U.S. Securities and Exchange CommissionWashington, D.C. 20549

FORM 10-KSB

(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended **December 31, 2003**
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESACT 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:  None

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

Check whether the issuer (1) filed all reports required  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 Regulations S-B is met contained in this form, and no disclosure  will be contained, to the best of the 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 ] Not applicable [ ]
State issuer's revenues for its most recent fiscal year.$2,244,047
On February 20, 2004 the aggregate  market value, based on the asked price, of the voting stock held by nonaffiliates of the  registrant was $3,246,039.
The number of shares outstanding of the registrant's  common stock as of February 20, 2004: 5,098,667 shares.
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, Commission File No. 2-92949-S; (2) Form 8-K, filed March 15, 1985, Commission  File No. 2-92949-S; Form 8-A, Commission File No. 000-27793, dated October 25, 1999;  Forms 8-K dated June 5, 1997, June 4, 1998, June 11, 1999, February 11, 2000, February 9,  2001, February 15, 2002, February 21, 2003 and February 20, 2004. 

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

 

PART I

ITEM 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.The Company’s development efforts during 2003 were concentrated ondevelopment and enhancement of the ESTeem 192E Ethernet based radio frequency modem, andinitial development of the ESTeem 195E Series product line. The Model 195E Series productsare multi-protocol, Ethernet based, spread spectrum nonlicensed radio frequency modems,with a physically reduced footprint and higher RF data rates. The first of the 195E Seriesproducts are scheduled for release during the first half of 2004. The Company alsodeveloped; type accepted and released the ESTeem 192CHP series of high power, licensedfrequency radio modems during 2003. In an effort to continually expand its customer base,particularly in the industrial control arena, the Company continues efforts to team withall major programmable logic controller (PLC) hardware vendors. The Company has also beeninvolved from time to time as a hardware provider for Government programs, where theCompany’s products have been used in watershed management, aircraft maintenance,airfield lighting and resource management applications. During 2003, the Company continuedmarketing the ESTeem products for use in foreign and domestic Supervisory Control and DataAcquisition (SCADA), Industrial Automation, and Government marketplaces, as well as mobiledata terminal applications for public safety entities. 
PRODUCTS AND MARKETS

The Company’s ESTeem wireless modem product lines provideswireless communication links between computers, peripherals, and instrumentation controlsusing radio frequency waves. The proliferation of computer applications in business,industry and public service has created a dynamic environment of automation andnetworking, requiring constantly growing amounts of data transfer. Prior to the inventionof the ESTeem modem, the majority of data transfers used telephone modems or direct cableconnections, both of which have costly side effects. Telephone modems have a potentiallyexpensive monthly charge for the use of telephone lines, and direct cable connections canhave installation costs as much or more than the cost of the communication system. ESTeemwireless modem products provide a "Wireless Solution" by eliminating the needfor conventional hardwiring 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". ESTeem modems work on a packet burst communicationsconcept. Packet systems, whether hardwired or radio, share the same principle ofoperation: data is taken from RS-232C, RS-422, RS-485 asynchronous or Ethernet ports andis transmitted in "Electronic Packets". Once a packet of data is formed, thepacket is transmitted in a "burst," from one ESTeem modem to another ESTeemmodem, hence the term "packet burst communications." Internal Digi-Repeaterfeatures allow the user to increase operating range by relaying transmission throughmultiple ESTeems to reach a destination ESTeem. An ESTeem can operate as an operatingnode, a repeater node, or both simultaneously, for added flexibility. Secure datacommunication is provided in the ESTeem products through use of proprietary technology andindustry standard techniques.

