U.S. Securities and Exchange Commission Washington, D.C. 20549FORM 10-KSB

(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended **December 31, 2002**

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES ACT OF 1934

For the transition period ______ to ________ 
Commission file number **000-27793****ELECTRONIC SYSTEMS    TECHNOLOGY, INC.
(Name of small business    issuer in its charter)**Washington**91-1238077
(State or other    jurisdiction of incorporation or organization)
(I.R.S. Employer    Identification No.) **415 N. Quay St.,    Kennewick , Washington **99336
(Address of    principal executive offices)
(Zip Code)
Issuer's    telephone number **(509) 735-9092
Securities registered under Section 12(b) of the Exchange Act: NoneSecurities registered under Section 12(g) of the Exchange Act:  Common

Check whether the issuer (1) filed all reports required by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response toItem 405 of Regulations S-B is met contained in this form, and no disclosure will becontained, to the best of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. [X ] Not applicable [ ]
State issuer's revenues for its most recent fiscal year.$2,092,865
On February 21, 2003 the aggregate market value,based on the asked price, of the voting stock held by nonaffiliates of the registrant was$1,670,061.
The number of shares outstanding of the registrant's common stock as ofFebruary 21, 2003: 5,098,667shares.
DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference into Parts I, II,III, and IV of this report:  (1) Form S-18, effective Nov. 5, 1984, CommissionFile No. 2-92949-S; (2) Form 8-K, filed March 15, 1985, Commission FileNo. 2-92949-S; Form 8-A, Commission File No. 000-27793, dated October 25, 1999; Forms8-K dated July 12, 1991, December 14, 1992, December 10, 1993, June 4, 1998, February 12,1999, June 11, 1999, February 11, 2000, February 9, 2001, February 15, 2002 and February21, 2003. 

Transitional Small Business Disclosure Format:Yes [ ] No [X]
 

 

 

 

 

 

PART IITEM 1.

 

FORWARD LOOKING STATEMENTS:
***When used in this Annual Report and the documents incorporated hereinby reference, the terms "anticipates", "believes", "expects"and similar expressions are intended to identify in certain circumstances, forward-lookingstatements. Such statements are subject to a number of risks and uncertainties that couldcause actual results to differ materially from those projected, including the risksdescribed in this Annual Report. Given these uncertainties, readers are cautioned not toplace undue reliance on such statements. The Company also undertakes no obligation toupdate those forward-looking statements.***
BUSINESS  

Electronic Systems Technology, Inc. ("EST" or the"Company") specializes in the manufacturing and development of wireless modemproducts. The Company uses research and development, manufacturing, and marketing effortsto produce and market the Company's line of ESTeem (TM) Wireless Modem products andaccessories. The Company offers products providing innovative communication solutions forapplications not served by existing conventional communication systems. The Company'sproducts are offered in markets for process automation in commercial, industrial, andgovernment arenas both domestically and internationally, as well as domestic markets forpublic safety communications infrastructure, primarily used by police and firedepartments. The Company's products are marketed through direct sales, salesrepresentatives, and domestic and foreign resellers. 

The Company was incorporated in the State of Washington in February1984, and was granted a U.S. Patent for the "Wireless Computer Modem" in May1987, and Canadian patent in October 1988. In the past three years, the Company hascontinued improvement of its products to incorporate the latest technology and respond tocustomer needs and market opportunities.During 2002, the Company's development efforts were concentrated on thedevelopment, refinement and enhancement of the ESTeem 192E product line of spreadspectrum, non-licensed radio frequency modems using Ethernet based communicationprotocols, which was granted Federal Communication Commission type approval in late 2001.In an effort to continually expand its customer base, particularly in the industrialcontrol arena, the Company continues efforts to team with all major programmable logiccontroller (PLC) hardware vendors. The Company has also been involved from time to time asa hardware provider for Government programs, where the Company's products have been usedin watershed management, aircraft maintenance, airfield lighting and resource managementapplications. During 2002, the Company continued to market ESTeem products for use inmobile data terminal applications by public safety entities, and continued to participatein foreign and domestic Supervisory Control and Data Acquisition (SCADA), IndustrialAutomation, and Government marketplaces. 
PRODUCTS AND MARKETS

EST's products provide communication links between computers,peripherals, and instrumentation controls using radio frequency waves. The Company'sproducts are packet burst, VHF & UHF FM radio modems, operating in radio frequencybands of 72 to 76 Megahertz (MHz), 150 to 174 MHz, 400 to 420 MHz, 450 to 470 MHz, and 2.4Gigahertz (GHz).

The proliferation of computer applications in business, industry andpublic service has created a dynamic environment of automation and networking, requiringconstantly growing amounts of data transfer. Prior to the invention of the ESTeem modem,the majority of data transfers used telephone modems or direct cable connections, both ofwhich have costly side effects. Telephone modems have a potentially expensive monthlycharge for the use of telephone lines, and direct cable connections can have installationcosts as much or more than the cost of the communication system. ESTeem wireless modemproducts provide a "Wireless Solution" by eliminating the need for conventionalhardwiring and leased phone lines. 

All of the ESTeem models ("ESTeems") come with industrystandard asynchronous or Ethernet communications ports, giving users new dimensions to"Local Area Networking", allowing as many as 253 devices to be interfaced on asingle frequency. ESTeem wireless modems have over one hundred internal software commands,which are saved in non-volatile memory, allowing user-friendly configuration for anyapplication. 

ESTeem Modems work on a packet burst communications concept. Packetsystems, whether hardwired or radio, share the same principle of operation: data is takenfrom RS-232C, RS-422, RS-485 asynchronous or Ethernet ports and is transmitted in"Electronic Packets". The size of the packet can be user defined from 1 to 2000bytes of information, depending on model. Once a packet of data is formed, the packet istransmitted in a "burst," from one ESTeem modem to another ESTeem modem, hencethe term "packet burst communications." Internal Digi-Repeater features allowthe user to increase operating range by relaying transmission through a maximum of threeESTeems to reach a destination ESTeem. An ESTeem can operate as an operating node, arepeater node, or both simultaneously, for added flexibility. Secure data communication isprovided in the ESTeem products through use of proprietary technology and techniques. Ifhigher security is required, the ESTeem is compatible with asynchronous Data EncryptionStandard (DES) encryption devices.

