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 SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended **December 31, 2004**
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES ACT OF 1934

For the transition period from __________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 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.$2,442,390
On February 22, 2005 the aggregate market value,based on the asked price, of the voting stock held by nonaffiliates of the registrant was$3,610,943.
The number of shares outstanding of the registrant's common stock as ofFebruary 22, 2005: 5,148,667shares.
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 Registration Statement, effectiveNov. 5, 1984, Commission File No. 2-92949-S; (2) Form 8-K, regarding Articles ofIncorporation and By-laws, filed March 15, 1985, Commission File No. 2-92949-S; Form8-A, Registration Statement, Commission File No. 000-27793, dated October 25, 1999; Forms8-K dated June 5, 1997, June 4, 1998, June 11, 1999, June 6, 2003 and June 4, 2004,regarding cash distributions; Forms 8-K dated February 9, 2001, February 15, 2002,February 21, 2003, February 20, 2004, and February 25, 2005 regarding issuance of stockoptions. 

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 risks and uncertainties that could cause actualresults to differ materially from those projected, including the risks described in thisAnnual Report. Given these uncertainties, readers are cautioned not to place unduereliance on such statements. The Company also undertakes no obligation to update thoseforward-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, as well as 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. During the past three years, the Company hascontinued product improvements to incorporate the latest technological developments andrespond to customer needs and market opportunities.Development efforts during 2004 were concentrated on development of the ESTeem195E Ethernet based radio frequency modem. The Model 195E Series products aremulti-protocol, Ethernet based, spread spectrum nonlicensed radio frequency modems, with aphysically reduced "footprint" and higher RF data rates, up to 54 Megabits persecond (Mbps), an increase from a maximum of 11 Mbps RF data rate of the ESTeem 192Emodem. In an effort to maintain and expand its customer base, particularly in theindustrial control arena, the Company continues efforts to team with all majorprogrammable logic controller (PLC) hardware vendors. The Company has also been involvedfrom time to time as a hardware provider for Government programs, where the Company’sproducts have been used in watershed management, aircraft maintenance, airfield lightingand resource management applications. During 2004, the Company continued marketingproducts for use in foreign and domestic Supervisory Control and Data Acquisition (SCADA),Industrial Automation, and Government marketplaces, as well as mobile data communicationapplications 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 for data transfer by eliminating theneed for 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"communications concept. Packet systems, whether hardwired or radio, share the sameprinciple of operation: data is taken from RS-232C, RS-422, RS-485 asynchronous orEthernet ports and is transmitted in "Electronic Packets". Once a packet of datais formed, the packet is transmitted in a "burst," from one ESTeem modem toanother ESTeem modem, hence the term "packet burst communications." InternalDigi-Repeater features allow the user to increase operating range by relaying transmissionthrough multiple ESTeems to reach a destination ESTeem. An ESTeem can operate as anoperating node, a repeater node, or both simultaneously, for added flexibility. Securedata communication is provided in the ESTeem products through use of proprietarytechnology and industry standard techniques.

PRODUCT APPLICATIONS

Some of the major applications and/or industries for which 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" radiomodems are typically used for foreign and domestic commercial, industrial, federal, andpublic safety applications. Typical indoor and outdoor fixed base and mobile applicationsinclude point to point as well as point to multi-point digital data networking. Thedistance is dependent on the product chosen as shown in the table below. Employing theinternal digi-repeater feature in each radio modem can increase the Line-of-Sight (LOS)distances shown 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, 802.11b/gEthernet connectivity for commercial, industrial, federal, and public safety applicationsoperating in the unlicensed 2.4 GHz spectrum with data transfer rates of up to 54 Mbps.Typical installations include data rate critical, point to point, point to multi-point,and "last-mile" bridge data networking and mobile applications for distances ofapproximately 5 to 7 miles line-of-sight without the use of the digi-repeater option. Thehigh data capability of these products allows them to be used in Video and Voice overInternet Protocol (VoIP) applications.
**ESTeem Model**Type**Frequency**
(MHz)**RF Power**
(Watts)**RF Data Rate (bps)**LOS Range (Miles)**Interface**
(10baseT)
195Eg
Unlicensed
2400
1
54    M
5-7
Ethernet    
192E
Unlicensed
2400
1
11    M
5-7
Ethernet    
WLANC
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 2004 and 2003 were$306,949 and $239,446, respectively. None of the Company’s research and developmentexpenses were paid directly by any of the Company’s customers. During 2004, theCompany contracted and will continue to contract, with independent, nonaffiliated,engineering companies specializing in radio design and software development, when suchexpertise is required. 