PRODUCT APPLICATIONS

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

Water/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
**Licensed Narrow Band Products**
The Company’s licensed, narrow band packet burst radio modems aretypically used for foreign and domestic commercial, industrial, federal, and public safetyapplications. Typical indoor and outdoor fixed base and mobile applications include pointto point as well as point to multi-point digital data networking. The distance isdependent on the product chosen as shown in the table below. Using the internaldigi-repeater feature in each radio modem can increase the Line-of-Sight (LOS) distancesshown below for each product type.
**ESTeem Model**Type**Frequency (MHz)**RF Power (Watts)**RF Data Rate (bps)**LOS Range (Miles)**Interface
192C
Narrow    Band Licensed
450    to 470
1    to 5
19.2    K
15
RS-232/422/485
192CHP
Narrow    Band Licensed
450    to 470
10,    20, or 30
19.2    K
40-70
RS-232/422/485
192F
Narrow    Band Licensed
400    to 420
1    to 5
19.2    K
15
RS-232/422/485
192M
Narrow    Band Licensed
150    to 174
1    to 5
19.2    K
15
RS-232/422/485
192MHP
Narrow    Band Licensed
150    to 174
10,    20, or 30
19.2    K
40-70
RS-232/422/485
192V
Narrow    Band Licensed
72    to 79
1
19.2    K
5
RS-232/422/485**Unlicensed Spread Spectrum Products**
The Model 192S is a low cost unlicensed direct sequence spread spectrumtransceiver for foreign and domestic commercial and industrial applications operating inthe 2.4 GHz spectrum. Typical indoor and outdoor applications include point to point andpoint to multi-point digital data networking for distances to approximately 10 milesline-of-sight without the use of the digi-repeater option. 
**ESTeem Model**Type**Frequency (MHz)**RF Power (Watts)**RF Data Rate (bps)**LOS Range (Miles)**Interface
192S
Unlicensed
2400
.5    or 1
171K
10
RS-232/422/485**Unlicensed Ethernet Spread Spectrum Products**
The Company’s Ethernet radios are a high performance, directsequence spread spectrum transceiver employing the industry standard, 10baseT, 802.11bEthernet connectivity for commercial, industrial, federal, and public safety applicationsoperating in the unlicensed 2.4 GHz spectrum with data transfer rates of up to 11 Mbps.Typical installations include data rate critical, point to point, point to multi-point,and "last-mile" bridge digital data networking and mobile applications fordistances to approximately 5 to 7 miles line-of-sight without the use of the digi-repeateroption. Their high data capability allows these products to be used in Video and Voiceover IP applications.
**ESTeem Model**Type**Frequency (MHz)**RF Power (Watts)**RF Data Rate (bps)**LOS Range (Miles)**Interface    (10baseT)
192E
Unlicensed
2400
1
11    M
5-7
Ethernet    
WLANC11
Unlicensed
2400
0.2
11    M
300-3000    ft.
Ethernet
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 provides direct services to customers, such as repair andupgrade of ESTeem products. To assist in the application of ESTeem wireless modems, theCompany also 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 rapidlychanging technology. This environment results in the necessity of the Company to becontinually updating and enhancing existing products, as well as developing new productsin order to remain competitive. Research and Development expenditures for new productdevelopment and improvements of existing products by the Company for 2003 and 2002 were$239,446 and $167,522, respectively. None of the Company’s research and developmentexpenses were paid directly by any of the Company’s customers. During 2003, theCompany contracted and will continue to contract, with independent, nonaffiliated,engineering companies specializing in radio design, when such expertise was required. 

The Company’s development efforts during 2003 were concentrated ondevelopment and enhancement of the ESTeem 192E Ethernet based radio frequency modem, aswell as initial development of the ESTeem 195E Series product line. The Model 195E Seriesof multi-protocol, Ethernet based, spread spectrum nonlicensed radio frequency modems,have a physically reduced footprint and higher RF data rates. The first of the Model 195ESeries products are scheduled for release during the first half of 2004. The Company alsodeveloped, type accepted, and released the ESTeem 192CHP series of high power, licensedfrequency radio modems during 2003. The Company plans continued research and developmentexpenditures and to undertake new development and improvement projects, as they becomenecessary.

