Edgar Filing: Electronic Sensor Technology, Inc

PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration No. 333-130900

[GRAPHIC OMITTED][ELECTRONIC SENSOR TECHNOLOGY]

ELECTRONIC SENSOR TECHNOLOGY, INC.
27,538,695 SHARES OF COMMON STOCK

This prospectus is part of a registration statement on Form SB-2 that we
filed with the Securities and Exchange Commission. Under this registration
statement, the holders of common stock named in this registration statement may,
and the holders of the warrants and the debentures described below may upon
exercise of such warrants and upon conversion of such debentures, offer for
resale up to a total of 27,538,695 shares of common stock at any time at market
prices prevailing at the time of the sale or at privately negotiated prices. The
selling security holders may sell the common stock directly to purchasers or
through underwriters, broker-dealers or agents, who may receive compensation in
the form of discounts, concessions or commissions.

The 27,538,695 shares of common stock that may be sold by selling security
holders pursuant to this registration statement consist of:

o 1,925,000 shares of common stock of Electronic Sensor Technology, Inc.
(formerly Bluestone Ventures Inc.), par value $.001 per share, which
were issued in a private offering on February 1, 2005;

o 1,500,000 shares of common stock underlying three-year warrants to
purchase such common stock at an exercise price of $1.00 per share,
which were issued in the same private offering on February 1, 2005;

o 130,000 shares of common stock, which were issued in a private
offering on December 5, 2005;

o 350,000 shares of common stock underlying a five-year warrant to
purchase such common stock at an exercise price of $2.40 per share,
which was issued in a private offering on December 5, 2005;

o 23,148,482 shares of common stock, which include 110% of shares
underlying 8% unsecured convertible debentures due December 7, 2009,
which were issued in a private offering on December 7, 2005 and shares
that, at our option, may be used to pay interest on the debentures;
and

o 485,213 shares of common stock underlying a five-year warrant to
purchase such common stock at an exercise price of $0.4761 per share,
which was issued in a private offering on December 7, 2005.

We have agreed to register the foregoing shares of common stock in order to
facilitate secondary trading by the holders of the aforementioned common stock,
debentures and warrants.

Our common stock is quoted on the OTC bulletin board under the symbol
"ESNR.OB".

INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 2 FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

This prospectus is dated May 14, 2007

In making your investment decision, you should rely only on the information
contained in this prospectus and in each prospectus supplement, if any. We have
not authorized anyone to provide you with any other information. If you receive
any unauthorized information, you must not rely on it. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state or jurisdiction where the offer or sale of these
securities is not permitted. You should assume that the information appearing in
this prospectus and any prospectus supplement is accurate only as of the
respective dates thereof. Our business, financial condition, results of
operations and prospects may have changed since those dates.

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TABLE OF CONTENTS

Page

Prospectus Summary........................................................1
Risk Factors..............................................................2
Use of Proceeds...........................................................8
Determination of Offering Price...........................................8
Selling Security Holders..................................................8
Plan of Distribution.....................................................12
Legal Proceedings........................................................13
Directors, Executive Officers and Control Persons........................13
Security Ownership of Certain Beneficial Owners and Management...........16
Description of Securities....... .......................................19
Interest of Named Experts and Counsel....................................19
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.............................................................19
Description of Business..................................................20
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................27
Description of Property..................................................33
Certain Relationships and Related Transactions...........................34
Market for Common Equity and Related Stockholder Matters.................35
Executive Compensation...................................................37
Financial Statements.....................................................45
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................46
Where You Can Find More Information......................................46
Special Note of Caution Regarding Forward-Looking Statements.............47
Legal Matters............................................................47
Experts..................................................................47

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PROSPECTUS SUMMARY

This summary highlights information described more fully elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our audited and unaudited
financial statements and the notes to those financial statements, which are
included in this prospectus.

OVERVIEW OF THE COMPANY

Electronic Sensor Technology is engaged in the development, manufacture,
and sale of a patented product called zNose(R), a device designed to detect and
analyze chemical odors and vapors, or, in other words, an electronic "nose." The
zNose(R) identifies the chemical makeup of any fragrance, vapor or odor. The
zNose(R) does this by creating a visual image of the fragrance, vapor or odor
that it detects, so that the user of the zNose(R) may easily identify the
fragrance, vapor or odor. We are involved in ongoing product research and
development efforts in the homeland security and laboratory instrumentation
markets.

Electronic Sensor Technology was originally incorporated under the name
"Bluestone Ventures Inc.", on July 12, 2000. From inception until February 1,
2005, we were engaged in the business of acquiring, exploring and developing
certain mining properties in Canada. On January 26, 2005, a transaction closed
whereby:

(i) Amerasia Acquisition Corp., a wholly-owned subsidiary of Bluestone,
merged with and into Amerasia Technology, Inc., holder of
approximately 55% of the partnership interests of Electronic Sensor
Technology, L.P. (the predecessor business of Electronic Sensor
Technology, Inc.), such that Amerasia Technology became a wholly-owned
subsidiary of Bluestone;

(ii) L&G Acquisition Corp., a wholly owned subsidiary of Bluestone, merged
with and into L&G Sensor Technology, L.P., holder of approximately 45%
of the partnership interests of Electronic Sensor Technology, L.P.,
such that L&G Sensor Technology became a wholly-owned subsidiary of
Bluestone;

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

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

Upon the acquisition of Electronic Sensor Technology, L.P., we abandoned
our mining business and adopted Electronic Sensor Technology, L.P.'s business of
developing, manufacturing and selling the vapor analysis device. Prior to the
closing of the aforementioned mergers, we changed our name to "Electronic Sensor
Technology, Inc."

Electronic Sensor Technology's executive offices are located at 1077
Business Center Circle, Newbury Park, California 91320, telephone: (805)
480-1994.

THE OFFERING

Issuer........................ Electronic Sensor Technology, Inc.
Securities Offered............ 27,538,695 shares of common stock, par
value $.001.
Use of Proceeds............... We will not receive any proceeds from the
resale by the selling security holders of the
common stock registered pursuant to this
registration statement.

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SUMMARY FINANCIAL DATA

The financial data set forth below under the captions "Results of
Operations Data" and "Balance Sheet Data" for the years ended December 31, 2006
and December 31, 2005 and as of December 31, 2006, respectively, are derived
from our financial statements, included elsewhere in this prospectus, audited by
Sherb & Co., LLP, independent public accountants. The financial data set forth
below should be read in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." All statistical data
set forth herein is unaudited.

RESULTS OF OPERATIONS DATA

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------------------
2006 2005 2007 2006
-------------- -------------- -------------- --------------
(unaudited) (unaudited)

Revenues ......................................... $ 2,180,208 $ 2,122,349 $ 477,275 $ 532,817
Cost of sales .................................... 1,085,056 1,302,602 253,843 301,592
Gross profit ..................................... 1,095,152 819,747 223,432 231,225
Operating expenses ............................... 3,512,590 2,902,089 996,245 991,891
Net operating loss ............................... (2,417,438) (2,082,342) (772,813) (760,666)
Other income and (expense) ....................... (394,552) 4,861,318 (580,615) 489,589
Net income (loss) ................................ (2,811,990) 2,778,976 (1,353,428) (271,077)
Earning (loss) per common share, basic ........... (0.05) 0.05 (0.02) (0.01)
Weighted average number of common shares, basic .. 54,166,872 53,636,560 54,173,745 54,145,922
Loss per common share, diluted ................... (0.10) (0.04) (0.03) (0.03)
Weighted average number of common shares, diluted 54,166,872 53,636,560 54,173,745 54,145,922

Balance Sheet Data

March 31, 2007
December 31, 2006 ---------------
----------------- (unaudited)

Working Capital (deficit)............ $ (140,962) $ (1,578,621)
Total assets......................... 4,451,216 3,814,327
Total liabilities.................... 6,379,835 7,041,965
Stockholders' equity (deficit)....... (1,928,619) (3,227,638)

RISK FACTORS

You should carefully consider each of the following risk factors, as well
as the other information contained elsewhere in this prospectus before deciding
to purchase any of our common stock. We face risks other than those listed here,
but at present consider such risks immaterial. We may also face additional risks
which are unknown to us at this time. Because of the following factors, as well
as other variables affecting our operating results, past financial performance
may not be a reliable indicator of future performance, and historical trends
should not be used to anticipate results or trends in future periods.

RISKS RELATED TO OUR COMPANY

WE HAVE A SIGNIFICANT ACCUMULATED DEFICIT AND WE MAY NEVER ACHIEVE
PROFITABILITY.

We have incurred significant net losses nearly every year since our
inception, including net losses in 2006. These losses have resulted principally
from expenses incurred in our research and development programs and general and
administrative expenses. We have also incurred non-cash expenses related to the
recognition of derivative liabilities. To date, we have not generated
significant recurring revenues. Our limited revenues that derive from sales of
the zNose(R) product have not been and may not be sufficient to sustain our
operations. We anticipate that we will continue to incur substantial operating
losses based on

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projected sales revenues less manufacturing, general and administrative and
other operating costs for the next twelve months. We expect that our revenues
will not be sufficient to sustain our operations for the near term,
notwithstanding any anticipated revenues we may receive when our vapor detection
products obtain increased visibility in our markets, due to the significant
costs associated with the development and marketing of our products. No
assurances can be given when we will ever be profitable.