Development efforts during 2004 were concentrated on development of theESTeem 195E Ethernet based radio frequency modem. The Model 195E Series products aremulti-protocol, Ethernet based, spread spectrum nonlicensed radio frequency modems, with aphysically reduced footprint and higher RF data rates, up to 54 Megabits per second(Mbps), an increase from a maximum of 11 Mbps RF data rate of the ESTeem 192E modem. Thefirst of the Model 195E Series products were released for sales during the third quarterof 2004. The Company plans continued research and development expenditures for developmentand improvement projects, as they are deemed necessary.

MARKETING, CUSTOMERS AND SUPPORT

The majority of the Company’s products sold during 2004 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 2004, approximately sixty percent of the Company’s products weredistributed through resellers and forty percent through direct sales. Customers generallyplace orders on an "as needed basis". Shipping of products is generallycompleted 1 to 15 working days after receipt of a customer order, with the exception ofongoing, scheduled projects, and custom designed equipment for specific customerapplications. As of December 31, 2004, the Company had a backlog of $42,422 in salesorders.

During 2004, the Company continued advertisements in trade publicationsspecifically targeted at users of control, instrumentation, and automation systems, aswell as domestic public safety entities. The Company’s advertising targeted at usersof control, instrumentation, and automation systems was focused primarily on potentialusers of Programmable Logic Controllers (PLCs). There are approximately twenty-five majorPLC 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.During 2005, the Company intends to continue strategies targeting existing markets ofindustrial controls and Mobile Data Computers for public safety networks, and haspreliminary plans for hiring an additional sales manger. The Company maintains an Internetweb site to provide access to product and technical information for both present andpotential customers of the Company’s products. Due to the variable configurationpossibilities of the Company’s products, and existing distributor relationships, theCompany has not implemented an electronic commerce internet website. The Company providestechnical support and service for ESTeem products through phone support, field techniciansand internet sources. The Company believes high quality customer support is necessary andvital to its business. To maintain a 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 continues 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.

No sales to a single customer comprised 10% or more of total productsales for the year ended December 31, 2004. See "Management’s Discussion andAnalysis of Financial Condition and Results of Operations", and "FinancialStatements".

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, Cisco/Aironet, Digital Wireless, Dlink, Linksys, P-Com and Proxim
Mobile Data    Computer systems for public safety applications
Data Radio, IP    Mobilenet, Motorola, TAIT North America, various cellular service providers using GPRS    architectures.
Federal    applications
Adaptive    Broadband, Data Radio, 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 reapplied for the applicabletrademarks, which were successfully renewed with the U.S. Patent and Trademark Office inMay 2004. To protect the Company against unauthorized disclosure of proprietaryinformation belonging to the Company, all employees, dealers, distributors, originalequipment manufacturers, sales representatives and other persons having access toconfidential information regarding Company products or technology are bound bynon-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. All of the Company’s current ESTeem productionmodels have also been granted type acceptance in Canada. 

All ESTeem radio modem products, with the exception of the ESTeem 192S,192E and 195E 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 Hitachi, Intersil,Motorola Corporation, Mitsubishi, Murata Corporation, Rakon, Temex and Toko America Inc.as purchased through a number of distributors, supply key components for theCompany’s products. The components provided by these companies could be replaced orsubstituted by other products, if it became necessary to do so. If this action occurs, amaterial interruption of production and/or material cost expenditures, for exampleinvolved with locating and qualifying replacement components, could take place. 

