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

                                   FORM 10-KSB

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

                                     For the fiscal year ended DECEMBER 31, 2006

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

                                  For the transition period from ______ to______

                                                Commission file number 000-51859

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

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

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

Issuer's telephone number (805) 480-1994

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

     Title of each class               Name of each exchange on which registered

            None.                                        N/A
     -------------------               -----------------------------------------

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

                         Common Stock, Par Value $0.001
                         ------------------------------
                                (Title of class)

     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 [X] No [ ]

     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. $2,180,208

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     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. $7,138,417 as of March 1, 2007

     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 March 1, 2007

                       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 I, 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]
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     Certain statements in this annual report on Form 10-KSB, including those
relating to the company's plans regarding business and product development;
product sales and distribution; market demands and developments in the homeland
security, analytical instrumentation/quality control and environmental
monitoring markets; and the sufficiency of the company's resources to satisfy
operation cash requirements are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
may contain the words "believe," "anticipate," "expect," "predict," "estimate,"
"project," "will be," "will continue," "will likely result," or other similar
words and phrases. Risks and uncertainties exist that may cause results to
differ materially from those set forth in these forward-looking statements.
Factors that could cause the anticipated results to differ from those described
in the forward-looking statements include: risks related to changes in
technology, our dependence on key personnel, our ability to protect our
intellectual property rights, emergence of future competitors, changes in our
largest customer's business and government regulation of homeland security
companies. The forward-looking statements speak only as of the date they are
made. We do not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
are made.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

     In this annual report, references to the "company," "we," "our," or "us"
refers to Electronic Sensor Technology, Inc., a Nevada corporation.

     We are engaged in the development, manufacture, and sale of a patented
product we call zNose(R), a device designed to detect and analyze chemical odors
and vapors, or, in another words, an electronic "nose". We believe the zNose(R)
is superior to other electronic "noses" because of its speed, specificity and
sensitivity. The zNose(R) identifies the chemical makeup of any fragrance, vapor
or odor. The zNose(R) does this by creating a visual image of the fragrance,
vapor or odor that it detects, so that the user of the zNose(R) may easily
identify the fragrance, vapor or odor.

     We believe that our products have broad applications in the homeland
security, environmental monitoring and detection and laboratory instrument
markets. We are involved in ongoing product research and development efforts in
that regard. We have also concentrated our efforts on further product
development, testing and proving, and continuing to expand our sales and support
organization.

     Our executive offices are located at 1077 Business Center Circle, Newbury
Park, California 91320 and our telephone number is (805) 480-1994.

HISTORY AND BACKGROUND

     Electronic Sensor Technology, Inc. was originally incorporated under the
laws of the state of Nevada as Bluestone Ventures Inc. on July 12, 2000. From
the date of its incorporation until February 1, 2005, Bluestone Ventures was in
the business of acquiring and exploring potential mineral properties in Ontario,
Canada. The company's name was changed to "Electronic Sensor Technology, Inc."
on January 26, 2005 in connection with the acquisition of two corporations that
had together owned Electronic Sensor Technology, L.P. Since the acquisition of
Electronic Sensor Technology, L.P., our business has been the development,
manufacture and sale of instruments that detect and analyze vapors and odors.
The company has abandoned its mining exploration business.

OVERVIEW OF PAST OPERATIONS OF ELECTRONIC SENSOR TECHNOLOGY, L.P.

     Electronic Sensor Technology, L.P. was formed in 1995 to develop and
manufacture, the zNose(R), an advanced technology in chemical vapor detection
and analysis. In 1999, Electronic Sensor Technology, L.P. completed beta testing
of its products and commenced commercial sales to the analytical
instrumentation/quality control market as well as the homeland security market.

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ELECTRONIC SENSOR TECHNOLOGY, L.P. ACQUISITION

     On February 1, 2005, pursuant to the terms of an Agreement and Plan of
Merger by and among Electronic Sensor Technology, Inc., Amerasia Technology,
Inc., holder of approximately 55% of the partnership interests of Electronic
Sensor Technology, L.P., L&G Sensor Technology, Inc., holder of approximately
45% of the partnership interests of Electronic Sensor Technology, L.P., Amerasia
Acquisition, a wholly-owned subsidiary of Electronic Sensor Technology, Inc.,
and L&G Acquisition, a wholly-owned subsidiary of Electronic Sensor Technology,
Inc., Electronic Sensor Technology, Inc., acquired 100% of the outstanding
equity partnership interest of Electronic Sensor Technology, L.P. Under the
Agreement and Plan of Merger:

     (i)  Amerasia Technology merged with and into Amerasia Acquisition such
          that Amerasia Technology became a wholly-owned subsidiary of
          Electronic Sensor Technology, Inc.;

     (ii) L&G Sensor Technology merged with and into L&G Acquisition such that
          L&G Sensor Technology became a wholly-owned subsidiary of Electronic
          Sensor Technology, Inc.;

     (iii)as a result of the mergers of (i) and (ii), Electronic Sensor
          Technology, Inc. indirectly acquired the partnership interests of
          Electronic Sensor Technology, L.P.; and

     (iv) Electronic Sensor Technology, Inc. issued 20,000,000 shares of its
          common stock to the shareholders of Amerasia Technology and L&G Sensor
          Technology.

     In November 2004, Electronic Sensor Technology, L.P. sold $200,000 in
limited partnership interests to certain bridge investors. Concurrent with the
mergers, these limited partnership interests were directly exchanged into
200,000 shares of common stock of Electronic Sensor Technology, Inc. and
warrants to purchase 200,000 shares of common stock of Electronic Sensor
Technology, Inc. at $1.00 per share.

     In connection with the mergers, Electronic Sensor Technology, Inc. entered
into Subscription Agreements with certain investors on January 31, 2005. Under
these Subscription Agreements, Electronic Sensor Technology issued and sold in a
private placement 3,985,000 shares of its common stock and warrants to purchase
3,985,000 shares of common stock at $1.00 per share to certain investors for
gross proceeds of $3,985,000, which were received on February 1, 2005.
Electronic Sensor Technology received net proceeds of approximately $3,821,000
less fees, including counsel fees for the investors and Electronic Sensor
Technology, L.P. of approximately $164,000.

     Immediately following the mergers and the private placement, on February 1,
2005 there were 53,968,471 shares of Electronic Sensor Technology common stock
outstanding, of which (i) shareholders of Bluestone Ventures prior to the
mergers and the private placement held 26,988,279 shares (approximately 50.0% of
our common stock), (ii) the shareholders of Amerasia Technology and L&G Sensor
Technology prior to the mergers and the private placement held 22,783,471 shares
(approximately 42.2% of our common stock) and (iii) investors in the private
placement occurring on February 1, 2005 and the bridge investors as a group held
4,185,000 shares (approximately 7.8% of our common stock). The total outstanding
interests of Electronic Sensor Technology, L.P. were exchanged for 20,000,000
shares of Electronic Sensor Technology, Inc. In addition, 2,783,279 shares of
Electronic Sensor Technology, Inc. were distributed to pre-merger shareholders
of Amerasia Technology and L&G Sensor Technology in exchange for the
cancellation of debt owed to such shareholders, at a conversion rate of $1.00
per share. The conversion rate of $1.00 per share was established immediately
preceding the merger through the private placement of 3,985,000 shares of common
stock at $1.00 per share and the conversion of a $200,000 equity advance to
Electronic Sensor Technology, L.P. for 200,000 shares of Electronic Sensor
Technology common stock. The transaction price of $1.00 per share was
established by arms length negotiation between the former management of
Bluestone Ventures and Electronic Sensor Technology, L.P. (now management of
Electronic Sensor Technology, Inc.) in December 2004. As a condition to the
merger transactions, Bluestone Ventures agreed to raise not less than $3,000,000
of new equity capital in a private placement offering. In determining to proceed
with the merger transactions, management of Electronic Sensor Technology, L.P.
(now management of Electronic Sensor Technology, Inc.) weighed the expected cash
balance of Bluestone Ventures after giving effect to the private placement
offering discussed above and the mergers against the overall equity ownership of
Electronic Sensor Technology, Inc. post-merger that would be held by the former
owners of Electronic Sensor Technology, L.P. (i.e., the former owners of
Electronic Sensor Technology, L.P. were willing to give up 57.8% of Electronic
Sensor Technology, L.P. for not less than $3,000,000 in cash). While management
of Electronic Sensor Technology, L.P. (now management of Electronic Sensor
Technology, Inc.) was not privy to the valuation methodology used by management
of Bluestone Ventures in establishing a transaction price of $1.00 per

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share, management of Electronic Sensor Technology, L.P. (now management of
Electronic Sensor Technology, Inc.) assumes that management of Bluestone
Ventures and its advisors used one or more traditional valuation methodologies.

     Following the mergers we assumed as our principal operations the operations
of Electronic Sensor Technology, L.P. and the prior operations of Bluestone
Ventures were terminated.

INDUSTRY OVERVIEW

     Although there are a vast number of applications for the zNose(R) product,
we believe that the most significant demands for our product will be in three
general market categories - homeland security, analytical
instrumentation/quality control and environmental monitoring and detection.

     Homeland Security. According to published sources, the overall homeland
security market is projected to amount to more than $240 billion over the next
five years. We believe that detection and analysis of chemical compounds will
aid greatly in various homeland security efforts including:

     o    Cargo Containers. Over 22.5 million cargo containers arrive in the
          U.S. every year and only a fraction of them are being inspected by the
          U.S. Customs Department. We believe cargo container security will
          become a top priority with the U.S. government.

     o    Airports. Our zNose(R) products may be used to complement existing
          x-ray and bomb detection technologies.

     o    Drug Interdiction. The zNose(R) has been used to detect contraband,
          including illicit controlled substances along U.S. borders.

     o    Building Security. zNose(R) technology can be applied for continuous
          and real-time chemical detection and to monitor the air in buildings
          and in confined spaces. Detecting hazardous gases and poisonous
          chemical agents such as sarin, VX explosives, and contrabands for
          security and environmental safety purposes are the main concerns for
          various government and commercial buildings, as well as military
          facilities.

     Analytical Instrumentation/Quality Control. The zNose(R) has been serving
the chemical vapor analysis needs in various manufacturing industries. We
estimate that the market for products such as zNose(R) will exceed $50 million
during the next few years. The zNose(R) has been used for a host of applications
relating to analysis and quality control such as:

     o    screening incoming raw materials;

     o    checking ingredients in processed food and pharmaceutical products;

     o    inspecting packaging materials and finished goods; and

     o    detecting hazardous gas leaks in chemical plants.

     Environmental Monitoring and Detection. The zNose(R) has been serving rapid
on-location needs in detection and monitoring of toxic chemicals in the water
for environmental protection purposes. In a recent toxic chemical spill caused
by a chemical plant explosion in northeastern China which contaminated major
water sources, the zNose(R) was deployed by local authorities to detect and
monitor toxic flows in a river and to determine the safety of the water on a
near real-time basis.

CONVENTIONAL ELECTRONIC NOSE TECHNOLOGY

     Conventional electronic noses are unable to meet the needs of the market
because of their fundamental construction. They are not able to identify
fragrances, vapors and odors with an acceptable degree of specificity and
preciseness. In addition, conventional electronic noses require sophisticated
computer software in order for its chemical analyses to be recognized. This type
of electronic nose is therefore not acceptable for use in scientific
measurement.

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THE ZNOSE(R) SOLUTION

     Speed, precision and versatility are the key characteristics of the
zNose(R) product. The zNose(R) has been developed to replace the conventional
electronic nose. The zNose(R) operates as quickly as a conventional electronic
nose while delivering the precision and accuracy of a much more expensive
instrument. The zNose(R) has advanced chemical analysis technology by performing
vapor analysis within 10 seconds. Early models of the zNose(R) have been tested
by the U.S. Environmental Protection Agency under Environmental Technology
Verification program and by the Office of National Drug Control Policy for drug
interdiction. Tests have also been performed at the Midwest Research Institute's
Surety Laboratory in Kansas City and at the U.S. Army Dugway Proving Ground in
Utah with respect to the effectiveness of the zNose(R) in detecting chemical
agents such as sarin gases. The zNose(R) is currently approved for purchase
through the General Services Administration pre-approved procurement program.

     Our VaporPrint(R) imaging ability is another major advantage of the
zNose(R) product. VaporPrint(R) allows the user of the zNose(R) to see a visual
image of the makeup of a particular fragrance, vapor or odor within 10 seconds.
In addition, VaporPrint(R) can produce high-resolution visual images of odor
intensity. VaporPrint(R) images are displayed on a laptop computer screen and
are recorded on the hard drive of the laptop computer.

OUR PRODUCTS

ZNOSE(R)

     The zNose(R) is essentially a vapor detector that uses a sensor based on
Surface Acoustic Wave technology. Basically, the zNose(R) "inhales" a particular
fragrance, vapor or odor. The fragrance, vapor or odor is carried up through a
column and the chemicals making up the fragrance, vapor or odor condense on the
crystal surface of the sensor in the zNose(R). This condensation on the sensor
causes a change in what is called the "fundamental acoustic frequency" of the
crystal surface. It is this change in fundamental acoustic frequency that allows
the zNose(R) to determine the chemical makeup of the fragrance, vapor or odor.
This change is measured by a microprocessor that calculates the change in
frequency which is related to the amount of fragrance, vapor or odor sampled by
the zNose(R). The microprocessor also measures the arrival time (called the
retention time) of the change in the fundamental frequency. Different chemicals
arrive at different times and so, once the microprocessor has determined the
retention time of the unidentified fragrance, vapor or odor, it compares it to
retention times that are stored in a computer library. This allows the zNose(R)
to identify the particular fragrance, vapor or odor.

     The zNose(R) analyzes and identifies vapor specimens in a two-step process.
In the first step, typically lasting 10 seconds, the instrument collects a small
sample of the vapor to be analyzed. The sample is then injected in to the gas
chromatography column where the individual chemicals present are separated and
measured. The chemical analysis requires as little as 10 seconds to produce the
vapor's chemical signature, or chromatogram. The vapor's chemical signature can
also be visually displayed in a graphic form called a "VaporPrint". This
chemical signature is then compared against the reference database of chemical
odor profiles. If the chemical compound of the specimen is not in the reference
database, it will not be identified by name; however, the makeup of the
unidentified specimen can be stored in the reference database for future
identification. The reference database of chemical odor profiles that is stored
on the hard drive of the laptop computer is composed of standards of various
chemicals that are available through the National Institute of Standards and
Technology (NIST). The database can be updated when standards of new chemicals
are encountered and input by way of simple software selection, or by way of
sampling unknown chemical compounds and storing the measurements of such
chemical compounds in the database. If the zNose(R) samples a non-specimen
vapor, such as clear ambient air, no signal is generated on the laptop computer
screen and no VaporPrint(R) is created. If the zNose(R) samples a complex
mixture of chemical compounds, each compound and the concentration of such
compound is measured independently of the other compounds contained in the
mixture. Due to the independent measurement of each compound in a complex
mixture, each measurement is free from the influence of the other compounds, and
the accuracy of the zNose(R) is therefore not affected by complex mixtures.

