of common stock of Bluestone at an exchange ratio of 90 shares of
Bluestone common stock for each share of L&G common stock. In addition, all
200,000 Class C limited partnership units of Electronic Sensor Technology L.P.
were automatically converted into 200,000 shares of Bluestone common stock. The
combined effect of the adjustment of the shares pursuant to the Mergers was to
cancel 54,279,147 shares of common stock held by certain of the pre-merger
stockholders of the Company and the issuance of 20,200,000 shares of common
stock to the pre-merger partners of EST.

Conversion of shares for pre-merger liabilities

In connection with the Mergers, the Company issued, in aggregate, 2,783,892
shares of common stock in satisfaction of liabilities incurred pursuant to notes
payable, loan payable, and related accrued interest to related parties.

Shares issued pursuant to services

During December 2005, the Company issued 130,000 shares of common stock to a
consultant for services rendered. The fair value of such shares amounted to
approximately $75,000 based on the quoted price of the Company's shares at the
date of issuance.

                                       F-17
<PAGE>

OPTIONS

In 2005, the Board of Directors adopted the Electronic Sensor Technology, Inc.
2005 Stock Incentive Plan. The purpose of the Stock Incentive Plan is to attract
and retain the services of experienced and knowledgeable individuals to serve as
our employees, consultants and directors. On the date the Stock Incentive Plan
was adopted, the total number of shares of common stock subject to it was
5,000,000. The Stock Incentive Plan is currently administered by the Board of
Directors, and may be administered by any Committee authorized by the Board of
Directors, so long as any such Committee is made up of Non-Employee Directors,
as that term is defined in Rule 16(b)-3(b) of the Securities Exchange Act of
1934.

The Stock Incentive Plan is divided into two separate equity programs: the
Discretionary Option Grant Program and the Stock Issuance Program. Under the
Discretionary Option Grant Program, eligible persons may, at the discretion of
the administrator, be granted options to purchase shares of common stock and
stock appreciation rights. Under the Stock Issuance Program, eligible persons
may, at the discretion of the administrator, be issued shares of common stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered for Electronic Sensor Technology (or a parent or subsidiary of
Electronic Sensor Technology).

Pursuant to the terms of the Discretionary Option Grant Program, the exercise
price per share is fixed by the administrator, but may not be less than 85% of
the fair market value of the common stock on the date of grant, unless the
recipient of a grant owns 10% or more of Electronic Sensor Technology's common
stock, in which case the exercise price of the option must not be less than 110%
of the fair market value. An option grant may be subject to vesting conditions.
Options may be exercised in cash, with shares of the common stock of Electronic
Sensor Technology already owned by the person or through a special sale and
remittance procedure, provided that all applicable laws relating to the
regulation and sale of securities have been complied with. This special sale and
remittance procedure involves the optionee concurrently providing irrevocable
written instructions to: (i) a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to Electronic Sensor Technology, out of
the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable federal, state and local income and employment taxes required to be
withheld by Electronic Sensor Technology by reason of such exercise and (ii)
Electronic Sensor Technology to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale. The term
of an option granted pursuant to the Discretionary Option Grant Program may not
be more than 10 years.

The Discretionary Option Grant Program also allows for the granting of Incentive
Options to purchase common stock, which may only be granted to employees, and
are subject to certain dollar limitations. Any options granted under the
Discretionary Option Grant Program that are not Incentive Options are considered
Non-Statutory Options and are governed by the aforementioned terms. The exercise
price of an Incentive Option must be no less than 100% of the fair market value
of the common stock on the date of grant, unless the recipient of an award owns
10% or more of Electronic Sensor Technology's common stock, in which case the
exercise price of an incentive stock option must not be less than 110% of the
fair market value. The term of an Incentive Option granted may not be more than
five years if the option is granted to a recipient who owns 10% or more of
Electronic Sensor Technology's common stock, or 10 years for all other
recipients of Incentive Options. Incentive Options are otherwise governed by the
general terms of the Discretionary Option Grant Program.

Pursuant to the terms of the Stock Issuance Program, the purchase price per
share of common stock issued is fixed by the administrator, but may not be less
than 85% of the fair market value of the common stock on the issuance date,
unless the recipient of a such common stock owns 10% or more of Electronic
Sensor Technology's common stock, in which case the purchase price must not be
less than 100% of the fair market value. Common stock may be issued in exchange
for cash or past services rendered to Electronic Sensor Technology (or any
parent or subsidiary of Electronic Sensor Technology). Common stock issued may
be fully and immediately vested upon issuance or may vest in one or more
installments, at the discretion of the administrator.

The following pro forma information regarding stock-based compensation has been
determined as if the Company had accounted for its employee stock options under
the fair value method pursuant to SFAS 123. For purposes of the proforma
calculations, the fair value of each option granted in 2005 and 2004 was
estimated at the date of grant using the Black-Scholes model with the following
assumptions used: risk-free interest rate: 4.39%, respectively; dividend yield:
none; volatility: 39% (at the date of grant); expected lives: 3 years.