MARKETING, CUSTOMERS AND SUPPORT

The majority of the Company’s products sold during 2003 werethrough the reselling efforts of non-exclusive, non-stocking distributors and resellers ofthe Company’s products, with the remainder of the Company’s sales distributeddirectly from the Company’s facility through direct sales to end-users of the ESTeemproducts. During 2003, approximately sixty percent of the Company’s products weredistributed through resellers and forty percent through direct sales. Direct salesincreased during 2003 due to an increase in sales to Public Safety entities representing21% of sales revenues during 2003. Customers generally place orders on an "as neededbasis". Shipping dates for products are generally 5 to 10 working days after receiptof a customer order, with the exception of ongoing, scheduled projects, and customdesigned equipment for specific customer applications. As of December 31, 2003, theCompany had a backlog of $136,767 in sales orders.

During 2003, 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 has increased attendance at tradeshowsspecifically targeted toward the customers and markets in which it sells products. TheCompany employs sales managers to concentrate marketing and sales efforts in both theLatin American industrial automation and Mobile Data Computers for public safety markets.For 2004, the Company intends to continue strategies targeting existing markets ofindustrial controls and Mobile Data Computers for public safety networks. The Companymaintains an Internet web site to provide access to product and technical information forboth present and potential customers of the Company’s products. Due to the variableconfiguration possibilities of the Company’s products, and existing distributorrelationships, the Company has not implemented an electronic commerce internet website.The Company provides technical support and service for ESTeem products through phonesupport, field technicians and internet sources. The Company believes high qualitycustomer and technical support is necessary and vital to its business and the markets inwhich it competes. To maintain this high level of customer support the Company has in thepast, and will continue in the future, to make investments and expenditures in support ofits 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 beenincluded in projects for water-shed management, aircraft maintenance, airfield lighting,and resource management for U.S. Government entities. The Company has a General ServicesAdministration (GSA) contract to sell goods to the U.S. Government. This contract is afixed price, indefinite quantity and delivery agreement. The current contract expiresduring February 2009.

For the year ended December 31, 2003, no sales to a single customercomprised 10% or more of total product sales as of December 31, 2003. See"Management’s Discussion and Analysis of Financial Condition and Results ofOperations", and "Financial Statements".

COMPETITION

The Company’s competition varies according to the market in whichthe Company's products are competing. All of the markets in which the Company’sproducts are sold are highly competitive. Listed below are the markets the Company’sproducts compete in 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 advertisingand sales 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 tothe ESTeem Wireless Modem trademark, in uninterrupted use by the Company since 1985,lapsed with the U.S. Patent and Trademark Office. The Company has reapplied for theapplicable trademarks, which are currently published for comment with the U.S. Patent andTrademark Office, with final status pending at the time of this report. To protect theCompany against unauthorized disclosure of proprietary information belonging to theCompany, all employees, dealers, distributors, original equipment manufacturers, salesrepresentatives and other persons having access to confidential information regardingCompany products or technology 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 Acceptancehave been 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. All of theCompany’s current ESTeem production models have been granted type acceptance inCanada. 

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 customerswill receive 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 the ESTeem products from sole suppliers. Components manufactured by Intersil, MotorolaCorporation, Mitsubishi, Murata Corporation, Temex and Toko America Inc. as purchasedthrough a number of distributors, supply key components for the Company’s products.The components provided by these companies could be replaced or substituted by otherproducts, if it became necessary to do so. If this action became necessary, a materialinterruption of production and/or material cost expenditures, for example involved withlocating and qualifying replacement components, could take place. 

