**ELECTRONIC
SENSOR TECHNOLOGY, INC.**
  **2005
STOCK INCENTIVE PLAN**
  ARTICLE
ONE
  GENERAL
PROVISIONS
  I.  PURPOSE
OF THE PLAN
  This 2005
Stock Incentive Plan is intended to promote the interests of Electronic Sensor
Technology, Inc., a Nevada corporation (the “Corporation”), by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the Service of the Corporation.
  Capitalized
terms shall have the meanings assigned to such terms in the attached
Appendix.
  II.  STRUCTURE
OF THE PLAN
  A.  The Plan
shall be divided into two separate equity programs:
  -
    the
      Discretionary Option Grant Program under which eligible persons may, at
      the discretion of the Plan Administrator, be granted options to purchase
      shares of Common Stock and stock appreciation rights;
  and  -
    the
      Stock Issuance Program under which eligible persons may, at the discretion
      of the Plan Administrator, be issued shares of Common Stock directly,
      either through the immediate purchase of such shares or as a bonus for
      services rendered the Corporation (or any Parent or
      Subsidiary).  B.  The
provisions of Articles One and Four shall apply to all equity programs under the
Plan and shall govern the interests of all persons under the Plan.
  III.  ADMINISTRATION
OF THE PLAN
  A.  The Plan
shall be administered by the Board or one or more committees appointed by the
Board, provided that (1) beginning with the Section
12 Registration Date , the
Primary Committee shall have sole and exclusive authority to administer the Plan
with respect to Section 16 Insiders, and (2) administration of the Plan may
otherwise, at the Board's discretion, be vested in the Primary Committee or a
Secondary Committee. Beginning with the Section 12 Registration Date, any
discretionary option grants or stock issuances to members of the Primary
Committee must be authorized and approved by a disinterested majority of the
Board.
  B.  Members
of the Primary Committee or any Secondary Committee shall serve for such period
of time as the Board may determine and may be removed by the Board at any time.
The Board may also at any time terminate the functions of any Secondary
Committee and reassume all powers and authority previously delegated to such
committee.
  -1-
 
 C.  Each Plan
Administrator shall, within the scope of its administrative functions under the
Plan, have full power and authority (subject to the provisions of the Plan) to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
  D.  Service
on the Primary Committee or the Secondary Committee shall constitute service as
a Board member, and members of each such committee shall accordingly be entitled
to full indemnification and reimbursement as Board members for their service on
such committee. No member of the Primary Committee or the Secondary Committee
shall be liable for any act or omission made in good faith with respect to the
Plan or any option grants or stock issuances under the Plan.
  IV.  ELIGIBILITY
  A.  The
persons eligible to participate in the Discretionary Option Grant and Stock
Issuance Programs are as follows:
  (i)  Employees,
  (ii)  non-employee
members of the Board or the board of directors of any Parent or Subsidiary,
and
  (iii)  consultants
and other independent advisors who provide services to the Corporation (or any
Parent or Subsidiary).
  B.  Each Plan
Administrator shall, within the scope of its administrative jurisdiction under
the Plan, have full authority to determine: (i) with respect to the option
grants or stock appreciation rights under the Discretionary Option Grant
Program, which eligible persons are to receive grants, the time or times when
such grants are to be made, the number of shares to be covered by each such
grant, the status of a granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding; and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
  C.  The Plan
Administrator shall have the absolute discretion either to grant options or
stock appreciation rights in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
  V.  STOCK
SUBJECT TO THE PLAN
  A.  The stock
issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock, including shares repurchased by the Corporation on the open
market. The maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed five million (5,000,000)
shares. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than five hundred thousand (500,000) shares of Common Stock in the
aggregate per calendar year.
  -2-
 
 B.  Shares of
Common Stock subject to outstanding options shall be available for subsequent
issuance under the Plan to the extent (i) those options expire or terminate for
any reason prior to exercise in full or (ii) the options are cancelled in
accordance with the cancellation-regrant provisions of Article Two. Unvested
shares issued under the Plan and subsequently cancelled or repurchased by the
Corporation at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan, shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. In addition, should the
exercise price of an option under the Plan be paid with shares of Common Stock
or should shares of Common Stock otherwise issuable under the Plan be withheld
by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced only by the net number of shares of Common Stock
issued to the holder of such option or stock issuance, and not by the gross
number of shares for which the option is exercised or which vest under the stock
issuance. However, shares of Common Stock underlying one or more stock
appreciation rights exercised under Section V of Article Two of the Plan shall
not be available for subsequent issuance under the Plan.
  C.  If any
change is made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to: (i) the
maximum number and/or class of securities issuable under the Plan; (ii) the
number and/or class of securities for which any one person may be granted stock
options and direct stock issuances under this Plan per calendar year; and (iii)
the number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
  ARTICLE
TWO
 