Approximately 20% of the Company’s inventory at December 31, 2004consisted of parts having lead times ranging from 12 to 24 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 procurement cannot be guaranteed in the future. If shortages were tooccur, material interruption of production and product delivery to customers could 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, 2004, the Company employed a staff of15 persons on a full time basis, 3 inmarketing, 2 in technical support, 8 in engineering/manufacturing, and 2 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 2004 the Company employed 2 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 approximately 6,275 square feet of office and laboratoryspace by a lease agreement with The Port of Kennewick in Kennewick, Washington. As ofJanuary 1, 2005, the total monthly lease cost is $2,683.23, including a leasehold tax of$305.32. 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 2004 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, 2004
First Quarter
0.77
0.55
0.95
0.55
Second Quarter
1.05
0.70
1.25
0.70
Third Quarter
0.85
0.75
0.93
0.75
Fourth Quarter
0.85
0.75
1.01
0.75 
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
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 5, 2005 was 515 persons/entities.

Electronic Systems Technology Inc. paid non-cumulative, cashdistributions on July 14, 2004, July 9, 1999, July 9, 1998 and July 11, 1997,respectively, each equivalent to $0.01 per outstanding share. The Company also paid anon-cumulative cash distribution on July 16, 2003, equivalent to $0.015 per outstandingshare. The Company’s Forms 8-K dated June 4, 2004, June 6, 2003, June 11, 1999, June4, 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.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 2004 vs. FISCAL YEAR 2003

GROSS REVENUES: Total revenues for the fiscalyear 2004 were $2,422,390 reflecting an 8% increase from $2,244,047 gross revenues forfiscal year 2003. The increase in total revenues is the result of increased product salesrevenues in the domestic MDC, and foreign industrial automation market segments during2004. Product sales increased to $2,297,945 in 2004, as compared to 2003 sales of$2,064,628. Management believes the increase in sales revenues for the particular marketsegments were the result of continued marketing efforts on the part of the Company,specifically efforts by the Company’s MDC and Latin American sales managers. During2004 sales revenues for the domestic industrial automation market were consistent with2003 results. Management believes that the lack of growth for domestic industrialautomation revenues is the result of increased product and price competition in thedomestic industrial automation market when compared with 2003. For 2005, the Companyintends to continue strategies targeting existing markets of industrial controls and MDCapplications, and has preliminary plans for hiring an additional sales manger forincreasing the Company’s marketing presence in the domestic industrial automationmarket. Though Management plans to increase the Company’s marketing efforts in 2005,sustaining or increasing sales revenues for 2005 cannot be guaranteed due to the highlycompetitive markets in which the Company’s products and services are marketed.
Interest revenues decreased to $23,508 from 2003 levels of $34,206 dueto decreased rates of return received on the Company’s investments. Engineeringservices revenues during 2004 decreased to $118,680 from 2003 levels of $145,213 due todecreased requests for the Company’s engineering services when compared with 2003.Management believes the reduction experienced in engineering service revenues is theresult of increased sales of Ethernet based wireless modems, which to date have requiredless preinstall, installation and project commissioning services, when compared with theCompany’s licensed frequency radio modems. Management believes this downward trendfor engineering services may continue or accelerate as sales of the Company’sEthernet based wireless modems increase. 

During 2004, a majority of the Company's domestic product sales wereemployed in industrial automation applications. An example of an industrial automationapplication is a municipal water treatment operation, which employs the ESTeem modem totransmit industrial control information to and from control room areas via a wirelesscommunications infrastructure. 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 22% of theCompany’s domestic sales during 2004. 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 funding of MDC projects on a local, stateand federal level, cannot be guaranteed and therefore MDC projects involving theCompany’s products become very difficult to predict. 