No stock-based employee compensation cost is reflected in net income, as all
options granted under the Company's plans had an exercise price equal to or
above market value of the underlying common stock on the date of grant. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for grants under those
plans

                                       F-18
<PAGE>

consistent with the method of SFAS No. 123, the Company's cash flows would
have remained unchanged; however net loss and loss per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                       2005          2004
                                                                    (Restateed)   (Restated)
                                                                   -------------  -----------
<S>                                                                  <C>           <C>
Net income (loss) as reported:                                       $ 2,778,976   $ (602,883)
Deduct:  Total stock-based employee compensation expense
 determined under fair value based method for all awards,
 net of related tax effects                                             ( 12,500)        ( - )
                                                                   -------------  -----------
Net income (loss) pro forma                                          $ 2,776,476   $ (602,883)
                                                                   =============  ===========
</TABLE>

A summary of the activity during 2005 and 2004 of the Company's stock option
plan and options and rights granted prior to the adoption, or otherwise outside,
of the 2005 Stock Incentive Plan is presented below:

                                         Options           Weighted Average
                                        and Rights          Exercise Price
                                      -------------      --------------------
Outstanding at January 1, 2004                    -               $         -
Granted                                           -                         -
Exercised                                         -                         -
Expired or cancelled                              -                         -
                                      -------------       --------------------
Outstanding at December 31, 2004                  -                         -
Granted                                   1,794,500                      0.89
Exercised                                         -                         -
Expired or cancelled                              -                         -
                                      -------------       --------------------
Outstanding at December 31, 2005          1,794,500               $      0.89
                                      =============       ====================
Exercisable at December 31, 2004                  -               $         -
                                      =============       ====================
Exercisable at December 31, 2005            969,500               $       1.03
                                      =============       ====================

The weighted average remaining contractual life and weighted average exercise
price of options and rights outstanding at December 31, 2005, for selected
exercise price ranges, is as follows:

Options outstanding:

<TABLE>
<CAPTION>
                                                      Weighted average remaining    Weighted average
  Range of exercise prices       Number of options         contractual life          exercise price
----------------------------   ---------------------  --------------------------   ------------------
       <S>                            <C>                   <C>                          <C>
         $0.64                        750,000               9.5                          $0.64
       1.00-1.05                      969,500               9.91                          1.03
         1.57                          75,000               9.91                          1.57
</TABLE>

WARRANTS

During February 2005, the Company issued 3,985,000 warrants in connection with
the Subscription Agreements. These warrants have an exercise price of $1.00 per
share. These warrants expire in 2008. The Subscription Agreement provided for
certain registration rights: piggy-back registration rights and demand
registration rights.

There are no liquidated damages provided for untimely effectiveness of shares
pursuant to piggy-back registration rights. The Company intends to register all
shares and warrants pursuant to the subscriber piggy-back registration rights.

The Subscription Agreement provided for liquidated damages pursuant to demand
registration rights in the event of failure to timely register the shares in
connection with the issuance of shares of common stock and the related warrants.
The demand registration rights of these investors are such that if the Company
fails to register the investors shares, including the shares underlying the
warrants, the Company will pay a cash penalty amounting to 1% of the amount
invested per month, $39,850, if the registration statement is not filed within
60 days of demand or is not declared effective within 150 days from the date of
initial filing. The maximum liability associated with the liquidated damages
amount to 49% of the gross proceeds associated with the

                                       F-19
<PAGE>

issuance of shares of common stock, which amounts to $1,952,650. The percentage
of liquidated damages amounts to the difference between 60 months, which is the
inherent time limitation under which the underlying shares would be free-trading
(three year term and two year holding period) and 11 months, which is the grace
period for registering the shares (no demand permitted for four months,
two-month period to file and five-month period to become effective), times the
penalty percentage, which is 1%. The Company believes that the likelihood that
it will incur any liabilities resulting from the liquidated damages pursuant to
the demand registration rights is remote considering that it will register the
shares and the shares underlying the warrants pursuant to piggy-back
registration rights.

Please refer to Note 4 - Derivative Liabilities - February 2005 Transaction for
further discussion on the accounting and valuation of the derivative liabilities
associated with freestanding warrants.

During February 2005, the Company issued 1,591,871 warrants in connection with
its merger. These warrants have an exercise price of $1.00 per share. These
warrants expire in 2010. The fair value of the warrants has been accounted as a
derivative liability at the date of issuance and at December 31, 2005.

During December 2005, the Company issued 12,615,527 warrants in connection with
the issuance of its convertible debentures. These warrants have an initial
exercise price of $0.4761 per share. The exercise price per share may be reduced
to $0.001 per share in the event the Company fails to timely register the
underlying shares. Furthermore, the warrants could be converted in cash if
certain events occur, such as a provision which require compensation for buy-in
on failure to timely deliver shares issued pursuant to the exercise of warrants,
whereas we reimburse the warrant holders for shares they purchase on the market
at the market price for shares issued pursuant to the exercise of warrants we
fail to issue in a timely manner. This compensation may be paid in shares of
common stock or cash. These warrants expire in 2010. The fair value of the
warrants has been accounted as a derivative liability at the date of issuance
and at December 31, 2005.