     We currently manufacture and sell three zNose(R) models designated as Model
4200 (Handheld Unit), Model 4300 (Portable Unit) and Model 7100 (Bench Top
Unit). Model 4200 is designed for portability and for applications requiring
quick and accurate vapor screening in the field. Model 4300 is also designed for
portability and can operate outdoors with the same capabilities of Model 4200
without the need for an external power source. Model 7100 is designed for
laboratory testing and is ideal for testing water and product quality control
samples. Both Model 4200 and Model 7100 weigh approximately 27 pounds, not
including a laptop computer that must be used with each zNose(R). Model 4300
also weighs approximately 27 pounds, not including the laptop computer, but also
includes a battery charger that weighs approximately 8 pounds. The Model 4200
has two

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housings (the case and the detector head) and a laptop computer. The
case of the Model 4200 is 10" x 12" x 6" and weighs 20 pounds and the detector
head of the Model 4200 is 4.25" x 12" x 7" and weighs 7 pounds. The components
and dimensions of the Model 4300 are similar to the Model 4200, but the battery
charger of the Model 4300 is 5.5" x 13.5" x 5.5. The Model 7100 is packaged in a
single housing and also requires a laptop computer. The dimensions of the Model
7100 packaging are 14.3" x 14.3" x 7.5". Both the Model 4200 and Model 7100 are
powered by a standard AC electrical outlet, and both models adapt to standard
outlets in North America, Asia and Europe (i.e., the zNose(R) may be operated by
a 110 volt or 220 volt power source). In addition, both the Model 4200 and 7100
may be powered by connecting the unit to a car battery with an appropriate
adaptor. All three models can be produced in one of two basic vapor sensing
configurations: volatile and semi-volatile. The volatile configuration can
detect volatile organic compounds, such as benzene. The semi-volatile
configuration can detect heavier vapors such as those found in explosives and
drugs.

     We are also developing Models 7200 and 7400. Model 7200 is designed as a
fixed installation unit for both indoor and outdoor ambient air monitoring
instrument. It can be used for building security as well as outdoor
environmental monitoring applications. It is designed to be operated remotely
from a central control station via a radio frequency (RF) control link. Model
7400 is designed to be used for shipping containers and truck monitoring for
both commercial and homeland security applications. It is designed to be used
with a remote sampling kit which enables multiple samples to be collected then
taken to the zNose(R) to be analyzed.

     We have designs to produce a hand-held zNose(R) that is smaller than the
Model 4300 for commercial market. This model is designed to meet the needs of
law enforcement, manufacturing process monitoring, and environmental monitoring.
We plan to develop a separate version of the mini-zNose(R) to be used as a
personal nerve agent detector for the military and security markets.

ACCESSORIES

     We offer several lines of accessory products such as calibration devices,
sample desorbers, MicroSense Software(C), and GPS receivers. An example is our
Model 3100 which provides a calibrated vapor source as well as a tool for
extracting vapors from solid and liquid samples.

TECHNICAL SUPPORT

     All zNose(R) instruments sold are equipped with a software package called
PCAnywhere. PCAnywhere allows a technical support person at the company to
operate an instrument anywhere in the world through the internet. This better
enables our technicians to be available to address any customer problem.

SALES AND DISTRIBUTION

     We sell our zNose(R) product through distribution channels including
equipment distributors and sales representatives both in the U.S. and in over 20
foreign countries, e-commerce and customer referrals. We entered into an
agreement with TechMondial, Ltd. to be a distributor in the countries of the
European Community, Romania, Bulgaria, Turkey, Croatia and Switzerland on
October 21, 2005. In 2005, we selected Beijing R&D Technology Co., Ltd. to be
our exclusive distributor in China. We entered into an agreement with Microchem
JSC to be a distributor in the countries of Germany, Russia, and Ukraine on
March 27, 2006. We entered into an agreement with Analytical Solutions and
Product B.V. to be a distributor in the Benelux countries on January 15, 2007.
We entered into an agreement with eScreen Sensor Solutions to be a distributor
in Israel, the Caribbean, the State of Florida, and Central and South America on
October 16, 2003. As part of the latter agreement, eScreen paid us an up-front
fee of $250,000 in 2004.

     All sales representatives and distributors are required to attend a
three-day training course conducted at our headquarters in Newbury Park,
California. We advertise in selected industry trade journals and trade
conventions. We are working to build a dedicated marketing and sales team. We
historically generated sales from both domestic and international customers,
each of which accounted for approximately 50% of our sales in the past. However,
for the fiscal years ending December 31, 2005 and December 31, 2006,
international customers accounted for approximately two-thirds of our total
sales. We expect a similar split among domestic and international sales to
continue. All of our customers pay us in U.S. dollars. Major domestic customers
include the U.S. Armed Forces, Life Safety Systems, Inc. and the National
Aeronautics and Space Administration (NASA). Major international customers
include Beijing R&D Technology Company Ltd. in China, Beehive International
Trading Co., Ltd. in Japan, Kosmo Scientific Co. in Korea, Microchem Corp. in
Ukraine, Max Planck Institute in Germany, and Arnott Drake S.R.L. in Argentina.

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COMPETITION

     We are unaware of any direct competitor to the zNose(R) product on the
market today. In the homeland security markets, we face competition from
manufacturers of x-ray machines, ion-mobility spectrometers and chemical coated
sensors. X-ray machines have been widely used for security purposes in detecting
metal objects but not for chemical compounds. Ion-mobility spectrometer
equipment is a vapor detector and is designed to detect certain compounds but is
blind to other compounds. Hence, it can only see a small dot in a space but
cannot see the total picture. It employs a different sample collection technique
by wiping the surfaces of the object placed for screening. The ion-mobility
spectrometer also uses materials in its construction which may be offensive to
users in certain countries.

     Chemical coated sensors are the conventional electronic noses. They use an
array of chemical sensors each reacting to certain specific compounds. As
mentioned earlier, electronic noses cannot be calibrated with chemical standards
and therefore cannot be used effectively for scientific measurement.

     We have another set of competitors manufacturing portable vapor and odor
analysis products for the instrumentation market from major corporations such as
Agilent Technologies, Inc. (NYSE: A), Perkin-Elmer, Inc. (NYSE: PKI) and Varian,
Inc. (NASDAQ: VARI). We believe that our zNose(R)product is competitive with
these companies' products based on speed and cost.

     Many of our current and potential competitors, including the aforementioned
competitors, have larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do and
may enter into strategic or commercial relationships with larger, more
established companies. Some of our competitors may be able to secure alliances
with customers and affiliates on more favorable terms, devote greater resources
to marketing, advertising and promotional campaigns and devote substantially
more resources to research and development than we do. In addition, new
technologies and the expansion of existing technologies may increase the
competitive pressures on us.

     We cannot assure you that we will be able to compete successfully against
current or future competitors, and competitive pressures faced by us could harm
our business, operating results and financial condition. We do not currently
represent a significant competitive presence in the homeland security or
analytic instrumentation markets.

MANUFACTURING AND RAW MATERIALS

     We design, prototype and manufacture our products at our headquarters. Our
manufacturing facilities adhere to ISO9000 manufacturing methods (quality
standards developed by the International Organization for Standardization, which
have been adopted by many countries around the world). We contract out the
manufacturing and assembling of certain components to subcontractors. Our
current annual manufacturing capacity is approximately 1,000 zNose(R)units. The
principal components to our products are computer chips, circuit boards,
transformers and sensory devices. The prices for these components are subject to
market forces largely beyond our control, including energy costs, market demand,
and freight costs. The prices for these components have varied significantly in
the past and may vary significantly in the future. Our principal suppliers of
components and raw materials include: Sigma Co. of Bellefonte, Pennsylvania,
Ventura Fluid System Technologies of Camarillo, California, Valco Instruments
Co., Inc. of Houston, Texas, Inspired Energy, Inc. of Newbury, Florida, and
Vicor Corporation of Andover, Massachusetts.

CUSTOMERS

     In 2006, we had approximately 62 customers. Our largest customer in 2006,
Beijing R&D Technology Company Ltd. (which is our exclusive distributor in
China), purchased 27 of the total 58 zNose(R) units sold by us in 2006,
constituting approximately 47% of the zNose(R) units sold in 2006. Our largest
customers are (1) Beijing R&D Technology Company Ltd. of China, (2) Arnott Drake
S.R.L. and (3) Applied Systems International, Inc.

PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS

     We regard our patents, trademarks, trade names and similar intellectual
property as critical to our success. We rely on patent and trademark laws, trade
secret protection and confidentiality agreements with employees, distributors,
customers, partners and others to protect our proprietary rights.

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     We own four United States patents covering our zNose(R) product, including:

     o    No. 5,289,715, "Vapor Detection Apparatus and Method Using an Acoustic
          Interferometer" issued March 1, 1994;

     o    No. 5,970,803, "Method and Apparatus for Identifying and Analyzing
          Vapor Elements", issued October 26, 1999;

     o    No. 6,212,938, "Method of Detecting Smell of a Vapor and Producing a
          Unique Visual Representation thereof," issued April 10, 2001;

     o    No. 6,354,160, "Method and Apparatus for Identifying and Analyzing
          Vapor Elements," issued December 3, 2002.

     We may not be able to obtain patent protection for any derivative uses of
zNose(R), or for any other products we may later acquire or develop. We also
cannot assure you that we will be able to obtain other foreign patents to
protect our products.

     We have copyrighted our MicroSense Windows software and Xilinx gate array
firmware, which controls the operation of the zNose(R) and produces visual
images. These images, trademarked as VaporPrint(R) images, make it possible to
display vapor analysis data from any vapor analysis system, as unique visual
images and facilitate pattern recognition of complex odors and fragrances.

     We currently hold registered trademarks for zNose(R) and VaporPrint(R). We
intend to evaluate the possible application for new patents and trademarks as
needed to cover current and future applications of our technology and product
developments. We intend to undertake all steps necessary to preserve and protect
our patents, trademarks and intellectual property generally.

     We are not aware that our products, trademarks or other proprietary rights
infringe the rights of third parties, nor are we aware of any infringements of
our proprietary rights. We continually evaluate potential infringements of our
proprietary rights and intend to take such legal and other actions as may be
necessary to protect those rights. However, there can be no assurance that third
parties will not assert infringement claims against us in the future with
respect to current or future products or that any such assertion may not require
us to enter into royalty arrangements or result in costly litigation.

GOVERNMENT REGULATION

     Government agencies, in particular, the Department of Defense, are
principal customers for our products. As a result, we are required to comply
with the Federal Acquisition Regulations, a comprehensive set of regulations
governing how vendors do business with the U.S. federal government, to the
extent we contract with departments or agencies of the U.S. government, as well
as similar regulations to the extent we contract with state or local
governments. Sales to or grants from foreign governments or organizations
generally have their own regulatory framework, which may or may not be similar
to present U.S. standards or requirements.

RESEARCH AND DEVELOPMENT

     Our research and development program consists of developing technologies
related to enhancing our electronic nose product and making it more portable.
Fees related to research and development include consulting fees, technical
fees, and research, development and testing of our zNose(R) product. We spent
approximately $600,000 in 2005 and $834,000 in 2006 on research and development
activities, none of which was borne directly by customers.

EMPLOYEES

     As of December 31, 2006 we had a total of 20 full-time employees and 1
consultant. In addition to management, we employ sales people, administrative
staff, and development and technical personnel. From time to time, we may employ
independent consultants or contractors to support our research and development,
marketing, sales and support, and administrative organizations. No collective
bargaining units represent our employees and Electronic Sensor Technology is not
party to any labor contracts.

                                       7
<PAGE>

CAPITALIZATION

     The following table sets forth our capitalization as of December 31, 2006.
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, 2006.

                                December 31, 2006

Long-term debt..............................................$ 2,527,777
Stockholders' deficit:
  Common stock; $0.001 par value; 200,000,000
  Shares authorized; 54,173,745 shares issued
   and outstanding..........................................$     54,174
  Additional paid-in capital................................$  8,516,354
  Accumulated deficit.......................................$(10,499,147)
                                                             -----------
Total Stockholders' deficit.................................$ (1,928,619)
                                                             -----------
Total capitalization....................................... $    599,158
                                                             ===========
ITEM 2.  DESCRIPTION OF PROPERTY.

     We lease approximately 13, square feet of office space and production
facilities at 1077 Business Center Circle, Newbury Park, California. Our current
lease expires on September 30, 2010. The lease payments are currently $11,430.90
per month, and increase by 3% per annum beginning on October 1, 2007. The
facility serves as our headquarters and research and development and
manufacturing facility. This property is in good condition and is suitable and
adequate for our uses. We do not believe this property is subject to any
material competitive conditions. Our management is of the opinion that this
property is adequately covered by insurance.

INVESTMENT POLICIES

     We do not invest, nor do we plan to invest in the foreseeable future in
real estate, interests in real estate, real estate mortgages or securities of or
interests in persons primarily engaged in real estate activities. This policy
may be changed without a vote of security holders.

ITEM 3.  LEGAL PROCEEDINGS.

     We are not a party to any pending legal proceeding, other than routine
litigation that is incidental to our business, and are not aware of any
proceeding contemplated by a governmental authority against us.

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2006.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET FOR COMMON EQUITY

     Our common stock has been quoted on the Over-the-Counter Bulletin Board
since February 1, 2005 under the symbol "ESNR.OB". Prior to February 1, 2005
Bluestone Ventures's common stock was quoted on the Over-the-Counter Bulletin
Board under the symbol "BLUV.OB". There is currently no broadly followed,
established public trading market for our common stock. The quarterly range of
high and low Over-the-Counter Bulletin Board quotation information for our
common stock for the last two

                                       8
<PAGE>

fiscal years is set forth below. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.

                       QUARTERLY COMMON STOCK PRICE RANGES

               QUARTER ENDED                        2006
             -------------------              ----------------
                                               HIGH      LOW
                                              ------    ------
             December 31                      $  .48    $  .21
             September 30                        .40       .20
             June 30                             .29       .17
             March 31                            .41       .19

               QUARTER ENDED                        2005
             -------------------              ----------------
                                               HIGH      LOW
                                              ------    ------
             December 31                      $  .62    $  .27
             September 30                       1.19       .42
             June 30                            2.50      1.07
             February - March 31                2.51      1.90

     Source: Yahoo! Finance.

     There were 52 record holders of our common stock as of March 1, 2007. This
number does not include an indeterminate number of shareholders whose shares are
held by brokers in street name.

     We have not paid dividends on our common stock since our inception. The
decision to pay dividends on common stock is within the discretion of our Board
of Directors. It is our current policy to retain any future earnings to finance
the operations and growth of our business. Accordingly, we do not anticipate
paying any dividends on common stock in the foreseeable future.

                                       9
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The following table illustrates, as of December 31, 2006, information
relating to all of our equity compensation plans:

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                                                              NUMBER OF SECURITIES
                                          NUMBER OF SECURITIES TO BE    WEIGHTED AVERAGE       REMAINING AVAILABLE
                                           ISSUED UPON EXERCISE OF      EXERCISE PRICE OF      FOR FUTURE ISSUANCE
                                             OUTSTANDING OPTIONS,      OUTSTANDING OPTIONS,     UNDER THE EQUITY
PLAN CATEGORY                                WARRANTS AND RIGHTS       WARRANTS AND RIGHTS      COMPENSATION PLAN
----------------------------              --------------------------   -------------------    ----------------------
<S>                                                        <C>                        <C>                  <C>
Equity compensation plans
 approved by security holders                                      0                   N/A                         0

Equity compensation plans not
 approved by security holders                              1,191,500                  $.89                 3,808,500(1)

Total                                                      1,191,500                  $.89                 3,808,500
</TABLE>

(1)     This amount represents the remainder of the 5,000,000 shares of our
common stock authorized for issuance under the Electronic Sensor Technology,
Inc. 2005 Stock Incentive Plan, less 1,191,500, the number of shares of common
stock underlying outstanding options granted pursuant to the Stock Incentive
Plan as of December 31, 2006. In addition, subsequent to December 31, 2006,
under our Stock Incentive Plan, we issued options to purchase 1,239,700 shares
of common stock on January 16, 2007 and options to purchase 418,250 shares of
common stock on March 5, 2007. Consequently, as of the date of this annual
report, 2,150,550 shares remain available for future issuance under our Stock
Incentive Plan.

ELECTRONIC SENSOR TECHNOLOGY, INC. 2005 STOCK INCENTIVE PLAN

     A description of the Electronic Sensor Technology, Inc. 2005 Stock
Incentive Plan is set forth in Note 7 to the company's consolidated financial
statements under the heading "Options" included in this annual report and is
incorporated herein by reference.

RECENT SALES OF UNREGISTERED SECURITIES

     We did not sell any unregistered equity securities or repurchase any of our
equity securities during the three months ended December 31, 2006.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

     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.