PRODUCT APPLICATIONS

Some of the major applications and/or industries for which the ESTeemproducts are being utilized are as follows:

Water and Waste Water    Industry 
Overhead Crane ControlIndustrial Automation 
Shop Floor Manufacturing
Remote Data Acquisition    (SCADA) 
Intra-Office/Building    Computer NetworkingLaw Enforcement/Public Safety
Power Utility 
FederalOil/Gas Pipeline 
Ground Mobile    Communications
Material Handling 
Ship to Shore    Communications 
Flight Line Maintenance
PRODUCT LINES
**Model 192C. A licensed narrow band packet burst transceiver forcommercial, industrial, and public safety applications operating in the 450 to 470 MHzspectrum. The digitally synthesized transceiver is field tunable over the operating bandin 6.25 KHz increments. Typical indoor and outdoor fixed base and mobile applicationsinclude point to point as well as point to multi-point digital data networking fordistances to approximately 15 miles line-of-sight without the use of the digi-repeateroption. Typical application uses for the ESTeem 192C are: 

Domestic:
Industrial Automation,    inventory control, public safety.
International:
Industrial automation.**Model 192E. A high performance, direct sequence spread spectrumtransceiver employing industry standard, 10baseT, 802.11b Ethernet connectivity forcommercial and industrial applications operating in the unlicensed 2.4 GHz spectrum. Datatransfer rates of up to 11 Mega bits per second (Mbps). Typical applications include datarate critical, point to point, point to multi-point, and "last-mile" bridgedigital data networking for distances to approximately 5 to 7 miles line-of-sight withoutthe use of the digi-repeater option. Typical application uses for the ESTeem 192E are:

Domestic and international:    
Industrial automation,    process control and interoffice networking.**Model 192F. A licensed narrow band packet burst transceiver forforeign market commercial and industrial automation, and Federal (USA only) applicationsoperating in the 400 to 420 MHz spectrum. The digitally synthesized transceiver is fieldtunable over the operating band in 6.25 KHz increments. Typical indoor and outdoor fixedbase and mobile applications include point to point and point to multi-point digital datanetworking for distances to approximately 15 miles line-of-sight without the use of thedigi-repeater option. Typical application uses for the ESTeem 192F are: 

International:
Industrial automation and    inventory control.
Federal: 
Inventory and command    control.**Model 192M. A licensed narrow band packet burst transceiver forforeign and domestic commercial, industrial automation, and public safety applicationsoperating in the 150 to 174 MHz spectrum. The digitally synthesized transceiver is fieldtunable over the operating band in 6.25 KHz increments. Typical indoor and outdoor fixedbase and mobile applications include point to point and point to multi-point digital datanetworking for distances to approximately 15 miles line-of-sight without the use of thedigi-repeater option. Typical application uses for the ESTeem 192M are:

Domestic:
Industrial automation,    inventory control, and public safety.
International:
Industrial automation and    SCADA.**Model 192V. A licensed narrow band packet burst transceiver for foreign and domesticcommercial and industrial applications operating in the 72 to 73 MHz spectrum. Thedigitally synthesized transceiver is field tunable over the operating band in 20 KHzincrements. Typical indoor and outdoor fixed base and mobile applications include point topoint and point to multi-point digital data networking for distances to approximately 5miles line-of-sight without the use of the digi-repeater option. Typical application usesfor the ESTeem 192V are:
Domestic and international:    
Industrial automation and    inventory control.**Model 192S. A low cost unlicensed direct sequence spread spectrumtransceiver for foreign, domestic, and federal applications operating in the 2.4 GHzspectrum. Typical indoor and outdoor fixed base and mobile applications include point topoint and point to multi-point digital data networking for distances to approximately 10miles line-of-sight without the use of the digi-repeater option. Typical application usesfor the ESTeem 192S are as follows:

Domestic:
Industrial automation and    inventory control.
International:
Telephone by-pass and    industrial automation.
Federal: 
Inventory and command    control.**Model 95. A low cost licensed narrow band packet burst transceiverfor foreign, domestic and federal applications operating in the 72 to 73 MHz spectrum. Thedigitally synthesized transceiver is field tunable over the operating band in 20 KHzincrements. Typical indoor and outdoor fixed base and mobile applications include point topoint and point to multi-point digital data networking for distances to approximately 5miles line-of-sight without the use of the digi-repeater option. Typical application usesfor the ESTeem 95 are:

Domestic and international:    
Industrial automation and    inventory control.
Federal: 
Inventory and command    control.
ADDITIONAL PRODUCTS AND SERVICES
The Company offers various accessories to support the ESTeem products.Accessories are purchased from other manufacturers and resold by EST to support theapplication of ESTeem modems. Antennas, power supplies and cable assemblies are examplesof such items. The Company also provides direct services to customers, such as repair andupgrade of ESTeem products, also to assist in the application of ESTeem wireless modems,the Company provides professional services, site survey testing, system start-up, andcustom engineering services.

RESEARCH AND DEVELOPMENT AND NEW PRODUCTS

The Company's products compete in an environment of rapidly changingtechnology. This environment results in the necessity of the Company to be continuallyupdating and enhancing existing products, as well as developing new products in order toremain competitive. Research and Development expenditures for new product development andimprovements of existing products by the Company for 2002 and 2001 were $167,522 and$146,245, respectively. None of the Company's research and development expenses weredirectly paid for by any of the Company's customers. During 2002, the Company contractedand will continue to contract, with independent, nonaffiliated, engineering companiesspecializing in radio design, when such expertise was required. 

During 2002, the Company's development resources were primarilyconcentrated on the development, refinement and enhancement of the ESTeem 192E, a spreadspectrum, non-licensed, wireless, modem using the networking standard, Ethernet interfaceprotocol. The ESTeem 192E received Federal Communication Commission type approval inOctober 2001. The ESTeem 192E augments the Company's existing products through the use ofEthernet based, open network architecture, allowing the product to be used in broadervariety of applications, such as "last mile" and building network applications.The Company plans continued research and development expenditures and to undertake newdevelopment and improvement projects, as they become necessary. 