Please refer to Note 4 - Derivative Liabilities - December 2005 Transaction for
further discussion on the accounting and valuation of the derivative liabilities
associated with freestanding warrants.

During December 2005, the Company issued 350,000 warrants to an investor
relations firm in partial satisfaction of amounts due to the firm. The warrants
have an exercise price of $2.40 and expire in 2010. No value was attributed to
the issuance of such warrants based on the Black Scholes model using the
following assumptions: volatility: 39%; dividend rate: 0%, term: 5 years,
risk-free interest rate: 4.39%.

A summary of the activity during 2005 and 2004 of the Company's warrants is
presented below:

                                     Warrants        Weighted Average
                                                      Exercise Price
                                   --------------   ------------------
Outstanding at January 1, 2004                  -   $                -
Granted                                         -                    -
Exercised                                       -                    -
Expired or cancelled                            -                    -
Outstanding at December 31, 2004                -                    -
Granted                                18,542,398                 0.67
Exercised                                       -                    -
Expired or cancelled                            -                    -
                                   --------------   ------------------
Outstanding at December 31, 2005       18,542,398   $             0.67
                                   ==============   ==================
Exercisable at December 31, 2004                -   $                -
                                   ==============   ==================
Exercisable at December 31, 2005       18,542,398   $             0.67
                                   ==============   ==================

The weighted average remaining contractual life and weighted average exercise
price of warrants outstanding at December 31, 2005, for selected exercise price
ranges, is as follows:

                                      F-20
<PAGE>

<TABLE>
<CAPTION>
                                                       Weighted average remaining    Weighted average
  Range of exercise prices       Number of warrants          contractual life          exercise price
----------------------------   ---------------------   --------------------------   ------------------
       <S>                          <C>                        <C>                        <C>
       $0.48                        12,615,527                 4.91 years                 $0.48
        1.00                         5,576,871                 4.09 years                  1.00
        2.40                           350,000                 4.91 years                  2.40
</TABLE>

(11) Commitments and Contingencies

Leases

The Company rents office space in Newbury Park, California. The lease expires in
September 2006 with an optional extension through September 2007.

Rental expense associated with this lease amounted to $155,581 and $155,581
during 2005 and 2004, respectively.

(12) Retirement savings plan

The Company sponsors a 401(k) retirement savings plan (the plan) which covers
most of its full-time employees. Eligible employees may elect to contribute a
percentage of their compensation to the Plan. Matching contributions by the
Company equal 50% of the eligible participant's tax-deferred contribution
percentage for each payroll period of up to a maximum election of 3% and 6% per
payroll period, during 2005 and 2004, respectively. During 2005 and 2004, the
Company contributed approximately $27,000 and $10,000, respectively, to the
Plan.

(13) Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred taxes, as of December 31, 2005, are as follows:

     Deferred tax assets:
     Net operating loss carryforward                  $900,000
     Less valuation allowance                         (900,000)
                                                      ---------
     Total net deferred tax assets:                   $       -
                                                      =========

The Company's net operating losses amounts to approximately $2.1 million at
December 31, 2005 and expire in 2025.

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported, if any, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Management has determined that a valuation allowance of $ 900,000 at December
31, 2005 is necessary to reduce the deferred tax assets to the amount that will
more likely than not be realized. The change in the valuation allowance during
2005 and 2004 was a decrease of approximately $900,000 and $0, respectively.

The federal statutory tax rate reconciled to the effective tax rate during 2005
and 2004, respectively, is as follows:

                                              2005        2004
                                           ---------   ----------
Tax at U.S. Statutory Rate:                     35.0%        35.0%
State tax rate, net of federal benefits          5.7          5.7
Change in valuation allowance                  (40.7)       (40.7)
                                           ---------   ----------
Effective tax rate                               0.0%         0.0%
                                           =========   ==========

                                      F-21
<PAGE>

(14) Restatement of Previously Issued Financial Statements

As a result of inquiries from the Securities and Exchange Commission in
connection with its registration statement on Form SB-2, an amendment to which
was last filed on May 1, 2006, the Company is restating its 2004 and 2005
financial statements as follows:

REVENUE RECOGNITION

The Company had previously recognized a one-time license fee of $250,000 as
revenues in its 2004 financial statements. The substance of the transaction
indicated that the client was paying for certain services to be performed over
time. Accordingly, the Company believes that it should have recognized this
one-time license fee over the terms of the license agreement. The Company
adjusted its financial statements to recognized revenues of $58,333 in its 2004
statement of operations. The effect on the 2004 financial statements is as
follows:

Balance sheet as of December 31, 2004:

Increase in deferred revenues and current liabilities of $191,667 to $191,667
and $6,318,313, respectively.
Increase in accumulated deficit of $191,667 to $10,466,133

2004 statement of operations:
Decrease in revenues of $191,667 to $1,076,749
Increase in loss from operations and net loss of $191,667 to $431,040 and
$602,883, respectively.