We expect to continue to experience losses until the time, if ever, when we
are able to sell products sufficient to generate revenues adequate to support
our operations. If we fail to become profitable, we may be forced to cease
operations.

OUR LIMITED MANUFACTURING EXPERIENCE AND CAPACITY MAY LIMIT OUR ABILITY TO GROW
OUR REVENUES.

To be successful, we must manufacture our products in compliance with
industry standards and on a timely basis, while maintaining product quality and
acceptable manufacturing costs. We also currently use a limited number of
sources for most of the supplies and services that we use in the manufacturing
of our vapor detection and analysis technology. We do not have agreements with
our suppliers. Our manufacturing strategy presents the following risks:

o delays in the quantities needed for product development could delay
commercialization of our products in development;

o if market demand for our products increases suddenly, our current
suppliers might not be able to fulfill our commercial needs, which
would require us to seek new supply arrangements and may result in
substantial delays in meeting market demand; and

o we may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for our products.

Any of these factors could delay commercialization of our products under
development, entail higher costs and result in our being unable to effectively
sell our products.

WE FACE SIGNIFICANT COMPETITION AND OUR BUSINESS AND FINANCIAL RESULTS COULD
SUFFER FROM COMPETITION.

While we are unaware of any competitor that has created a vapor analysis
device similar to the zNose(R), there are companies that offer products and
services that compete with the zNose(R) in our markets. We believe that
manufacturers of x-rays, ion mobility spectrometers, and other electronic noses
compete with us in the security-related markets. In the markets for instruments
that analyze chemicals, we compete with many manufacturers including
Perkin-Elmer (NYSE: PKI), Agilent Technologies (NYSE: A) and Varian, Inc.
(NASDAQ: VARI). Many of our existing and potential competitors have longer
operating histories, greater experience, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Because of their greater resources, our competitors are
able to undertake more extensive marketing campaigns for their products and
services, and make more attractive offers to potential employees, strategic
partners, and others. We may not be able to compete successfully against our
current or future competitors and our business and financial results could
suffer from such competition.

IF OUR PRODUCTS DO NOT ACHIEVE A SIGNIFICANT LEVEL OF MARKET ACCEPTANCE, IT IS
HIGHLY UNLIKELY THAT WE EVER WILL BECOME PROFITABLE.

To our knowledge, electronic nose technology, and our zNose(R) product, has
yet to receive widespread market acceptance in the markets we are focused on.
The commercial success of our current and future products will depend upon the
adoption of our zNose(R) technology by our customers. In order to be successful,
our future products must meet the technical and cost requirements for the
markets we intend to penetrate. Market acceptance will depend on many factors,
including:

o our ability to convince potential customers to adopt our products;

o the willingness and ability of potential customers to adopt our
products;

o our ability to sell and service sufficient quantities of our products;
and
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o new, advanced technology offered by other companies which compete with
our products.

Because of these and other factors, our products may not achieve market
acceptance. If our products do not achieve a significant level of market
acceptance, demand for our future products will not develop as expected and it
is highly unlikely that we ever will become profitable.

OTHER COMPANIES COULD CREATE A TECHNOLOGY WHICH COMPETES EFFECTIVELY WITH OUR
ZNOSE(R) TECHNOLOGY, AND WE MAY BE UNABLE TO MAINTAIN OUR EXISTING, OR CAPTURE
ADDITIONAL, MARKET SHARE IN OUR MARKETS.

Based upon our review of the industry, we are unaware of any company today
that markets a technology which is similar to our zNose(R) technology.
Nonetheless, our intended markets generally are dominated by very large
corporations (or their subsidiaries), which have greater access to capital,
manpower, technical expertise, distribution channels and other elements which
would give them a competitive advantage over us were they to begin to compete
directly against us. It is possible that these and other competitors may
implement new, advanced technologies before we are able to, allowing them to
provide more effective products at more competitive prices. Any number of future
technological developments could:

o adversely impact our competitive position;

o require write-downs of obsolete technology;

o require us to discontinue production of obsolete products before we
can recover any or all of our related research, development and
commercialization expenses; or

o require significant capital expenditures beyond those currently
contemplated.

We cannot assure investors that we will be able to achieve the
technological advances to remain competitive and profitable, that new products
and services will be developed and manufactured on schedule or on a
cost-effective basis, that anticipated markets will exist or develop for new
products or services, or that any marketed product will not become
technologically obsolete.

WE DEPEND ON KEY PERSONNEL IN A COMPETITIVE MARKET FOR SKILLED EMPLOYEES, AND
FAILURE TO RETAIN AND ATTRACT QUALIFIED PERSONNEL COULD SUBSTANTIALLY HARM OUR
BUSINESS.

We believe that our future success will depend in large part on our ability
to attract and retain highly skilled engineering, sales and marketing and
management personnel. If we are unable to hire the necessary personnel, the
development of our business will likely be delayed or prevented. Competition for
these highly skilled employees is intense. As a result, we cannot assure you
that we will be successful in retaining our key personnel or in attracting and
retaining the personnel we require for expansion.

WE ARE DEPENDENT UPON A MAJOR CUSTOMER FOR A LARGE PERCENTAGE OF OUR SALES AND
ANY CHANGES TO THAT CUSTOMER'S BUSINESS OR OUR RELATIONSHIP WITH THAT CUSTOMER
COULD HAVE A SUBSTANTIAL EFFECT ON OUR SALES AND REVENUE.

Our largest customer is Beijing R&D Technology Co., Ltd., which is our
exclusive distributor in China. During the fiscal year ending December 31, 2006,
purchases by Beijing R&D Technology accounted for $918,166, or approximately 42%
of our total sales. We expect that in the upcoming fiscal year, Beijing R&D
Technology will continue to account for a large percentage of our total sales.
If Beijing R&D Technology experiences any changes in its business that affect
its level of purchases from Electronic Sensor Technology, or if there is any
change in the business relationship between Beijing R&D Technology and
Electronic Sensor Technology leading to a decrease in its level of purchases
from Electronic Sensor Technology, our sales and revenues could substantially
decrease.
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WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND MAY INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

The protection of our intellectual property, including our patents and
other proprietary rights, is important to our success and our competitive
position. Accordingly, we devote substantial resources to the maintenance and
protection of intellectual property through various methods such as patents and
patent applications, trademarks, copyrights, confidentiality and non-disclosure
agreements. We also rely on trade secrets, proprietary methodologies and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees. However, it is possible that
these agreements may be breached and that the available remedies for any breach
will not be sufficient to compensate us for damages incurred.

We currently have four patents in the United States and patents in various
foreign countries. There can be no assurance that the patents that we hold will
protect us from competition from third parties with similar technologies or
products, as it is possible that third parties may be able to develop similar
technologies or products without necessarily infringing on the patents that we
currently hold. Moreover, we cannot assure you that others will not assert
rights in, or ownership of, patents and other proprietary rights we may
establish or acquire or that we will be able to successfully resolve such
conflicts. We do not have reason to believe that our current patents are at
great risk of being challenged, however, due to the nature and complexity of our
technology, we cannot assure you that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted under these
patents will provide a competitive advantage to us. Moreover, the laws of some
foreign countries do not protect intellectual property rights to the same extent
as the laws of the United States, and we could experience various obstacles and
high costs in protecting our intellectual property rights in foreign countries.
If we are unable to obtain or maintain these protections, we may not be able to
prevent third parties from using our intellectual property.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

OUR STOCK PRICE IS SUBJECT TO EXTREME VOLATILITY.

The trading price of our common stock has been, and is likely to continue
to be, highly volatile and could be subject to wide fluctuations in response to
factors such as actual or anticipated variations in our quarterly operating
results, announcements of technological innovations, announcements of
significant new orders or cancellation of significant orders, or new products by
Electronic Sensor Technology or its competitors, changes in financial estimates
by securities analysts, conditions or trends in the analytic instrumentation
markets, changes in the market valuations of other security-detection oriented
companies, announcements by Electronic Sensor Technology or its competitors of
significant acquisitions, strategic partnerships, joint ventures or capital
commitments, additions or departures of key personnel, sales of common stock or
other securities of Electronic Sensor Technology in the open market and other
events or factors, many of which are beyond our control.

THERE IS NO ESTABLISHED TRADING MARKET FOR OUR SHARES OF COMMON STOCK. THE
LIQUIDITY OF OUR COMMON STOCK WILL BE AFFECTED BY ITS LIMITED TRADING MARKET.

Bid and ask prices for our common stock are quoted on the Over-the-Counter
Bulletin Board under the symbol "ESNR.OB." There is currently no broadly
followed, established trading market for our common stock. An established
trading market for our shares may never develop or be maintained. Active trading
markets generally result in lower price volatility and more efficient execution
of buy and sell orders. The absence of an active trading market reduces the
liquidity of our shares. Prior to the consummation of the merger in February
2005, we had no reported trading volume in our common stock. Since then, we have
had sporadic reported trading in our shares. As a result of this sporadic
trading activity, the quoted price for our common stock on the Over-the-Counter
Bulletin Board is not necessarily a reliable indicator of its fair market value.
Further, if we cease to be quoted, holders would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, our
common stock, and the market value of our common stock would likely decline.