MARKETING, CUSTOMERS AND SUPPORT

The majority of the Company's products sold during 2002 were throughthe reselling efforts of non-exclusive, non-stocking distributors of the Company'sproducts, with the remainder of the Company's sales distributed directly from theCompany's facility through direct sales to end-users of the ESTeem products. During 2002,approximately seventy percent of the Company's products were distributed through resellersand thirty percent through direct sales. Customers generally place orders on an "asneeded basis". Shipping dates for products are generally 5 to 10 working days afterreceipt of a customer order, with the exception of ongoing, scheduled projects, and customdesigned equipment for specific customer applications. As of December 31, 2002, theCompany had a backlog of $150,800 in sales orders.

During 2002, the Company continued to advertise in trade publicationsspecifically targeted at users of control, instrumentation, and automation systems, aswell as domestic public safety entities. The Company's advertising targeted potentialcustomers using Programmable Logic Controllers (PLCs). There are approximately twenty-fivemajor PLC manufacturers worldwide. The Company also attends tradeshows each yearspecifically targeted toward the customers and markets in which it sells products. During2002, the Company hired a sales manager to concentrate marketing and sales efforts in theLatin American industrial automation market. For 2003, the Company intends to continuemarketing strategies targeting existing markets of industrial controls and Mobile DataComputers for public safety networks. The Company maintains an Internet web site toprovide easy access to product and technical information for both present and potentialcustomers of the Company's products. Due to the variable configuration possibilities ofthe Company's products, and existing distributor relationships, the Company has notimplemented an electronic commerce internet website. The Company provides technicalsupport and service for ESTeem products through phone support, field technicians, andinternet sources. The Company believes high quality customer and technical support isnecessary and vital to its business and the markets in which it competes. To maintain thishigh level of customer support the Company has in the past, and will continue in thefuture, to make investments and expenditures in support of its customer service programs. 

The Company is continuing marketing activities directed towards allbranches of the U.S. Government. In the past, the Company's products have been included inprojects for water shed management, aircraft maintenance, airfield lighting, and resourcemanagement for U.S. Government entities. 

For the year ended December 31, 2002, no sales to a single customercomprised 10% or more of total product sales as of December 31, 2002. See"Management's Discussion and Analysis of Financial Condition and Results ofOperations", and "Financial Statements".

The Company has a General Services Administration (GSA) contract tosell goods to the U.S. Government. This contract is a fixed price, indefinite quantity anddelivery agreement. The current contract runs through February 2004. 

COMPETITION

The Company's competition varies according to the market in which theCompany's products are competing. All of the markets in which the Company's products aresold are highly competitive. Listed below are the markets the Company's products competein and major competitors in those markets:

Major Market
Major    Competitors
Industrial    Automation, Remote Data Acquisition, Shop Floor Manufacturing, Overhead Crane Control
Control Chief,    Data-Linc, Freewave, Locus, Microwave Data Systems and Prosoft.
Computer    Networking, inter and intra building
Adaptive    Broadband, Aironet Wireless Communications, Cisco, Cylink, Digital Wireless, Dlink,    Linksys and Proxim
Mobile Data    Computer systems for public safety applications
Data Radio, IP    Mobilenet, Motorola, various cellular service providers using GPRS architectures.
Federal    applications
Adaptive    Broadband, Data Radio, Datron Technology, Freewave, Harris Computer Systems, Lockheed    Martin, Magnavox, Motorola, and Watkins-Johnson.
Management believes the ESTeem products compete favorably in the marketbecause of performance, price, and adaptability of the products to a wide range ofapplications. The Company's major limitation in competing with other manufacturers is itslimited marketing budget, which currently limits the Company's nationwide advertising andsales force presence.

PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION

EST was granted a United States patent in 1987 for a "WirelessComputer Modem". In 1988, EST was granted a Canadian Patent for a "WirelessComputer Modem". Both patents have lives of 17 years. The Company's rights to theESTeem Wireless Modem trademark, in uninterrupted use by the Company since 1985, lapsedwith the U.S. Patent and Trademark Office, and were acquired by an unrelated computercompany. The Company is currently negotiating with that company to acquire rights to theESTeem trademark for continued use in the Company's business. To protect the Companyagainst unauthorized disclosure of proprietary information belonging to the Company, allemployees, dealers, distributors, original equipment manufacturers, sales representativesand other persons having access to confidential information regarding Company products ortechnology are bound by non-disclosure agreements.

GOVERNMENT REGULATION

For operation in the United States, the ESTeem Radio Modems requireFederal Communications Commission (FCC) Type Acceptance. The FCC Type Acceptance isgranted for devices, which demonstrate operation within mandated, observed, and testedperformance criteria. All of the Company's products requiring FCC Type Acceptance havebeen granted such acceptance. 

For operation in Canada, the ESTeem RF Modems require Industry CanadaType Acceptance. Industry Canada grants the Type Acceptance for devices demonstratingoperation within performance criteria mandated, observed, and tested. Of the Company'scurrent production line, the ESTeem 192E, 192F, 192C, 192V, 192M and 192S have beengranted type acceptance in Canada. 

All ESTeem radio modem products, with the exception of the ESTeem 192Sand 192E products, which are nonlicensed, spread spectrum wireless modems, requireconsumer licensing under Part 90 of the FCC Rules and Regulations, which must be appliedfor by the end user of the Company's products. The Company cannot guarantee customers willreceive FCC consumer licenses in the VHF or UHF frequency spectrum for any particularapplication. The Company provides information to customers to assist in the applicationfor FCC consumer licenses.

At the time of this filing the Company is unaware of any existing orproposed FCC regulation that would have a materially adverse effect on the Company'soperations, but there can be no assurance that future FCC regulations will not havematerially adverse effects on the operations of the Company.

SOURCE OF SUPPLY AND MANUFACTURING

The Company purchases certain components necessary for the productionof its products from sole suppliers. Intersil, Motorola Corporation, Mitsubishi, MurataCorporation, and Toko America Inc. as purchased through a number of distributors, supplykey components for the Company's products. The components provided by these companiescould be replaced or substituted by other products, if it became necessary to do so. Ifthis action became necessary, a material interruption of production and/or material costexpenditures, for example involved with locating and qualifying replacement components,could take place. 

Approximately 30% of the Company's inventory at December 31, 2002consisted of parts having lead times ranging from 12 to 28 weeks. Some parts aremaintained at high levels to assure availability to meet production requirements, andaccordingly, account for a significant portion of the Company's inventory value. Based onpast experience with component availability, distributor relationships, and inventorylevels, the Company does not foresee shortages of materials used in production. However,developments in the electronic component marketplace, involving components used by theCompany which are also used in cellular phones and paging devices, have the potential ofcreating negative component availability and delivery issues for the Company in thefuture. The Company has been able to procure parts on a timely basis as of the date ofthis report, however this cannot be guaranteed in the future and if shortages were tooccur material interruption of production and consequently product delivery to customerscould occur. 