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 shipment 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.

                                       10
<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, 2006 no assets were impaired.

     We account for liquidated damages during 2006 and 2005 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". In December 2006, FASB issued FASB Staff
Position No. EITF 00-19-2 "Accounting for Registration Payment Arrangements"
("FSP 00-19-2"), which superseded EITF 05-04. FSP 00-19-2 provides that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, should be separately
recognized and measured in accordance with FASB Statement No.5, "Accounting for
Contingencies". The registration statement payment arrangement should be
recognized and measured as a separate unit of account from the financial
instrument(s) subject to that arrangement. If the transfer of consideration
under a registration payment arrangement is probable and can be reasonably
estimated at inception, such contingent liability is included in the allocation
of proceeds from the related financing instrument. Pursuant to EITF 05-04, View
C, the liquidated damages paid 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.
FSP00-19-2 did not have an impact on our accounting of the liquidated damages.

     We registered all shares underlying the convertible debentures as well as
all shares underlying the warrants related to the convertible debentures on
November 21, 2006, and December 21, 2006, respectively.

     We account for 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, which are measured at the balance sheet date, are
recognized as other expense or other income, respectively.

     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
$2,000,000 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, 2006, 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.

                                       11
<PAGE>

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

     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, 2006 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2005

     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 %
                                                --------------------------------         2006 vs         2006 vs
                                                    2006              2005                2005            2005
                                                --------------    --------------     --------------   --------------
In $
<S>                                             <C>               <C>                   <C>              <C>
REVENUES                                        $    2,180,208    $    2,122,349            57,859              2.7%
COST OF SALES                                        1,085,056         1,302,602          (217,546)           (16.7%)
                                                --------------    --------------    --------------    ---------------
   GROSS PROFIT                                      1,095,152           819,747           275,405             33.6%

OPERATING EXPENSES:
  Research and development                             833,791           260,125           573,666            220.5%
  Selling                                              822,954           653,092           169,862             26.0%
  Compensation                                         655,045           466,421           188,624             40.4%
  General and administrative                         1,200,800         1,522,451          (321,651)           (21.1%)
                                                --------------    --------------    --------------    ---------------
   TOTAL OPERATING EXPENSES                          3,512,590         2,902,089           610,501             21.0%
                                                --------------    --------------    --------------    ---------------
LOSS FROM OPERATIONS                                (2,417,438)       (2,082,342)         (335,096)           (16.1%)

OTHER INCOME AND EXPENSE:
  Other income - derivative liabilities              2,414,605         7,577,929        (5,163,324)           (68.1%)
  Other expense - derivative liabilities                     0        (2,401,358)        2,401,358            100.0%
  Other income                                           2,140                               2,140              NM**
  Gain (loss) on sale of property and equipment         (1,615)            9,287           (10,902)          (117.4%)
  Interest expense                                  (2,809,682)         (324,540)       (2,485,142)          (765.7%)
                                                --------------    --------------    --------------    ---------------
   TOTAL OTHER INCOME (EXPENSE)                       (394,552)        4,861,318        (5,255,870)          (108.1%)
                                                --------------    --------------    --------------    ---------------
NET INCOME LOSS                                 $   (2,811,990)   $    2,778,976        (5,590,966)          (201.2%)
                                                ==============    ==============    --------------    ---------------
</TABLE>

                                       12
<PAGE>

**NM = not meaningful.

     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,
                                   ----------------------
                                      2006        2005
                                   ----------  ----------
As a % of revenues
REVENUES                                100%        100%
COST OF SALES                            49%         61%
GROSS PROFIT                             51%         39%
OPERATING EXPENSES                      161%        136%
LOSS FROM OPERATIONS                   (110%)       (97%)
OTHER INCOME AND EXPENSE                (18%)       229%
NET INCOME (LOSS)                      (128%)       132%

     Revenues primarily consist of the sale of our zNose products. Revenues in
2006 were better than 2005 due to slightly higher sales volume. Product revenues
increased approximately 2.5% over 2005 as a result of a greater number of zNose
units shipped, 58 units versus 56 units. Product support sales improved 8% over
2005 primarily due to greater revenues generated from training and technical
support.

     Cost of Sales primarily consists of manufacturing costs and licensing fees.
Cost of sales as a percentage of revenues improved from 61% in 2005 to 49% in
2006. The improvement was due to sales mix in which lower cost products
accounted for a larger percentage of sales in 2006 than in 2005. There were also
some additional production efficiencies achieved through refinement of the
production process.

     Research and development expenses primarily consist 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 2006 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.

     Selling expenses primarily consist of salaries, commissions and related
benefits associated with our selling and marketing efforts. The increase in
selling expenses during 2006 when compared to 2005 is attributable to an
increase in personnel on the marketing staff as well as greater expenditures for
advertising, promotion and attendance at trade shows.

     Compensation expenses primarily consist of salaries and related benefits of
our general and administrative personnel. The increase in compensation expenses
during 2006 when compared to 2005 is primarily attributable to payment of
severance to the former President and Chief Executive Officer of the company and
an increase in personnel to support the growth of our operations.

     General and administrative expenses for 2006 were 21% less than 2005. The
improvement of approximately $322,000 resulted primarily from non-recurring
professional fees associated with the company's reverse merger in 2005. The
improvement was offset by an increase in personnel to support the company's
growth.

                                       13
<PAGE>

     Other income - derivative liabilities primarily consists of the decrease in
the fair value of derivative liabilities between balance sheet dates. The
decrease in other income-derivative liabilities during 2006 when compared to
2005 is primarily attributable to a decrease in the fair value of our stock
between issuance of the derivative contracts and the measurement dates during
2005.

     Other expense - derivative liabilities primarily consists of the
recognition of derivative liabilities we issued during 2005. No such derivatives
were issued during 2006.

     Interest expense primarily consists of debt discount amortization and
interest on certain debt. The increase in interest expense during 2006 when
compared to 2005 is primarily attributable to the recognition of debt discount
amortization associated with the issuance of convertible debentures in December
2005. In 2005, only one month's debt discount amortization was recognized while
twelve (12) months of debt discount amortization was recorded to interest
expense in 2006.

LIQUIDITY AND CAPITAL RESOURCES

     Our cash and cash equivalents amounted to approximately $1.094 million at
December 31, 2006.

     During 2006, we used approximately $2.963 million in our operating
activities which is the result of the following:

          o    A net loss of approximately $2.812 million adjusted for:

               o    the amortization of debt discount of approximately $2.333
                    million, amortization of deferred financing costs of
                    approximately $182,000 and a decrease in the fair value of
                    the derivative liabilities of approximately $2.415 million.

          o    An increase in inventories of approximately $383,000 for
               materials required for the production of several new products
               introduced during the year. A decrease in accounts receivable and
               accounts payable and accrued expenses of approximately $165,000,
               and $77,000 respectively, due to better collection efforts and
               control over expenditures.

     During 2006, we used approximately $162,000 in investing activities mostly
for purchase of property and equipment of approximately $129,000.

     During 2006, we did not have any financing activities.

     The company has a revolving line of credit for borrowings up to $500,000
with East West Bank. The line of credit is collateralized with a certificate of
deposit in the amount of $250,000. Borrowings under this agreement bear interest
at prime. The maturity date of the line of credit is March 31, 2007 and the line
of credit is in the process of being renewed with East West Bank.

     During 2005, we used approximately $2.945 million in our operating
activities which is the result of the following:

          o    A net income of approximately $2.779 million adjusted for:

               o    the recognition of derivative liabilities of approximately
                    $2.401 million resulting from the issuance of such
                    derivative (convertible debentures and warrants) and a
                    decrease in the fair value of the derivative liabilities of
                    approximately $7.578 million.

          o    An increase in accounts receivables, inventories, and accounts
               payable and accrued expenses of approximately $435,000, $459,000,
               $267,000, respectively, resulting from increased revenues,
               increased production to meet the increased demand for our
               products and a general increase in our expenses associated with
               our growth.

     During 2005, we used approximately $1.001 million in investing activities
by purchasing a certificate of deposit of approximately $919,000 to satisfy
collateral requirement of our line of credit and by incurring capital
expenditures of approximately $127,000.

                                       14
<PAGE>

     During 2005, we generated approximately $8.140 million in financing
activities by generating proceeds of approximately $7.000 million and $3.812
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 $1.969 million and by paying financing costs of approximately
$593,000.

     Although Electronic Sensor Technology possesses a bank operating line of
credit, there can be no assurance that these proceeds 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
expanding our 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, 2006, our cash balance and working capital were
$1,796,223 and $3,215,511, respectively. Our current monthly cash burn rate is
approximately less than $200,000 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, the cash balance in the bank and
our sales backlog of approximately $1.750 million; we believe that we will not
require any financing until the first half of 2008. 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.

                                       15
<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, 2006                           F-2

Consolidated Statements of Operations for the Year Ended
 December 31, 2006                                                           F-3

Consolidated Statement of Changes in Stockholders' Deficit for the
 Period from January 1, 2005 to December 31, 2006                            F-4

Consolidated Statements of Cash Flows for the Year Ended
 December 31, 2006                                                           F-5

Notes to Consolidated Financial Statements                                   F-6

                                       16
<PAGE>

[GRAPHIC OMITTED]                                               805 Third Avenue
                                                                      21st Floor
                                                              New York, NY 10022
                                                               Tel: 212-838-5100
                                                               Fax: 212-838-2676
                                                       e-mail: info@sherbcpa.com
SHERB & CO., LLP                                 Offices in New York and Florida
--------------------------------------------------------------------------------

             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, 2006 and the related consolidated statements
of operations, changes in stockholders' deficit and cash flows for the years
ended December 31, 2006 and 2005. 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. 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 audits provide 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, 2006 and the consolidated results of its operations and
its cash flows for the years ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of America.


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

New York, New York
February 16, 2007


                                       F-1
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2006
                                     ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                    $    1,094,141
  Certificate of deposit                                              702,082
  Certificate of deposit-restricted                                   250,000
  Accounts receivable, net of allowance for
   doubtful accounts of $24,362                                       300,413
  Prepaid expenses                                                     78,770
  Inventories                                                       1,285,690
                                                               --------------
     TOTAL CURRENT ASSETS                                           3,711,096
                                                               --------------
DEFERRED FINANCING COSTS, net of amortization of $198,845             529,515
PROPERTY AND EQUIPMENT, net of accumulated
 depreciation of $960,650                                             197,788
SECURITY DEPOSITS                                                      12,817
                                                               --------------
                                                               $    4,451,216
                                                               ==============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                        $      403,918
  Deferred revenues                                                    91,667
  Derivative liabilities                                            3,356,473
                                                               --------------
     TOTAL CURRENT LIABILITIES                                      3,852,058
                                                               --------------
CONVERTIBLE DEBENTURES, net of unamortized discount
 of $4,472,223                                                      2,527,777
                                                               --------------
     TOTAL LIABILITIES                                              6,379,835
                                                               --------------
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, 54,173,745 issued and outstanding                54,174
  Additional paid-in capital                                        8,516,354
  Accumulated deficit                                             (10,499,147)
                                                               --------------
     TOTAL STOCKHOLDERS' DEFICIT                                   (1,928,619)
                                                               --------------
                                                               $    4,451,216
                                                               ==============

                 See notes consolidated to financial statements

                                       F-2
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     Year Ended
                                                                     December 31,
                                                          ----------------------------------
                                                               2006               2005
                                                          ---------------    ---------------
<S>                                                       <C>                <C>
REVENUES                                                  $     2,180,208    $     2,122,349
COST OF SALES                                                   1,085,056          1,302,602
                                                          ---------------    ---------------
   GROSS PROFIT                                                 1,095,152            819,747
                                                          ---------------    ---------------
OPERATING EXPENSES:
  Research and development                                        833,791            260,125
  Selling                                                         822,954            653,092
  Compensation                                                    655,045            466,421
  General and administrative                                    1,200,800          1,522,451
                                                          ---------------    ---------------
   TOTAL OPERATING EXPENSES                                     3,512,590          2,902,089
                                                          ---------------    ---------------
LOSS FROM OPERATIONS                                           (2,417,438)        (2,082,342)
                                                          ---------------    ---------------

OTHER INCOME AND EXPENSE:
  Other income - derivative liabilities                         2,414,605          7,577,929
  Other expense - derivative liabilities                                -         (2,401,358)
  Other income                                                      2,140
  Gain (loss) on sale of property and equipment                    (1,615)             9,287
  Interest expense                                             (2,809,682)          (324,540)
                                                          ---------------    ---------------
   TOTAL OTHER INCOME (EXPENSE)                                  (394,552)         4,861,318
                                                          ---------------    ---------------
NET INCOME (LOSS)                                         $    (2,811,990)   $     2,778,976
                                                          ===============    ===============
  Earnings (loss) per share, basic                        $         (0.05)   $          0.05
                                                          ===============    ===============
  Weigthed average number of shares, basic                     54,166,872         53,636,560
                                                          ===============    ===============
  Earnings (loss) per share, diluted                      $         (0.10)   $         (0.04)
                                                          ===============    ===============
  Weighted average number of shares, diluted                   54,166,872         53,636,560
                                                          ===============    ===============
</TABLE>

                 See notes to consolidated financial statements

                                       F-3
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                               Common Stock                Preferred Stock       Additional
                                     --------------------------------    -------------------      Paid-In
                                         Shares            Amount         Shares     Amount       Capital
                                     --------------    --------------    --------   --------   --------------
<S>                                     <C>            <C>                      <C>    <C>     <C>
BALANCE - January 1, 2005                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                                      -                 -           -          -                -
                                     --------------    --------------    --------   --------   --------------
BALANCE - December 31, 2005              54,098,745            54,099           -          -        8,495,429
  Issuance of shares for
   services                                  75,000                75           -          -           20,925
  Net (loss)                                      -                 -           -          -                -
                                     --------------    --------------    --------   --------   --------------
BALANCE - December 31, 2006              54,173,745    $       54,174           -   $      -   $    8,516,354
                                     ==============    ==============    ========   ========   ==============
<CAPTION>
                                                            Total
                                       Accumulated      Stockholders'
                                         Deficit           Deficit
                                      --------------    --------------
<S>                                   <C>               <C>
BALANCE - January 1, 2005             $  (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
                                      --------------    --------------
BALANCE - December 31, 2005               (7,687,157)          862,371
  Issuance of shares for
   services                                        -            21,000
  Net (loss)                              (2,811,990)       (2,811,990)
                                      --------------    --------------
BALANCE - December 31, 2006           $  (10,499,147)   $   (1,928,619)
                                      ==============    ==============
</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,
                                                                                        -----------------------------
                                                                                             2006            2005
                                                                                        --------------    -----------
<S>                                                                                     <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                     $   (2,811,990)   $ 2,778,976
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in)operating activities:
    Depreciation and amortization                                                               43,756         21,300
    Increase in reserve for obsolescence                                                        36,483              -
    Issuance of shares for services                                                             21,000         74,950
    Recognition of derivative liabilities                                                                   2,401,358
    Amortization of debt discount                                                            2,333,333        194,444
    Amortization of deferred financing costs                                                   181,547         17,297
    Decrease in fair value of derivative liability                                          (2,414,606)    (7,577,929)
  Changes in assets and liabilities:
    Accounts receivable                                                                        165,363       (435,089)
    Inventories                                                                               (382,551)      (458,974)
    Prepaid expenses                                                                            (8,834)       (55,679)
    Security deposits                                                                                -            140
    Accounts payable and accrued expenses                                                      (76,881)       266,578
    Deferred revenues                                                                          (50,000)       (50,000)
    Due to related party                                                                             -        (60,000)
    Interest payable                                                                                 -        (26,961)
    Other current liabilities                                                                        -        (35,665)
                                                                                           -----------    -----------
  Net cash provided by (used in) operating activities                                       (2,963,380)    (2,945,254)
CASH FLOWS FROM INVESTING ACTIVITIES:
    Decrease (increase) in restricted certificate of deposit                                   (33,404)      (918,678)
    Proceeds from sale of property and equipment                                                     -         43,933
    Purchase of property and equipment                                                        (128,997)      (126,582)
                                                                                           -----------    -----------
  Net cash provided by (used in) investing activities                                         (162,401)    (1,001,327)
                                                                                           -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Increase (decrease) in line of credit                                                            -     (1,969,137)
    Repayment of partners' loans payable                                                             -       (110,000)
    Proceeds from issuance of common stock                                                           -      3,811,708
    Proceeds from convertible debentures                                                             -      7,000,000
    Payment of deferred financing costs                                                              -       (592,500)
                                                                                           -----------    -----------
  Net cash provided by financing activities                                                          -      8,140,071
                                                                                           -----------    -----------
NET INCREASE (DECREASE) IN CASH                                                             (3,125,780)     4,193,491
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                               4,219,921         26,430
                                                                                           -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                   $ 1,094,141    $ 4,219,921
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid during the period for:
    Interest                                                                               $   578,280    $   102,928
                                                                                           ===========    ===========
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              $         -    $ 7,000,000
   debentures                                                                              ===========    ===========
  Fair value of derivative liability recorded as deferred financing costs                  $         -    $ 7,000,000
                                                                                           ===========    ===========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-5
<PAGE>

                       ELECTRONIC SENSOR TECHNOLOGY, INC.
                          Notes to Financial Statements
                                December 31, 2006

(1)  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS

     Electronic Sensor Technology, 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 Electronic Sensor Technology and accounted for as a reverse acquisition.
     Prior to the merger, Bluestone was a non-operating public shell and
     Electronic Sensor Technology was a privately-held operating limited
     partnership. Accordingly, the accompanying financial statements include the
     accounts of Electronic Sensor Technology, L.P., for the period from January
     1, 2005 to December 31, 2006 and the accounts of Bluestone from February 1,
     2005 to December 31, 2006.