There is no impact on the loss per share and the cash flows from operating,
investing, and financing activities for 2004.

Consistent with its revised revenue recognition of the one-time license fee, the
Company recognized an additional amount of $49,999 in revenue during 2005.
Please see the effect on the 2005 financials statement below (Adjustment a).

DERIVATIVE LIABILITIES

February 2005 Transaction

The Company had previously recognized derivative liabilities in connection with
the granting of liquidated damages pursuant to registration rights in a February
2005 private placement. Such liquidated damages were not granted pursuant to a
separate registration rights agreement and are payable in cash. The Company had
valued such liquidated damages at approximately $580,000 and $630,000 at their
issuance and at December 31, 2006, respectively. The fair value of such
liquidated damages at issuance were recorded as other expenses and the increase
in fair value of approximately $54,000 at December 31, 2005 was recognized as an
offset to other income. The Company believes it has incorrectly valued such
liquidated damages and that it will not incur any corresponding liabilities.
Accordingly it has reversed the entries resulting from the revised treatment
(Adjustment b).

The Company incorrectly assumed that such liquidated damages would be settled in
shares and that it could not ascertain that it had a sufficient amount of
authorized and unissued shares to satisfy its obligations under the liquidated
damages and any other outstanding warrants at the time of the issuance of the
liquidated damages. Based on that assumption, it believed that all other
outstanding warrants at the date of issuance of the liquidated damages would be
also classified as derivative liabilities. The Company valued such outstanding
warrants at approximately $2.5 million and $32,000 at the date of issuance of
the liquidated damages and at December 31, 2005, respectively. The fair value of
such outstanding warrants were recorded as other expenses and the decrease in
fair value of $2.5 million at December 31, 2005 was recognized as other income.
The Company has reversed the entries resulting from the revised treatment
(Adjustment c).

The Company incorrectly assumed that the options outstanding and issued to
employees would be reclassified as derivative contracts. The Company valued such
outstanding options at approximately $1.5 million and $0 at the date of issuance
of the liquidated damages and at December 31, 2005, respectively. The fair value
of such outstanding options at the date of the February 2005 transaction were
recorded as other expenses and the decrease in fair value of $1.5 million at
December 31, 2005 was recognized as other income. The Company has reversed the
entries resulting from the revised treatment (Adjustment d).

                                      F-22
<PAGE>

December 2005 Transaction

The Company also initially recognized an aggregate $13.4 million and $13.3
million in derivative liabilities associated with the issuance of the
convertible debentures and the related warrants and registration rights in
December 2005 and at December 31, 2005, respectively. We have revised the fair
value of such derivatives at the time of issuance and at December 31, 2005 to
weight probabilities and likely scenarios which have reduced the fair value of
such liabilities to $7.05 at the date of the December 2005 transaction. The
revised measurement and accounting of these instruments resulted in a decrease
of approximately $6.3 million in other expenses and $100,000 in deferred
financing costs for the fair value of warrants issued to the placement agent
which had similar terms that the warrants issued in connection with the December
2005 transaction. Additionally, the Company revised the fair value of the
derivatives associated with December 2005 Transaction at December 31, 2005 to
weight probabilities and likely scenarios which have reduced the fair value of
such derivative liabilities by approximately $7.0 million to approximately $5.7
million at December 31, 2005. The revised valuation has also resulted in an
adjustment in the decrease in the fair value of the derivative liabilities
associated with the December 2005 transaction, which was recorded as other
income, of approximately $9,000 (Adjustment e).

In connection with the issuance of the convertible debentures, the Company could
no longer ascertain that it had sufficient authorized but unissued shares to
satisfy its obligations under the convertible debentures and any other
outstanding warrants at the time of the December 2005 transaction. Accordingly,
the Company reclassified its outstanding warrants, other than those issued
pursuant to the December 2005 transaction, as derivative liabilities. The
Company valued the derivative liabilities associated with such warrants at
approximately $140,000 and $30,000 at the date of the December 2005 transaction
and at December 31, 2005, respectively. Pursuant to the reclassification of
these warrants from equity to derivative liabilities, the Company recognized
approximately $140,000 as other expense during 2005 and recorded the decrease in
fair value of the derivative liabilities of approximately$110,000 as other
income (Adjustment f).

EARNINGS PER SHARE

The Company has also revised its diluted earnings per share to reflect an
adjustment to the numerator for any changes in income or loss that would result
if the derivative contracts had been reported as an equity instrument for
accounting purposes during that period to the extent that they are not
antidilutive. The Company decreased the numerator by approximately $5.2 million,
which is the aggregate of the other income and other expenses associated with
the derivative liabilities during 2005. (Adjustment g).