During 2004, the Company had $497,558 in foreign export sales,amounting to 21% of gross product and service revenues for the year, compared with foreignexport sales of $369,047 or 16% of gross product and service revenues for 2003. Theincrease in foreign sales was due to increased sales volumes for industrial automationprojects in Canada and Latin America, when compared with 2003. Products purchased byforeign customers were used primarily in industrial automation applications. Managementbelieves the majority of foreign export sales are the results of the Company’s LatinAmerican sales manager, EST foreign distributor efforts, and the Company’s internetwebsite presence. The geographic compositions of the Company’s foreign export salesfor 2004 and 2003 are shown in Note 13 to the Financial Statements. 

In 2004, products purchased by U.S. Government agencies or by U.S.Government contractors amounted to $16,432 or less than 1%, of gross product and servicerevenues as compared with 2003 levels of $19,828 or 1% of gross product and servicerevenues. Products purchased by the U.S. Government or U.S. Government contractors during2004 were used primarily for airport lighting applications. The level U.S. Governmentsales revenue reflects a continuing trend of low U.S. Government Sales. Managementbelieves U.S. Government sales will remain low during 2005 due to a lack of U.S.Government funding for, or discontinuance of, programs using the Company’s products.The Company continues to make specific marketing contacts regarding the use of theCompany’s products for Homeland Security communication projects, however at the timeof this report, no sales have been forthcoming from these efforts. 

As of December 31, 2004, the Company had a backlog of $42,422in sales orders. The backlog level at year end isunusually low for the Company, however Management believes it is the result of timingdifferences in customer ordering for projects, and does not signify a downward trend insales revenues. The Company’s customers generally place orders on an "as neededbasis". Shipment for the Company’s products is generally completed within 1 to15 working days after receipt of customer orders, with the exception of ongoing, scheduledprojects, and custom designed equipment for specific customer applications. 
COST OF SALES: Cost of Sales, as a percentage of gross sales, was 43%and 45% respectively, for 2004 and 2003. Cost of Sales variances are the result of theproduct mix sold, as well as the price discounting structure for the mix of products soldduring the period.

INVENTORY: The Company's year-end inventoryvalues for 2004 and 2003 were as follows:
2004
2003
Parts 
$248,433 
$232,801 
Work in progress 
104,488
86,928
Finished goods
252,238 
192,243 
TOTAL 
$605,159 
$511,972 
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 20% of the Company’s inventory at December 31,2004 consisted of parts having lead times ranging from 12 to 24 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, supplier 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, have the potential of creatingnegative availability issues for components used by the Company. The Company has been ableto procure parts on a timely basis as of the date of this report, however this cannot beguaranteed in the future. If shortages were to occur, material interruption of productionand product delivery to customers could occur. Inventory levels increased between December31, 2003 and December 31, 2004, due to the Company increasing purchases of inventoryspecific to the new ESTeem 195E product line, which was moving into volume production latein the third quarter of 2004. 

For year-end 2004, purchases and costs allocated to cost of goods soldwere $1,077,380 as compared to $880,909 in 2003. The increase in purchases and allocatedcosts is the result of increased purchases by the Company to meet the production needs ofincreased sales revenues, and purchase of specific inventory for the ESTeem 195E productline. 

OPERATING EXPENSES: Operating expenses increasedto $1,089,396 in 2004, from 2003 levels of $1,006,674. Material changes in expenses arecomprised of the following components: Sales Commissions decreased to $6,706 in 2004 from2003 levels of $22,147 due to decreased commissions paid to Indian resellers of theCompany’s products during 2004, when compared with 2003. Depreciation expenseincreased during 2004 to $65,370 from 2003 levels of $49,207 due to the Company’sincreased depreciable assets when compared with 2003. Supplies and materials expenseincreased to $31,920 for 2004 from 2003 levels of $17,639 due to increased supplies usedin the development process of the ESTeem 195E. Professional services increased to $96,039from 2003 levels of $67,112 due to increased subcontracted software development andengineering expertise employed during the development of the ESTeem 195E. Repairs andmaintenance expense increased to $24,774 during 2004 as compared with $15,912 during 2003due to increased repairs and updates needed for test equipment and computer systems.Travel expenses increased to $91,879 for 2004, compared to $83,498 for 2003, due toincreased marketing and engineering related travel expenses during 2004.
Salaries increased to $810,901 in 2004, from 2003 levels of $783,991,due to increased wages paid to Company employees during 2004 when compared with 2003. TheCompany did not incur any bad debt expense during 2004 as compared with $3,047 during2003. 