 DISCRETIONARY
OPTION GRANT PROGRAM
  I.  OPTION
TERMS
  Each
option shall be evidenced by one or more documents in the form approved by the
Plan Administrator; provided, however, that each such document shall comply with
the terms specified below. Each document evidencing an Incentive Option shall,
in addition, be subject to the provisions of the Plan applicable to such
option.
  A.  EXERCISE
PRICE.
  1.  The
exercise price per share shall be fixed by the Plan Administrator but shall not
be less than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the option grant date, except that the exercise price shall not
be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date in the case of any person who owns
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation or its parent or subsidiary
corporations.
  -3-
 
 2.  The
exercise price shall become immediately due upon exercise of the option and may,
subject to the provisions of Section I of Article Four and the documents
evidencing the option, be payable in one or more of the forms specified
below:
  (i)  cash or
check made payable to the Corporation,
  (ii)  with
respect to the exercise of options after the Section 12 Registration Date,
shares of Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date, or
  (iii)  with
respect to the exercise of options for vested shares after the Section 12
Registration Date and to the extent the sale complies with all applicable laws
relating to the regulation and sale of securities, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to: (a) a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, 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 the Corporation by reason of such exercise; and (b)
the Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.
  Except to
the extent such sale and remittance procedure is utilized, payment of the
exercise price for the purchased shares must be made on the Exercise
Date.
  B.  EXERCISE
AND TERM OF OPTIONS. Each option shall be exercisable at such time or times,
during such period and for such number of shares as shall be determined by the
Plan Administrator and set forth in the documents evidencing the option.
However, no option shall have a term in excess of ten (10) years measured from
the option grant date.
  C.  EFFECT OF
TERMINATION OF SERVICE.
  1.  The
following provisions shall govern the exercise of any options held by the
Optionee at the time of cessation of Service or death:
  (i)  Any
option outstanding at the time of the Optionee's cessation of Service for any
reason shall remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option.
  (ii)  Any
option held by the Optionee at the time of death and exercisable in whole or in
part at that time may be subsequently exercised by the personal representative
of the Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution of by the Optionee's designated beneficiary or
beneficiaries of that option.
  (iii)  Should
the Optionee's Service be terminated for Misconduct or should the Optionee
otherwise engage in Misconduct while holding one or more outstanding options
under this Article Two, then all those options shall terminate immediately and
cease to be outstanding.
  -4-
 
 (iv)  During
the applicable post-Service exercise period, the option may not be exercised in
the aggregate for more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
  2.  The Plan
Administrator shall have complete discretion, either at the time an option is
granted or at any time while the option remains outstanding, to:
  (i)  extend
the period of time for which the option is to remain exercisable following the
Optionee's cessation of Service from the limited exercise period otherwise in
effect for that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the expiration of the option
term, and/or
  (ii)  permit
the option to be exercised, during the applicable post-Service exercise period,
not only with respect to the number of vested shares of Common Stock for which
such option is exercisable at the time of the Optionee's cessation of Service
but also with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.
  D.  STOCKHOLDER
RIGHTS. The holder of an option shall have no stockholder rights with respect to
the shares subject to the option until such person shall have exercised the
option, paid the exercise price and become a holder of record of the purchased
shares.
  E.  REPURCHASE
RIGHTS. The Plan Administrator shall have the discretion to grant options which
are exercisable for unvested shares of Common Stock. Should the Optionee cease
Service while holding such unvested shares, the Corporation shall have the right
to repurchase, at the exercise price paid per share, any or all of those
unvested shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase
right.
  F.  LIMITED
TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive
Options shall be exercisable only by the Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following the Optionee's death. Non-Statutory Options shall be subject to the
same limitation, except that a Non-Statutory Option may be assigned in whole or
in part during Optionee's lifetime to one or more members of the Optionee's
Immediate Family or to a trust established for the exclusive benefit of one or
more family members or the Optionee's former spouse, to the extent such
assignment is in connection with Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion shall be exercisable only by the
person or persons who acquire a proprietary interest in the option pursuant to
such assignment. The terms applicable to the assigned portion shall be the same
as those in effect for this option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee
may also designate one or more persons as the beneficiary or beneficiaries of
his or her outstanding options under this Article Two, and those options shall,
in accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred option
subject to all the terms and conditions of this Agreement, including (without
limitation) the limited time period during which the option may be exercised
following the Optionee's death.
  -5-
 