RECLASSIFICATION OF ACCUMULATED DEFICIT

The Company had initially reclassed to additional paid-in capital its
accumulated deficit incurred while it was a pass-through entity for tax purposes
during 2005. The Company's accumulated deficit incurred while it was a pass
through entity for tax purposes amounted to approximately $10.3 million.
However, this reclassification did not meet the criteria for quasi
reorganization provided by Financial Reporting Release 210. Accordingly, the
Company reversed this reclassification (Adjustment h).

The effect on the 2005 financial statements is as follows:

                                      F-23
<PAGE>


                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                     ASSETS
                                                                           As Previously
                                                                              Reported      Adjustments      Restated
                                                                          ---------------  -------------    -----------
<S>                                                                       <C>                 <C>           <C>
CURRENT ASSETS:
  Cash and cash equivalents                                               $     4,219,921                   $ 4,219,921
  Certificate of deposit-restricted                                               918,678                       918,678
  Accounts receivable, net of allowance for doubtful accounts of $20,577          465,776                       465,776
  Prepaid expenses                                                                 69,936                        69,936
  Inventories                                                                     939,622                       939,622
                                                                          ---------------  -------------    -----------
    TOTAL CURRENT ASSETS                                                        6,613,933                     6,613,933

DEFERRED FINANCING COSTS, net of amortization of $17,297                          812,957       (101,895) (e)   711,062

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $917,010               112,548                       112,548

SECURITY DEPOSITS                                                                  12,817                        12,817
                                                                          ---------------  -------------    -----------
                                                                          $     7,552,255       (101,895)   $ 7,450,360
                                                                          ===============  =============    ===========
                              LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                                           480,799              -        480,799
  Deferred revenues                                                                     -        141,667 (a)    141,667
  Derivative liabilities                                                       12,780,439       (631,740)(b)  5,771,079
                                                                                                 (31,837)(d)
                                                                                              (6,377,620)(e)
                                                                                                  31,837 (f)
                                                                          ---------------  -------------    -----------
  TOTAL CURRENT LIABILITIES                                                    13,261,238     (6,867,693)     6,393,545
                                                                          ---------------  -------------    -----------
CONVERTIBLE DEBENTURES, net of unamortized discount of $6,805,556                 194,444                       194,444
                                                                          ---------------  -------------    -----------
  TOTAL LIABILITIES                                                            13,455,682     (6,867,693)     6,587,989
                                                                          ---------------  -------------    -----------
STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value 50,000,000 shares authorized
   none issued and outstanding                                                          -              -              -
  Common stock, $.001 par value, 200,000,000
   shares authorized, 54,098,745 issued and outstanding,                           54,099              -         54,099
  Additional paid-in capital                                                   (1,779,037)    10,274,466 (h)  8,495,429
  Accumulated deficit                                                          (4,178,489)     6,957,464     (7,687,157)
                                                                                             (10,274,466)(h)
                                                                                                (191,666)(a)
                                                                          ---------------  -------------  -------------
  TOTAL STOCKHOLDERS' EQUITY                                                   (5,903,427)     6,765,798        862,371
                                                                          ---------------  -------------  -------------
                                                                          $     7,552,255       (101,895) $   7,450,360
                                                                          ==============   =============  =============
</TABLE>

                                      F-24
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      For The Year Ended December 31, 2005

<TABLE>
<CAPTION>
                                                      As Previously
                                                         Reported      Adjustments         Restated
                                                      -------------   -------------    ----------------
<S>                                                   <C>             <C>               <C>
REVENUES                                              $   2,072,350   $      49,999 (a) $     2,122,349
COST OF SALES                                             1,302,602               -           1,302,602
                                                      -------------   -------------    ----------------
    GROSS PROFIT                                            769,748          49,999             819,747
                                                      -------------   -------------    ----------------

OPERATING EXPENSES:
  Research and development                                  260,125               -             260,125
  Compensation                                              466,421               -             466,421
  Selling                                                   653,092               -             653,092
  General and administrative                              1,522,451               -           1,522,451
                                                      -------------   -------------    ----------------
    TOTAL OPERATING EXPENSES                              2,902,089               -           2,902,089
                                                      -------------   -------------    ----------------
LOSS FROM OPERATIONS                                     (2,132,341)         49,999          (2,082,342)

OTHER INCOME AND EXPENSE:
  Other income- derivative liabilities                   11,404,106          53,999 (b)       7,577,929
                                                                         (2,475,157)(c)
                                                                         (1,524,970)(d)
                                                                              8,520 (e)
                                                                            111,431 (f)
  Other expense- derivative liabilities                 (13,135,000)        577,741 (b)      (2,401,358)
                                                                          2,506,994 (c)
                                                                          1,524,970 (d)
                                                                          6,267,205 (e)
                                                                           (143,268)(f)
  Gain (loss) on sale of property and equipment               9,287               -               9,287
  Interest expense                                         (324,540)              -            (324,540)
                                                      -------------   -------------    ----------------
    TOTAL OTHER INCOME AND EXPENSE                       (2,046,147)      6,907,465           4,861,318
                                                      -------------   -------------    ----------------
NET (LOSS) INCOME                                     $  (4,178,488)  $   6,957,464           2,778,976
                                                      =============   =============    ================
  Earnings (loss) per share, basic                    $       (0.08)           0.13     $          0.05
                                                      =============   =============    ================
  Weighted average number of shares, basic               53,636,560                          53,636,560
                                                      =============   =============    ================
  Earnings (loss) per share, diluted                  $       (0.08)              - (g) $         (0.04)
                                                      =============   =============    ================
  Weighted average number of shares, diluted             53,636,560       7,446,419 (g)       5,636,560
                                                      =============   =============    ================
</TABLE>