     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 had cash and cash equivalents amounting to $1,094,141 at December
     31, 2006.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

     The allowance for doubtful accounts is based on the Company's assessment of
     the collectibility of customer accounts and the aging of the accounts
     receivable. If there is a deterioration of a major customer's credit
     worthiness or actual defaults are higher than the Company's historical
     experience, the Company's estimates of the recoverability of amounts due it
     could be adversely affected. The Company regularly reviews the adequacy of
     the Company's allowance for doubtful accounts through identification of
     specific receivables where it is expected that payments will not be
     received. The Company also establishes an unallocated reserve that is
     applied to all amounts that are not specifically identified. In determining
     specific receivables where collections may not be received, the Company
     reviews past due receivables and gives consideration to prior collection
     history and changes in the customer's overall business condition. The
     allowance for doubtful accounts reflects the Company's best estimate as of
     the reporting dates. Changes may occur in the future, which may require the
     Company to reassess the collectibility of amounts and at which time the
     Company may need to provide additional allowances in excess of that
     currently provided.

     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 issued by

                                       F-6
<PAGE>

     the Company in December 2005 amounts to $7,000,000, based on the Company's
     incremental borrowing rate. The carrying value of the derivative
     liabilities 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.
     The Company's largest customer accounted for 91% of its net accounts
     receivable at December 31, 2006. No other customers accounted for more than
     5% 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.

     CUSTOMER CONCENTRATION RISK

     One of the Company's customers accounted for 42% of its revenues during
     2006. This same customer accounted for 29% of the Company's revenues in
     2005. 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, 2006:

          Machinery and equipment          $   852,255
          Leasehold improvements                39,500
          Office furniture and equipment       266,683
                                           -----------
                                             1,158,438
          Accumulated depreciation            (960,650)
                                           -----------
                                           $   197,788
                                           ===========

     Depreciation expense amounted to approximately $43,800 and $21,300 during
     2006 and 2005, respectively.

                                       F-7
<PAGE>

     DEFERRED FINANCING COSTS

     Deferred financing costs consist 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.

     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 54,190,546 and 45,612,115 at
     December 31, 2006 and 2005, respectively. The outstanding options, warrants
     and shares equivalent issuable pursuant to embedded conversion features and
     warrants at December 31, 2006 and 2005, respectively, 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 the period. However, the Company
     did not adjust the numerator for interest charges during the period 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>
                                                                             2006            2005
                                                                         ------------    ------------
Numerator:
<S>                                                                        <C>             <C>
  Net (loss) income                                                      $ (2,811,990)   $  2,778,976
Net other income (expense) associated with derivative contracts            (2,414,605)     (5,176,571)
                                                                         ------------    ------------
Net loss for diluted earnings per share purposes                         $ (5,226,595)   $ (2,397,595)
                                                                         ============    ============
Denominator:
  Denominator for basic earnings per share - Weighted average shares
   outstanding                                                             54,166,872      53,636,560
  Effect of dilutive warrants, embedded conversion features and
   liquidated damages                                                               -               -
                                                                         ------------    ------------
  Denominator for diluted earnings per share - Weighted average shares     54,166,872      53,636,560
   outstanding                                                           ============    ============
</TABLE>

                                       F-8
<PAGE>
                                                2006            2005
                                            ------------    ------------
Basic earnings (loss) per share             $      (0.05)   $       0.05
                                            ============    ============
Diluted earnings (loss) per share           $      (0.10)   $      (0.04)
                                            ============    ============

     STOCK-BASED COMPENSATION

     In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
     which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS
     No. 123(R), companies are required to measure the compensation costs of
     share-based compensation arrangements based on the grant-date fair value
     and recognize the costs in the financial statements over the period during
     which employees are required to provide services. Share-based compensation
     arrangements include stock options, restricted share plans,
     performance-based awards, share appreciation rights and employee share
     purchase plans. In March 2005 the SEC issued Staff Accounting Bulletin No.
     107, or "SAB 107". SAB 107 expresses views of the staff regarding the
     interaction between SFAS No. 123(R) and certain SEC rules and regulations
     and provides the staff's views regarding the valuation of share-based
     payment arrangements for public companies. SFAS No. 123(R) permits public
     companies to adopt its requirements using one of two methods. On April 14,
     2005, the SEC adopted a new rule amending the compliance dates for SFAS No.
     123(R). Companies may elect to apply this statement either prospectively,
     or on a modified version of retrospective application under which financial
     statements for prior periods are adjusted on a basis consistent with the
     pro forma disclosures required for those periods under SFAS 123. Effective
     January 1, 2006, the Company has fully adopted the provisions of SFAS No.
     123(R) and related interpretations as provided by SAB 107. 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 applies this statement
     prospectively.

     ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses at December 31, 2006 consist
     primarily of vendor payables.

     DEFERRED REVENUES

     Deferred revenues at December 31, 2006 amounted to $91,667. 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 $50,000 pursuant to this
     agreement during 2006 and 2005, respectively.

     DERIVATIVE LIABILITIES

     The Company accounted for its liquidated damages during 2006 and 2005
     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".
     In December 2006, FASB issued FASB Staff Position No. EITF 00-19-2
     "Accounting for Registration Payment Arrangements" ("FSP 00-19-2"), which
     superseded EITF 05-04. FSP 00-19-2 provides that the contingent obligation
     to make future payments or otherwise transfer consideration under a
     registration payment arrangement, should be separately recognized and
     measured in accordance with FASB Statement No.5, "Accounting for
     Contingencies". The registration statement payment arrangement should be
     recognized and measured as a separate unit of account from the financial
     instrument(s) subject to that arrangement. If the transfer of consideration
     under a registration payment arrangement is probable and can be reasonably
     estimated at inception, such contingent liability is included in the
     allocation of proceeds from the related financing instrument. Pursuant to
     EITF 05-04, View C, the liquidated damages paid 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. FSP00-19-2 did not have an impact on the
     Company's accounting of the liquidated damages.

     The Company registered all shares underlying the convertible debentures as
     well as all shares underlying the warrants related to the convertible
     debentures on November 21, 2006, and December 21, 2006, respectively.

     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 and a

                                       F-9
<PAGE>

     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.

     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.

     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.

     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, 2006 no assets were
     impaired.

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5,
     "Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
     Instruments on Redeemable Shares". FSP 150-5 clarifies that warrants on
     shares that are redeemable or puttable immediately upon exercise and
     warrants on shares that are redeemable or puttable in the future qualify as
     liabilities under SFAS 150, regardless of the redemption feature or
     redemption price. The FSP is effective for the first reporting period
     beginning after September 30, 2005, with resulting changes to prior period
     statements reported as the cumulative effect of an accounting change in
     accordance with the transition provisions of SFAS 150. We adopted the
     provisions of FSP 150-5 on July 1, 2005, which did not have a material
     effect on our financial statements.

                                      F-10
<PAGE>

     In July 2005, the FASB issued EITF 05-6, "Determining the Amortization
     period for Leasehold Improvements Purchased After Lease Inception or
     Acquired in a Business Combination", which addressed the amortization
     period for leasehold improvements made on operating leases acquired
     significantly after the beginning of the lease. The EITF is effective for
     leasehold improvements made in periods beginning after June 29, 2005. We
     adopted the provisions of EITF 05-6 on July 1, 2005, which did not have a
     material impact to the Company's financial position, results of operations
     and cash flows.

     In September 2006, the FASB issued FASB Statement No. 157. This Statement
     defines fair value, establishes a framework for measuring fair value in
     generally accepted accounting principles (GAAP), and expands disclosures
     about fair value measurements. This Statement applies under other
     accounting pronouncements that require or permit fair value measurements,
     the Board having previously concluded in those accounting pronouncements
     that fair value is a relevant measurement attribute. Accordingly, this
     Statement does not require any new fair value measurements. However, for
     some entities, the application of this Statement will change current
     practices. This Statement is effective for financial statements for fiscal
     years beginning after November 15, 2007. Earlier application is permitted
     provided that the reporting entity has not yet issued financial statements
     for that fiscal year. Management believes this Statement will have no
     impact on the financial statements of the Company once adopted.

     On July 13, 2006, the Financial Accounting Standards Board (FASB) issued
     FASB Interpretation No. 48, ("FIN 48"), entitled, "Accounting for
     Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109".
     Concurrently, FASB issued a FASB staff position (FSP) relating to income
     taxes, (FSP) No. FAS 13-2, "Accounting for a Change or Projected Change in
     the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged
     Lease Transaction." FASB's summary of FIN 48 notes that differences between
     tax positions recognized in the financial statements and tax positions
     taken in the tax return (referred to commonly as "book" vs. "tax") will
     generally result in: (a) an increase in a liability for income taxes
     payable or a reduction of an income tax refund receivable, (b) a reduction
     in a deferred tax asset or an increase in a deferred tax liability, or (c)
     both of the above. FIN 48 requires the affirmative evaluation that it is
     more likely than not, based on the technical merits of a tax position, that
     an enterprise is entitled to economic benefits resulting from positions
     taken in income tax returns. Further, if a tax position does not meet the
     more-likely-than-not recognition threshold, the benefit of that position is
     not recognized in the financial statements. Additionally, FIN 48
     establishes guidance for "derecognition" of previously recognized deferred
     tax items, and sets forth disclosure requirements. The effective date of
     FIN 48 is for fiscal years beginning after December 15, 2006. The Company
     does not believe that FIN 48, once adopted, will have a significant impact
     on its financial position, operating results, or cash flows.

(2)  Inventory

     Inventory at December 31, 2006 consist of the following:

          Finished goods             $   403,701
          Work-in-process                494,451
          Raw materials                  424,020
          Reserve for obsolescence       (36,482)
                                     -----------
                                     $ 1,285,690
                                     ===========

     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 equal to 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
     of the measurement date.

(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 any time on or prior to the
     maturity date at the option of the debenture holder at a conversion price
     of $0.4544, which was subsequently reduced to $0.4000 as per a Forbearance
     and Amendment Agreement, dated September 7, 2006, with the holders of the
     convertible debentures (see Note 5), and can be redeemed at the lesser of
     $0.4000 or 90% of the average of the volume weighted average price for the
     20 consecutive trading days immediately prior to the conversion date. The
     Company received $7,000,000 in cash as consideration. The convertible

                                       F-11
<PAGE>

     debentures bear interest at 8%, payable in cash or stock, at the Company's
     option, and are required to be redeemed in 9 equal quarterly payments
     commencing January 1, 2008, in cash or stock, at the Company's option. If
     the Company chooses to pay interest on or redeem the debentures in shares
     of the Company's common stock, rather than in cash, the conversion rate for
     such stock payment is the lesser of $0.4544, which was subsequently reduced
     to $0.4000 as per a Forbearance and Amendment Agreement, dated September 7,
     2006, with the holders of the convertible debentures (see Note 5), or 90%
     of the average of the volume weighted average price for the 20 consecutive
     trading days immediately prior to the interest payment or redemption date,
     as applicable.

     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, which was subsequently reduced to
     $0.4300 per share as per a Forbearance and Amendment Agreement, dated
     September 7, 2006, with the holders of the warrants (see Note 5).
     Furthermore, the Company granted liquidated damages pursuant to a
     registration rights agreement.

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

          a.   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
               (which was subsequently extended to February 28, 2007 as per a
               Forbearance and Amendment Agreement, dated September 7, 2006,
               with the holders of the convertible debentures and warrants - see
               Note 5). The registration statement covering the shares
               underlying the convertible debentures was declared effective on
               November 21, 2006;

          b.   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 7, 2005 (which was subsequently
               extended to February 28, 2007 as per a Forbearance and Amendment
               Agreement, dated September 7, 2006 with the holders of the
               convertible debentures and warrants (see Note 5) - the
               registration statements covering the shares underlying the
               convertible debentures and warrants were declared effective on
               November 21 and December 21, 2006, respectively). 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;

          c.   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; and

          d.   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 (and was
               subsequently reduced to $0.4300 per share as per a Forbearance
               and Amendment Agreement, dated September 7, 2006, with the
               holders of the warrants - see Note 5), may be further reduced 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 (which was
               subsequently extended to February 28, 2007 as per a Forbearance
               and Amendment Agreement, dated September 7, 2006 with the holders
               of the warrants - see Note 5). The registration statement
               covering the shares underlying the warrants was declared
               effective on December 21, 2006.

     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
     approximated $181,500 for the year ending December 31, 2006.

                                      F-12
<PAGE>

     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.

     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.

(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 the
     registration 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 pursuant to which the warrants were issued and the
     registration rights were granted provided for liquidated damages pursuant
     to demand registration rights in the event of a failure to timely register
     the shares after demand is made by the holders of a majority of the
     warrants and shares of common stock issued pursuant to such agreement. 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 amounts 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 agreement, 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, 2006 is as follows:

                                   At issuance       At December 31, 2006
                               ------------------    --------------------
     Freestanding warrants     $        6,017,350    $                  0

     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, 2006
                                ---------------     --------------------
     Market price:                        $2.40                    $0.24
     Exercise price:                      $1.00                    $1.00
     Term:                              3 years               1.33 years
     Volatility:                            39%                      39%
     Risk-free interest rate:             2.78%                    4.74%
     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 timely filed). The default provisions are
     effective, at the holders' option, upon 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, which was subsequently
     reduced to $0.4000 as per a Forbearance and Amendment Agreement, dated
     September 7, 2006, with the holders of the convertible debentures (see Note
     5), 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

                                      F-14
<PAGE>

     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.

     In connection with the issuance of the convertible debentures, the Company
     granted liquidated damages pursuant to a registration rights agreement. The
     liquidated damages results 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 (which was
     subsequently extended to February 28, 2007 as per a Forbearance and
     Amendment Agreement, dated September 7, 2006 with the holders of the
     convertible debentures - see Note 5). The registration statement covering
     the shares underlying the convertible debentures was declared effective on
     November 21, 2006.