 II.  INCENTIVE
OPTIONS
  The terms
specified below shall be applicable to all Incentive Options. Except as modified
by the provisions of this Section II, all the provisions of Articles One, Two
and Four shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options when issued under the Plan
shall NOT be subject to the terms of this Section II.
  A.  ELIGIBILITY.
Incentive Options may only be granted to Employees.
  B.  EXERCISE
PRICE. The exercise price per share shall not be less than one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
  C.  DOLLAR
LIMITATION. The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more
options granted to any Employee under the Plan (or any other option plan of the
Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as Incentive Options shall be applied on the basis of the order in
which such options are granted.
  D.  FAILURE
TO QUALIFY AS INCENTIVE OPTION. To the extent that any option governed by this
Plan does not qualify as an Incentive Option by reason of the dollar limitation
described in Section II.C of Article Two or for any other reason, such option
shall be exercisable as a Non-Statutory Option under the Federal tax
laws.
  E.  10%
STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10%
Stockholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock on
the option grant date, and the option term shall not exceed five (5) years
measured from the option grant date.
  III.  CANCELLATION
AND REGRANT OF OPTIONS
  The Plan
Administrator shall have the authority to effect, at any time and from time to
time, with the consent of the affected option holders, the cancellation of any
or all outstanding options under the Discretionary Option Grant Program and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new grant date.
  IV.  CHANGE IN
CONTROL/HOSTILE TAKE-OVER
  A.  No option
outstanding at the time of a Change in Control shall become exercisable on an
accelerated basis if and to the extent: (i) that option is, in connection with
the Change in Control, assumed by the successor corporation (or parent thereof)
or otherwise continued in full force and effect pursuant to the terms of the
Change in Control transaction, (ii) such option is replaced with a cash
incentive program of the successor corporation which preserves the spread
existing at the time of the Change in Control on the shares of Common Stock for
which the option is not otherwise at that time exercisable and provides for
subsequent payout in accordance with the same exercise/vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. However, if none of the foregoing conditions are satisfied,
then each option outstanding at the time of the Change in Control but not
otherwise exercisable for all the shares of Common Stock at that time subject to
such option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock.
  -6-
 
 B.  All of
the Corporation's outstanding repurchase rights under the Discretionary Option
Grant Program shall also terminate automatically, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Change in Control, except to the extent: (i) those repurchase rights are
assigned to the successor corporation (or parent thereof) or otherwise continued
in full force and effect pursuant to the terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is
issued.
  C.  Immediately
following the consummation of the Change in Control, all outstanding options
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) or otherwise expressly continued in
full force and effect pursuant to the terms of the Change in Control
transaction.
  D.  Each
option which is assumed in connection with a Change in Control or otherwise
continued in effect shall be appropriately adjusted, immediately after such
Change in Control, to apply to the number and class of securities which would
have been issuable to the Optionee in consummation of such Change in Control had
the option been exercised immediately prior to such Change in Control.
Appropriate adjustments to reflect such Change in Control shall also be made to:
(i) the exercise price payable per share under each outstanding option, provided
the aggregate exercise price payable for such securities shall remain the same;
(ii) the maximum number and/or class of securities available for issuance over
the remaining term of the Plan; and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances or share right
awards under the Plan per calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Change in Control transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under the Discretionary Option Grant Program, substitute one or more shares of
its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Change in Control
transaction.
  E.  The Plan
Administrator shall have the discretionary authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of a Change in Control,
become exercisable for all the shares of Common Stock at that time subject to
such options on an accelerated basis and may be exercised for any or all of such
shares as fully vested shares of Common Stock, whether or not those options are
to be assumed or otherwise continued in full force and effect pursuant to the
express terms of the Change in Control transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall immediately terminate at the time of such Change in
Control and shall not be assignable to the successor corporation (or parent
thereof), and the shares subject to those terminated rights shall accordingly
vest in full at the time of such Change in Control.
  F.  The Plan
Administrator shall have full power and authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall vest and become exercisable for all the shares of Common Stock at
that time subject to such options on an accelerated basis in the event the
Optionee's Service is subsequently terminated by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of any Change in Control in which those options do
not otherwise accelerate. Any options so accelerated shall remain exercisable
for fully vested shares of Common Stock until the expiration or sooner
termination of the option term. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall immediately
terminate with respect to any shares of Common Stock held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that
time.
  -7-
 