IF AND WHEN A TRADING MARKET FOR OUR COMMON STOCK DEVELOPS, BECAUSE WE ARE A
TECHNOLOGY COMPANY, WE EXPECT THAT THE TRADING PRICES WILL BE EXTREMELY
VOLATILE.

The trading prices of technology company stocks in general tend to
experience extreme price fluctuations. The valuations of many technology
companies without consistent product revenues or earnings, if any, are not based
on conventional valuation standards such as price to earnings and price to sales
ratios. Any negative change in the public's perception of the prospects of

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technology companies could depress our stock price regardless of our results of
operations if a trading market for our stock develops. In addition, our stock
price could be subject to wide fluctuations in response to factors including,
but not limited to, the following:

o announcements of new technological innovations or new products by us
or our competitors;

o conditions or trends in the sensor technology industry;

o changes in the market valuations of other technology companies;

o developments in domestic and international governmental policy or
regulations that affect the technology utilized in our products;

o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;

o developments in patent or other proprietary rights held by us or by
others; or

o loss or expiration of our intellectual property rights.

WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE
THE OWNERSHIP INTERESTS OF OUR SHAREHOLDERS.

We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges
senior to those of the holders of our common stock. The issuance of additional
common stock or securities convertible into common stock by our management will
also have the effect of further diluting the proportionate equity interest and
voting power of holders of our common stock.

In addition, under our articles of incorporation, our Board of Directors is
authorized to issue, without obtaining shareholder approval, shares of preferred
stock having the rights, privileges and designations as determined by the Board
of Directors. Therefore, the Board of Directors could issue shares of preferred
stock that would have preferential liquidation, distribution, voting, dividend
or other rights, which would be superior to the rights of common stockholders.

A SIGNIFICANT NUMBER OF OUR SHARES ARE ELIGIBLE FOR SALE, AND THEIR SALE COULD
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.

Sales of a significant number of shares of our common stock in the open
market could harm the market price of our common stock. A reduced market price
for our shares could make it more difficult to raise funds through future
offerings of common stock. Approximately 32.5 million shares are presently
eligible for trading in the open market (including those eligible for sale into
the open market pursuant to Rule 144 under the Securities Act, as described
below). As additional shares become available for resale in the open market,
including new shares issued upon conversion of our debentures issued on December
7, 2005, the exercise of our outstanding options, warrants, and contractual
obligations to issue shares, the number of our publicly tradable shares will
increase, which could decrease their trading price. Some of our shares may be
offered from time to time in the open market pursuant to Rule 144, and these
sales may have a depressive effect on the market for our shares. In general, a
person who has held restricted shares for a period of one year may, upon
satisfying certain conditions to the application of Rule 144, sell into the
market shares up to an amount equal to 1% of the outstanding shares (and
potentially more) of our common stock. These sales may be repeated once each
three months. In addition, restricted shares may be sold by a non-affiliate
after they have been held for two years pursuant to Rule 144(k) without volume
limitations.

WE ARE SUBJECT TO THE SEC'S PENNY STOCK RULES.

Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain rules adopted by the SEC. Penny stocks generally are
equity securities with a price of less than $5.00, other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market if current price and volume information with respect to

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transactions in such securities is provided by the exchange or system. The rules
require that a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, deliver a standardized risk disclosure document
that provides information about penny stocks and the risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in connection with the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the rules generally require that prior to a transaction in
a penny stock, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the liquidity of penny stocks. Our securities
are subject to the penny stock rules. As such, holders of our shares of common
stock may find it more difficult to sell their securities.

WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO POTENTIAL FUTURE APPRECIATION
IN THE VALUE OF OUR STOCK.

We have never paid cash dividends on our stock and do not anticipate paying
cash dividends on our stock in the foreseeable future. The payment of dividends
on our shares, if ever, will depend on our earnings, financial condition and
other business and economic factors affecting us at such time as the Board of
Directors may consider relevant. If we do not pay dividends, our stock may be
less valuable because a return on investment will only occur if and to the
extent that our stock price appreciates, and if the price of our stock does not
appreciate, then there will be no return on investment.

OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRERS AND DEPRESS
OUR STOCK PRICE.

Certain provisions of our articles of incorporation, bylaws and Nevada law
could be used by our incumbent management to make it substantially more
difficult for a third party to acquire control of us. These provisions include
the following:

o we may issue preferred stock with rights senior to those of our common
stock; and

o the Board of Directors may fill casual vacancies occurring in the
Board of Directors and may appoint one or more additional directors
between annual meetings of shareholders to hold office until the next
annual meeting of shareholders.

These provisions may discourage certain types of transactions involving an
actual or potential change in control. These provisions may also limit our
shareholders' ability to approve transactions that they may deem to be in their
best interests and discourage transactions in which our shareholders might
otherwise receive a premium for their shares over the then current market price.

SOME OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL SHAREHOLDERS.

Our officers and directors currently own or control approximately 15.37% of
our outstanding common stock, and may acquire an additional 2.71% of our
outstanding common stock upon the exercise of warrants and options. Land &
General Berhad through its wholly owned subsidiary, L&G Resources (1994), Inc.,
owns approximately 17.78% of our outstanding common stock, and may acquire an
additional 0.48% of our outstanding common stock upon the exercise of warrants
and options. As a result, these shareholders may exert a significant degree of
influence over our management and affairs and/or over matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of Electronic Sensor Technology and
might affect the market price of our shares, even when a change may be in the
best interests of all shareholders. Moreover, the interests of this
concentration of ownership may not always coincide with our interests or the
interests of other shareholders, and, accordingly, they could cause us to enter
into transactions or agreements which we would not otherwise consider.

PAST ACTIVITIES OF THE COMPANY AND ITS AFFILIATES MAY LEAD TO FUTURE LIABILITY
FOR US.

Prior to the acquisition of Electronic Sensor Technology, L.P., we engaged
in the exploitation of mining claims, a business unrelated to Electronic Sensor
Technology's current operations. Although we are unaware of any at this time,
liabilities, if any, of the prior business may have a material adverse effect on
us. These liabilities potentially may include liabilities relating

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to Bluestone's operations of its mining business, individuals that Bluestone
employed, contracts to which Bluestone was a party, any personal injury claims
against Bluestone and any other liabilities that may arise as a result of
operating a publicly-traded mining business.

USE OF PROCEEDS

We will not receive any proceeds from the resale by the selling security
holders of the common stock registered pursuant to this registration statement.

DETERMINATION OF OFFERING PRICE

There is currently no broadly followed, established trading market for our
common stock. Each selling security holder and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on through the OTC Bulletin Board or any stock exchange,
market or trading facility on which the shares are traded (if we ever become
eligible for trading on any stock exchange, market or trading facility and seek
a listing or quotation thereon) or in private transactions. These sales may be
at fixed prices or negotiated prices, as determined by the selling security
holder.

SELLING SECURITY HOLDERS

Each of the selling security holders obtained beneficial ownership of the
common stock being registered for resale pursuant to this registration statement
in one of the following transactions, as set forth below.

o On February 1, 2005, in a private offering, Electronic Sensor
Technology issued 3,985,000 shares of common stock of Electronic
Sensor Technology and three-year warrants to purchase 3,985,000 shares
of our common stock at an exercise price of $1.00 per share (units
consisting of one share of common stock and one warrant were sold for
$1.00 per unit). The following selling security holders obtained
beneficial ownership of our common stock through this private
offering: Mark S. Barbara, Bixbie Financial Corp., John J. and Alicia
C. Caufield, Chase Investments, Inc., Crown Capital Partners SA,
Richard Forte, Jeffrey R. Haines, Highgate House Funds, Ltd.,
Nathaniel Kramer, Memphis Group, Inc., Jeremy Shaffer Roenick, Gene
Salkind, M.D., Brian Patrick Shanahan and Paul Tompkins.

o Electronic Sensor Technology issued 130,000 shares of common stock to
CEOcast, Inc. on December 5, 2005, in a private offering, in exchange
for investor relations services valued at approximately $105,882.
CEOcast provides us with investor relations services valued at
approximately $17,500 per month. We have entered into three short-term
consulting agreements with CEOcast on each of January 17, 2005, July
17, 2005 and October 17, 2005, pursuant to which we agreed to
compensate CEOcast with $7,500 per month, paid in cash, and CEOcast is
compensated for the remainder of the value of its services with our
common stock. The 130,000 shares of common stock issued to CEOcast
represented the compensation in our shares due to CEOcast under the
three consulting agreements. The number of shares issued to CEOcast
was calculated by determining for each of the nine months of the
contract between us and CEOcast that number of shares that could be
purchased per month at a 15% discount with $10,000.

o On December 5, 2005, in a private offering, Electronic Sensor
Technology issued to HomelandSecurityStocks, a division of
Protect-A-Life, Inc., a warrant to purchase 350,000 shares of common
stock at an exercise price of $2.40 per share. HomelandSecurityStocks
formerly provided us with investor relations services. The warrant was
issued pursuant to a Settlement Agreement entered into on October 11,
2005 among HomelandSecurityStocks, Protect-A-Life and Electronic
Sensor Technology. The Settlement Agreement settled a dispute between
HomelandSecurityStocks and Electronic Sensor Technology resulting from
the termination by Electronic Sensor Technology of a consulting
agreement dated February 7, 2005, between HomelandSecurityStocks and
Electronic Sensor Technology. Pursuant to the consulting agreement, we
had engaged HomelandSecurityStocks to provide us with investor
relations and public relations services from February 9, 2005 through
February 9, 2006 for a fee of $12,000 per month and warrants to
purchase 500,000