     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, 2006 are as follows:

                                      At Issuance   At December 31, 2006
                                     ------------   --------------------
     Freestanding warrants           $  3,532,348   $            504,621
     Embedded conversion features       3,463,542              2,851,852
     Liquidated damages                   192,500                      0
     Other outstanding warrants           143,268                      0

     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 that would be
     issuable pursuant to its assumptions. The Company revisits the weight of
     probabilities and the likelihood of scenarios at each measurement date 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, 2006
                                     ---------------     --------------------
     Market price:                   $        0.4880     $               0.24
     Conversion price:               $        0.4544     $               0.22
     Term:                                   4 years               2.92 years
     Volatility:                                 39%                      39%
     Risk-free interest rate:                  4.39%                    4.74%

     Freestanding warrants

     The derivative liability amounts to the fair value of the warrants issuable
     upon exercise. 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, 2006
                                     ---------------     --------------------
     Market price:                   $         0.488     $               0.24
     Exercise price:                 $        0.4761     $               0.43
     Term:                                   5 years               3.92 years
     Volatility:                                 39%                      39%
     Risk-free interest rate:                  4.39%                    4.74%

     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 $192,500 and $0 at the date of the
     grant of the registration rights and at December 31, 2006, respectively.

     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 was recorded as other expenses in December 2005.
     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 their issuance
     in 2005 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 and charged to other expenses (in 2005), and approximately
     $136,000 was allocated to deferred financing costs (in 2005).

     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,
     amounted to approximately $2.4 million and $5.2 million, and have been
     recorded as other income in 2006 and 2005, respectively.

(5)  FORBEARANCE AND AMENDMENT AGREEMENT

     On September 7, 2006, the Company entered into a Forbearance and Amendment
     Agreement with the holders of the convertible debentures and warrants that
     we issued in a private placement on December 7, 2005. The terms of the
     convertible debentures and warrants required that we register the shares of
     our common stock underlying such debentures and warrants within 180 days of
     the date of issuance of the debentures and warrants. The failure to do so
     is an event of default under the debentures, giving the holders the right
     to accelerate the debentures and receive a premium of approximately 30% of
     the outstanding amounts due under the debentures upon acceleration. The
     failure to do so also reduces the exercise price of the warrants by $0.03
     per month until such shares are registered. In addition, the failure to
     register such shares within 150 days of the date of issuance of the
     debentures and warrants gives the holders the right to receive liquidated
     damages in the amount of 2% per month of the purchase price of the
     debentures and warrants, pursuant to a registration rights agreement, and
     the failure to pay such liquidated damages relating to the debentures is an
     event of default under the debentures.

     Pursuant to the Forbearance and Amendment Agreement, the holders agreed,
     among other things, to abstain from exercising the aforementioned rights
     and remedies arising out of the existing defaults under the debentures and
     warrants unless we were unable to register the shares underlying the
     convertible debentures and the warrants by February 28, 2007. In exchange
     for such forbearance, the Company agreed to reduce the conversion price of
     the debentures issued on December 7, 2005 from $0.4544 per share to $0.4000
     per share and to reduce the exercise price of the warrants issued to the
     holders of the convertible debentures on such date from $0.4761 per share
     to $0.4300 per share. The registration statements covering the shares
     underlying the convertible debentures and warrants were declared effective
     on November 21 and December 21, 2006, respectively.

     The Forbearance and Amendment Agreement provides for revised probabilities
     and likely outcomes that the Company will use in its valuation of the
     embedded conversion features, the freestanding warrants and the liquidated
     damages associated with the issuance of the convertible debentures, as
     required by SFAS 133, paragraph 17. Such valuation is performed at each
     balance sheet date.

                                      F-16
<PAGE>

(6)  LINE OF CREDIT

     The Company has a revolving line of credit agreement for borrowings up to
     $500,000. Borrowings under this agreement bear interest at prime and are
     collateralized with a certificate of deposit in the amount of $250,000. No
     amounts were due under this line of credit at December 31, 2006.

(7)  STOCKHOLDERS' DEFICIT

     COMMON STOCK

     Shares issued pursuant to services

     During January 2006, the Company issued 75,000 shares of common stock to
     its former chief executive officer for services rendered. The fair value of
     such shares amounted to approximately $21,000 based on the quoted price of
     the Company's shares at the date of issuance.

     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.

                                      F-17
<PAGE>

     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.

     All options outstanding at December 31, 2006 were fully-vested at January
     1, 2006, with the exception of 500,000 options held by our former Chief
     Executive Officer, Matthew Collier, and 250,000 (of which 125,000 options
     became vested during 2006) options held by the Chairman of our Board of
     Directors, James Frey. Upon the termination of our Chief Executive Officer
     in January 2006, 200,000 of his options vested and the remainder of his
     500,000 options were cancelled. The 200,000 vested options were
     subsequently cancelled, without being exercised, in April 2006.
     Accordingly, no expense associated with the outstanding options was
     recorded during the year ending December 31, 2006.

(8)  COMMITMENTS AND CONTINGENCIES

     LEASES

     The Company rents office space and production facilities in Newbury Park,
     California. The lease expired in September 2006 and was extended through
     September 2010. The rental expense associated with this lease was
     approximately $196,800 and $163,500 in 2006 and 2005, respectively. As of
     December 31, 2006, the total future minimum rental payments on this lease
     is approximately $542,900 (if stated by year, the minimum rental payments
     are: 2007 - $138,200, 2008 - 142,300, 2009 - 146,600, and 2010 - 115,800).

(9)  RETIREMENT SAVINGS PLAN

     The Company sponsors a safe harbor 401(k) retirement savings plan (the
     plan) which covers most of its full-time employees. The Company contributes
     3% of compensation for each payroll period to all eligible employees.
     Eligible employees may also elect to contribute a percentage of their
     compensation to the Plan. During 2006 and 2005, the Company contributed
     approximately $40,500 and $27,000, respectively, to the Plan.

(10) 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, 2006,
     are as follows:

         Deferred tax assets:
         Net operating loss carryforward                     $   2,000,000
         Less valuation allowance                               (2,000,000)
                                                             -------------
         Total net deferred tax assets:                      $           -
                                                             =============

     The Company's net operating losses totaled approximately $5.1 million at
     December 31, 2006, and will expire in 2026.

     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 $
     2,000,000 at December 31, 2006 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 2006 and 2005 was a decrease of
     approximately $1.100,000 and $900,000 respectively.

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

                                                      2006         2005
                                                    ---------    --------
        Tax at U.S. Statutory Rate:                      35.0%       35.0%

                                       F-18
<PAGE>

                                                      2006         2005
                                                    ---------    --------
        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%
                                                    =========    ========

(11) SUBSEQUENT EVENTS

     On January 16, 2007, the Company granted stock options to its Board of
     Directors, employees and a consultant to the company. The number of stock
     options granted was 1,239,700 of which 340,000 were fully vested. The
     exercise price per option is $0.24, which was the quoted share price of the
     Company's common shares at the date of issuance. All of the stock options
     will be vested, at variable dates, within the next five years.

     On March 5, 2007, the Company additionally granted stock options to certain
     long time employees. The number of stock options granted was 418,250 and
     all stock options were vested as of the grant date. The exercise price per
     option is $0.19, which was the quoted share price of the Company's common
     shares at the date of issuance.

     On March 8, 2007, Dr. Edward Staples, Chief Scientific Officer and
     director, resigned from the Company. In connection and concurrently with
     the resignation, Dr. Staples will receive severance payment equaling nine
     (9) months' salary (to be paid in eighteen (18) equal bi-weekly
     installments) and reimbursement of major medical insurance premiums paid by
     Dr. Staples for twelve (12) months.

                                      F-19
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

None.

ITEM 8A.  CONTROLS AND PROCEDURES.

     We have carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive
Officer and our Treasurer and Chief Financial Officer, on the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2006 pursuant to Exchange Act Rule 13a-15(b). Based upon that
evaluation, our President and Chief Executive Officer and our Treasurer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.

     There were no changes in the company's internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the company's internal control over financial reporting.

ITEM 8B.  OTHER INFORMATION.

None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
        GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

TEONG C. LIM

     Teong C. Lim, age 67, currently serves as interim President and Chief
Executive Officer and a director of Electronic Sensor Technology. Dr. Lim has
served as a director of Electronic Sensor Technology since January 31, 2005 and
served as Vice President of Corporate Development from February 1, 2005 through
January 25, 2006. Dr. Lim was the Director of Corporate Development of
Electronic Sensor Technology, L.P. from March 1995 through August 2000 and was
the Manager of Corporate Development of Electronic Sensor Technology, L.P. from
August 2000 through February 2005. Dr. Lim has been the President of Amerasia
Technology, Inc., a subsidiary of Electronic Sensor Technology, since 1984.
Since 1997, Dr. Lim has been a director of Crystal Clear Technology, Sdn. Bhd.,
a privately-owned Malaysian company that manufactures and markets a
high-contrast liquid crystal display (LCD) product line. Dr. Lim received a
Ph.D. in Electrical Engineering from McGill University in 1968 and an M.B.A.
from Pepperdine University in 1982. Dr. Lim does not serve as a director of any
other publicly reporting company.

PHILIP YEE

     Philip Yee, age 57, currently serves as Secretary, Treasurer and Chief
Financial Officer of Electronic Sensor Technology. Mr. Yee has served as
Secretary, Treasurer and Chief Financial Officer of Electronic Sensor Technology
since November 1, 2006. From April 2006 through November 1, 2006, Mr. Yee served
as Controller of Electronic Sensor Technology. From February 2005 through April
2006, Mr. Yee was Corporate Controller of Sleepwell Laboratories, Inc., a
regional healthcare provider, and its related companies. From 2001 through
February 2005, Mr. Yee was Corporate Controller of BLT Enterprises, Inc., a
regional recycling company and real estate developer, and its related companies.
Mr. Yee received a B.A. and an M.B.A. from the University of Michigan.

GARY WATSON

     Gary Watson, age 57, currently serves as Vice President of Engineering and
interim Chief Scientist of Electronic Sensor Technology. Mr. Watson has served
as Vice President of Engineering since September 8, 2005. Mr. Watson is the
co-inventor of the zNose(R). Mr. Watson has over twenty years experience in gas
chromatography. Mr. Watson joined Amerasia Technology in 1988 and directed
Amerasia Technology's research in adapting gas chromatographic techniques with
surface acoustic wave (SAW) detectors. He received his B.S. degree from the
University of Southern California in 1972.

                                       17
<PAGE>

JAMES H. FREY

     James H. Frey, age 69, currently serves as Chairman of the Board of
Directors of Electronic Sensor Technology. Mr. Frey has served as Chairman since
February 21, 2005. From June 1999 to March 2003, Mr. Frey served as Chief
Executive Officer of TASC Inc., a subsidiary of Litton/Northrup Grumman. He also
served as the Vice President of Information Technology at Litton from March 2001
to March 2002. Mr. Frey is currently a director of SSG Precision Optronics, a
privately-held optical component manufacturing company. Mr. Frey received a B.S.
in Electrical Engineering from Duke University in 1960. Mr. Frey does not serve
as a director of any other publicly reporting company.

MIKE KRISHNAN

     Mike Krishnan, age 67, currently serves as a director of Electronic Sensor
Technology. Mr. Krishnan has served as a director of Electronic Sensor
Technology since February 21, 2005. Mr. Krishnan serves on our audit committee
and compensation committee. Mr. Krishnan has been President of L&G Resources
(1994) Inc. since August 2003. He has served as Managing Director of Land &
General Berhad since September 2001. Land & General Berhad is an investment
holding company with subsidiaries engaging in property development, property
management and education services in Malaysia and Australia. Mr. Krishnan also
served as the executive director of Antah Holdings Berhad from April 1990 to
October 2000. Mr. Krishnan received an A.M.P from Harvard Business School in
1987. Mr. Krishnan does not serve as a director of any other publicly reporting
company in the United States. Mr. Krishnan is a director of Land & General
Berhad, which is listed on the Kuala Lumpur Stock Exchange.

FRANCIS H. CHANG

     Francis H. Chang, age 72, currently serves as a director of Electronic
Sensor Technology. Mr. Chang has served as a director of Electronic Sensor
Technology since January 31, 2005 and served as Secretary and Vice President of
Finance and Administration from February 1, 2005 through November 1, 2006. Mr.
Chang serves on our audit committee and compensation committee. Mr. Chang was
the Vice President of Finance and Operations of Electronic Sensor Technology,
L.P. from March 1995 through February 2005. Mr. Chang received a B.A. in
Economics from National Taiwan University in Taiwan in 1956 and an M.B.A. from
Pepperdine University in 1978. Mr. Chang does not serve as a director of any
other publicly reporting company.

JAMES WILBURN

     James Wilburn, age 74, currently serves as a director of Electronic Sensor
Technology. Dr. Wilburn has served as a director of Electronic Sensor Technology
since September 8, 2005. Dr. Wilburn serves as the chairman of both our audit
committee and compensation committee. Dr. Wilburn has served as dean of
Pepperdine University's School of Public Policy since September 1996. Dr.
Wilburn has also served Pepperdine as Vice President of University Affairs, and
as provost and Chief Operating Officer. He is also a member of the European
Parliament Industrial Council. Dr. Wilburn has served as a director of several
companies in the United States and Europe, including Signet Scientific, George
Fisher (Switzerland), The Olsen Company, Flowline, Brentwood Square Savings Bank
and First Fidelity Thrift and Loan. Dr. Wilburn received his Ph.D. in economic
history from the University of California at Los Angeles, a masters degree from
Midwestern State University and an MBA from Pepperdine's Presidential/Key
Executive program. He received his bachelors degree from Abilene Christian
University. Dr. Wilburn currently serves as a director of Virco Manufacturing,
which is a publicly reporting company.

MICHEL A. AMSALEM

     Michel A. Amsalem, age 59, currently serves as a director of Electronic
Sensor Technology. Mr. Amsalem has served as a director of Electronic Sensor
Technology since September 7, 2006. Mr. Amsalem is the founder and, since July
2001, President of Midsummer Capital, the investment manager of the Midsummer
Group of Funds, as well as a director of Midsummer Investment Ltd. Prior to his
involvement with hedge funds and the creation of Midsummer Capital, Mr. Amsalem,
from May 1999 through June 2001, was a Principal and Managing Partner of Omicron
Capital, an investment advisor to a group of funds with a strategy similar to
that of Midsummer. Mr. Amsalem was also founder and head of the Structured
Finance Department of Citibank, and of similar activities for Banque Indosuez'
Investment Bank for Latin America and Eastern Europe and Patricof & Co. Mr.
Amsalem holds a Doctoral degree in Business Administration from Harvard
University, an MBA from Columbia University and is a graduate of Ecole des
Hautes Etudes Commerciales in France. He is a professor of Business and
Investment

                                       18
<PAGE>

Strategy at Columbia University Graduate School of Business. Mr.
Amsalem currently serves as a director of Hartville Group, Inc., which is a
publicly reporting company.

LEWIS E. LARSON

     Lewis E. Larson, age 60, currently serves as a director of Electronic
Sensor Technology. Mr. Larson has served as a director of Electronic Sensor
Technology since September 7, 2006. Mr. Larson is the founder and President of
The Lion Group which has provided consulting and system engineering services to
the Federal Government and supporting industries since 1994. He has 15 years of
Federal service with the National Security Agency (NSA) and the Central
Intelligence Agency (CIA). Mr. Larson holds professional certifications from NSA
and the Department of Defense in Collection Management; Traffic Analysis and
Special Research; Education and Training; and Arabic language. After leaving the
Federal Government as a senior executive in 1984, Mr. Larson co-founded
Analytical Decisions Inc. which was acquired by the Ball Corporation. Mr. Larson
received his BSEE from the University of Minnesota and has conducted post-
graduate studies at the University of Maryland; New Mexico; California;
Georgetown; Naval Post Graduate School; and John Hopkins. He also completed the
Senior Executive Education business program at Stanford University and also the
John F. Kennedy School of Government at Harvard University. Mr. Larson currently
serves as a director of Digital Media Broadcasting Corporation, Global Wireless
Networks, Fortress Technologies and Universal Scientific Technologies Ltd in
England.