                                      F-25
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      For The Year Ended December 31, 2005

<TABLE>
<CAPTION>
                                                                          As
                                                                     Previously
                                                                       Reported       Adjustments                 Restated
                                                                     ------------   --------------            ---------------
<S>                                                                  <C>            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                  $ (4,178,488)  $    6,957,464              $   2,778,976
  Adjustments to reconcile net income (loss) to net
   cash provided by (used in)operating activities:
    Depreciation and amortization                                          21,300                -                     21,300
    Issuance of shares for services                                        74,950                -                     74,950
    Recognition of derivative liabilities                              13,135,000      (10,733,642)(b,c,d,e,f)      2,401,358
    Amortization of debt discount                                         194,444                -                    194,444
    Amortization of deferred financing costs                               17,297                -                     17,297
    Notes payable related party - interest waived                               -                -                          0
    Decrease in fair value of derivative liability                    (11,404,023)       3,826,094 (b,c,d,e,f)     (7,577,929)
  Changes in assets and liabilities:                                                                                        0
    Accounts receivable                                                  (435,089)               -                   (435,089)
    Inventories                                                          (458,974)               -                   (458,974)
    Prepaid expenses                                                      (55,679)               -                    (55,679)
    Security deposits                                                         140                -                        140
    Accounts payable and accrued expenses                                 266,494               83                    266,577
    Due to related party                                                  (60,000)               -                    (60,000)
    Interest payable                                                      (26,961)               -                    (26,961)
    Deferred revenues                                                           0          (49,999)(a)                (49,999)
    Other current liabilities                                             (35,665)               -                    (35,665)
                                                                     ------------   --------------            ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                    (2,945,254)               -                 (2,945,254)
                                                                     ------------   --------------            ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of property and equipment                           43,933                -                     43,933
    Purchase of certificate deposit                                      (918,678)               -                   (918,678)
    Purchase of property and equipment                                   (126,582)               -                   (126,582)
                                                                     ------------   --------------            ---------------
  NET CASH (USED IN) INVESTING ACTIVITIES                              (1,001,327)               -                 (1,001,327)
                                                                     ------------   --------------            ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Increase (decrease) in line of credit                              (1,969,137)               -                 (1,969,137)
    Repayment of partners' loans payable                                 (110,000)               -                   (110,000)
    Proceeds from issuance of common stock                              3,811,708                -                  3,811,708
    Proceeds from convertible debenture                                 7,000,000                -                  7,000,000
    Payment of deferred financing costs                                  (592,500)               -                   (592,500)
                                                                     ------------   --------------            ---------------
  NET CASH PROVIDED BY FINANCING ACTIVITIES                             8,140,071                -                  8,140,071
                                                                     ------------   --------------            ---------------
NET INCREASE (DECREASE) IN CASH                                         4,193,491                -                  4,193,491
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             26,430                -                     26,430
                                                                     ------------   --------------            ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                             $  4,219,921                -                  4,219,921
                                                                     ============   ==============            ===============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid during the period for:
    Interest                                                         $    102,928                -              $     102,928
                                                                     ============   ==============            ===============
    Taxes                                                            $          -                -              $           -
                                                                     ============   ==============            ===============
NON-CASH INVESTING AND FINANCING ACTIVITIES
  Notes payable, loans payable and accrued expenses converted
   into Common stock and additional paid-in capital                  $  3,718,849                -              $   3,718,849
                                                                     ============   ==============            ===============
  Fair value of derivative liability recorded as debt discount
   on convertible debentures                                         $  7,000,000                -              $   7,000,000
                                                                     ============   ==============            ===============
  Fair value of derivative liability recorded as a deferred
   financing costs$                                                  $    237,754   $     (101,895)             $     135,859
                                                                     ============   ==============            ===============
</TABLE>