-8-

shares of common stock at an exercise price of $2.40 per share, to
vest as follows: (i) warrants to purchase 200,000 shares on February
9, 2005, (ii) warrants to purchase 75,000 shares on May 9, 2005, (iii)
warrants to purchase 75,000 shares on August 9, 2005, (iv) warrants to
purchase 75,000 shares on November 9, 2005 and (v) warrants to
purchase 75,000 shares on February 8, 2006. Electronic Sensor
Technology terminated the consulting agreement in July 2005.

o In a private offering on December 7, 2005, we issued to Islandia, L.P.
and Midsummer Investment Ltd. an aggregate principal amount of
$7,000,000 of 8% unsecured convertible debentures due December 7, 2009
that were convertible into 15,404,930 shares of our common stock. At
issuance, the debentures were convertible into common stock at a
conversion price of $0.4544 per share. This price was calculated based
upon 105% of the volume weighted average price over the 20 trading
days preceding the date of issuance of the debentures. Such conversion
price was subsequently reduced to $0.4000, pursuant to the Forbearance
and Amendment Agreement entered into among Electronic Sensor
Technology, Midsummer and Islandia on September 7, 2006, which
consequently increased the shares of common stock issuable upon
conversion of the debentures to 17,500,000. Under certain
circumstances, we have the right, at our option to pay interest on the
debentures with shares of common stock. In connection with the private
offering, we agreed to register 130% of the common stock into which
the debentures are convertible plus 130% of the common stock that we
may use to pay interest on the debentures. On this registration
statement, we are registering 110% of such shares, or 23,148,482
shares, to facilitate secondary trading by the holders of the
debentures.

o In a private offering on December 7, 2005, we issued to Montgomery
2006-1 Partnership, a subsidiary of Montgomery & Co., LLC, a five-year
warrant to purchase 485,213 shares of common stock at an exercise
price of $0.4761 per share. This price was calculated based upon 110%
of the volume weighted average price over the 20 trading days
preceding the date of issuance of the warrant. Montgomery & Co., LLC
provided us with financial advisory services in connection with the
issuance of the 8% unsecured convertible debentures issued on December
7, 2005 and various other securities, for which it received $490,000
in addition to the warrant.

The table below sets forth the following information, as of the date that
we received such information from the selling security holder (this information
was received by Electronic Sensor Technology between December 6, 2005 and the
date of this prospectus):

o the name of each beneficial owner of the common stock registered
pursuant to this registration statement;

o the number of shares of common stock that each selling security holder
beneficially owns as of such date;

o the number of shares of common stock that may, assuming the exercise
in full of all of the warrants described above and the conversion in
full of all of the debentures described above, be offered for sale by
each selling security holder from time to time pursuant to this
prospectus;

o the number of shares of common stock to be beneficially owned by each
selling security holder assuming the exercise in full of all of the
warrants described above and the conversion in full of all of the
debentures described above, and the sale of all of the shares of
common stock offered hereby;

o the percentage of common stock to be beneficially owned by each
selling security holder after completion of the offering, based upon
the number of shares of common stock to be beneficially owned by such
selling security holder (taking into account the assumptions set forth
above), divided by 54,173,745, which represents the total number of
shares of common stock issued and outstanding as of May 1, 2007, plus,
for such selling security holder, the number of shares of common stock
to be beneficially owned by such selling security holder; and

o by footnote, any position or office held or other material
relationship with Electronic Sensor Technology or any of its
predecessors or affiliates within the past three years, other than
that of being a shareholder, and details

-9-

regarding the transaction in which each selling security holder
acquired beneficial ownership of its common stock.

Of the selling security holders, we understand that Montgomery & Co. LLC,
the parent of Montgomery 2006-1 Partnership, is registered as a broker-dealer
with the NASD, California, Connecticut, Florida, Massachusetts, Nevada, New York
and Washington. Otherwise, to our knowledge, none of the selling security
holders is a broker-dealer or an affiliate of a broker-dealer.

NUMBER OF SHARES
SHARES OF OF COMMON STOCK SHARES OF COMMON STOCK
COMMON STOCK TO BE OFFERED BENEFICIALLY OWNED AFTER
BENEFICIALLY FOR THE SELLING COMPLETION OF THE OFFERING
OWNED PRIOR SECURITY HOLDER'S -------------------------------
NAME OF SELLING SECURITY HOLDER TO THE OFFERING ACCOUNT NUMBER PERCENTAGE
--------------------------------------------- ----------------- ------------------ -------------- --------------

Mark S. Barbara (1) 50,000 50,000 0 *
Bixbie Financial Corp. (2) 250,000 250,000 0 *
John J. and Alicia C. Caufield (3) 130,000 100,000 30,000 *
CEOcast, Inc. (4) 130,000 130,000 0 *
Chase Investments, Inc. (5) 50,000 50,000 0 *
Crown Capital Partners SA (6) 1,000,000 1,000,000 0 *
Richard Forte (7) 50,000 50,000 0 *
Jeffrey R. Haines 50,000 50,000 0 *
Highgate House Funds, Ltd. (8) 1,000,000 1,000,000 0 *
HomelandSecurityStocks.com, a division of
Protect-A-Life, Inc. (9) 350,000 350,000 0 *
Islandia, L.P. (10) 10,582,255 8,267,315 2,314,940 4.10
Nathaniel Kramer (11) 50,000 50,000 0 *
Memphis Group Inc. (12) 500,000 500,000 0 *
Midsummer Investment Ltd. (13) 19,048,059 14,881,167 4,166,892 7.14
Montgomery 2006-1 Partnership (14) 485,213 485,213 0 *
Jeremy Shaffer Roenick (15) 50,000 50,000 0 *
Gene Salkind, M.D. (16) 200,000 200,000 0 *
Brian Patrick Shanahan 212,500 50,000 162,500 *
Paul Tompkins 25,000 25,000 0 *

* Less than 1%

(1) Mr. Barbara's shares include 25,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

(2) Alan Meiteen is a beneficial owner of Bixbie Financial Corp.'s shares by
virtue of his position as sole control person of Bixbie Financial Corp.

(3) The Caufields' shares include 50,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

(4) Rachel Glicksman and Kenneth D. Sgro are beneficial owners of CEOcast's
shares by virtue of their positions as principal shareholders of CEOcast,
Inc.

(5) Richard Chase is a beneficial owner of Chase Investment, Inc.'s shares by
virtue of his position as sole control person of Chase Investments, Inc.

(6) Crown Capital Partners SA's shares include 500,000 shares of common stock
underlying a warrant exercisable within 60 days of the date of this
prospectus. John Graham Douglas is a beneficial owner of Crown Capital
Partners' shares by virtue of his position as sole control person of Crown
Capital Partners SA.

-10-

(7) Mr. Forte's shares include 25,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

(8) Highgate House Funds, Ltd.'s shares include 500,000 shares of common stock
underlying a warrant exercisable within 60 days of the date of this
prospectus. Mark Angelo is a beneficial owner of Highgate House Funds'
shares by virtue of his position as Portfolio Manager of Highgate House
Funds, Ltd.

(9) HomelandSecurityStocks.com's shares include 350,000 shares of common stock
underlying a warrant exercisable within 60 days of the date of this
prospectus. Leon Hamerling and J. Robert Paul are both beneficial owners of
HomelandSecurityStocks' shares by virtue of their collective ownership of
100% of the outstanding shares of Protect-A-Life.

(10) Islandia, L.P.'s shares include 110% of 6,250,000 shares of common stock
underlying a debenture convertible within 60 days of the date of this
prospectus and of 1,265,741 shares of common stock that may be used to pay
interest on the debenture. The general partner of Islandia is John Lang,
Inc., a New York Sub-S corporation formed to manage investments. John Lang,
Inc. has sole dispositive power and sole voting power over all matters not
related to director elections. The individuals that exercise shared
dispositive and voting power for John Lang, Inc. are Richard Berner,
President of John Lang, Inc. and Edgar Berner and Thomas Berner, both
Vice-Presidents of John Lang, Inc. By virtue of these relationships John
Lang, Inc., Richard Berner, Edgar Berner and Thomas Berner may be deemed to
have indirect beneficial ownership of the shares of common stock
beneficially owned by Islandia; however, John Lang, Inc. Richard Berner,
Edgar Berner and Thomas Berner disclaim beneficial ownership of the shares
of common stock beneficially owned by Islandia.

(11) Mr. Kramer's shares include 25,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

(12) Memphis Group, Inc.'s shares include 250,000 shares of common stock
underlying a warrant exercisable within 60 days of the date of this
prospectus. Jeffrey Shear is a beneficial owner of Memphis Group's shares
by virtue of his position as sole control person of Memphis Group, Inc.