The Company contracts with Manufacturing Services, Inc., in Kennewick,Washington, for assembly of the Company's products, using material purchased by theCompany. By contracting with Manufacturing Services, Inc., the Company is able to avoidstaff fluctuations associated with operating its own manufacturing operation. ThePresident of Manufacturing Services, Melvin H. Brown, is a Director of the Company.Management believes all prices for services, provided by Manufacturing Services, Inc.,were as favorable as could be obtained from comparable manufacturing services companies.See "Management's Discussion and Analysis of Financial Condition and Results ofOperations", and "Financial Statements".

EMPLOYEES

As of December 31, 2002, the Company employed a staff of12 persons on a full time basis, 4 inmarketing, 2 in technical support, 5 in engineering/manufacturing, and 1 in Finance andAdministration. The Company's operations are dependent upon key members of its Engineeringand Management personnel. In the event services of these key individuals were lost to theCompany, adverse effects on the Company's operations may be realized. The Company employspart-time labor on an "as needed" basis, usually in engineering/manufacturing.At year-end 2002 the Company employed 4 part-time employees. None of the Company'semployees are represented by a labor union and the Company believes it has good relationswith its employees.
 

ITEM 2.PROPERTIES

EST does not own any real property, plants, mines, or any othermaterially important physical properties. The Company's administrative offices, inventoryand laboratories are located in leased facilities at 415 N. Quay Street, Kennewick,Washington. The Company leases its office and laboratory space in a lease agreement withThe Port of Kennewick in Kennewick, Washington for approximately 6,275 square feet ofoffice and laboratory space. As of January 2, 2003, the total monthly lease cost is$2,549.06, including a leasehold tax of $290.06. The lease covers a period of three years,expiring October, 2005. 

The Company also owns miscellaneous assets, such as computer equipment,laboratory equipment, and furnishings. The Company does not have any real estate holdings,nor investments in real estate. The Company maintains insurance in such amounts andcovering such losses, contingencies and occurrences that the Company deems adequate toprotect its property. Insurance coverage includes a comprehensive liability policycovering legal liability for bodily injury or death of persons, and for property owned by,or under the control of the Company, as well as damage to the property of others. TheCompany maintains key man life insurance protecting the Company in the event of the deathof the Company President. The Company also maintains fidelity insurance which providescoverage to the Company in the event of employee dishonesty.

 

ITEM 3. LEGAL PROCEEDINGS

No proceedings are identified to which involve a claim for damages,exclusive of interest and costs, that exceed 10% of the current assets of the Company. 

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

The Company did not submit any matters for shareholder approval duringthe fourth quarter of the 2002 fiscal year. 

 

PART II

ITEM 5.****MARKET INFORMATION FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS****
There is no established market for trading the Common Stock of theCompany. The Common Stock is not regularly quoted in the automated quotation system of aregistered securities system or association. The Common Stock of the Company is traded onthe "over-the-counter" market and is listed on the electronic bulletin boardunder the symbol of "ELST". The following table illustrates the average high/lowprice of the Common Stock for the last two (2) fiscal years. The"over-the-counter" quotations do not reflect inter-dealer prices, retailmark-ups, commissions or actual transactions.
 
Bid
Ask
High
Low
High
Low
Fiscal year ended December    31, 2002
First Quarter
0.38
0.32
0.51
0.32
Second Quarter
0.37
0.33
0.50
0.33
Third Quarter
0.37
0.33
0.40
0.33
Fourth Quarter
0.37
0.26
0.51
0.26 
Fiscal year ended December    31, 2001
First Quarter
0.6563
0.375
0.8125
0.3125 
Second Quarter
0.42
0.30
0.45
0.34
Third Quarter
0.44
0.37
0.47
0.37
Fourth Quarter
0.48
0.36
0.60
0.36
The above data was compiled from information obtained from the PinkSheets LLC, OTC Market Report daily quotation service.

The approximate number of record holders of common stock of theRegistrant as of February 21, 2003 was 600 persons/entities.

Electronic Systems Technology Inc. paid non-cumulative, cashdistributions on July 9, 1999, July 9, 1998 and July 11, 1997, respectively, eachequivalent to $0.01 per outstanding share. The Company's Forms 8-K dated June 11, 1999,June 4, 1998 and June 5, 1997, as filed with the Securities and Exchange Commission areincluded herein by reference. Dividends undertaken by the Company will be solely at thediscretion of the Board of Directors. 

 

ITEM 6.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
**Management's discussion and analysis is intended to be read inconjunction the Company's audited financial statements the integral notes thereto. Thefollowing statements may be forward-looking in nature and actual results may differmaterially.**
RESULTS OF OPERATIONS

GENERAL: The Company specializes in themanufacturing and development of wireless modem products. The Company offers a productline which provide innovative communication solutions for applications not served byexisting conventional communication systems. The Company offers product lines in marketsfor process automation in commercial, industrial and government arenas domestically, aswell as internationally, and domestically to public safety entities for mobile datacomputer terminal applications. The Company markets its products through direct sales,sales representatives, and domestic, as well as foreign, resellers. Operations of theCompany are sustained solely from revenues received through sales of its products andservices. 
FISCAL YEAR 2002 vs. FISCAL YEAR 2001

GROSS REVENUES: Total revenues for the fiscalyear 2002 were $2,092,865 reflecting a 39% increase from $1,509,545 gross revenues forfiscal year 2001. The increase in total revenues is the result in increased sales revenuesfor all sales segments, domestic, foreign and government for the Company during 2002.Product sales increased to $1,932,648 in 2002, as compared to 2001 sales of $1,303,811. Inmanagement's opinion, the increase in sales of the Company's products were the result ofincrease marketing efforts on the part of the Company, specifically increased regionaltradeshow attendance for both industrial automation and MDC marketplaces, and increasedsalesperson activity. Management intends to sustain or increase the Company's marketingefforts in 2004, but believes that sales revenues for 2004 may be impacted by existingeconomic factors negatively effecting industrial automation projects involving theCompany's products and services.
Interest and investment revenues decreased from 2001 levels of $54,970,to 2002 levels of $44,644 due to decreased rates of return received on the Company'sinvestments. Engineering Services revenues during 2002 decreased to $117,573 from 2001levels of $150,404 due to decreased scope and frequency of projects involving theCompany's engineering services when compared with 2001. 