FAMILY RELATIONSHIPS AND INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

     Each of our directors holds office until the next annual meeting of our
shareholders, or until his prior death, resignation or removal. There are no
family relationships among our directors or executive officers. Within the past
five years, there has not been any bankruptcy petition filed by or against any
business of which any of our officers, directors or control persons were a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time. None of our officers, directors or control
persons has been convicted in a criminal proceeding in the past five years or is
subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses). None of our officers, directors or control persons is subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities. None of our officers, directors
or control persons has been found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law, where the judgment has not been reversed, suspended, or vacated.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires that the
company's officers, directors and persons who beneficially own more than ten
percent (10%) of the company's outstanding common stock, file reports of
ownership and changes in ownership with the Security Exchange Commission. Such
persons are required by the Securities and Exchange Commission to furnish the
company with copies of all Section 16(a) reports they file. To the best of our
knowledge, based solely on review of copies of such reports, including Forms 3,
4 and 5 and amendments thereto, we believe each of our directors, officers and
persons who beneficially own more than ten percent (10%) of our outstanding
common stock have complied with all filing requirements applicable to such
persons.

CODE OF ETHICS

     We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer and principal accounting officer or
controller, or persons performing similar functions. A copy of our code of
ethics is attached as Exhibit 14 to our annual report on Form 10-KSB for the
fiscal year ended December 31, 2004. Our code of ethics will be provided to any
person without charge, upon request. Requests should be addressed to: Electronic
Sensor Technology, Inc., Attn: Investor Relations Department, 1077 Business
Center Circle, Newbury Park, California 91320.

NOMINATING COMMITTEE

     There have been no material changes to the procedures by which security
holders may recommend nominees to the company's Board of Directors.

                                       19
<PAGE>

AUDIT COMMITTEE FINANCIAL EXPERT

     Our board of directors has determined that we have one audit committee
financial expert serving on our audit committee. Our audit committee financial
expert is Francis Chang. Although there are no standards applicable to us
regarding the independence of our audit committee members, Mr. Chang would not
be considered independent using the standards contained in the NASDAQ
Marketplace Rules, as described further below under "Item 12. Certain
Relationships and Related Transactions, and Director Independence."

ITEM 10.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION

     The table below outlines the total compensation of the named executive
officers of Electronic Sensor Technology for the fiscal years ended December 31,
2005 and December 31, 2006.

                         SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
            NAME AND                                                    STOCK      OPTION         ALL OTHER
           PRINCIPAL                            SALARY      BONUS       AWARDS     AWARDS       COMPENSATION      TOTAL
            POSITION                 YEAR       ($)(2)       ($)        ($)(3)     ($)(3)          ($) (4)         ($)
  --------------------------------  ---------   ---------   ---------   --------   -----------   --------------   -------
<S>                                 <C>         <C>          <C>        <C>               <C>      <C>          <C>
Teong C. Lim,                       2005        111,316           _          _            (6)        3,340(7)     114,656
President and Chief Executive       2006        165,229           _          _             _         4,957(7)     170,186
Officer (January 26,
2006-present)

Former Vice President of
Corporate Development
(February 1, 2005-January 25, 2006)
Director (5)

Matthew Collier,                    2005        135,384           _          _            (9)             _       135,384
Former President and Chief          2006         37,796      18,334     21,000(8)          _      113,482(10)     190,612
Executive Officer (May 26,
2005-January 25, 2006)

Francis H. Chang,                   2005        123,888           _          _           (11)        3,717(7)     127,605
Former Secretary & Vice             2006        130,070           _          _             _       18,669(12)     148,739
President of Finance (February
1, 2005- November 1, 2006)
Director (5)
</TABLE>

                                      -20-
<PAGE>


<TABLE>
<CAPTION>
            NAME AND                                                    STOCK      OPTION         ALL OTHER
           PRINCIPAL                            SALARY      BONUS       AWARDS     AWARDS       COMPENSATION      TOTAL
            POSITION                 YEAR       ($)(2)       ($)        ($)(3)     ($)(3)          ($) (4)         ($)
  --------------------------------  ---------   ---------   ---------   --------   -----------   --------------   -------
<S>                                 <C>         <C>          <C>        <C>          <C>           <C>            <C>
Edward J. Staples,                  2005        132,411           _          _           (13)        3,972(7)     136,383
Former President and Chief          2006        206,360           _          _             _         6,190(7)     212,550
Executive Officer (February 1,
2005 -May 26, 2005) Former
Chief Scientific Officer
(May 26, 2005-March 8, 2007)
Former Director (February 1,
2005-March 8, 2007) (5)

Gary Watson,                        2005        120,898           _          _           (14)        3,627(7)     124,525
Vice President of Engineering       2006        145,172           _          _             _         4,355(7)     149,527
(May 26, 2005-present)

Philip Yee,                         2005              _           _          _             _               _            _
Secretary, Treasurer and Chief      2006         64,750           _          _             _               _       64,750
Financial Officer (November 1,
2006-present)
</TABLE>

(1)    The columns entitled "Non-Equity Incentive Plan Compensation" and
"Nonqualified Deferred Compensation Earnings" have been omitted from the Summary
Compensation Table because there has been no compensation awarded to, earned by,
or paid to any of the named executive officers required to be reported in such
columns.

(2)    Amounts represent all pre-tax salaries and include any amounts earned but
deferred under the company's 401(k) plan.

(3)    The manner in which the company values stock and option awards is
outlined in Note 1 to the company's consolidated financial statements under the
heading "Stock-Based Compensation" included in this annual report. We did not
grant any option awards to the named executive officers during our 2006 fiscal
year.

(4)    All named executive officers are covered by the company's health
insurance plan, which does not discriminate in scope, terms or operation, in
favor of named executive officers or directors and is generally available to all
salaried employees. As a result, the information regarding health insurance
premiums paid to the named executive officers has been omitted from the Summary
Compensation Table, except as noted in footnote 12 below.

(5)    Teong Lim, Francis Chang and Edward Staples did not receive any
compensation for their services as directors of the company in 2006.

(6)    Teong Lim was granted an option to purchase 80,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.00 per limited partnership
interest on December 31, 2003. Such option was terminated in connection with the
merger whereby Electronic Sensor Technology, L.P. became an indirect subsidiary
of Electronic Sensor Technology, Inc. and was replaced with an option to
purchase 80,000 shares of common stock of Electronic Sensor Technology, Inc. at
$1.00 per share. Such option was accounted for at the time of the original grant
of Electronic Sensor Technology, L.P. options and no dollar amount was
recognized in connection therewith for financial statement reporting purposes
with respect to the 2005 fiscal year.

(7)    Amounts represent 401(k) contributions by the company, as described under
the heading "401(k) Plan" below.

                                       21
<PAGE>

(8)    On January 25, 2006, Mr. Collier was granted 75,000 shares of restricted
common stock. The 75,000 shares were all fully vested on the date of the grant,
but are restricted by a right of first refusal on the part of Electronic Sensor
Technology in the event that Mr. Collier decides to sell such shares. Aside from
the right of first refusal on our part, the shares of restricted common stock
carry the same rights and privileges as our unrestricted shares of common stock,
including the right to receive dividends, if any.

(9)    On September 8, 2005, the Board of Directors approved the granting of an
option under our 2005 Stock Incentive Plan to Mr. Collier to acquire 500,000
shares common stock at an exercise price of $0.64 per share, the closing price
of the common stock on September 8, 2005. On October 7, 2005, Electronic Sensor
Technology entered into an Option Agreement with Mr. Collier, substantially in
the form attached as Exhibit 10.2 to our annual report on Form 10-KSB for the
fiscal year ended December 31, 2004 filed with the Commission on April 15, 2005,
for the granting of the option to purchase 500,000 shares of common stock at an
exercise price of $0.64 per share. Mr. Collier's option would have vested, 33%
annually (and 34% in the third year), provided Mr. Collier was still employed by
Electronic Sensor Technology at the end of each such annual period. On January
25, 2006, Mr. Collier resigned from his position as President and Chief
Executive Officer of Electronic Sensor Technology, and is no longer employed by
Electronic Sensor Technology. Pursuant to the terms of Mr. Collier's employment
agreement, upon Mr. Collier's resignation, the vesting schedule of his option
was accelerated by six months. In addition, pursuant to the terms of the
Settlement Agreement, Mutual Release and Amendment of Option Agreement entered
into between Electronic Sensor Technology and Mr. Collier on January 25, 2006,
the option to purchase 200,000 shares of common stock at an exercise price of
$0.64 per share would vest in the first vesting period, which, as a result of
the six-month acceleration of the vesting of the option, was deemed to occur on
November 26, 2005. In accordance with the terms of the Option Agreement, Mr.
Collier's resignation resulted in the forfeiture of the unvested option to
purchase 300,000 shares of common stock, and Mr. Collier had three months from
January 25, 2006 in which to exercise the vested option to purchase 200,000
shares of common stock. Mr. Collier did not exercise the vested option within
three months of January 25, 2006 and the option expired. In accordance with the
valuation methodology used by the company, as outlined in Note 1 to the
company's consolidated financial statements under the heading "Stock-Based
Compensation" included in this annual report, the company did not recognize any
compensation cost for such option.

(10)   Amount represents (i) $110,000 received as severance pursuant to the
Settlement Agreement, Mutual Release and Amendment of Option Agreement, as more
fully described under the heading "Severance and Termination Agreements" below
and (ii) a payment of $3,482 for accrued but unused vacation time paid to Mr.
Collier at the time of his resignation.

(11)   Francis Chang was granted an option to purchase 80,000 limited
partnership interests of Electronic Sensor Technology, L.P. at $1.00 per limited
partnership interest on December 31, 2003. Such option was terminated in
connection with the merger whereby Electronic Sensor Technology, L.P. became an
indirect subsidiary of Electronic Sensor Technology, Inc., and was replaced with
an option to purchase 80,000 shares of common stock of Electronic Sensor
Technology, Inc. at $1.00 per share. Such option was accounted for at the time
of the original grant of Electronic Sensor Technology, L.P. options and no
dollar amount was recognized in connection therewith for financial statement
reporting purposes with respect to the 2005 fiscal year.

(12)   Amount represents (i) a total of $800 in insurance premiums paid to
Francis Chang for the months of November and December pursuant to the retirement
agreement, as more fully described under the heading "Retirement Agreements"
below, (ii) $12,000 in compensation for Mr. Chang's services as a consultant for
the company from November 1, 2006 through December 31, 2006 at a biweekly
retainer fee of $3,000, (iii) a payment of $1,910 for accrued but unused
vacation time paid to Mr. Chang at the time of his retirement and (iv) $3,959 in
401(k) contributions by the company.

(13)   Edward Staples was granted an option to purchase 100,000 limited
partnership interests of Electronic Sensor Technology, L.P. at $1.00 per limited
partnership interest on December 31, 2003. Such option was terminated in
connection with the merger whereby Electronic Sensor Technology, L.P. became an
indirect subsidiary of Electronic Sensor Technology, Inc., and was replaced with
an option to purchase 100,000 shares of common stock of Electronic Sensor
Technology, Inc. at $1.00 per share. Such option was accounted for at the time
of the original grant of Electronic Sensor Technology, L.P. options and no
dollar amount was recognized in connection therewith for financial statement
reporting purposes with respect to the 2005 fiscal year.

(14)   Gary Watson was granted options to purchase (i) 50,000 limited
partnership interests of Electronic Sensor Technology, L.P. at $1.00 per limited
partnership interest on March 15, 1999, (ii) 50,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.05 per limited partnership
interest on July 1, 2000, (iii) 50,000 limited partnership interests of
Electronic Sensor Technology, L.P. at $1.05 per limited partnership interest on
May 15, 2001 and (iv) 25,000 limited partnership interests of Electronic Sensor
Technology, L.P. at $1.05 per limited partnership interest on September 15,
2002. Such options were terminated in connection with the merger whereby
Electronic Sensor Technology, L.P. became an indirect subsidiary of Electronic
Sensor

                                      22
<PAGE>

Technology, Inc., and were replaced with an option to purchase 50,000 shares of
common stock at $1.00 per share and an option to purchase 125,000 shares of
common stock at $1.05 per share. Such options were accounted for at the time of
the original grants of Electronic Sensor Technology, L.P. options and no dollar
amount was recognized in connection therewith for financial statement reporting
purposes with respect to the 2005 fiscal year.

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND ADDITIONAL NARRATIVE
DISCLOSURE

EMPLOYMENT AND CONSULTING AGREEMENTS

     Philip Yee. On March 16, 2006, Philip Yee accepted an offer letter extended
by Electronic Sensor Technology regarding his employment with Electronic Sensor
Technology as Controller, which is attached as Exhibit 10.2 to our amended
current report on Form 8-K/A filed February 14, 2007 and is incorporated herein
by reference. The offer letter set Mr. Yee's salary at $75,000 per year, to be
adjusted to $80,000 per year after completion of a three-month trial period, and
included an agreement by Electronic Sensor Technology to grant to Mr. Yee an
option to purchase 75,000 shares of common stock, subject to approval by the
Board of Directors (an option to purchase 100,000 shares of common stock of the
company, was approved by the Board of Directors and granted to Mr. Yee on
January 16, 2007). On October 16, 2006, the Board of Directors appointed Mr. Yee
to become Secretary, Treasurer and Chief Financial Officer of the company,
effective November 1, 2006. In connection with the appointment of Mr. Yee as
Secretary, Treasurer and Chief Financial Officer of Electronic Sensor
Technology, Electronic Sensor Technology and Mr. Yee entered into an oral
agreement to increase Mr. Yee's annual salary to $110,000 through April 1, 2007,
at which point Electronic Sensor Technology and Mr. Yee have orally agreed to
increase Mr. Yee's annual salary to $125,000.

     Francis Chang. On October 16, 2006, Francis Chang announced his retirement
as Secretary, Treasurer and Vice President of Finance and Administration to the
Board of Directors of the company, effective November 1, 2006. Mr. Chang
continues to serve as a director of and consultant to the company. On November
1, 2006 Mr. Chang and the company entered into a letter agreement regarding the
company's engagement of Mr. Chang as a consultant through April 30, 2007 for a
biweekly retainer fee of $3,000, as more fully described in Exhibit 10.1 to our
amended current report on Form 8-K/A filed February 14, 2007 and is incorporated
herein by reference.

SEVERANCE AND TERMINATION AGREEMENTS

     Matthew Collier. On May 16, 2005, Electronic Sensor Technology entered into
a letter agreement with Matthew Collier, who was appointed President and Chief
Executive Officer on May 26, 2005. Pursuant to the letter agreement, as more
fully described in Exhibit 10.1 to our amended current report on Form 8-K/A
filed October 6, 2005 and incorporated herein by reference, Mr. Collier agreed
to serve as President and Chief Executive Officer of Electronic Sensor
Technology for at an annual salary of $220,000 per year and a potential target
bonus of 25% of such annual salary, to be paid at the discretion of the Board of
Directors. The letter agreement also provides for a grant of 75,000 shares of
restricted common stock that may be traded one year from Mr. Collier's date of
employment and an additional 75,000 shares of restricted common stock to be
granted one year from Mr. Collier's date of employment, if Mr. Collier remains
an employee of Electronic Sensor Technology, tradable on the first anniversary
of such grant. The letter agreement also provides for a grant of an option to
purchase 500,000 shares common stock at an exercise price of $1.50 per share,
subject to approval by the Board of Directors. On September 8, 2005, the Board
of Directors approved the granting of such option at $0.64 per share, the
closing price of the common stock on September 8, 2005. On October 7, 2005,
Electronic Sensor Technology entered into an Option Agreement with Mr. Collier,
substantially in the form attached as Exhibit 10.2 to our annual report on Form
10-KSB for the fiscal year ended December 31, 2004 filed with the Commission on
April 15, 2005, for the granting of the option to purchase 500,000 shares of
common stock at an exercise price of $0.64 per share. Mr. Collier's option would
have vested, 33% annually (and 34% in the third year), provided Mr. Collier was
still employed by Electronic Sensor Technology at the end of each such annual
period.