(13) Midsummer Investment Ltd.'s shares include 110% of 11,250,000 shares of
common stock underlying a debenture convertible within 60 days of the date
of this prospectus and of 2,278,334 shares of common stock that may be used
to pay interest on the debenture. Midsummer Capital, LLC, a New York
limited liability company, serves as investment advisor to Midsummer
Investment Ltd., a Bermuda company. By reason of such relationships,
Midsummer Capital may be deemed to share dispositive power over the shares
of common stock beneficially owned by Midsummer Investment. Midsummer
Capital disclaims beneficial ownership of such shares of common stock.
Michel A. Amsalem and Scott D. Kaufman are members of Midsummer Capital. By
reason of such relationships, Mr. Amsalem and Mr. Kaufman may be deemed to
share dispositive power over the shares of common stock stated as
beneficially owned by Midsummer Investment. Mr. Amsalem and Mr. Kaufman
disclaim beneficial ownership of such shares of common stock.

(14) Montgomery 2006-1 Partnership's shares include 485,213 shares of common
stock underlying a warrant exercisable within 60 days of the date of this
prospectus. Montgomery & Co., LLC and Montgomery and Associates are
beneficial owners of Montgomery 2006-1 Partnership's shares by virtue of
Montgomery & Co., LLC's position as a controlling entity of Montgomery
2006-1 Partnership and Montgomery & Associates's position as a controlling
entity of Montgomery & Co., LLC. George Montgomery, Michael Montgomery and
Brian Bean are beneficial owners of Montgomery 2006-1 Partnership's shares
by virtue of their positions as control persons of Montgomery & Co. Jamie
Montgomery is a beneficial owner of Montgomery 2006-1 Partnership's shares
by virtue of his positions as both a control person of Montgomery & Co. and
sole control person of Montgomery & Associates.

(15) Mr. Roenick's shares include 25,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

(16) Dr. Salkind's shares include 100,000 shares of common stock underlying a
warrant exercisable within 60 days of the date of this prospectus.

-11-

PLAN OF DISTRIBUTION

Each selling security holder and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on through the OTC Bulletin Board or any other stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. A selling
security holder may use any one or more of the following methods when selling
shares:

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;

o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;

o a combination of any such methods of sale;

o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or

o any other method permitted pursuant to applicable law.

The selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.

Broker-dealers engaged by the selling security holders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, but, except as set forth in a supplement to this
prospectus, in the case of an agency transaction not in excess of a customary
brokerage commission in compliance with NASDR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.

In connection with the sale of the common stock or interests therein, the
selling security holders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
security holders may also sell shares of the common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
selling security holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each selling security holder
has informed us that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the common
stock. In no event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent (8%).

-12-

Electronic Sensor Technology is required to pay certain fees and expenses
incurred by Electronic Sensor Technology incident to the registration of the
shares. Electronic Sensor Technology has agreed to indemnify the selling
security holders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.

Because selling security holders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each selling security holder has advised us that they have not entered into any
written or oral agreements, understandings or arrangements with any underwriter
or broker-dealer regarding the sale of the resale shares. There is no
underwriter or coordinating broker acting in connection with the proposed sale
of the resale shares by the selling security holders.

We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the selling security holders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the common stock for the applicable
restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling security holders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling security holders or any other
person. We will make copies of this prospectus available to the selling security
holders and have informed them of the need to deliver a copy of this prospectus
to each purchaser at or prior to the time of the sale.

We will not receive any part of the proceeds from the resale by the selling
security holders of any common stock under this prospectus. We will bear all
expenses other than selling discounts and commissions and fees and expenses of
the selling security holders in connection with the registration of the shares
being reoffered by the selling security holders.

LEGAL PROCEEDINGS

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

DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS

TEONG C. LIM

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

PHILIP YEE

Philip Yee, age 57, currently serves as Secretary, Treasurer and Chief
Financial Officer of Electronic Sensor Technology. Mr. Yee has served as
Secretary, Treasurer and Chief Financial Officer of Electronic Sensor Technology
since November 1, 2006.

-13-

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

BARRY S. HOWE

Barry S. Howe, age 51, currently serves as Chief Operating Officer of
Electronic Sensor Technology. Mr. Howe has served as Chief Operating Officer of
Electronic Sensor Technology since April 11, 2007. Prior to joining Electronic
Sensor Technology, Mr. Howe held various executive positions within the Thermo
Electron Corporation family of companies, including President and Chief
Executive Officer of Thermo Electron subsidiaries and President of several
divisions. Thermo Electron Corporation provides process monitoring and control
instrumentation to the metals, chemical and food and beverage industries. From
2002 to 2004, Mr. Howe served as the President and Corporate Vice President of
the Measurement and Control Sector. In 2006, Mr. Howe served on the Board of
Directors and the Audit Committee of Glenrose Instruments Inc. Mr. Howe received
a B.S. in Business Administration from Boston University.

GARY WATSON

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

JAMES H. FREY

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

MIKE KRISHNAN

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

FRANCIS H. CHANG

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

-14-

JAMES WILBURN

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

MICHEL A. AMSALEM

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

LEWIS E. LARSON

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

FAMILY RELATIONSHIPS AND INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

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

-15-

DIRECTOR INDEPENDENCE

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

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

AMOUNT AND NATURE OF
NAME AND ADDRESS (1) BENEFICIAL OWNERSHIPS PERCENTAGE OF
TITLE OF CLASS OF BENEFICIAL OWNER (SHARES OF STOCK) CLASS (2)
---------------- ------------------------------ ---------------------- ---------------

Common stock Teong Lim*+++ 5,287,908(3) 9.66%

Common stock Philip Yee+ 30,000(4) 0.06%

Common stock Barry Howe+ 0 0.00%

Common stock Gary Watson+ 262,500(5) 0.48%

Common stock James Frey* 312,500(6) 0.57%

Common stock Francis Chang*++ 3,998,160(7) 7.33%

Common stock Mike Krishnan* 100,000(8) 0.18%

Common stock James Wilburn* 75,000(9) 0.14%

Common stock Michel Amsalem* 0(10) 0.00%

Common stock Lewis Larson* 50,000(11) 0.09%

Common stock Land & General Berhad++ 9,948,801(12) 18.26%

Common stock L&G Resources (1994), Inc.++ 9,948,801(12) 18.26%

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Common stock 3 Springs, LLC++ 3,853,160 7.08%

Common stock TC Lim, LLC++ 5,167,908 9.46%

Common stock Edward Staples++ 4,262,525(13) 7.80%

Common stock Midsummer Investment Ltd.++ 19,048,059(14) 26.01%

Common stock Islandia L.P.++ 10,582,255(15) 16.34%

Common stock All directors and named
executive officers as a group 10,116,068(16) 18.08%
* Director

+ Named executive officer

++5% or more beneficial owner

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

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

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

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

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

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

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

(8) Includes 100,000 shares of common stock underlying an option exercisable
within 60 days of the date of this prospectus. Mr. Krishnan is the Managing
Director of Land & General Berhad and President of L&G Resources (1994), Inc., a
wholly owned subsidiary of Land & General Berhad. By virtue of his position, Mr.
Krishnan may be deemed to share dispositive power over the 9,948,801 shares of
common stock beneficially owned by Land & General Berhad and L&G Resources
(1994), Inc. Mr. Krishnan

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is one of six directors on the Board of Directors of Land & General Berhad and
the Board of Directors of Land & General Berhad makes the ultimate voting and
investment decisions with respect to the 9,948,801 shares of common stock. Mr.
Krishnan disclaims beneficial ownership of such shares of common stock.

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

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

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

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

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

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

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

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

-18-

DESCRIPTION OF SECURITIES

As of May 1, 2007, Electronic Sensor Technology has 54,173,745 shares of
common stock issued and outstanding and no shares of preferred stock issued and
outstanding. Electronic Sensor Technology is authorized to issue 200,000,000
shares of common stock in the aggregate and 50,000,000 shares of preferred stock
in the aggregate. Each of our shareholders is entitled to one vote for each
share of common stock on all matters submitted to a shareholder vote. Holders of
our common stock do not have cumulative voting rights. Directors must be elected
by a plurality of the votes cast in an election of directors. Those candidates
for directors receiving the highest number of votes, up to the number of
directors to be elected are elected directors. A quorum is required for any
annual or special meeting of our shareholders in order to transact any business
at the meeting. The presence of the holders of a majority of the issued and
outstanding shares of each class of stock entitled to vote at a meeting
constitutes a quorum.

Dividends on our common stock may be declared and paid at such times as the
Board of Directors may determine. Holders of common stock are entitled to share
in all dividends that the Board of Directors, in its discretion, declares from
legally available funds. However, we have never paid cash dividends on our
common stock and do not anticipate paying cash dividends on our common stock in
the foreseeable future.

In the event of a liquidation, dissolution or winding up, each outstanding
share of common stock entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of
stock, if any, having preference over the common stock. Holders of our common
stock have no pre-emptive rights, no conversion rights and there are no
redemption provisions applicable to our common stock.

Certain provisions of our articles of incorporation, bylaws and Nevada law,
as well as certain agreements we have with our executives, could be used by our
incumbent management to make it substantially more difficult for a third party
to acquire control of us. These provisions include the following:

o we may issue preferred stock with rights senior to those of our common
stock; and

o the Board may fill casual vacancies occurring in the Board and may
appoint one or more additional directors between annual meetings of
shareholders to hold office until the next annual meeting of
shareholders.