Approximately 25% of the Company’s inventory at December 31, 2003consisted of parts having lead times ranging from 12 to 32 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 on past experience with component availability, distributor relationships, andinventory levels, the Company does not foresee shortages of materials used in production.However, developments in the electronic component marketplace, involving components usedby the Company which are also used in cellular phones and paging devices, have thepotential of creating negative availability and delivery issues for components used by theCompany. 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, 2003, the Company employed a staff of14 persons on a full time basis, 3 inmarketing, 2 in technical support, 8 in engineering/manufacturing, and 1 in finance andadministration. The Company’s operations are dependent upon key members of itsengineering and management personnel. In the event services of these key individuals werelost to the Company, adverse effects on the Company’s operations may be realized. TheCompany employs part-time labor on an "as needed" basis, usually inengineering/manufacturing. At year-end 2003 the Company employed 3 part-time employees.None of the Company’s employees are represented by a labor union and the Companybelieves it has good relations with 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 by a lease agreement withThe Port of Kennewick in Kennewick, Washington for approximately 6,275 square feet ofoffice and laboratory space. As of January 2, 2004, the total monthly lease cost is$2,600.04, including a leasehold tax of $285.96. 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 2003 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, 2003
First Quarter
0.37
0.34
0.43
0.34
Second Quarter
0.51
0.29
0.60
0.30
Third Quarter
0.51
0.36
0.57
0.36
Fourth Quarter
0.56
0.37
0.62
0.37 
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
The above data was compiled from information obtained from the PinkSheets LLC, OTC Market Report daily quotation service.

The number of record holders of common stock of the Registrant as ofJanuary 9, 2004 was 542 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 also paid a non-cumulative cashdistribution on July 16, 2003, equivalent to $0.015 per outstanding share. TheCompany’s Forms 8-K dated June 6, 2003, June 11, 1999, June 4, 1998 and June 5, 1997,as filed with the Securities and Exchange Commission are included herein by reference.Dividends undertaken by the Company will be solely at the discretion of the Board ofDirectors. 

 

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.The following 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 (MDC) applications. The Company markets its products through directsales, sales representatives, and domestic, as well as foreign, resellers. Operations ofthe Company are sustained solely from revenues received through sales of its products andservices. 
FISCAL YEAR 2003 vs. FISCAL YEAR 2002

GROSS REVENUES: Total revenues for the fiscalyear 2003 were $2,244,047 reflecting a 7% increase from $2,092,865 gross revenues forfiscal year 2002. The increase in total revenues is the result of increased product salesrevenues in the domestic, industrial automation market segment during 2003. Product salesincreased to $2,064,628 in 2003, as compared to 2002 sales of $1,932,648. Managementbelieves the increase in sales of the Company’s products were the result of continuedmarketing efforts on the part of the Company, including increased attendance at regionaltradeshows for both industrial automation and MDC marketplaces, and increased salespersonactivity. Management intends to sustain or increase the Company’s marketing effortsin 2004, but cannot guarantee that sales revenues for 2004 will increase or remain at thesame level as experienced during 2003 due to the highly competitive markets in which theCompany markets products and services.
Interest and investment revenues decreased from 2002 levels of $37,051,to 2003 levels of $31,873 due to decreased rates of return received on the Company’sinvestments. Engineering Services revenues during 2003 increased to $145,213 from 2002levels of $117,573 due to increased requests for the Company’s engineering services,particularly MDC projects, when compared with 2002. 

In 2003, 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 theCompany’s products for MDC systems to public entities, which accounted for 21% of theCompany’s domestic sales during 2003. An example of an MDC system for a public entityis a local area network (LAN), between police department computer dispatch centers andindividual police vehicles. Management believes future federal funding of MDC projectscannot be guaranteed and therefore MDC projects involving the Company’s productsbecome very difficult to predict. 

During 2003, the Company had $369,047 in foreign export sales,amounting to 17% of gross product and service revenues for the year, compared with foreignexport sales of $335,706 or 16% of gross product and service revenues for 2002. Theincrease in foreign sales was due to increased sales volumes for industrial automationprojects in India and Latin America. Products purchased by foreign customers were usedprimarily for use in industrial automation. Management believes the majority of foreignexport sales are the results of the Company’s Latin American sales manager, ESTforeign distributor efforts, and the Company’s Internet website presence. Thegeographic compositions of the Company’s foreign export sales for 2003 and 2002 areshown in Note 13 to the Financial Statements. 