In 2002, a majority of the Company's domestic sales were for industrialautomation applications. An example of an industrial automation application is a municipalwater treatment operation. It is the opinion of Management that industrial automationapplications will continue to provide the largest portion of the Company's revenues in theforeseeable future. The Company's domestic sales were augmented by sales of the Company'sproducts for mobile data computer systems to public entities, which accounted for 9% ofthe Company's domestic sales during 2002. An example of a mobile data computer system fora public entity is a local area network (LAN), between police department computer dispatchcenters and individual police vehicles. Management believes future federal funding of MDCprojects cannot be guaranteed and therefore MDC projects involving the Company's productsbecome very difficult to predict. 

During 2002, the Company had $335,706 in foreign export sales,amounting to 16% of gross product and service revenues for the year, compared with foreignexport sales of $302,324 or 21% of gross product and service revenues for 2001. Theincrease in foreign sales was due to increased sales volumes for projects in Canada, andLatin America. Products purchased by foreign customers were used primarily for use inindustrial automation projects. Management believes the majority of foreign export salesare the results of the Company's Latin American sales manager, employed during the secondhalf of 2002, EST distributor efforts, and the Company's Internet website presence. Thegeographic compositions of the Company's foreign export sales for 2002 and 2001 are shownin Note 13 to the Financial Statements. 

In 2002, products purchased by U.S. Government agencies or by U.S.Government contractors amounted to $148,177 or 7%, of gross product and service revenuesas compared with 2001 levels of $29,343 or 2%, of gross product and service revenues.During 2002, products purchased by the U.S. Government were used primarily in watercontrol applications. Management believes the increase in U.S. Government sales revenuesduring 2002 was the result a single large water control project, which varies fromprevious U.S. Government projects involving the Company's products, specifically militaryrelated maintenance and logistics projects. Management believes that the increase in U.S.Government sales will not continue during 2004 primarily due to a lack of U.S. Governmentfunding for, or discontinuance of, programs using the Company's products. Due to theuncertain nature of U.S. Government purchasing, prediction and planning of revenues to bereceived from U.S. Government is very difficult to predict. The Company has made specificmarketing contacts regarding the possibility of use of the Company's products for HomelandSecurity communication projects, however at the time of this report, no sales have beenforthcoming from these efforts. 

As of December 31, 2002, the Company had a backlog of $150,800 in salesorders. The Company's customers generally place orders on an "as needed basis".Shipment for the Company's products is generally made within 5 to 10 working days afterreceipt of customer orders, with the exception of ongoing, scheduled projects, and customdesigned equipment for specific customer applications. 

COST OF SALES: Cost of Sales, as a percentage of gross sales, for theyears of 2002 and 2001 was 45% and 53%, respectively. The cost of sales variation for 2002is the result of a combination of reduced product costs due to increased productionvolumes and sales price restructuring for the Company's distributors positively effectingcost of sales margins for 2002 when compared with 2001. 

INVENTORY: The Company's year-end inventoryvalues for 2002 and 2001 were as follows: 
2002
2001
Parts 
$359,915 
$357,884 
Work in Progress 
0
94,036 
Finished goods
209,509 
79,679 
TOTAL 
$569,424 
$531,599 
The Company's objective is to maintain inventory levels as low aspossible to provide maximum cash liquidity, while at the same time, meet production anddelivery requirements. Approximately 30% of the Company's inventory at December 31, 2002consisted of parts having lead times ranging from 12 to 28 weeks. Some parts aremaintained at high levels to assure availability to meet production requirements, andaccordingly, account for a significant portion of the Company's inventory value. Based onpast experience with component availability, distributor relationships, and inventorylevels, the Company does not foresee shortages of materials used in production. However,developments in the electronic component marketplace, involving components used by theCompany which are also used in cellular phones and paging devices, have the potential ofcreating negative component availability and delivery issues for the Company in thefuture. The Company has been able to procure parts on a timely basis as of the date ofthis report, however this cannot be guaranteed in the future and if shortages were tooccur material interruption of production and consequently product delivery to customerscould occur. Inventory levels increased between year-end 2001 and year-end 2002 due toincreased purchases by the Company to meet increased production requirements during 2002. 

For year-end 2002, purchases and costs allocated to cost of goods soldwere $907,087 as compared to $664,047 in 2001. The increase in purchases and allocatedcosts is a result of increased purchases and production volume related to increased salesof the Company's products during 2002. 

OPERATING EXPENSES: Operating expenses increasedto $788,631 in 2002, from 2001 levels of $681,374. Material changes in expenses arecomprised of the following components: Advertising expenses decreased to $18,277 in 2002from 2001 levels of $20,774 due to reduced frequency of advertising in trade publicationsby the Company during 2002. Depreciation expense decreased during 2002 to $40,869 from2001 levels of $42,978 due decreased depreciable Company assets when compared with 2001.Printing expenses decreased from 2001 levels of $10,238 to $7,359 for 2002 due to timingdifferences in printing of marketing related material during 2002. Professional servicesdecreased to $59,462 from 2001 levels of $71,122 due to decreased subcontractedengineering services required for Research and Development projects when compared with2001. Trade show expenses increased during 2002 to $36,578, from 2001 levels of $23,357dueto increased shows attended by the Company when compared with 2001. Travel expensesincreased to $81,023 for 2002, compared to $71,802 for 2001, due to increased marketingrelated travel expenses during 2002.
Salaries increased to $597,562 in 2002, from 2001 levels of $520,726,wages paid to an increased number of Company employees during 2002 when compared with2001. The Company incurred bad debt expense of $18,334 during 2002 due to nonpayment by areseller of the Company's products, as compared with $3,187 during 2001. 