INTEREST OF NAMED EXPERTS AND COUNSEL

No expert preparing or certifying all or part of this registration
statement or a report or valuation for use in connection with the registration
statement or counsel named in this prospectus as having given an opinion on the
validity of the securities being registered or upon other legal matters
concerning the registration or offering of the securities was hired on a
contingent basis, will receive a direct or indirect interest in Electronic
Sensor Technology, or was a promoter, underwriter, voting trustee, director,
officer, or employee of Electronic Sensor Technology.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES

Under our bylaws, directors and officers are generally indemnified to the
fullest extent permitted by law. Nevada Revised Statute 78.7502 provides that
Electronic Sensor Technology may indemnify directors, officers, employees and
agents of Electronic Sensor Technology for expenses reasonably incurred in
connection with and to the extent that such director, officer, employee or agent
of Electronic Sensor Technology has been successful on the merits or otherwise
in defense of any action, suit or proceeding or any claim, issue or matter
wherein such person "acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful," subject to certain limitations.

-19-

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Electronic
Sensor Technology pursuant to the foregoing provisions, or otherwise, Electronic
Sensor Technology has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.

DESCRIPTION OF BUSINESS

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

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

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

HISTORY AND BACKGROUND

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

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

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

ELECTRONIC SENSOR TECHNOLOGY, L.P. ACQUISITION

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

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

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

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

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

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

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

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

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

INDUSTRY OVERVIEW

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

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

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

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

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

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

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

o screening incoming raw materials;

o checking ingredients in processed food and pharmaceutical products;

o inspecting packaging materials and finished goods; and

o detecting hazardous gas leaks in chemical plants.

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

CONVENTIONAL ELECTRONIC NOSE TECHNOLOGY

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

THE ZNOSE(R) SOLUTION

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

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

-22-

OUR PRODUCTS

zNOSE(R)

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

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

We currently manufacture and sell three zNose(R) models designated as Model
4200 (Handheld Unit), Model 4300 (Portable Unit) and Model 7100 (Bench Top
Unit). Model 4200 is designed for portability and for applications requiring
quick and accurate vapor screening in the field. Model 4300 is also designed for
portability and can operate outdoors with the same capabilities of Model 4200
without the need for an external power source. Model 7100 is designed for
laboratory testing and is ideal for testing water and product quality control
samples. Both Model 4200 and Model 7100 weigh approximately 27 pounds, not
including a laptop computer that must be used with each zNose(R). Model 4300
also weighs approximately 27 pounds, not including the laptop computer, but also
includes a battery charger that weighs approximately 8 pounds. The Model 4200
has two housings (the case and the detector head) and a laptop computer. The
case of the Model 4200 is 10" x 12" x 6" and weighs 20 pounds and the detector
head of the Model 4200 is 4.25" x 12" x 7" and weighs 7 pounds. The components
and dimensions of the Model 4300 are similar to the Model 4200, but the battery
charger of the Model 4300 is 5.5" x 13.5" x 5.5. The Model 7100 is packaged in a
single housing and also requires a laptop computer. The dimensions of the Model
7100 packaging are 14.3" x 14.3" x 7.5". Both the Model 4200 and Model 7100 are
powered by a standard AC electrical outlet, and both models adapt to standard
outlets in North America, Asia and Europe (i.e., the zNose(R) may be operated by
a 110 volt or 220 volt power source). In addition, both the Model 4200 and 7100
may be powered by connecting the unit to a car battery with an appropriate
adaptor. All three models can be produced in one of two basic vapor sensing
configurations: volatile and semi-volatile. The volatile configuration can
detect volatile organic compounds, such as benzene. The semi-volatile
configuration can detect heavier vapors such as those found in explosives and
drugs.

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

-23-

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

ACCESSORIES

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

TECHNICAL SUPPORT

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

SALES AND DISTRIBUTION

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

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

COMPETITION

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

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

-24-

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

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

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

MANUFACTURING AND RAW MATERIALS

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

CUSTOMERS

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

PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS

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

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

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

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

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

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

-25-

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

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

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

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

GOVERNMENT REGULATION

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

RESEARCH AND DEVELOPMENT

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

EMPLOYEES

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

REPORTS TO SECURITY HOLDERS

Electronic Sensor Technology is subject to the reporting requirements under
the Securities and Exchange Act of 1934. Consequently, we file reports and
information with the Securities and Exchange Commission, including annual
reports, periodic reports, current reports and proxy materials.

The public may read and copy any materials that Electronic Sensor
Technology files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at: http://www.sec.gov. More information regarding Electronic
Sensor Technology is available at our website: http://www.znose.com. The
information on or that can be accessed through our website is not part of this
prospectus.

-26-

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2007. The
figures in the table are derived from our unaudited financial statements and
should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus.

March 31, 2007
(unaudited)

Long-term debt, net of current portion of $777,778 .............. $ 2,333,333
Stockholders' deficit:
Common stock; $0.001 par value; 200,000,000
Shares authorized; 54,173,745 shares issued
and outstanding .............................................. $ 54,174
Additional paid-in capital .................................... $ 8,570,763
Accumulated deficit ........................................... $ (11,852,575)
----------------
Total Stockholders' deficit ..................................... $ (3,227,638)
----------------
Total capitalization ............................................ $ (894,305)
================

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial
condition and results of operations together with the financial statements and
the related notes appearing in this prospectus.

CRITICAL ACCOUNTING POLICIES

The company records revenue from direct sales of products to end-users when
the products are shipped, collection of the purchase price is probable and the
company has no significant further obligations to the customer. Costs of
remaining insignificant company obligations, if any, are accrued as costs of
revenue at the time of revenue recognition. Cash payments received in advance of
product shipment or service revenue are recorded as deferred revenue.

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the recorded amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The company reviews long-lived assets, such as property and equipment, to
be held and used or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. At March 31, 2007 no assets were impaired.

The company accounts for its liquidated damages pursuant to Emerging Issue
Task Force ("EITF") 05-04, View C, "The Effect of a Liquidated Damages Clause on
a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
company's Own Stock". In December 2006, FASB issued FASB Staff Position No. EITF
00-19-2 "Accounting for Registration Payment Arrangements" ("FSP 00-19-2"),
which superseded EITF 05-04. FSP 00-19-2 provides that the contingent obligation
to make future payments or otherwise transfer consideration under a registration
payment arrangement, should be separately recognized and measured in accordance
with FASB Statement No.5, "Accounting for Contingencies". The registration
statement payment arrangement should be recognized and measured as a separate
unit of account from the financial instrument(s) subject to that arrangement. If
the transfer of consideration under a registration payment arrangement is
probable and can be reasonably estimated at inception, such contingent liability
is included in the allocation of proceeds from the related financing instrument.
Pursuant to EITF 05-04, View C, the liquidated

-27-

damages paid in cash or stock are accounted for as a separate derivative, which
requires a periodical valuation of its fair value and a corresponding
recognition of liabilities associated with such derivative. FSP00-19-2 did not
have an impact on the company's accounting of the liquidated damages.

The company has registered all shares underlying the convertible debentures
as well as all shares underlying the warrants related to the convertible
debentures.

The company accounts for its embedded conversion features and freestanding
warrants pursuant to SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires a periodic valuation of their fair value and
a corresponding recognition of liabilities associated with such derivatives. The
recognition of derivative liabilities related to the issuance of shares of
common stock is applied first to the proceeds of such issuance, at the date of
issuance, and the excess of derivative liabilities over the proceeds is
recognized as other expense in the accompanying consolidated financial
statements. The recognition of derivative liabilities related to the issuance of
convertible debt is applied first to the proceeds of such issuance as a debt
discount, at the date of issuance, and the excess of derivative liabilities over
the proceeds is recognized as other expense in the accompanying consolidated
financial statements. Any subsequent increase or decrease in the fair value of
the derivative liabilities, which are measured at the balance sheet date, are
recognized as other expense or other income, respectively.

Accounts receivable are reported at net realizable value. We have
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible.

Inventories are stated at the lower of cost or market, cost determined by
the first-in, first-out (FIFO) method. The company writes down its inventory for
estimated obsolescence or unmarketable inventory using the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions.

We are required to estimate our income taxes in each of the jurisdictions
in which we operate as part of the process of preparing our consolidated
financial statements. SFAS No. 109, "Accounting for Income Taxes", requires a
valuation allowance to reduce the deferred tax assets reported if, based on the
weight of the evidence, it is not more likely than not that some portion or all
of the deferred tax assets will be realized. Management reviews deferred tax
assets periodically for recoverability and makes estimates and judgments
regarding the expected geographic sources of taxable income, gains from
investments, as well as tax planning strategies in assessing the need for a
valuation allowance. We determined that a valuation allowance of approximately
$2,000,000 relating to net operating loss carryovers was necessary to reduce our
deferred tax assets to the amount that will more likely than not be realized. As
a result, at December 31, 2006, the company has no net deferred tax assets. If
the estimates and assumptions used in our determination change in the future, we
could be required to revise our estimates of the valuation allowances against
our deferred tax assets and adjust our provisions for additional income taxes.
In the ordinary course of global business, there are transactions for which the
ultimate tax outcome is uncertain, thus judgment is required in determining the
worldwide provision for income taxes. We provide for income taxes on
transactions based on our estimate of the probable liability. We adjust our
provision as appropriate for changes that impact our underlying judgments.
Changes that impact provision estimates include such items as jurisdictional
interpretations on tax filing positions based on the results of tax audits and
general tax authority rulings.