                                      F-26
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                   (Restated)
<TABLE>
<CAPTION>
                                                    Common Stock            Preferred  Stock      Paid-In
                                             --------------------------    -----------------    Additional
                                               Shares         Amount       Shares    Amount      Capital
                                             -----------    -----------    ------   --------   ------------
<S>                                           <C>           <C>            <C>                 <C>
BALANCE - December 31, 2003                   81,279,000    $    81,279    $    -          -   $  4,500,000
  Sale of Partnership interest - Class C               -              -         -          -        200,000
  Note payable related party - interest
  waived                                               -              -         -          -         63,774
  Net loss                                             -              -         -          -              -
                                             -----------    -----------    ------   --------   ------------
BALANCE - December 31, 2004                   81,279,000         81,279         -          -      4,763,774
  Cancellation of common stock               (54,279,147)       (54,279)        -          -         54,279
  Notes payable converted to common stock      1,272,000          1,272         -          -      1,270,728
  Reverse Acquisition                                  -              -         -          -        (89,325)
  Sale of common stock                         3,985,000          3,985         -          -         (3,985)
  Deferred compensation contributed to
   capital                                             -              -         -          -        934,957
  Officers loans converted to common stock     1,198,630          1,199         -          -      1,197,431
  Issuance of shares for services                130,000            130         -          -         74,820
  Accrued interest converted to common
   stock                                         313,262            313         -          -        312,950
  Common stock issued for acquisition of
  EST                                         20,200,000         20,200         -          -        (20,200)
  Net income                                           -              -         -          -              -
                                             -----------    -----------    ------   --------   ------------
                                              54,098,745    $  54,099      $    -          -   $  8,495,429
                                             ===========    ===========    =====+   ========   ============
</TABLE>

<TABLE>
<CAPTION>
                                                               Total
                                             Accumulated    Stockholders'
                                               Deficit        Deficit
                                             -----------    -------------
<S>                                          <C>           <C>
BALANCE - December 31, 2003                  $(9,863,250)   $  (5,281,971)
  Sale of Partnership interest - Class C               -          200,000
  Note payable related party - interest
  waived                                               -           63,774
  Net loss                                      (602,883)        (602,883)
                                             -----------    -------------
BALANCE - December 31, 2004                  (10,466,133)      (5,621,080)
  Cancellation of common stock                         -                -
  Notes payable converted to common stock              -        1,272,000
  Reverse Acquisition                                  -          (89,325)
  Sale of common stock                                 -                -
  Deferred compensation contributed to
   capital                                             -          934,957
  Officers loans converted to common stock             -        1,198,630
  Issuance of shares for services                      -           74,950
  Accrued interest converted to common
   stock                                               -          313,263
  Common stock issued for acquisition of
  EST                                                  -                -
  Net income                                   2,778,976        2,778,976
                                             -----------    -------------
                                             $(7,687,157)   $     862,371
                                             ===========    =============
</TABLE>

                                      F-27
<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER   DESCRIPTION
-------  -----------------------------------------------------------------------

3.1      Articles of Incorporation of Electronic Sensor Technology, as amended
         (incorporated by reference from Exhibit 3.1 of the registration
         statement on Form SB-2 filed on January 6, 2006).

4.1      Description of our common stock in Article Fourth of the Amendment to
         Electronic Sensor Technology's Articles of Incorporation dated January
         25, 2005 (incorporated by reference from Exhibit 3.1 hereto).

4.2      Description of rights of shareholders of Electronic Sensor Technology
         in Article I and Article IX of Electronic Sensor Technology's Amended
         and Restated Bylaws (incorporated by reference from Exhibit 3.1 of the
         quarterly report on Form 10-QSB filed on August 16, 2006).

10.1     Term Sheet dated December 2, 2004 between Bluestone Ventures Inc. and
         Electronic Sensor Technology, L.P. (incorporated by reference from
         Exhibit 10.1 of the current report on Form 8-K filed on January 10,
         2005).

10.2     Agreement and Plan of Merger dated as of January 31, 2005, by and
         among Bluestone Ventures Inc., Amerasia Technology, Inc., L&G Sensor
         Technology, Inc., Amerasia Acquisition Corp. and L&G Acquisition Corp.
         (incorporated by reference from Exhibit 10.1 of the current report on
         Form 8-K filed on February 7, 2005).

10.3     Form of Subscription Agreement between Bluestone Ventures Inc. and
         each investor on the signature page thereto (incorporated by reference
         from Exhibit 10.2 of the current report on Form 8-K filed on February
         7, 2005).

10.4     Electronic Sensor Technology, Inc. 2005 Stock Incentive Plan
         (incorporated by reference from Exhibit 10.1 of the annual report on
         Form 10-KSB filed on April 15, 2005).

10.5     Form of Stock Option Agreement (incorporated by reference from Exhibit
         10.2 of the annual report on Form 10-KSB filed on April 15, 2005).

10.6     Business Loan Agreement dated March 11, 2005, between Electronic
         Sensor Technology, Inc. and East West Bank (incorporated by reference
         from Exhibit 10.4 of the annual report on Form 10-KSB filed on April
         15, 2005).

10.7     Commercial Security Agreement dated March 11, 2005, between Electronic
         Sensor Technology, Inc. and East West Bank (incorporated by reference
         from Exhibit 10.5 of the annual report on Form 10-KSB filed on April
         15, 2005).