FISCAL YEAR 2001 vs. FISCAL YEAR 2000

GROSS REVENUES: Total revenues for the fiscalyear 2001 were $1,509,545 reflecting a 5% decrease from $1,584,665 gross revenues forfiscal year 2000. The decrease total revenues is attributable to decreased EngineeringServices and interest revenues, as well decreased product sales during 2001 when comparedwith 2000. Interest revenue decreased from 2000 levels of $79,144, to 2001 levels of$54,970 due to decreased rates of return received on the Company's short term investments.Engineering Services revenues during 2001 decreased to $150,404 from 2000 levels of$192,965 due to decreased Engineering Service projects performed by the Company during2001, primarily due to a smaller than expected number of Public Safety Mobile DataComputer (MDC) projects involving the Company's products and services when compared with2000. Sales of the Company's products were lower than anticipated during 2001 for MDCapplications due to, in Management's opinion, the public safety market being affected byreduced federal funding during 2001. Management believes future federal funding of MDCproject cannot be guaranteed and therefore MDC projects involving the Company's productsbecome very difficult to predict. Overall, product sales decreased slightly to $1,303,811in 2001, as compared to 2000 sales of $1,310,524. Offsetting the decrease in MDC segmentsales were increased foreign sales during 2001. 
In 2001, a majority of the Company's domestic sales were for industrialautomation applications. An example of an industrial automation application is a city'swater treatment operation. It is the opinion of Management that industrial automationapplications will continue to provide the largest portion of the Company's revenues in theforeseeable future. The Company's domestic sales were augmented by sales of the Company'sproducts for mobile data computer systems to public entities, which accounted for 4% ofthe Company's domestic sales during 2001. The sales of the Company's products were lowerthan anticipated during 2001. Management believes the decrease was due to the publicsafety market being affected by reduced federal funding during 2001. Management believesfuture purchases are difficult to predict due to the uncertain nature of federal funding.An example of a mobile data computer system for a public entity is a local area network(LAN), between police department computer dispatch centers and individual police vehicles.

During 2001, the Company had $302,324 in foreign export sales,amounting to 21% of gross product and service revenues for the year. For year-end 2000,foreign export sales were $109,292 or 7% of gross product and service revenues for theyear. The increase in foreign sales was due to increased sales volumes for projects inCroatia, Jordan and India. Products purchased by foreign customers were used primarily foruse in industrial automation projects. Management believes the majority of foreign exportsales are due to EST distributor efforts and the Company's Internet website presence. Thegeographic compositions of the Company's foreign export sales for 2001 and 2000 are shownin Note 13 to the Financial Statements. 

In 2001, products purchased by U.S. Government agencies or by U.S.Government contractors amounted to $29,343 or 2%, of gross product and service revenues ascompared with 2000 levels of $23,062 or 2%, of gross product and service revenues. During2001, products purchased by the U.S. Government were utilized primarily in powermonitoring and water control applications. Management believes the decrease in U.S.Government sales revenues was the result of lack of U.S. Government funding for, ordiscontinuance of, programs using the Company's products. The uncertain nature of U.S.Government purchases, makes prediction and planning of revenues to be received from U.S.Government difficult to predict. 

As of December 31, 2001, the Company had a backlog of $201,777 in salesorders. The Company's customers generally place orders on an "as needed basis".Shipment for most of the Company's products is generally made within 5 to 10 working daysafter receipt of customer orders, with the exception of ongoing, scheduled projects, andcustom designed equipment for specific customer applications. 

LIQUIDITY AND CAPITAL RESOURCES

The Company's revenues and expenses resulted in a net income of$213,576 for 2002, increased from a net loss of $10,296 for 2001. The increase in netincome is the result of increased sales revenues and reduced cost of goods sold during2002 when compared with 2001. At December 31, 2002, the Company's working capital was$2,351,155 compared with 2,127,471 at December 31, 2001. The Company's operations relysolely on the income generated from sales. The Company's major capital resourcerequirements are maintaining inventory levels adequate for production and payment ofemployee salaries. Extended availability for components critical for production of theCompany's products, ranging from 12 to 28 weeks, require the Company to maintain highinventory levels. It is Management's opinion that the Company's working capital as ofDecember 31, 2002 is adequate for expected resource requirements for the next twelvemonths. 

The Company's current asset to current liability ratio at December 31,2002 was 13.2:1 compared to 24.2:1 at December 31, 2001. The current asset ratio decreaseis the result of increased income tax payable liability for the Company's 2002 net income,compared with year-end 2001 liability levels. 

The Company's cash resources at December 31, 2002, including cash andcash equivalent liquid assets, were $322,997 decreased from cash resources of $1,513,592at year end 2001. The decrease in cash resources at year end is the result of the Companyimplementing an investment strategy during 2002, where the majority of the Company's cashand cash equivalent assets were converted to various mutual fund investments asrecommended by a third party investment management firm. At year-end 2002, certaincomponents of investments held by the Company, if sold as of December 31, 2002, would havepresented a realized loss of $6332. The contingency is shown in the Statement ofComprehensive Income in the Company's Financial Statements for December 31, 2002. Cashflows were increased by the Company's net income for 2002 and were offset by purchases ofinvestments of $1,344,000 and additions to property plant and equipment of $35,085 whencompared with 2001.
The Company's trade accounts receivable, adjusted for allowance foruncollectible accounts, at December 31, 2002, were $302,269, compared to $158,674 atyear-end 2001. The increase is the result of sales and collection timing differencesbetween December 31, 2002 and December 31, 2001. Management believes that all of theCompany's accounts receivable as of December 31, 2002, are collectible.

The Company believes the level of risk associated with customerreceipts on export sales is minimal. Foreign shipments are made only after payment hasbeen received, irrevocable letter of credit terms have been pre-arranged, or on Net 30terms to established foreign companies with which the Company has distributorrelationships. Foreign orders are generally filled as soon as they are received,therefore, foreign exchange rate fluctuations do not impact the Company. 

Inventory level as of December 31, 2002, was $569,424, reflecting adecrease from December 31, 2001, levels of $531,599. Inventory levels increased betweenyear-end 2001 and year-end 2002 due to increased purchases by the Company to meetincreased production requirements during 2002.

The Company had capital expenditures during year 2002 of $35,085,primarily for equipment and software used for research and development. The Companyintends on investing in additional capital equipment as deemed necessary to supportdevelopment and manufacture of the ESTeem Modem. As of December 31, 2002, the Company'scurrent liabilities were $192,226, increased from 2001 year-end levels of $91,522. Theincrease is due to increased levels of income taxes payable and refundable deposits atyear-end 2002. 