PLAN OF OPERATIONS

Over the course of the next 12 months, we intend to execute our business
plan and focus our business development efforts in the following key areas:

o By diversifying our product offerings to enhance the usefulness of our
solutions for customers who will have already adopted one or more
products;

o By enhancing our product lines and developing new products to attract
new customers; and

o By developing partnering relationships with wide-ranging sales and
distribution channel leaders already serving our vertical market space
in a way that assists them in developing new revenue streams and
opportunities through improved technical and sales support and
customer services.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

The following table sets forth, as a percentage of revenues, certain items
included in our Income Statements (see Financial Statements and Notes) for the
periods indicated:

THREE MONTHS ENDED MARCH 31
-----------------------------------
STATEMENT OF OPERATIONS DATA: 2007 2006
----------------------------------- --------------- ---------------
Revenues ..................... 100% 100%
Cost of Sales ................ 53% 57%
Gross Profit ................. 47% 43%
Operating Expenses ........... 209% 186%
(Loss) From Operations ....... (162%) (143%)
Other Income (Expense) ....... (122%) 92%
Net Income (Loss) ............ (284%) (51%)

Revenues are derived from product sales and product support services. For
the three months ending March 31, 2007, revenues were $477,300, compared to
$532,800 for the same period in 2006. Product revenues for the quarter were 5%
lower than in 2006. The decrease in product revenues results from an unfavorable
sales mix. Although the number of zNose(R) units shipped during the quarter
increased to 17 units from 13 units in 2006, a significant number of the shipped
units were our lowest priced instrument. A more balanced sales mix is expected
for the remainder of the year. Product support revenues for the quarter

-28-

decreased 71% from last year due primarily to a decrease in training and
after-sales support. A majority of our shipments for the quarter were to
overseas customers whose training and after-sale needs are performed by the
respective sales representative or distributor servicing their accounts.
Training and after-sale support functions for domestic customers are performed
by the company.

Cost of Sales consist of product costs and expenses associated with product
support services. For the three months ending March 31, 2007, cost of sales was
$253,800, compared to $301,600 for the same period 2006. Cost of sales decreased
from 57% of revenues in 2006 to 53% of revenues in 2007. The improvement was due
primarily to manufacturing efficiencies resulting from continued refinement of
our manufacturing processes.

Gross profit was $223,400 for the three months ending March 31, 2007,
compared to $231,200 for the same period in 2006. Gross profit as a percentage
of revenues improved to 47% from 43% in 2006 for the reasons noted in the cost
of sales discussion above. Unit margins are expected to continue to improve as
the aforementioned manufacturing efficiencies and refinement of our
manufacturing processes are expected to reduce our per unit manufacturing costs.

Research and Development costs for the three months ending March 31, 2007
were $218,800 versus $211,800 for the same period in 2006. Increased engineering
staffing in the area of software development resulted in personnel related
expenses being approximately $16,600 greater than in 2006. This increase was
offset by a reduction in engineering overhead expenses of approximately $8,700.

Selling, General and Administrative expenses for the three months ending
March 31, 2007 were $777,500, compared to $780,100 for the same period in 2006.
The $2,600 decrease was primarily due to a reduction of professional and legal
expenses, offset by an increase in health insurance costs and the occurrence of
an additional Board of Directors meeting during the quarter.

Interest expense for the three months ending March 31, 2007 was $709,500,
as compared to $730,400 for the same period in 2006. The increase in interest
expense is primarily due to the amortization of debt discount and stated
interest associated with our convertible debentures, which were issued in
December 2005.

Other income-derivatives primarily consist of the decrease in the fair
value of derivative liabilities between the measurement dates. The increase in
other income for the three month period ending March 31, 2007, as compared to
the prior period, is primarily attributable to a decrease in the quoted price of
our common stock. Please refer to Note 5 of our accompanying financial
statements for further explanation of the origin and nature of such income. We
are unable to determine whether we will record further decreases in the fair
value of derivative liabilities in the foreseeable future, which would be
recorded as other income-derivatives. Such decreases would be generally
triggered by a decrease in the fair value of our stock price, or, possibly, upon
satisfaction of our convertible debentures.

FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2005

The following table sets forth certain items included in our Income
Statements (see Financial Statements and Notes) for the periods indicated:

Year Ended
December 31, Variation $ Variation %
-------------------------------- 2006 vs 2006 vs
2006 2005 2005 2005
-------------- -------------- -------------- --------------

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

OPERATING EXPENSES:
Research and development 833,791 260,125 573,666 220.5%
-29-

Year Ended
December 31, Variation $ Variation %
-------------------------------- 2006 vs 2006 vs
2006 2005 2005 2005
-------------- -------------- -------------- --------------
Selling 822,954 653,092 169,862 26.0%
Compensation 655,045 466,421 188,624 40.4%
General and administrative 1,200,800 1,522,451 (321,651) (21.1)%
-------------- -------------- --------------
TOTAL OPERATING EXPENSES 3,512,590 2,902,089 610,501 21.0%
-------------- -------------- --------------
LOSS FROM OPERATIONS (2,417,438) (2,082,342) (335,096) (16.1)%

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

** NM = not meaningful.

The following table sets forth, as a percentage of revenues, certain items
included in our Income Statements (see Financial Statements and Notes) for the
periods indicated:

Year Ended
December 31,
-----------------------------------
2006 2005
--------------- ---------------
As a % of revenues
REVENUES 100% 100%
COST OF SALES 49% 61%
GROSS PROFIT 51% 39%
OPERATING EXPENSES 161% 136%
LOSS FROM OPERATIONS (110%) (97%)
OTHER INCOME AND EXPENSE (18%) 229%
NET INCOME (LOSS) (128%) 132%

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

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

-30-

Research and development expenses primarily consist of salaries and related
benefits, material and supplies associated with our efforts in developing and
enhancing our products. The increase in our research and development expenses
during 2006 is primarily attributable to an increase in salaries and related
benefits resulting from the hiring of personnel whose time is devoted to the
development and enhancement of our products.

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

For the three months ending March 31, 2007, net cash used by the company
for operating activities were $489,110 and $609,140 for 2007 and 2006
respectively. Cash used for the three months ending March 31, 2007 was comprised
of the net loss for the period of $1,353,428, plus net non-cash items (including
depreciation and amortization expenses of $13,385, issuance of stock option
shares of $54,409, amortization of debt discount of $583,334, amortization of
deferred financing costs of $45,386, less decrease in fair value of derivative
liability of $118,280, decrease in allowance for doubtful accounts of $7,996) of
$570,238 plus the net change in operating assets and liabilities of $294,080.
Cash used in operations during the same three months of 2006 was comprised of
the net loss for the period of $271,077, less net non-cash expenses (including
depreciation and amortization expenses of $8,666, issuance of common shares for
services of $21,000, amortization of debt discount of $583,333, amortization of
deferred financing costs of $51,894, less decrease in fair value of derivative
liability of $1,220,197) of $555,304, and plus the net change in operating
assets and liabilities of $217,241.

Investing activities used cash of $13,352 in the first three months of 2007
and provided cash of $605,754 during the same period in 2006. Cash of $2,967 in
2007, and $62,924 in 2006 were used to purchase capital equipment. In 2007,
there was an increase in our certificate of deposit of $10,385. Whereas in 2006,
$668,678 was provided through a reduction in the amount of collateral required
for the company's reduced line of credit.

There were no financing activities for the first three months of 2007 and
2006.

On March 31, 2007 the company's cash (including cash equivalents) was
$591,679, compared to $4,216,536 on March 31, 2006. The company had a working
deficit on March 31, 2007 of $1,578,621. The working deficit includes $3,238,193
for

-31-

derivative liabilities - excluding this amount from current liabilities; the
company's working capital would be $1,659,572. The company's working capital at
March 31, 2006 was $551,281 - excluding derivative liabilities; working capital
would be $5,102,162.

The company has a credit facility in place with East West Bank for
$500,000. No amounts were due under this line of credit at March 31, 2007. The
line of credit expires on March 31, 2008.

Although the company possesses a bank operating line of credit, there can
be no assurance that these proceeds will be adequate for our long-term future
capital needs. There can be no assurance that any required or desired financing
will be available through any other bank borrowings, debt, or equity offerings,
or otherwise, on acceptable terms. If future financing requirements are
satisfied through the issuance of equity securities, investors may experience
significant dilution in the net book value per share of common stock and there
is no guarantee that a market will exist for the sale of the company's shares.

The company's primary capital needs are to fund its growth strategy, which
includes creating a sales and marketing staff for the marketing, advertising and
selling of the zNose(R) family of chemical detection products, increasing
distribution channels both in the U.S. and foreign countries, introducing new
products, improving existing product lines and development of a strong corporate
infrastructure.

FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2005

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

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

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

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

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

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

During 2006, we did not have any financing activities.

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

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

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

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

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

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

During 2005, we generated approximately $8.140 million in financing
activities by generating proceeds of approximately $7.000 million and $3.812
million from the issuance of our convertible debentures and our shares of common
stock, respectively, offset by the repayment of our line of credit of
approximately $1.969 million and by paying financing costs of approximately
$593,000.