 G.  The Plan
Administrator shall have the discretionary authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of a Hostile Take-Over,
vest and become exercisable for all the shares of Common Stock at that time
subject to such options on an accelerated basis and may be exercised for any or
all of such shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Hostile Take-Over, and the shares subject to those terminated rights shall
thereupon immediately vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
Involuntary Termination of the Optionee's Service within a designated period
(not to exceed eighteen (18) months) following the effective date of such
Hostile Take-Over. Each option so accelerated shall remain exercisable for fully
vested shares of Common Stock until the expiration or sooner termination of the
option term.
  H.  The
portion of any Incentive Option accelerated in connection with a Change in
Control or Hostile Take-Over shall remain exercisable as an Incentive Option
only to the extent the applicable maximum dollar limitation permitted under the
Code (currently $100,000) is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
  I.  The grant
of options under the Discretionary Option Grant Program shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or
assets.
  V.  STOCK
APPRECIATION RIGHTS
  The Plan
Administrator may, subject to such conditions as it may determine, grant to
selected Optionees stock appreciation rights which will allow the holders of
those rights to elect between the exercise of the underlying option for shares
of Common Stock and the surrender of that option in exchange for a distribution
from the Corporation in an amount equal to the excess of: (A) the Option
Surrender Value of the number of shares for which the option is surrendered;
over (B) the aggregate exercise price payable for such shares. The distribution
may be made in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
  -8-
  ARTICLE
THREE
 
 STOCK
ISSUANCE PROGRAM
  I.  STOCK
ISSUANCES
  Shares of
Common Stock may be issued under the Stock Issuance Program through direct and
immediate issuances without any intervening option grants. Each such stock
issuance shall be evidenced by a Stock Issuance Agreement which complies with
the terms specified below.
  II.  STOCK
ISSUANCE TERMS
  A.  PURCHASE
PRICE.
  1.  The
purchase price per share shall be fixed by the Plan Administrator, but shall not
be less than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the issuance date, except that the exercise price shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the issuance date in the case of any person who owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Corporation or its parent or subsidiary
corporations.
  2.  Subject
to the provisions of Section I of Article Four, shares of Common Stock may be
issued under the Stock Issuance Program for any of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:
  (i)  cash or
check made payable to the Corporation, or
  (ii)  past
services rendered to the Corporation (or any Parent or Subsidiary).
  B.  VESTING
PROVISIONS.
  1.  Shares of
Common Stock issued under the Stock Issuance Program may, in the discretion of
the Plan Administrator, be fully and immediately vested upon issuance or may
vest in one or more installments over the Participant's period of Service or
upon attainment of specified performance objectives. The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement. Shares of Common Stock may also
be issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals. Upon the attainment of such performance goals, fully vested
shares of Common Stock shall be issued upon satisfaction of those share right
awards.
  2.  Any new,
substituted or additional securities or other property (including money paid
other than as a regular cash dividend) which the Participant may have the right
to receive with respect to the Participant's unvested shares of Common Stock by
reason of any stock dividend, stock split, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration shall be
issued subject to: (i) the same vesting requirements applicable to the
Participant's unvested shares of Common Stock; and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.
  3.  The
Participant shall have full stockholder rights with respect to any shares of
Common Stock issued to the Participant under the Stock Issuance Program, whether
or not the Participant's interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares.
  -9-
 