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 was 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 was 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. 
Interest decreased from 2002 levels of $41,233, to 2003 levels of$34,206 due to decreased rates of return received on the Company’s investments.Engineering services revenues during 2003 increased to $145,213 from 2002 levels 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. 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. 

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. 

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.

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:Operatingexpenses increased to $1,006,674 in 2003, from 2002 levels of $788,631. Material changesin expenses are comprised of the following components: Sales commissions increased to$22,147 in 2003 from 2002 levels of $1,749 due to increased commissions paid to Indianresellers of the Company’s products during 2003. Depreciation expense increasedduring 2003 to $49,207 from 2002 levels of $40,869 due to increased depreciable assetswhen compared with 2002. Professional services increased to $67,112 from 2002 levels of$59,462 due to increased professional fees for reapplication of the Company’strademarks, and increased audit fees. Trade show expenses increased during 2003 to $40,851from 2002 levels of $36,578 due to increased shows attended by the Company when comparedwith 2002. Travel expenses increased to $83,498 for 2003, compared to $81,023 for 2002,due to increased marketing and engineering service related travel expenses during 2003.Salaries increased to $783,991 in 2003, from 2002 levels of $597,562, due to higher wagespaid to an increased number of Company employees during 2003 when compared with 2002. TheCompany also paid salary bonuses during 2003 for 2002 net income performance, as well asaccruing salary bonus expense for 2003 net income performance, to be paid during 2004. TheCompany incurred bad debt expense of $3,047 during 2003 as compared with $18,334 during2002. 
LIQUIDITY AND CAPITAL RESOURCES

The Company’s revenues and expenses resulted in net income of$174,820 for 2004, increased from net income of $123,006 for 2003. The increase in netincome is the result of increased sales revenues during 2004, when compared with 2003. AtDecember 31, 2004, the Company's working capital was $2,498,881 compared with $2,355,418at December 31, 2003. The Company’s operations rely solely on the income generatedfrom sales. The Company's major capital resource requirements are maintaining inventorylevels adequate for production and payment of employee salaries. Extended availability forcomponents critical for production of the Company’s products, ranging from 12 to 24weeks, require the Company to maintain high inventory levels. It is Management’sopinion that the Company’s working capital as of December 31, 2004 is adequate forexpected resource requirements for the next twelve months. 

The Company's current asset to current liability ratio at December 31,2004 was 13:1 compared to 12.6:1 at December 31, 2003. The increase in current asset ratiois the result of increased inventory and cash assets when compared with year-end 2003. 

The Company's cash resources at December 31, 2004, including cash andcash equivalent liquid assets, were $488,480, increased from cash resources of $378,103 atyear end 2003. The increase in cash resources at year-end is the result of timingdifferences in accounts receivables during the last quarter of 2004 when compared with thesame period of 2003. The Company maintains a brokerage account comprised of marketablesecurities investments, which is managed by a third-party investment management firm. Asof December 31, 2004, the Company’s investments were valued at $1,344,619. Atyear-end 2004, certain components of investments held by the Company, if sold as ofDecember 31, 2004, would have presented a realized loss, net of tax of $6,350. A netunrealized loss on marketable securities in the amount of $23,974 has been recognized asan accumulated other comprehensive loss for the year ended December 31, 2004. Thecontingency is shown in the Statement of Comprehensive Income (Loss) in the Company’sFinancial Statements for December 31, 2004. 