In 2003, products purchased by U.S. Government agencies or by U.S.Government contractors amounted to $19,828 or 1%, of gross product and service revenues ascompared with 2002 levels of $148,177 or 7%, of gross product and service revenues. During2003, products purchased by the U.S. Government or U.S. Government contractors were usedprimarily for airport lighting applications. The comparative decrease in 2003 U.S.Government sales revenues reflects a continuing trend of declining U.S. Government Sales.2002 U.S. Government sales included sales for a large water control project. Managementbelieves U.S. Government sales will remain static or decrease during 2004 due to a lack ofU.S. Government funding for, or discontinuance of, programs using the Company’sproducts. Due to the uncertain nature of U.S. Government purchasing, planning of revenuesto be received from U.S. Government is very difficult to predict. The Company has madespecific marketing contacts regarding the possibility of use of the Company’sproducts for Homeland Security communication projects, however at the time of this report,no sales have been forthcoming from these efforts. 

As of December 31, 2003, the Company had a backlog of $136,767in sales orders. The Company’s customers generallyplace orders on an "as needed basis". Shipment for the Company’s productsis generally made within 5 to 10 working days after receipt of customer orders, with theexception of ongoing, scheduled projects, and custom designed equipment for specificcustomer applications. 
COST OF SALES: Cost of Sales, as a percentage of gross sales, was 45%for both 2003 and 2002. 

INVENTORY: The Company's year-end inventoryvalues for 2003 and 2002 were as follows:
2003
2002
Parts 
$232,801 
$359,915 
Work in Progress 
86,928
0
Finished goods
192,243 
209,509 
TOTAL 
$511,972 
$569,424 
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 25% of the Company’s inventory at December 31,2003 consisted of parts having lead times ranging from 12 to 32 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 on past experience with component availability, distributor relationships, andinventory levels, the Company does not foresee shortages of materials used in production.However, developments in the electronic component marketplace, involving components usedby the Company which are also used in cellular phones and paging devices, have thepotential of creating negative availability and delivery issues for components used by theCompany. 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 decreased between December 31, 2002 and December 31, 2003,due to a combination of increased sales of the Company’s products on a whole during2003, and reduced levels of purchases of material by the Company at year-end 2003 whencompared with the same period of 2002. 

For year-end 2003, purchases and costs allocated to cost of goods soldwere $880,909 as compared to $907,087 in 2002. The decrease in purchases and allocatedcosts is the result of decreased purchases at year-end, combined with reduced inventory onhand, when compared with year-end 2002. 

OPERATING EXPENSES: Operating expenses increasedto $1,006,674 in 2003, from 2002 levels of $788,631. Material changes in expenses arecomprised of the following components: Sales Commissions increased to $22,147 in 2003 from2002 levels of $1,749 due to increased commissions paid to Indian resellers of theCompany’s products during 2003. Depreciation expense increased during 2003 to $49,207from 2002 levels of $40,869 due to increased depreciable assets when compared with 2002.Professional services increased to $67,112 from 2002 levels of $59,462 due to increasedprofessional fees for reapplication of the Company’s trademarks, and increased auditfees. Trade show expenses increased during 2003 to $40,851 from 2002 levels of $36,578 dueto increased shows attended by the Company when compared with 2002. Travel expensesincreased to $83,498 for 2003, compared to $81,023 for 2002, due to increased marketingand engineering service related travel expenses during 2003.
Salaries increased to $783,991 in 2003, from 2002 levels of $597,562,due to higher wages paid to an increased number of Company employees during 2003 whencompared with 2002. The Company also paid salary bonuses during 2003 for 2002 net incomeperformance, as well as accruing salary bonus expense for 2003 net income performance, tobe paid during 2004. The Company incurred bad debt expense of $3,047 during 2003 ascompared with $18,334 during 2002. 