The Company has a General Services Administration (GSA) contract tosell goods to the U.S. Government. This contract is a fixed price, indefinite quantity anddelivery agreement. The current contract runs through February 2004. Projections regardingliquidity, profitability, and material purchases are based on past history of annualpurchases. Due to the uncertain nature of Federal Government purchasing, procurement ofmaterial and production planning is adjusted quarterly based on demand. It is Management'sopinion that the majority of Federal Government purchases in 2003 will be pursuant to theCompany's GSA contract. 

The Company's operations were not adversely effected by inflationduring 2002. No adverse affect is anticipated during 2003.

CONTROLS & PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. TheCompany's Chief Executive and its Chief Financial Officer, after evaluating theeffectiveness of the Company's disclosure controls and procedures (as defined in theSecurities Exchange Act of 1934 Rules 13a-14(c) and 15d- 14(c) as of a date within 90 daysof the filing date of this annual report on Form 10-KSB (the "Evaluation Date"),have concluded that as of the Evaluation Date, the Company's disclosure controls andprocedures were adequate and effective to ensure that material information relating to theCompany would be made known to it by others within the Company, particularly during theperiod in which this annual report on Form 10-KSB was being prepared.

(b) Changes in Internal Controls. There were not significantchanges in the Company's internal controls or in other factors that could significantlyaffect the Company's disclosure controls and procedures subsequent to the Evaluation Date,nor any significant deficiencies or material weaknesses in such disclosure controls andprocedures requiring corrective actions.
**FORWARD LOOKING STATEMENTS: The above discussion may containforward-looking statements that involve a number of risks and uncertainties. In additionto the factors discussed above, among other factors that could cause actual results todiffer materially are the following: competitive factors such as rival wirelessarchitectures and price pressures; availability of third party component products atreasonable prices; inventory risks due to shifts in market demand and/or price erosion ofpurchased components; change in product mix, and risk factors that are listed in theCompany's reports and registrations statements filed with the Securities and ExchangeCommission.**
 

ITEM 7. FINANCIAL STATEMENTS

See Exhibit 1, Financial Statements and Financial Statement Schedules.Such Financial Statements and Schedules are incorporated herein by reference.

 

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

None

 

PART III

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

IDENTIFICATION OF DIRECTORS:

The following table sets forth the names and ages of all directors ofthe Company as of December 31, 2002; as well as term in office and principal occupation ofeach director. 
Name of Director
Term in Office
AgePrincipal OccupationT.L. Kirchner 
06/7/02 – 06/7/05
54President of the CompanyMelvin H. Brown
06/02/00 – 06/02/03
72President of Manufacturing Services, Inc.Robert Southworth
06/02/00 – 06/02/03
59Patent Attorney for U.S. Dept. of EnergyJon Correio
06/02/00 – 06/02/03
35Vice President of Finance of the CompanyJohn L. Schooley 
06/01/01 – 06/01/04
64President of Remtron, Inc.
Management believes that there are no agreements or understandingbetween the directors and suppliers or contractors of the Company, except the agreementwith Manufacturing Services, Inc. as described elsewhere in this report.

IDENTIFICATION OF EXECUTIVE OFFICERS

The following table sets forth the names and ages of all executiveofficers of the Company as of December 31, 2002; all positions by such persons; term ofoffice and the period during which he has served as such; and any arrangement orunderstanding between him and any other person(s) pursuant to which he was elected as anofficer:

Name of Officer
Age
Position
Term of Office
Period of Service
T. L. Kirchner
54
President
3 Years
02/10/84- Present
Jon Correio
35
Sec/Treas
3 Years
02/9/01- Present
There are no family relationships, whether by blood, marriage, oradoption, between any of the Directors or Executive Officers of the Company.

The following is a brief description of the business experience duringthe last five years of each director and/or executive officer of the Company.

T.L. KIRCHNER. Mr. Kirchner is founder, Presidentand a Director of the Company. During the last five years Mr. Kirchner devoted 100% of histime to the Management of the Company. His primary duties are to oversee the Managementand Marketing functions of the Company. Mr. Kirchner does not serve as a director for anyother company registered under the Securities Exchange Act.
MELVIN H. BROWN. Mr. Brown is a Director of theCompany. During the last five years Mr. Brown has been the owner and president ofManufacturing Services, Inc. Manufacturing Services provides services in packaging design,printed circuit board layout, prototyping, verification of documentation, testing,burn-in, quality control, and repetitive volume production. Manufacturing Servicesprovides electronic manufacturing and quality control testing services for ElectronicSystems Technology. Mr. Brown does not serve as a director for any other companyregistered under the Securities Exchange Act.
ROBERT SOUTHWORTH. Mr. Southworth is a Directorand the Secretary/Treasurer of the Company. Since 1980, Mr. Southworth has been employedwith the U. S. Department of Energy as a Senior Patent Attorney in Richland, Washington.His primary duties with the Department of Energy include the preparation and prosecutionof domestic and foreign patent applications in such fields as nuclear reactors, fuelreprocessing, waste management and energy related fields of solar, wind, and fossil fuels.Mr. Southworth does not serve as a director of any other company that is registered underthe Securities Exchange Act
JON CORREIO. Mr. Correio is the Vice President ofFinance and Administration, Secretary/Treasurer and a Director of the Company. During thelast five years Mr. Correio has been a full time employee of the Company, whose primaryduties are to oversee the Finance and Administration functions of the Company. Mr. Correiodoes not serve as a director for any other company registered under the SecuritiesExchange Act. 
JOHN L. SCHOOLEY. Mr. Schooley is a Director ofthe Company. During the past five years, Mr. Schooley has been the owner and President ofRemtron, Inc. in San Diego, California. Remtron, Inc. manufactures advanced radio controland telemetry systems for the industrial marketplace. Remtron, Inc. has previouslyprovided research and development services for Electronic Systems Technology. Mr. Schooleydoes not serve as director of any other company that is registered under the SecuritiesAct.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The following person(s) who, at any time during the fiscal year, was adirector, officer, beneficial owner or more than 10% any class of equity securities of theregistrant, failed to file on a timely basis the required disclosure Form as noted: None.

ITEM 10.EXECUTIVE COMPENSATION****
The Company's named compensated executive officer is T.L. Kirchner,President and CEO. The Company had no other compensated executive officers as of December31, 2002. 