10.8     Letter agreement dated as of May 16, 2005, by and between Electronic
         Sensor Technology, Inc. and Matthew Collier (incorporated by reference
         from Exhibit 10.1 of the current report on Form 8-K/A filed on October
         6, 2005).

10.9     Letter agreement dated as of October 3, 2005, between Electronic
         Sensor Technology, Inc. and James Frey (incorporated by reference from
         Exhibit 10.1 of the current report on Form 8-K filed on October 7,
         2005).

10.10    Letter agreement dated as of February 21, 2005, between Electronic
         Sensor Technology, Inc. and James Frey (incorporated by reference from
         Exhibit 10.2 of the current report on Form 8-K filed on October 7,
         2005).

10.11    Addendum dated as of April 1, 2005 to the letter agreement dated
         February 21, 2005, between Electronic Sensor Technology, Inc. and
         James Frey (incorporated by reference from Exhibit 10.3 of the current
         report on Form 8-K filed on October 7, 2005).

                                        8
<PAGE>

EXHIBIT
NUMBER   DESCRIPTION
-------  -----------------------------------------------------------------------

10.12    International Distributorship Agreement dated August 2005, between
         Electronic Sensor Technology, Inc. and Beijing R&D Technology Co.,
         Ltd. (incorporated by reference from Exhibit 10.12 of the amended
         registration statement on Form SB-2/A filed on February 15, 2006).

10.13    International Distributorship Agreement dated October 21, 2005,
         between Electronic Sensor Technology, Inc. and TechMondial, Ltd.
         (incorporated by reference from Exhibit 10.13 of the amended
         registration statement on Form SB-2/A filed on February 15, 2006).

10.14    Form of Securities Purchase Agreement dated as of December 7, 2005,
         among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
         and Islandia, L.P. (incorporated by reference from Exhibit 10.1 of the
         current report on Form 8-K filed on December 8, 2005).

10.15    Form of Registration Rights Agreement dated as of December 7, 2005,
         among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
         and Islandia, L.P. (incorporated by reference from Exhibit 10.2 of the
         current report on Form 8-K filed on December 8, 2005).

10.16    Settlement Agreement, Mutual Release and Amendment of Option
         Agreement, effective as of January 25, 2006, between Electronic Sensor
         Technology, Inc. and Matthew S. Collier (incorporated by reference
         from Exhibit 10.1 of the current report on Form 8-K filed on January
         31, 2006).

10.17    Forbearance and Amendment Agreement dated as of September 7, 2006,
         among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
         and Islandia L.P. (incorporated by reference from Exhibit 10.1 of the
         current report on Form 8-K filed on September 8, 2006).

14.1     Code of Ethics (incorporated by reference from Exhibit 14 of the
         annual report on Form 10-KSB for the fiscal year ended December 31,
         2004 filed on April 15, 2005).

21.1     Subsidiaries of Electronic Sensor Technology (incorporated by
         reference from Exhibit 21.1 of the registration statement on Form SB-2
         filed on January 6, 2006).

24.1     Power of Attorney.*

31.1     Certification of Chief Executive Officer Pursuant to Rule
         13a-14(a)/15d-14(a) of the Exchange Act.

31.2     Certification of Principal Financial and Accounting Officer Pursuant
         to Rule 13a-14(a)/15d-14(a) of the Exchange Act.

32.1     Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) or
         15d-14(b) of the Exchange Act and 18 U.S.C. 1350.

32.2     Certification of Principal Financial and Accounting Officer Pursuant
         to Rule 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. 1350.

----------
*  Previously filed.

                                        9
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                         ELECTRONIC SENSOR TECHNOLOGY, INC.


Date: September 26, 2006                 By: /s/ Teong C. Lim
                                            ------------------------------------
                                         Teong C. Lim
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.


Date: September 26, 2006                 By: /s/ Teong C. Lim
                                            ------------------------------------
                                         Teong C. Lim
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)


Date: September 26, 2006                 By: /s/ Francis Chang
                                             -----------------------------------
                                         Francis Chang
                                         Secretary, Treasurer and Vice President
                                         of Finance and Administration
                                         (Principal Financial Officer and
                                          Principal Accounting Officer)


                                                   By:
                                                       -------------------------
                                                   James Frey, Chairman

Date: September 26, 2006                           By:           *
                                                       -------------------------
                                                   Francis Chang, Director


Date: September 26, 2006                           By:           *
                                                       -------------------------
                                                   Teong C. Lim, Director


Date: September 26, 2006                           By:           *
                                                       -------------------------
                                                   Edward Staples, Director


Date: September 26, 2006                           By:           *
                                                       -------------------------
                                                   Mike Krishnan, Director


Date: September 26, 2006                           By:           *
                                                       -------------------------
                                                   James Wilburn, Director

                                                   By:
                                                       -------------------------
                                                   Michel Amsalem, Director

                                                   By:
                                                       -------------------------
                                                   Lewis Larson, Director


*By:  /s/ Francis Chang
     ----------------------
     Francis Chang
     Attorney-in-Fact