FISCAL YEAR 2002 vs. FISCAL YEAR 2001

GROSS REVENUES: Total revenues for 2002 were$2,092,865 reflecting a 39% increase from $1,509,545 gross revenues for 2001. The increasein total revenues was the result of increased sales revenues for 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. In management’s opinion,the increase in sales of the Company’s products were the result of increasedmarketing efforts on the part of the Company, specifically increased regional tradeshowattendance for both industrial automation and MDC marketplaces, and increased salespersonactivity. Management intends to sustain or increase the Company’s marketing effortsin 2003, but believes that sales revenues for 2003 may be impacted by existing economicfactors negatively effecting industrial automation projects involving the Company’sproducts and services.
Interest and investment revenues decreased from 2001 levels of $54,970,to 2002 levels of $37,051 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 theCompany’s products for mobile data computer systems to public entities, whichaccounted for 9% of the Company’s domestic sales during 2002. Management believesfuture federal funding of MDC projects cannot be guaranteed and therefore MDC projectsinvolving the Company’s products become 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 thesecond half of 2002, EST distributor efforts, and the Company’s Internet websitepresence. The geographic composition of the Company’s foreign export sales for 2002is shown in 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, specificallymilitary related maintenance and logistics projects. Management believes that the increasein U.S. Government sales will not continue during 2003 primarily due to a lack of U.S.Government funding for, or discontinuance of, programs using the Company’s products. 

LIQUIDITY AND CAPITAL RESOURCES

The Company’s revenues and expenses resulted in net income of$123,006 for 2003, decreased from net income of $213,576 for 2002. The decreased netincome is the result of increased operating expenses, specifically wages, salaries andrelated taxes paid during 2003, when compared with 2002. At December 31, 2003, theCompany's working capital was $2,355,418 compared with $2,351,155 at December 31, 2002.The Company’s operations rely solely on the income generated from sales. TheCompany's major capital resource requirements are maintaining inventory levels adequatefor production and payment of employee salaries. Extended availability for componentscritical for production of the Company’s products, ranging from 12 to 32 weeks,require the Company to maintain high inventory levels. It is Management’s opinionthat the Company’s working capital as of December 31, 2003 is adequate for expectedresource requirements for the next twelve months. 

The Company's current asset to current liability ratio at December 31,2003 was 12.6:1 compared to 13.2:1 at December 31, 2002. The slight decrease in currentasset ratio is the result of decreased inventory and accounts receivable assets andincreased refundable deposits and accrued payroll when compared with year-end 2002. 

The Company's cash resources at December 31, 2003, including cash andcash equivalent liquid assets, were $378,103 increased from cash resources of $322,997 atyear end 2002. The increased in cash resources at year end is the result of refundabledeposits received late in the fourth quarter for foreign sales orders to be shipped inearly 2004. The Company maintains a brokerage account comprised of marketable securitiesinvestments, which is managed by a third-party investment management firm. As of December31, 2003, the Company’s investments were valued at $1,341,491. At year-end 2003,certain components of investments held by the Company, if sold as of December 31, 2003,would have presented a realized loss, net of tax of $5,465. The contingency is shown inthe Statement of Comprehensive Income (Loss) in the Company’s Financial Statementsfor December 31, 2003. 

The Company's trade accounts receivable, adjusted for allowance foruncollectible accounts, at December 31, 2003, were $284,972, compared to $302,269 at yearend 2002. The decrease is the result of sales and collection timing differences betweenDecember 31, 2003 and December 31, 2002. Management believes that all of theCompany’s accounts receivable as of December 31, 2003, 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, 2003, was $511,972, reflecting adecrease from December 31, 2002, levels of $569,424. The decrease in inventory isdecreased purchases by the Company at year end and increased sales of the Company’sproducts during 2003.

The Company had capital expenditures during 2003 of $113,943 primarilyfor software and test equipment used for research and development and manufacturing of theCompany’s products. The Company intends on investing in additional capital equipmentas deemed necessary to support development and manufacture current and future products. Asof December 31, 2003, the Company's current liabilities were $202,511, increased from 2002year-end levels of $192,226. The increase is due to increases in accounts payable,refundable deposit and accrued payroll liabilities when compared with year-end 2002. 

The Company’s operations were not adversely effected by inflationduring 2003. No adverse affect is anticipated during 2004.