     On January 25, 2006, the letter agreement with Mr. Collier was mutually
terminated by Mr. Collier and Electronic Sensor Technology (other than that
portion of the letter agreement relating to indemnification of Mr. Collier for
liability incurred within the scope of his employment with the company, embodied
in Section 7 of the letter agreement), by way of a Settlement Agreement, Mutual
Release and Amendment of Option Agreement entered into between Mr. Collier and
Electronic Sensor Technology in connection with the resignation of Mr. Collier
as President and Chief Executive Officer and a director of Electronic Sensor
Technology, effective January 25, 2006. The Settlement Agreement, Mutual Release
and Amendment of Option Agreement is attached as Exhibit 10.1 to our current
report on Form 8-K filed January 31, 2006 and is incorporated herein by
reference. The terms of the Settlement Agreement, Mutual Release and Amendment
of Option Agreement in large part carried out

                                       23
<PAGE>

the terms of the letter agreement dated May 16, 2005 with Mr. Collier.
Specifically, the Settlement Agreement, Mutual Release and Amendment of Option
Agreement provided for (i) the payment of six months' base salary to Mr.
Collier, totaling $110,000, over the course of 13 biweekly payroll periods, (ii)
the payment of a bonus in the sum of $18,334 earned through the date of Mr.
Collier's resignation, (iii) the acceleration by six months of the vesting
schedule of Mr. Collier's option to purchase 500,000 shares of common stock,
each of (i) through (iii) as provided for in the letter agreement in the event
of a termination without cause and (iv) the issuance of 75,000 shares of
restricted common stock, as contemplated in the letter agreement. The Settlement
Agreement, Mutual Release and Amendment of Option Agreement also provided for
the vesting of an option to purchase 200,000 shares of common stock in the first
vesting period of the vesting schedule of Mr. Collier's option to purchase
500,000 shares of common stock, described above. As a result of the six-month
acceleration of the vesting schedule, such vesting of the option to purchase
200,000 shares of common stock was deemed to occur on November 26, 2005. In
accordance with the terms of Mr. Collier's Option Agreement, Mr. Collier's
resignation resulted in the forfeiture of the remaining unvested option to
purchase 300,000 shares of common stock, and Mr. Collier had three months from
January 25, 2006 in which to exercise the vested option to purchase 200,000
shares of common stock. Mr. Collier did not exercise the vested option within
three months from January 25, 2006 and the option expired.

     Edward Staples. On March 8, 2007, Electronic Sensor Technology accepted the
resignation of Edward Staples as Chief Scientific Officer and a director of the
company. In connection and concurrently with such resignation, the company and
Dr. Staples entered into a Severance Agreement, Mutual Release and Promotion
Agreement, which is attached as Exhibit 10.1 to our current report on Form 8-K
filed March 13, 2007 and is incorporated herein by reference. The Severance
Agreement, Mutual Release and Promotion Agreement provides for (i) payment of
nine months' salary to Dr. Staples (totaling $116,324.52) in eighteen equal
biweekly installments, (ii) reimbursement of major medical insurance premiums
paid by Dr. Staples for twelve months, pursuant to the Consolidated Omnibus
Budget Reconciliation Act (COBRA), provided that such amount does not exceed the
insurance coverage presently maintained by Dr. Staples through the company's
group policy and (iii) a mutual release of claims by the company and Dr.
Staples. Dr. Staples also agreed, in the Severance Agreement, Mutual Release and
Promotion Agreement, to spend one hour per month for nine months, promoting the
company and its products in exchange for $100 per hour and reimbursement of
reasonable business costs and expenses incurred in connection with such
promotion.

RETIREMENT AGREEMENTS

     The company has an agreement with each of Francis Chang, Teong Lim and Gary
Watson, under which, so long as the individual continues to be employed by the
company until retirement age, which is currently 65 years of age, the company
shall provide Medigap insurance, also known as Medicare supplemental insurance,
to the individual after retirement until the individual's death.

401(K) PLAN

     The company sponsors a 401(k) retirement savings plan which covers its
full-time employees who have been employed by the company for at least one (1)
year. Eligible employees may elect to contribute a percentage of their
compensation to the 401(k) plan, subject to the maximum amount established
annually under Section 401(k) of the Internal Revenue Code. In each of 2005 and
2006, the company contributed an amount equal to three percent (3%) of each
employee's respective compensation to the 401(k) plan account of each eligible
employee.

     Other than the agreements mentioned herein, we have no employment
agreements with any of our named executive officers, nor do we have any
compensatory plans or arrangements with respect to any named executive officers
that results or will result from the resignation, retirement or any other
termination of such executive officer's employment with Electronic Sensor
Technology or from a change-in-control of Electronic Sensor Technology or a
change in the named executive officer's responsibilities following a
change-in-control wherein the amount involved, including all periodic payments
or installments, exceeds $100,000.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     The following table outlines all outstanding equity awards held by named
executive officers as of the fiscal year ended December 31, 2006.

                                       24
<PAGE>

                OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END(1)


                                                     Option Awards

                      NUMBER OF
                      SECURITIES
                      UNDERLYING        OPTION
                     UNEXERCISED       EXERCISE          OPTION
                       OPTIONS           PRICE         EXPIRATION
NAME                (#)EXERCISABLE        ($)             DATE
-----------------   --------------   ------------   ----------------
Teong C. Lim                80,000   $       1.00   February 1, 2015
Matthew Collier                  _              _                  _
Philip Yee                       _              _                  _
Francis H. Chang            80,000   $       1.00   February 1, 2015
Edward J. Staples          100,000   $       1.00   February 1, 2015
Gary Watson                 50,000   $       1.00   February 1, 2015
                           125,000   $       1.05   February 1, 2015

(1)    The columns entitled "Number of Securities Underlying Unexercised Options
(#) Unexercisable," and "Equity Incentive Plan Awards: Number of Securities
Underlying Unexercised Unearned Options," have been omitted from the Outstanding
Equity Awards at Fiscal Year-End Table because there was no applicable
information required to be reported in such columns. In addition, the columns
related to stock awards have been omitted because there were no outstanding
unvested stock awards as of the fiscal year ended December 31, 2006.

DIRECTOR COMPENSATION

     The following table sets forth the compensation paid by Electronic Sensor
Technology to all non-employee directors for the fiscal year ended December 31,
2006.

                            DIRECTOR COMPENSATION (1)

                        FEES
                      EARNED OR
                       PAID IN        ALL OTHER
                        CASH        COMPENSATION     TOTAL
NAME (2)                 ($)           ($)(3)         ($)
-----------------   ------------    ------------     -----
Mike Krishnan              7,500(4)       10,064(5)  17,564
James Wilburn             16,500(6)            _     16,500
Lewis E. Larson            2,000(7)        5,650(8)   7,650
James Frey                30,000(9)            _     30,000
Michel A. Amsalem              _               _         _

(1)   The columns entitled "Stock Awards," "Option Awards," "Non-Equity
Incentive Plan Compensation" and "Nonqualified Deferred Compensation Earnings"
have been omitted from the Director Compensation Table because there has been no
compensation awarded to, earned by, or paid to any of the directors required to
be reported in such columns.

                                       25
<PAGE>

(2)   Teong Lim, Edward Staples and Francis Chang are not included in the
Director Compensation table because any compensation received by Dr. Lim, Dr.
Staples and Mr. Chang as directors of Electronic Sensor Technology for the
fiscal year ended December 31, 2006 is reflected in the Summary Compensation
Table above.

(3)   With the exception of Michel Amsalem, the company reimburses each director
who is not an officer or employee of the company for reasonable out-of-pocket
expenses for attending board meetings. In 2006, with respect to each director,
the aggregate amount of such expenses amounted to less than $10,000, other than
with respect to Mike Krishnan as noted below.

(4)   In 2006, Mike Krishnan received an attendance fee of $2,500 per meeting.

(5)   The company reimbursed Mike Krishnan $10,064 for his out-of-pocket
expenses associated with attending board meetings. As noted in footnote 3 above,
the company reimburses each director for reasonable business expenses. Mr.
Krishnan's expenses exceeded $10,000 because he must travel from Malaysia to
California for all board meetings.

(6)   In 2006, James Wilburn received an attendance fee of $1,500 per meeting
and a monthly retainer fee of $1,000, which was paid quarterly.

(7)   In 2006, Lewis Larson received an attendance fee of $2,000 for attending
one meeting following his appointment as a director of the company.

(8)   Includes $5,650 paid to Lewis Larson in exchange for consulting services.

(9)   James Frey received an attendance fee of $2,000 per meeting and an annual
retainer fee of $2,000, which was paid quarterly.

NARRATIVE TO DIRECTOR COMPENSATION

AGREEMENTS WITH DIRECTORS

     On October 3, 2005, Electronic Sensor Technology entered into a letter
agreement with James Frey, Chairman of the Board of Directors, which is attached
as Exhibit 10.1 to our current report on Form 8-K filed October 7, 2005 and is
incorporated herein by reference. The letter agreement superseded and replaced a
prior letter agreement dated February 21, 2005 (and an addendum thereto dated
April 1, 2005). The letter agreement dated October 3, 2005 also provides that
Mr. Frey will continue to serve as Chairman of the Board of Directors of the
company until such time, if any, as (i) Mr. Frey and the company shall enter
into a new agreement, (ii) Mr. Frey resigns or is replaced as Chairman of the
Board of Directors or (iii) Mr. Frey ceases being a director of the company. On
September 8, 2005, the Board of Directors approved the granting of an option
under our 2005 Stock Incentive Plan to Mr. Frey to acquire 250,000 shares common
stock at an exercise price of $0.64 per share, the closing price of the common
stock on September 8, 2005. On October 7, 2005, Electronic Sensor Technology
entered into an Option Agreement with Mr. Frey, substantially in the form
attached as Exhibit 10.2 to our annual report on Form 10-KSB for the fiscal year
ended December 31, 2004 filed with the Commission on April 15, 2005, for the
granting of the option to purchase 250,000 shares of common stock at an exercise
price of $0.64 per share. Mr. Frey's stock option shares vest as follows: one
quarter of the option shares vested on each of March 8, 2006, September 8, 2006
and March 8, 2007, and the remaining one quarter will vest on September 8, 2007,
provided he is still participating as a member of our Board of Directors at such
time.

     The company also has agreements with each of the directors listed in the
Director Compensation table, with the exception of Lewis Larson and Michel
Amsalem, to continue to pay the retainer fees and meeting attendance fees set
forth in such table, as well as to reimburse such directors for reasonable
out-of-pocket expenses for attending board meetings. Lewis Larson and the
company have agreed that beginning January 1, 2007 Lewis Larson will no longer
receive meeting attendance fees, but will be compensated for consulting services
provided to the company from time to time, and will receive reimbursement for
reasonable out-of-pocket expenses incurred in connection with the provision of
such services.

                                       26
<PAGE>

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

     The following table sets forth information, as of the date of this annual
report, concerning our issued and outstanding stock beneficially owned (i) by
each director and each named executive officer of Electronic Sensor Technology,
(ii) by all directors and executive officers of Electronic Sensor Technology as
a group and (iii) by each shareholder known by Electronic Sensor Technology to
be the beneficial owner of more than 5% of the outstanding common stock. The
information regarding beneficial owners of 5% or more of our common stock was
gathered by us from the filings made by such owners with the SEC. Shares that
may be acquired within 60 days are treated as outstanding for purposes of
determining the amount and percentage beneficially owned.

<TABLE>
<CAPTION>
                                                           AMOUNT AND NATURE OF
                                NAME AND ADDRESS (1)        BENEFICIAL OWNERSHIP        PERCENTAGE OF
TITLE OF CLASS                  OF BENEFICIAL OWNER          (SHARES OF STOCK)            CLASS (2)
-------------------------   ----------------------------   -----------------------    ----------------
<S>                         <C>                                         <C>                      <C>
Common stock                Teong Lim*+++                                5,287,908(3)             9.66%
Common stock                Philip Yee+                                     30,000(4)             0.06%
Common stock                Gary Watson+                                   262,500(5)             0.48%
Common stock                James Frey*                                    312,500(6)             0.57%
Common stock                Francis Chang*++                             3,998,160(7)             7.33%
Common stock                Mike Krishnan*                                 100,000(8)             0.18%
Common stock                James Wilburn*                                  75,000(9)             0.14%
Common stock                Michel Amsalem*                                      0(10)            0.00%
Common stock                Lewis Larson*                                   50,000(11)            0.09%
Common stock                Land & General Berhad++                      9,948,801(12)           18.26%
Common stock                L&G Resources (1994), Inc.++                 9,948,801(12)           18.26%
Common stock                3 Springs, LLC++                             3,853,160                7.08%
Common stock                TC Lim, LLC++                                5,167,908                9.46%
Common stock                Edward Staples++                             4,262,525(13)            7.80%
Common stock                Midsummer Investment Ltd.++                 19,048,059(14)           26.01%
Common stock                Islandia L.P.++                             10,582,255(15)           16.34%
Common stock                All directors and named executive
                            officers as a group                         10,116,068(16)           18.08%
</TABLE>

* Director
+ Named executive officer
++5% or more beneficial owner

                                       27
<PAGE>

(1)    The address of each director, named executive officer, 3 Springs, LLC and
TC Lim, LLC is c/o Electronic Sensor Technology, Inc., 1077 Business Center
Circle, Newbury Park, California 91320. The address of Midsummer Investment Ltd.
and Islandia L.P. is 295 Madison Avenue, 38th Floor, New York, New York 10017.
The address of each of L&G Resources (1994), Inc. and Land & General Berhad is 7
Persiaran Dagang, Bandar Sri Damansara, Kuala Lumpur, Malaysia 52200. The
address of Edward Staples is 739 Parmenter Court, Thousand Oaks, California
91362.

(2)    These percentages are calculated based upon the total amount of
outstanding shares of common stock beneficially owned by each person or group,
including shares of common stock that person or group has the right to acquire
within 60 days pursuant to options, warrants, conversion privileges or other
rights, divided by 54,173,745, which represents the total number of shares of
common stock issued and outstanding as of the date of this annual report, plus,
for each person or group, any shares of common stock that person or group has
the right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.

(3)    Includes 120,000 shares of common stock underlying options exercisable
within 60 days of the date of this annual report, and 438,796 shares of common
stock underlying warrants exercisable within 60 days of the date of this annual
report and 4,729,112 shares of common stock held by TC Lim, LLC and beneficially
owned by Dr. Lim by virtue of his position as sole member of TC Lim, LLC.

(4)    Includes 30,000 shares of common stock underlying an option exercisable
within 60 days of the date of this annual report.

(5)    Includes 262,500 shares of common stock underlying options exercisable
within 60 days of the date of this annual report.

(6)    Includes 312,500 shares of common stock underlying options exercisable
within 60 days of the date of this annual report.

(7)    Includes 145,000 shares of common stock underlying options exercisable
within 60 days of the date of this annual report, and 257,247 shares of common
stock underlying warrants exercisable within 60 days of the date of this annual
report and 3,595,913 shares of common stock held by 3 Springs, LLC and
beneficially owned by Mr. Chang by virtue of his position as sole member of 3
Springs, LLC.

(8)    Includes 100,000 shares of common stock underlying an option exercisable
within 60 days of the date of this annual report. Mr. Krishnan is the Managing
Director of Land & General Berhad and President of L&G Resources (1994), Inc., a
wholly owned subsidiary of Land & General Berhad. By virtue of his position, Mr.
Krishnan may be deemed to share dispositive power over the 9,948,801 shares of
common stock beneficially owned by Land & General Berhad and L&G Resources
(1994), Inc. Mr. Krishnan is one of six directors on the Board of Directors of
Land & General Berhad and the Board of Directors of Land & General Berhad makes
the ultimate voting and investment decisions with respect to the 9,948,801
shares of common stock. Mr. Krishnan disclaims beneficial ownership of such
shares of common stock.