The Company's trade accounts receivable, adjusted for allowance foruncollectible accounts, at December 31, 2004, were $257,080, compared to $284,972 atyear-end 2003. The decrease is the result of sales and collection timing differencesbetween December 31, 2004 and December 31, 2003. Management believes that all of theCompany’s accounts receivable as of December 31, 2004 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 30 daycredit terms 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, 2004, was $605,159, reflecting anincrease from December 31, 2003, levels of $511,972. The increase in inventory is due tothe Company increasing purchases of inventory specific to the new ESTeem 195E productline, which was moving into volume production late in the third quarter of 2004, andgeneral increases in purchases to meet production needs of increased sales revenues. 

The Company had capital expenditures during 2004 of $96,155 primarilyfor test equipment and related software used for research and development andmanufacturing of the Company’s products. The Company intends on investing inadditional capital equipment as deemed necessary to support development and manufacture ofcurrent and future products. As of December 31, 2004, the Company's current liabilitieswere $209,035, increased from 2003 year-end levels of $202,511. The increase is due toincreases in accounts payable, income tax payable and accrued payroll liabilities whencompared with year-end 2003. 

The Company’s operations were not adversely effected by inflationduring 2004. No adverse affect is anticipated during 2005.

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 WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL 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, 2004; 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
56President of the CompanyMelvin H. Brown
06/06/03 – 06/02/06
74President of Manufacturing Services, Inc.Robert Southworth
06/06/03 – 06/02/06
61Patent Attorney, U.S. Dept. of Energy    (retired)Jon Correio
06/06/03 – 06/02/06
37Vice President of Finance of the CompanyJohn L. Schooley 
06/04/04 – 06/04/07
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, 2004is comprised of Robert Southworth (Chairman), Melvin Brown and John Schooley. Mr. Brown isconsidered to be a non-independent member of the Audit Committee, however his serving onthe Audit Committee was deemed by the Board to be in the best interest of the Corporationdue to Mr. Brown’s experience and familiarity with the Corporation. The Board ofDirectors has determined that none of the audit committee members can be classified as an"audit committee financial expert" as defined in Item 401(e) of Regulation S-B.The Board of Directors does not contain a member that can be classified as an "auditcommittee financial expert" under the referenced definition. The Board of Directorsbelieves that attracting and retaining board members that could be classified as an"audit committee financial expert" is unlikely due to the high cost of suchDirector candidates.

Code of Ethics

The Board of Directors has not currently adopted a code of ethics atthe time of this report. At the writing of this report the Board of Directors is reviewinga draft of a proposed Code of Ethics. The Board of Directors will undertake properdisclosure subsequent to adoption of a code of ethics.

IDENTIFICATION OF EXECUTIVE OFFICERS

The following table sets forth the names and ages of all executiveofficers of the Company as of December 31, 2004; 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
56
President
3 Years
02/10/84- Present
Jon Correio
37
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 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 was the former owner and Presidentof Remtron, Inc. in San Diego, California, prior to acquisition of Remtron by acompetitor. Remtron, Inc. manufactures advanced radio control and telemetry systems forthe industrial marketplace. Remtron, Inc. has previously provided research and developmentservices for Electronic Systems Technology. Mr. Schooley does not serve as director of anyother company that is registered under the Securities Exchange Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

During the year ended December 31, 2004, 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, 2004. 

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)(4)
T. L. Kirchner,    President/CEO
2004
125,000
3,865
1,079
0
25,000
0
8,388 
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
(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

(4) Amounts do not reflect proceeds of $0.01 per share cash distribution receivedduring 2004 totaling $4,035. Receipt of cash distribution was based solely on capacity asa shareholder. 

The information specified concerning the stock options of the named executive officersduring the fiscal year ended December 31, 2004 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
12.8%
0.80
2/19/07
(5) This table does not include Stock Options granted previously. Forms    8-K dated 2/15/02 and 02/21/03 respectively, are incorporated herein by reference.

The information specified concerning the stock options of the namedexecutive officers during the fiscal year ended December 31, 2004 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******************************************