The information specified concerning the compensation of the namedexecutive officers for each of the Registrant's last three completed fiscal years isprovided in the following Summary Compensation Table:

SUMMARY COMPENSATION TABLE Long Term Compensation
Annual    Compensation
Awards
Payouts 
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)    Name and Principal Position     Year
    Salary    ($)    Bonus    ($)(1)
    Other Annual Compensation ($)(2)
    Restricted Stock Awards    ($)
Securities Options    Underlying SARs    (#)
    LTIP    Payouts    ($)
    All    Other    Compensation    ($)(3)
T. L. Kirchner,    President &    CEO
 

 

2002
 

 

90,000
 

 

0
 

 

2,655
 

 

0
 

 

25,000
 

 

0
 

 

8,391 
2001
90,000
0
2,267
0
25,000
0
7,150
2000
90,000
0
3,545
0
25,000
0
7,401
(1) Includes amounts paid under the Non-qualified Employee Profit Sharing Bonus(2) Other Annual Compensation includes Accrued Vacation Pay(3) All Other Compensation consists of premiums paid for Group Health Insurance and KeyMan Insurance

The information specified concerning the stock options of the named executive officersduring the fiscal year ended December 31, 2002 is provided in the following Option/SARGrants in the Last Fiscal Year Table:

OPTION/SAR GRANTS IN LAST    FISCAL YEAR
Individual Grants (4)
(a)
(b)
(c)
(d)
(e)
 

Name
Number of Securities    Underlying    Options/SARs    Granted #    (4)
% of Total Options/SARs    Granted to Employees in Fiscal Year
 

Exercise or base price ($/Share)
 

Expiration Date
T.L. Kirchner
25,000
13.8%
0.44
2/9/04
(4) This table does not include Stock Options granted previously. Forms8-K dated 2/11/00, 2/9/01 respectively, are incorporated herein by reference.

The information specified concerning the stock options of the namedexecutive officers during the fiscal year ended December 31, 2002 is provided in thefollowing Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-EndOptions/SAR Values Table:

AGGREGATED OPTION/SAR    EXERCISES IN LAST FISCAL YEAR    AND FISCAL YEAR END OPTION/SAR VALUES
(a)
(b)
(c)
(d)
(e)
    Name
    Number of Shares Acquired on Exercise
 

    Value Realized ($)
Number of Securities    Underlying    Unexercised    Options/SARs at    FY-End (#)    Excercisable/    Unexercisable
    Value of Unexercised    In-the-money    Options/SARs    At FY-End ($)    Excercisable/    Unexercisable
T.L. Kirchner
0
0
75,000
0
The Company does not currently have a Long-Term Incentive Plan("LTIP").

Compensation to outside directors is limited to reimbursement ofout-of-pocket expenses that are incurred in connection with the directors dutiesassociated with the Company's business. Directors with no less than three years continuoustenure are eligible for stock option awards, as governed by the Company stock option plan.There is currently no other compensation arrangements for the Company's directors. (See"Security Ownership of Certain Beneficial Owners and Management" for StockOptions granted in previous years.)

The Company currently does not hold any Employment Contracts or Changeof Control Arrangements with any parties.

ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth, as of December 31, 2002, the amount andpercentage of the Common Stock of the Company, which according to information supplied bythe Company, is beneficially owned by each person who, to the best knowledge of theCompany, is the beneficial owner (as defined below) of more than five (5%) of theoutstanding common stock.

Title of Class
Name & Address    Of    Beneficial Owner (1)
Amount & Nature of    Beneficial Ownership
Percent of Class
Common
Gerald R Hewitt    2046 Harris Ave    Richland WA 99352
493,630 
9.7%
Common
EDCO Partners LLLP    4605 Denice Drive    Englewood CO 80111
415,015
8.14%
Common
T.L. Kirchner    415 N. Quay St.    Kennewick WA 99336
403,488 (2)(3)
7.9%
(1) Under Rule 13d-3, issued by the Securities    and Exchange Commission, a person is, in general, deemed to "Beneficially own"    any shares if such person directly or indirectly, through any contract, arrangement,    understanding, relationship or otherwise, has or shares (a) voting power, which includes    the power to vote or to direct the voting of those shares and/or (b) investment power,    which included the power to dispose, or to direct the disposition of those securities. The    foregoing table gives effect to shares deemed beneficially owned under Rule 13d-3 based on    the information supplied to the Company.  The persons named in the table have sole    voting power and investment power with respect to all shares of Common Stock beneficially    owned by them.

(2) The beneficial owner    listed above has stock options giving the right to acquire 75,000 shares of Electronic    Systems Technology, Inc. Common Stock: Options for 25,000 shares granted February 11,    2000, Options for 25,000 shares granted February 9, 2001 and Options for 25,000 shares    granted February 15, 2002. Forms 8-K, dated February 11, 2000, February 9, 2001 and    February 15, 2002 respectively, are incorporated herein by reference.
(3) Does not include    options granted. See footnote (1) above.
SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth, as of February 21, 2003, amount andpercentage of the Common Stock of the Company, which according to information supplied bythe Company, is beneficially owned by Management, including officers and directors of theCompany.

Title     Of    Class
Name     Of    Beneficial Owner
Amount & Nature    Of    Beneficial Ownership
Percent of Class
Common
T.L. Kirchner    (Officer & Director) 
403,488 (1)
7.9%
Common
Robert    Southworth    (Director) 
0 (1)
0.0%
Common
Melvin H. Brown    (Director) 
76,500 (1)
1.5%
CommonJon Correio     (Officer &Director) 
0 (1)
0.0%
Common
John Schooley    (Director)
85,000 (1)
1.7%
CommonD.B. Strecker (VP of Engineering)
20,000 (1)
0.4%
(1) Does not include stock options. See below.

On various dates, the Company's Board of Directors has approved StockOption Bonuses for Directors and Employees. The following is a summary of the Stock Optionbonuses currently outstanding: Options are exercisable at fixed prices. Options may not beexercised in blocks of less than 5,000 shares. Options not exercised expire three yearsafter approval date or 90 days following termination of employment/board membership,whichever occurs first. In the event of acquisition, merger, recapitalization or similarevents of the Company, the optionee will receive equivalent shares or will have a 10-daywindow in which to exercise the options. Option grants are not transferable or assignableexcept to the optionee's estate in the event of the optionee's death. 

The information below does not include stock options granted inFebruary 2003.

Recipients of Stock Options currently unexpired as of December 31, 2002were as follows:**************************