(9)    Includes 75,000 shares of common stock underlying an option exercisable
within 60 days of the date of this annual report.

(10)   Mr. Amsalem is a member of Midsummer Capital, LLC, a New York limited
liability company, which serves as investment advisor to Midsummer Investment
Ltd., a Bermuda company. By virtue of his position, Mr. Amsalem may be deemed to
share dispositive power over the 19,048,059 shares of common stock beneficially
owned by Midsummer Investment Ltd. Midsummer Capital disclaims beneficial
ownership of such shares of common stock and Mr. Amsalem disclaims beneficial
ownership of such shares of common stock.

(11)   Includes 50,000 shares of common stock underlying an option exercisable
within 60 days of the date of this annual report.

(12)   Includes 9,632,534 shares of common stock and 316,267 shares of common
stock underlying a warrant exercisable within 60 days of the date of this annual
report held by L&G Resources (1994), Inc., a wholly-owned subsidiary of Land &
General Berhad, of which Land & General Berhad is a beneficial owner. Mike
Krishnan is President of L&G Resources (1994), Inc. and Managing Director of
Land & General Berhad. By reason of such relationships, Mr. Krishnan may be
deemed to share dispositive power over the shares of common stock beneficially
owned by L&G Resources (1994), Inc. Mr. Krishnan expressly disclaims beneficial
ownership as Mr. Krishnan is one of six directors on the Board of Directors of
Land & General Berhad and the Board of Directors of Land & General Berhad makes
the ultimate voting and investment decisions with respect to the 9,948,801
shares of common stock.

                                       28
<PAGE>

(13)   Includes 150,000 shares of common stock underlying options exercisable
within 60 days of the date of this annual report and 343,689 shares of common
stock underlying warrants exercisable within 60 days of the date of this annual
report.

(14)   Includes 11,250,000 shares of common stock underlying a debenture
convertible within 60 days of the date of this annual report and 7,798,059
shares of common stock underlying a warrant exercisable within 60 days of the
date of this annual report. The conversion of the debenture and exercise of the
warrant is contractually capped such that such conversion or exercise, as
applicable, shall not cause Midsummer's beneficial ownership to exceed 4.99%,
unless waived by Midsummer, and in no event to exceed 9.99% (without giving
effect to shares of common stock underlying any unconverted portion of the
debenture or unexercised portion of the warrant). Midsummer Capital, LLC, a New
York limited liability company, serves as investment advisor to Midsummer
Investment Ltd., a Bermuda company. By reason of such relationships, Midsummer
Capital may be deemed to share dispositive power over the shares of common stock
beneficially owned by Midsummer Investment. Midsummer Capital disclaims
beneficial ownership of such shares of common stock. Michel A. Amsalem and Scott
D. Kaufman are members of Midsummer Capital. By reason of such relationships,
Mr. Amsalem and Mr. Kaufman may be deemed to share dispositive power over the
shares of common stock stated as beneficially owned by Midsummer Investment. Mr.
Amsalem and Mr. Kaufman disclaim beneficial ownership of such shares of common
stock.

(15)   Includes 6,250,000 shares of common stock underlying a debenture
convertible within 60 days of the date of this annual report and 4,332,255
shares of common stock underlying a warrant exercisable within 60 days of the
date of this annual report. The conversion of the debenture and exercise of the
warrant is contractually capped such that such conversion or exercise, as
applicable, shall not cause Islandia's beneficial ownership to exceed 4.99%,
unless waived by Islandia, and in no event to exceed 9.99% (without giving
effect to shares of common stock underlying any unconverted portion of the
debenture or unexercised portion of the warrant). The general partner of
Islandia is John Lang, Inc., a New York Sub-S corporation formed to manage
investments. John Lang, Inc. has sole dispositive power and sole voting power
over all matters not related to director elections. The individuals that
exercise shared dispositive and voting power for John Lang, Inc. are Richard
Berner, President of John Lang, Inc. and Edgar Berner and Thomas Berner, both
Vice-Presidents of John Lang, Inc. By virtue of these relationships John Lang,
Inc., Richard Berner, Edgar Berner and Thomas Berner may be deemed to have
indirect beneficial ownership of the shares of common stock beneficially owned
by Islandia; however, John Lang, Inc. Richard Berner, Edgar Berner and Thomas
Berner disclaim beneficial ownership of the shares of common stock beneficially
owned by Islandia.

(16)   Includes 1,095,000 shares of common stock underlying options exercisable
within 60 days of the date of this annual report and 696,043 shares of common
stock underlying warrants exercisable within 60 days of the date of this annual
report, as well as 3,595,913 shares of common stock held by 3 Springs, LLC and
4,729,112 shares of common stock held by TC Lim, LLC.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     See disclosure under Item 5 of this annual report with respect to
information regarding securities authorized for issuance under equity
compensation plans.

Item 12. Certain Relationships and Related Transactions, and Director
Independence.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

FORBEARANCE AND AMENDMENT AGREEMENT WITH MIDSUMMER INVESTMENT, LTD. AND
ISLANDIA, L.P.

     On September 7, 2006, Electronic Sensor Technology entered into a
Forbearance and Amendment Agreement with Midsummer Investment, Ltd. and
Islandia, L.P., each of which holds a debenture and warrant, the common stock
underlying which represent more than 5% of our outstanding shares of common
stock (the conversion of each debenture and exercise of each warrant is
contractually capped such that such conversion or exercise, as applicable, shall
not cause Midsummer's or Islandia's respective beneficial ownership to exceed
4.99%, unless waived by Midsummer or Islandia, respectively, and in no event to
exceed 9.99%, without giving effect to shares of common stock underlying any
unconverted portion of the debenture or unexercised portion of the warrant). The
terms of the convertible debentures and warrants that we issued to Midsummer and
Islandia in a private placement on December 7, 2005 required that we register
the shares of our common stock underlying such debentures and warrants within
180 days of the date of issuance of the debentures and warrants. The failure to
do so is an event of default under the debentures, giving Midsummer and Islandia
the right to accelerate the debentures and receive a premium of approximately
30% of the outstanding amounts due under the debentures upon acceleration. The
failure to do so also reduces the exercise price of the

                                       29
<PAGE>

warrants by $0.03 per month until such shares are registered. In addition, the
failure to register such shares within 150 days of the date of issuance of the
debentures and warrants gives the holders the right to receive liquidated
damages in the amount of 2% per month of the purchase price of the debentures
and warrants, pursuant to a registration rights agreement, and the failure to
pay such liquidated damages relating to the debentures is an event of default
under the debentures.

     Pursuant to the Forbearance and Amendment Agreement, Midsummer and Islandia
have agreed to abstain from exercising the aforementioned rights and remedies
arising out of the then existing defaults under the debentures and warrants
until February 28, 2007. In exchange for such forbearance, we agreed to reduce
the conversion price of the debentures from $0.4544 per share to $0.4000 per
share and to reduce the exercise price of the warrants from $0.4761 per share to
$0.4300 per share. In addition, we appointed a director, Michel Amsalem, and an
independent director, Lewis Larson to our Board of Directors, in accordance with
the terms of the Forbearance and Amendment Agreement. Electronic Sensor
Technology also agreed not to increase its Board of Directors to more than 9
members without the consent of Midsummer. Pursuant to the Forbearance and
Amendment Agreement, we are in the process of hiring a chief operating officer
of Electronic Sensor Technology with the potential to become chief executive
officer. If the Board approves of a candidate appointed by the special
committee, the company has agreed to hire such candidate for an interim and
trial basis for up to 3 months, at which time the Board will meet to determine
whether such chief operating officer shall be promoted to chief executive
officer or be released. If such chief operating officer is released, a new
search by the special committee will begin.

     The registration statements pursuant to which such shares were registered
were declared effective by the Securities and Exchange Commission on November
21, 2006 and December 21, 2006, respectively.

DEBT CONVERSION AGREEMENTS

     Prior to the mergers whereby Electronic Sensor Technology, L.P. became an
indirect subsidiary of Electronic Sensor Technology, Inc., Electronic Sensor
Technology, L.P. entered into Debt Conversion Agreements with holders of its
outstanding debt, including Francis Chang, Teong Lim, Edward Staples and
Amerasia Technology.

     Pursuant to the Debt Conversion Agreement with Mr. Chang, Electronic Sensor
Technology, L.P. agreed to convert $226,720 of debt into the right to receive
226,720 shares of Bluestone Ventures common stock and a warrant to purchase
113,360 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share,
which Mr. Chang assigned to 3 Springs, LLC, a Delaware limited liability company
of which Mr. Chang is the sole member. In addition, prior to the mergers, Mr.
Chang owned 30.21% of the outstanding shares of Amerasia Technology. Pursuant to
the Debt Conversion Agreement with Amerasia Technology, Electronic Sensor
Technology, L.P. agreed to convert $952,577 of debt into the right to receive
952,577 shares of Bluestone Ventures common stock and warrants to purchase
476,289 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share.
Following the mergers, Electronic Sensor Technology issued Bluestone Ventures
common stock and warrants to the former debtholders of Electronic Sensor
Technology, L.P., of which 3 Springs, LLC received (i) 226,720 shares of
Bluestone Ventures common stock and a warrant to purchase 113,360 shares by
virtue of the debt owed to Mr. Chang and (ii) 287,773 shares of Bluestone
Ventures common stock and a warrant to purchase 143,887 shares, which
represented Mr. Chang's portion of the shares and warrants received by Amerasia
Technology and distributed to its shareholders.

     Pursuant to the Debt Conversion Agreement with Dr. Lim, Electronic Sensor
Technology, L.P. agreed to convert $517,899 of debt into the right to receive
517,899 shares of Bluestone Ventures common stock and a warrant to purchase
258,950 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share,
which Dr. Lim assigned to TC Lim, LLC, a Delaware limited liability company of
which Dr. Lim is the sole member. In addition, prior to the mergers, Dr. Lim
owned 37.76% of the outstanding shares of Amerasia Technology. Following the
mergers, Electronic Sensor Technology issued common stock and warrants to the
former debtholders of Electronic Sensor Technology, L.P., of which TC Lim, LLC
received (i) 517,899 shares of Bluestone Ventures common stock and a warrant to
purchase 258,950 shares by virtue of the debt owed to Dr. Lim and (ii) 359,693
shares of Bluestone Ventures common stock and a warrant to purchase 179,846
shares, which represented Dr. Lim's portion of the shares and warrants received
by Amerasia Technology and distributed to its shareholders pursuant to the Debt
Conversion Agreement with Amerasia.

     Pursuant to the Debt Conversion Agreement with Dr. Staples, who was an
officer and a director of the company at the time of the mergers, Electronic
Sensor Technology, L.P. agreed to convert $399,643 of debt into the right to
receive 399,643 shares of Bluestone Ventures common stock and a warrant to
purchase 199,822 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share.
In addition, prior to the mergers, Dr.

                                       30
<PAGE>

Staples owned 30.21% of the outstanding shares of Amerasia Technology.
Following the mergers, Electronic Sensor Technology issued common stock and
warrants to the former debtholders of Electronic Sensor Technology, L.P., of
which Dr. Staples received (i) 399,643 shares of Bluestone Ventures common stock
and a warrant to purchase 199,822 shares by virtue of the debt owed to Dr.
Staples and (ii) 287,773 shares of Bluestone Ventures common stock and a warrant
to purchase 143,867 shares, which represented Dr. Staples's portion of the
shares and warrants received by Amerasia Technology and distributed to its
shareholders pursuant to the Debt Conversion Agreement with Amerasia.

DIRECTOR INDEPENDENCE

     Although we are not required to have independent directors on our Board of
Directors because our securities are not listed on a national securities
exchange or an inter-dealer quotation system which has director independence
requirements, four of the seven directors on our Board are independent using the
definition of "independent director" contained in Rule 4200(15) of the NASDAQ
Marketplace Rules. Our independent directors are James Frey, James Wilburn,
Lewis Larson and Mike Krishnan. Under Rule 4200(a)(15) of the NASDAQ Marketplace
Rules, an "independent director" is generally defined as a person other than an
executive officer or employee of the company or another individual having a
relationship which, in the opinion of the company's Board of Directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.

     The members of our audit committee and compensation committee include James
Wilburn, who is also the chairman of both committees, Francis Chang and Mike
Krishnan. In addition to being an independent director under Rule 4200(a)(15),
the NASDAQ audit committee independence standards (which are also not applicable
to us) contain NASDAQ Marketplace Rule 4350(d), which requires that audit
committee members meet certain additional independence requirements. James
Wilburn and Mike Krishnan are independent under the NASDAQ audit committee
independence standards. Francis Chang, however, is not independent under either
Rule 4200(a)(15) or the audit committee standards.

ITEM 13.  EXHIBITS.

          See Exhibit Index.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

     The aggregate fees billed for the 2005 and 2006 fiscal years for
professional services rendered by our principal accountant, Sherb & Co., LLP,
for the audit of our annual financial statements and review of financial
statements included in our periodic reports on Form 10-QSB and other services
provided in connection with statutory and regulatory filings were $55,000 and
$60,000 respectively.

AUDIT-RELATED FEES

     No assurance or related services that are reasonably related to the
performance of the audit or review of our financial statements were rendered by
our principal accountants during the 2005 or 2006 fiscal year.

TAX FEES

     The aggregate fees to be billed for professional services rendered by our
current principal accountant, Sherb & Co., LLP, for tax compliance and tax
advice were $7,500 for each of the 2005 and 2006 fiscal years.

ALL OTHER FEES

     No other products or services were provided by our principal accountants
during the 2005 or 2006 fiscal year, other than the services outlined in the
foregoing sections.

                                       31
<PAGE>

AUDIT COMMITTEE

     Our audit committee has not to date adopted any pre-approval policies or
procedures.


                                       32
<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 of the registration statement on Form SB-2 filed
               on January 6, 2006).

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 amended
               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).

                                       33
<PAGE>

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).

10.18          Letter Agreement dated November 1, 2006 between Electronic
               Sensor Technology, Inc. and Francis Chang (incorporated by
               reference from Exhibit 10.1 of the amended current report on Form
               8-K/A filed on February 14, 2007).

10.19          Offer letter dated March 15, 2006 between Electronic Sensor
               Technology, Inc. and Philip Yee (incorporated by reference
               from Exhibit 10.2 of the amended current report on Form 8-K/A
               filed on February 14, 2007).

10.20          Severance Agreement, Mutual Release and Promotion Agreement
               effective as of March 8, 2007 between Electronic Sensor
               Technology, Inc. and Edward Staples (incorporated by reference
               from Exhibit 10.1 of the current report on Form 8-K filed on
               March 13, 2007).

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 Section 302
               Of the Sarbanes-Oxley Act.

31.2           Certification of Principal Financial and Accounting Officer
               Pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1           Certification of Chief Executive Officer Pursuant to Section 906
               of the Sarbanes-Oxley Act.

32.2           Certification of Principal Financial and Accounting Officer
               Pursuant to Section 906 of the Sarbanes-Oxley.

                                       34
<PAGE>

                                   SIGNATURES

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

                                      ELECTRONIC SENSOR TECHNOLOGY, INC.


Date: April 2, 2007                   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: April 2, 2007                    By: /s/  Teong C. Lim
                                           -------------------------------------
                                           Teong C. Lim
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

Date:  April 2, 2007                   By: /s/  Philip Yee
                                           -------------------------------------
                                           Philip Yee
                                           Secretary, Treasurer and Chief
                                           Financial Officer
                                           (Principal Financial Officer and
                                           Principal Accounting Officer)

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           James Frey, Chairman

                                       By:
                                           -------------------------------------
                                            Francis Chang, Director

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           Teong Lim, Director

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           Mike Krishnan, Director

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           James Wilburn, Director

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           Michel Amsalem, Director

Date: April 2, 2007                    By:               *
                                           -------------------------------------
                                           Lewis Larson, Director

*By: /s/  Philip Yee
     -------------------------------
     Philip Yee
     Attorney-in-Fact