 4.  Should
the Participant cease to remain in Service while holding one or more unvested
shares of Common Stock issued under the Stock Issuance Program or should the
performance objectives not be attained with respect to one or more such unvested
shares of Common Stock, then those shares shall be immediately surrendered to
the Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
  5.  The Plan
Administrator may in its discretion waive the surrender and cancellation of one
or more unvested shares of Common Stock which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
  6.  Outstanding
share right awards under the Stock Issuance Program shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals or Service requirements have not been attained.
  III.  CHANGE IN
CONTROL/HOSTILE TAKE-OVER
  A.  All of
the Corporation's outstanding repurchase rights under the Stock Issuance Program
shall terminate automatically, and all the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control, except to the extent (i) those repurchase rights are assigned
to the successor corporation (or parent thereof) or otherwise continued in full
force and effect pursuant to the express terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.
  B.  The Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Stock Issuance Program so that
those rights shall automatically terminate in whole or in part upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
terminated rights shall immediately vest in full at the time of such Change in
Control.
  C.  The Plan
Administrator shall also have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Stock Issuance Program so
that those rights shall automatically terminate in whole or in part, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, upon the Involuntary Termination of the Participant's Service within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control in which those repurchase rights do not otherwise
terminate.
  -10-
 
 D.  The Plan
Administrator shall also have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Stock Issuance Program so
that those rights shall automatically terminate in whole or in part upon the
occurrence of a Hostile Take-Over, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full at the time of such
Hostile Take-Over.
  ARTICLE
FOUR
  MISCELLANEOUS
  I.  FINANCING
  Subject
to any restrictions under applicable federal securities laws, the Plan
Administrator may permit any Optionee or Participant to pay the option exercise
price under the Discretionary Option Grant Program or the purchase price of
shares issued under the Stock Issuance Program by delivering a full-recourse,
interest bearing promissory note payable in one or more installments. The terms
of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share
purchase.
  II.  SHARE
ESCROW/LEGENDS
  Unvested
shares issued under the Plan may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
  III.  VESTING
  Notwithstanding
any other provision of this Plan, the vesting schedule imposed with respect to
any option grant, share issuance or the lapse of any repurchase right shall not
result in the Optionee or Participant vesting or a repurchase right lapsing at a
rate of less than 20% per year for five years from the date of the option grant
or share issuance.
  IV.  TAX
WITHHOLDING
  A.  The
Corporation's obligation to deliver shares of Common Stock upon the exercise of
options or the issuance or vesting of such shares under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
  B.  The Plan
Administrator may, in its discretion, provide any or all holders of
Non-Statutory Options or unvested shares of Common Stock under the Plan with the
right to use shares of Common Stock in satisfaction of all or part of the Taxes
incurred by such holders in connection with the exercise of their options or the
vesting of their shares. Such right may be provided to any such holder in either
or both of the following formats:
  -11-
  1.  Stock
Withholding: The election to have the Corporation withhold, from the shares of
Common Stock otherwise issuable upon the exercise of such Non-Statutory Option
or the vesting of such shares, a portion of those shares with an aggregate Fair
Market Value equal to the amount of the Taxes (not to exceed one hundred percent
(100%) of such Taxes) to be satisfied in such manner as designated by the holder
in writing; or
 
 2.  Stock
Delivery: The election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such holder (other than in connection with
the option exercise or share vesting triggering the Taxes) with an aggregate
Fair Market Value equal to the amount of the Taxes (not to exceed one hundred
percent (100%) of such Taxes) to be satisfied in such manner as designated by
the holder in writing.
  V.  EFFECTIVE
DATE AND TERM OF THE PLAN
  A.  The Plan
shall become effective immediately upon the Plan Effective Date. Options may be
granted under the Discretionary Option Grant at any time on or after the Plan
Effective Date. The Plan shall be approved by the stockholders of the
Corporation within twelve (12) months after the date this Plan is adopted by the
Board.
  B.  The Plan
shall terminate upon the EARLIEST of (i) the tenth anniversary of the Plan
Effective Date, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Change in Control. Upon such
plan termination, all outstanding option grants and unvested stock issuances
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such grants or issuances.
  VI.  AMENDMENT
OF THE PLAN
  A.  The Board
shall have complete and exclusive power and authority to amend or modify the
Plan in any or all respects. However, no such amendment or modification shall
adversely affect the rights and obligations with respect to stock options or
unvested stock issuances at the time outstanding under the Plan unless the
Optionee or the Participant consents to such amendment or modification. In
addition, certain amendments may require stockholder approval pursuant to
applicable laws or regulations.
  B.  Options
to purchase shares of Common Stock may be granted under the Discretionary Option
Grant Program and shares of Common Stock may be issued under the Stock Issuance
Program that are in each instance in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued under those programs shall be held in escrow until there is obtained any
required approval of an amendment sufficiently increasing the number of shares
of Common Stock available for issuance under the Plan. If such approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
  -12-
 