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 no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and procedures subsequent tothe Evaluation Date, nor any significant deficiencies or material weaknesses in suchdisclosure controls and procedures 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 WITHACCOUNTANTS 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, 2003; 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
55President of the CompanyMelvin H. Brown
06/06/03 – 06/02/06
73President of Manufacturing Services, Inc.Robert Southworth
06/06/03 – 06/02/06
60Patent Attorney, U.S. Dept. of Energy    (retired)Jon Correio
06/06/03 – 06/02/06
36Vice President of Finance of the CompanyJohn L. Schooley 
06/01/01 – 06/01/04
65President 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.

Audit Committee

The Audit Committee of the Board of Directors as of December 31, 2003is comprised of Melvin H. Brown (Chairman), Robert Southworth and John Schooley. Mr. Brownis considered to be a non-independent member of the Audit Committee, however his servingas the Chairman of the Committee was deemed by the Board to be in the best interest of theCorporation due to Mr. Brown’s experience and familiarity with the Corporation. TheBoard of Directors has determined that none of the audit committee members can beclassified as an "audit committee financial expert" as defined in Item 401(e) ofRegulation S-B. The Board of Directors does not contain a member that can be classified asan "audit committee financial expert" under the referenced definition. The Boardof Directors believes that attracting and retaining board members that could be classifiedas an "audit committee financial expert" is unlikely due to the high cost ofsuch Director candidates.

Code of Ethics

The Board of Directors has not currently adopted a code of ethics atthe time of this report. The Board of Directors is undertaking evaluation of a code ofethics and expects to finalize and adopt a code of ethics at the directors meeting to beconvened prior to the Annual Shareholders meeting on June 4, 2004. Proper disclosure willbe undertaken subsequent to adoption of a code of ethics by the Board of Directors.

IDENTIFICATION OF EXECUTIVE OFFICERS

The following table sets forth the names and ages of all executiveofficers of the Company as of December 31, 2003; 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
55
President
3 Years
02/10/84- Present
Jon Correio
36
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 Directorof the Company. Mr. Southworth is a recently retired Senior Patent Attorney with the U. S.Department of Energy in Richland, Washington. His primary duties with the Department ofEnergy were the preparation and prosecution of domestic and foreign patent applications insuch fields as nuclear reactors, fuel reprocessing, waste management and energy relatedfields of solar, wind, and fossil fuels. Mr. Southworth does not serve as a director ofany other company that is registered under the 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

During the year ended December 31, 2003, in the best knowledge ofManagement, there was no director, officer, or beneficial owner of more than 10% any classof equity securities of the registrant who failed to file on a timely basis the requireddisclosure form as required by Section 16(a) of the Securities and Exchange Act of 1934.

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 ofDecember 31, 2003. 

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
2003
125,000
5,594
4,146
0
25,000
0
8,391 
2002
90,000
0
2,655
0
25,000
0
8,391
2001
90,000
0
2,267
0
25,000
0
7,150
(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 Key Man Insurance

(4)    Amounts do not reflect proceeds of $0.015 per    share cash distribution received during 2003 totaling $6,052. Receipt of cash distribution    was based solely on capacity as a shareholder. 

The information specified concerning the stock options of the named executive officersduring the fiscal year ended December 31, 2003 is provided in the following Option/SARGrants in the Last Fiscal Year Table:

OPTION/SAR GRANTS IN LAST    FISCAL YEAR
Individual Grants (5)
(a)
(b)
(c)
(d)
(e)
 

Name
Number of Securities    Underlying    Options/SARs    Granted # (5)
% of Total Options/SARs    Granted to Employees in Fiscal Year
 

Exercise or base price ($/Share)
 

Expiration Date
T.L. Kirchner
25,000
13.8%
0.40
2/20/06
(5) This table does not include Stock Options granted previously. Forms    8-K dated 2/9/01 and 02/15/02 respectively, are incorporated herein by reference.

The information specified concerning the stock options of the namedexecutive officers during the fiscal year ended December 31, 2003 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)********************************************************