 VII.  USE OF
PROCEEDS
  Any cash
proceeds received by the Corporation from the sale of shares of Common Stock
under the Plan shall be used for general corporate purposes.
  VIII.  REGULATORY
APPROVALS
  A.  The
implementation of the Plan, the granting of any stock option under the Plan and
the issuance of any shares of Common Stock (i) upon the exercise of any granted
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the stock options granted under
it and the shares of Common Stock issued pursuant to it.
  B.  No shares
of Common Stock or other assets shall be issued or delivered under the Plan
unless and until there shall have been compliance with all applicable
requirements of Federal and state securities laws, , and all applicable listing
requirements of any stock exchange (or the Nasdaq National Market or OTC
Bulletin Board, if applicable) on which Common Stock is then listed for
trading.
  IX.  NO
EMPLOYMENT/SERVICE RIGHTS
  Nothing
in the Plan shall confer upon the Optionee or the Participant any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee or the
Participant, which rights are hereby expressly reserved by each, to terminate
such person's Service at any time for any reason, with or without
cause.
  X.  FINANCIAL
REPORTS
  The
Corporation shall make available a balance sheet and an income statement at
least annually to each individual holding an outstanding option under the Plan,
unless such individual is a key Employee whose duties in connection with the
Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
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 ****
 -13-
  APPENDIX
  The
following definitions shall be in effect under the Plan:
  A.  BOARD
shall mean the Corporation's Board of Directors.
  B.  CHANGE IN
CONTROL shall mean a change in ownership or control of the Corporation effected
through any of the following transactions:
  (i)  a
stockholder-approved merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such
transaction;
  (ii)  a sale,
transfer or other disposition of all or substantially all of the Corporation's
assets; or
  (iii)  the
acquisition, directly or indirectly by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation), of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board recommends such
stockholders accept.
  C.  CODE
shall mean the Internal Revenue Code of 1986, as amended.
  D.  COMMON
STOCK shall mean the Corporation's common stock.
  E.  CORPORATION
shall mean Electronic Sensor Technology, Inc., a Nevada corporation, and its
successors.
  F.  DISCRETIONARY
OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect
under the Plan.
  G.  EMPLOYEE
shall mean an individual who is in the employ of the Corporation (or any Parent
or Subsidiary), subject to the control and direction of the employer entity as
to both the work to be performed and the manner and method of
performance.
  H.  EXERCISE
DATE shall mean the date on which the Corporation shall have received written
notice of the option exercise.
  I.  FAIR
MARKET VALUE per share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:
  (i)  If the
Common Stock is at the time traded on the Nasdaq National Market, then the Fair
Market Value shall be deemed equal to the closing selling price per share of
Common Stock on the date in question, as such price is reported on the Nasdaq
National Market or any successor system. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.
  -14-
 
 (ii)  If the
Common Stock is at the time listed on any Stock Exchange, then the Fair Market
Value shall be deemed equal to the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
  (iii)  If such
Common Stock is publicly traded but is not listed or admitted to trading on a
national securities exchange, the average of the closing bid and asked prices on
the date of determination as reported in Bloomberg, L.P.
  (v)  If the
Common Stock is at the time not publicly traded, then the Fair Market Value
shall be determined by the Plan Administrator after taking into account such
factors as the Plan Administrator shall deem appropriate.
  J.  HOSTILE
TAKE-OVER shall mean:
  (i)  the
acquisition, directly or indirectly, by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept; or
  (ii)  a change
in the composition of the Board over a period of thirty-six (36) consecutive
months or less such that a majority of the Board members ceases, by reason of
one or more contested elections for Board membership, to be comprised of
individuals who either: (a) have been Board members continuously since the
beginning of such period; or (b) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (a) who were still in office at the time the Board approved
such election or nomination.
  K.  IMMEDIATE
FAMILY shall mean any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive
relationships.
  L.  INCENTIVE
OPTION shall mean an option which satisfies the requirements of Code Section
422.
  M.  INVOLUNTARY
TERMINATION shall mean the termination of the Service of any individual which
occurs by reason of:
  (i)  such
individual's involuntary dismissal or discharge by the Corporation for reasons
other than Misconduct, or
  (ii)  such
individual's voluntary resignation following (A) a change in his or her position
with the Corporation which materially reduces his or her level of
responsibility, (B) a reduction in his or her level of compensation (including
base salary, fringe benefits and participation in any corporate-performance
based bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.
  -15-
 
 N.  MISCONDUCT
shall mean the commission of any act of fraud, embezzlement or dishonesty by the
Optionee or Participant, any unauthorized use or disclosure by such person of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
  O.  1934 ACT
shall mean the Securities Exchange Act of 1934, as amended.
  P.  NON-STATUTORY
OPTION shall mean an option not intended to satisfy the requirements of Code
Section 422.
  Q.  OPTIONEE
shall mean any person to whom an option is granted under the Discretionary
Option Grant Program.
  R.  OPTION
SURRENDER VALUE shall mean the Fair Market Value per share of Common Stock on
the date the option is surrendered to the Corporation or, in the event of a
Hostile Take-Over, effected through a tender offer, the highest reported price
per share of Common Stock paid by the tender offer or in effecting such Hostile
Take-Over, if greater. However, if the surrendered option is an Incentive
Option, the Option Surrender Value shall not exceed the Fair Market Value per
share.
  S.  PARENT
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation, provided each corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
  T.  PARTICIPANT
shall mean any person who is issued shares of Common Stock under the Stock
Issuance Program.
  U.  PERMANENT
DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or
the Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or has lasted or can be expected to last for a continuous period
of twelve (12) months or more.
  V.  PLAN
shall mean the Corporation's 2005 Stock Incentive Plan, as set forth in this
document.
  W.  PLAN
ADMINISTRATOR shall mean the particular entity, whether the Primary Committee,
the Board or the Secondary Committee, which is authorized to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to one or
more classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.
  X.  PLAN
EFFECTIVE DATE shall mean the date on which the Plan was adopted by the
Board.
  Y.  PRIMARY
COMMITTEE shall mean the committee of two (2) or more non-employee Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders following the Section 12
Registration Date , or if
no committee has been formed, then the Primary Committee shall mean the entire
Board .
  -16-
 
 Z.  SECONDARY
COMMITTEE shall mean a committee of two (2) or more Board members appointed by
the Board to administer any aspect of Plan not required hereunder to be
administered by the Primary Committee. The members of the Secondary Committee
may be Board members who are Employees eligible to receive discretionary option
grants or direct stock issuances under the Plan or any other stock option, stock
appreciation, stock bonus or other stock plan of the Corporation (or any Parent
or Subsidiary). If no such committee has been formed, then “Secondary Committee”
shall mean the Primary Committee or if no Primary Committee has been formed,
then the entire Board.
  AA.  SECTION
12 REGISTRATION DATE shall mean the date on which the Common Stock is first
registered under Section 12(g) or Section 15 of the 1934 Act.
  BB.  SECTION
16 INSIDER shall mean an officer or director of the Corporation subject to the
short-swing profit liabilities of Section 16 of the 1934 Act.
  CC.  SERVICE
shall mean the performance of services for the Corporation (or any Parent or
Subsidiary) by a person in the capacity of an Employee, a non-employee member of
the board of directors or a consultant or independent advisor, except to the
extent otherwise specifically provided in the documents evidencing the option
grant or stock issuance.
  DD.  SHORT
TERM FEDERAL RATE shall mean the federal short-term rate in effect under Section
1274(d) of the Code for the period the shares were held in escrow.
  EE.  STOCK
EXCHANGE shall mean either the American Stock Exchange or the New York Stock
Exchange.
  FF.  STOCK
ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and
the Participant at the time of issuance of shares of Common Stock under the
Stock Issuance Program.
  GG.  STOCK
ISSUANCE PROGRAM shall mean the stock issuance program in effect under the
Plan.
  HH.  SUBSIDIARY
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation, provided each corporation (other
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
  II.  TAXES
shall mean the Federal, state and local income and employment tax liabilities
incurred by the holder of Non-Statutory Options or unvested shares of Common
Stock in connection with the exercise of those options or the vesting of those
shares.
  JJ.  10%
STOCKHOLDER shall mean the owner of stock (as determined under Code Section
424(d)) possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
  -17-