Although Electronic Sensor Technology possesses a bank operating line of
credit, there can be no assurance that these proceeds will be adequate for our
capital needs. There can be no assurance that any required or desired financing
will be available through any other bank borrowings, debt, or equity offerings,
or otherwise, on acceptable terms. If future financing requirements are
satisfied through the issuance of equity securities, investors may experience
significant dilution in the net book value per share of common stock. There is
no guarantee that a market will exist for the sale of our shares.

Our primary capital needs are to fund our growth strategy, which includes
expanding our sales and marketing staff for the marketing, advertising and
selling of the zNose(R) family of chemical detection products, increasing
distribution channels both in the U.S. and foreign countries, introducing new
products, improving existing product lines and development of a strong corporate
infrastructure. We do not believe that we will have to incur significant capital
expenditures in the near future in order to meet our growth strategy goals.

As of December 31, 2006, our cash balance and working capital were
$1,796,223 and $3,215,511, respectively. Our current monthly cash burn rate is
approximately less than $200,000 and we do not anticipate any extraordinary cash
payments that we will have to make in the near future until the first principal
payment of approximately $780,000 is due on the convertible debentures that we
issued on December 7, 2005, which such payment is to be made on January 1, 2008.
Based on our current monthly cash burn rate, the cash balance in the bank and
our sales backlog of approximately $1.750 million; we believe that we will not
require any financing until the first half of 2008. Accordingly, we believe that
we will be able to continue as a going concern for at least the next twelve
months.

SEASONALITY AND QUARTERLY RESULTS

We do not foresee any seasonality to our revenues or our results of
operations.

INFLATION

Although we currently use a limited number of sources for most of the
supplies and services that we use in the manufacturing of our vapor detection
and analysis technology, our raw materials and finished products are sourced
from cost-competitive industries. While prices for our raw materials may vary
significantly based on market trends, we do not foresee any material
inflationary trends for our product sources.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

DESCRIPTION OF PROPERTY

We lease approximately 13,500 square feet of office space and production
facilities at 1077 Business Center Circle, Newbury Park, California. Our current
lease expires on September 30, 2010. The lease payments are currently $11,430.90
per month, and increase by 3% per annum beginning on October 1, 2007. The
facility serves as our headquarters and research and development and
manufacturing facility. This property is in good condition and is suitable and
adequate for our uses. We do not

-33-

believe this property is subject to any material competitive conditions. Our
management is of the opinion that this property is adequately covered by
insurance.

INVESTMENT POLICIES

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

On September 7, 2006, Electronic Sensor Technology entered into a
Forbearance and Amendment Agreement with Midsummer Investment, Ltd. and
Islandia, L.P., each of which holds a debenture and warrant, the common stock
underlying which represent more than 5% of our outstanding shares of common
stock (the conversion of each debenture and exercise of each warrant is
contractually capped such that such conversion or exercise, as applicable, shall
not cause Midsummer's or Islandia's respective beneficial ownership to exceed
4.99%, unless waived by Midsummer or Islandia, respectively, and in no event to
exceed 9.99%, without giving effect to shares of common stock underlying any
unconverted portion of the debenture or unexercised portion of the warrant). The
terms of the convertible debentures and warrants that we issued to Midsummer and
Islandia in a private placement on December 7, 2005 required that we register
the shares of our common stock underlying such debentures and warrants within
180 days of the date of issuance of the debentures and warrants. The failure to
do so is an event of default under the debentures, giving Midsummer and Islandia
the right to accelerate the debentures and receive a premium of approximately
30% of the outstanding amounts due under the debentures upon acceleration. The
failure to do so also reduces the exercise price of the warrants by $0.03 per
month until such shares are registered. In addition, the failure to register
such shares within 150 days of the date of issuance of the debentures and
warrants gives the holders the right to receive liquidated damages in the amount
of 2% per month of the purchase price of the debentures and warrants, pursuant
to a registration rights agreement, and the failure to pay such liquidated
damages relating to the debentures is an event of default under the debentures.

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

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

DEBT CONVERSION AGREEMENTS

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

Pursuant to the Debt Conversion Agreement with Mr. Chang, Electronic Sensor
Technology, L.P. agreed to convert $226,720 of debt into the right to receive
226,720 shares of Bluestone Ventures common stock and a warrant to purchase
113,360 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share,
which Mr. Chang assigned to 3 Springs, LLC, a Delaware limited liability company
of which Mr. Chang is the sole member. In addition, prior to the mergers, Mr.
Chang owned 30.21% of the outstanding shares of Amerasia Technology.

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

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

Pursuant to the Debt Conversion Agreement with Dr. Staples, who was an
officer and a director of the company at the time of the mergers, Electronic
Sensor Technology, L.P. agreed to convert $399,643 of debt into the right to
receive 399,643 shares of Bluestone Ventures common stock and a warrant to
purchase 199,822 shares of Bluestone Ventures common stock at $1.00 per share,
exercisable only if the trading price of such stock is at least $1.50 per share.
In addition, prior to the mergers, Dr. Staples owned 30.21% of the outstanding
shares of Amerasia Technology. Following the mergers, Electronic Sensor
Technology issued common stock and warrants to the former debtholders of
Electronic Sensor Technology, L.P., of which Dr. Staples received (i) 399,643
shares of Bluestone Ventures common stock and a warrant to purchase 199,822
shares by virtue of the debt owed to Dr. Staples and (ii) 287,773 shares of
Bluestone Ventures common stock and a warrant to purchase 143,867 shares, which
represented Dr. Staples's portion of the shares and warrants received by
Amerasia Technology and distributed to its shareholders pursuant to the Debt
Conversion Agreement with Amerasia.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Over-the-Counter Bulletin Board
since February 1, 2005 under the symbol "ESNR.OB". Prior to February 1, 2005
Bluestone Ventures's common stock was quoted on the Over-the-Counter Bulletin
Board under the symbol "BLUV.OB". There is currently no broadly followed,
established public trading market for our common stock. The quarterly range of
high and low Over-the-Counter Bulletin Board quotation information for our
common stock for the last two fiscal years is set forth below. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.

QUARTERLY COMMON STOCK PRICE RANGES

QUARTER ENDED 2007
--------------- ---------------
HIGH LOW
------ ------
March 31 $ .29 $ .13
------ ------

QUARTER ENDED 2006
--------------- ---------------
HIGH LOW
------ ------
December 31 $ .48 $ .21

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September 30 .40 .20
June 30 .29 .17
March 31 .41 .19
------ ------

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

Source: Yahoo! Finance.

As of the date of this prospectus, 38,254,348 of our shares of common stock
are subject to outstanding options or warrants to purchase, or securities
convertible into common stock.

As of the date of this prospectus, approximately 27,433,741 shares of our
common stock may be sold pursuant to Rule 144 under the Securities Act, provided
that all of the requirements of Rule 144 have been met.

We have agreed to register 47,445,364 shares of our common stock under the
Securities Act for sale by security holders. (This figure includes certain
shares of our common stock that are currently underlying outstanding warrants to
purchase and securities convertible into common stock, as well as certain shares
of our common stock that may be sold pursuant to Rule 144).

There were 51 record holders of our common stock as of May 1, 2007. This
number does not include an indeterminate number of shareholders whose shares are
held by brokers in street name.

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

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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

EQUITY COMPENSATION PLAN INFORMATION

NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER THE EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLAN
---------------------------------------- ------------------------- ------------------------- -------------------------

Equity compensation plans approved by
security holders 0 N/A 0

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

Total 1,191,500 $.89 3,808,500

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

ELECTRONIC SENSOR TECHNOLOGY, INC. 2005 STOCK INCENTIVE PLAN

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

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

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

SUMMARY COMPENSATION TABLE (1)

STOCK OPTION ALL OTHER
SALARY BONUS AWARDS AWARDS COMPENSATION TOTAL
NAME AND PRINCIPAL POSITION YEAR ($)(2) ($) ($)(3) ($)(3) ($)(4) ($)
-------------------------------- ------ --------- ------- -------- -------- -------------- ---------

Teong C. Lim, 2005 111,316 - - (6) 3,340(7) 114,656

President and Chief
Executive Officer (January
26, 2006-present) 2006 165,229 - - - 4,957(7) 170,186

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

Director (5)

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Matthew Collier, 2005 135,384 - - (9) - 135,384

Former President and Chief
Executive Officer (May 26,
2005-January 25, 2006) 2006 37,796 18,334 21,000 - 113,482(10) 190,612

Francis H. Chang, 2005 123,888 _ _ (11) 3,717(7) 127,605

Former Secretary & Vice
President of Finance (February
1, 2005- November 1, 2006) 2006 130,070 _ _ _ 18,669(12) 148,739

Director (5)

Edward J. Staples, 2005 132,411 _ _ (13) 3,972(7) 136,383

Former President and Chief
Executive Officer (February 1,
2005 -May 26, 2005) 2006 2006 206,360 _ _ _ 6,190(7) 212,550

Former Chief Scientific
Officer (May 26, 2005-March
8, 2007)

Former Director (February 1,
2005-March 8, 2007) (5)

Gary Watson, 2005 120,898 _ _ (14) 3,627(7) 124,525

Vice President of
Engineering (May 26,
2005-present) 2006 145,172 _ _ _ 4,355(7) 149,527

Philip Yee, 2005 - - - - - -

Secretary, Treasurer and Chief
Financial Officer (November 1,
2006-present) 2006 64,750 - - - - 64,750

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

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

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

(4) All named executive officers are covered by the company's health insurance
plan, which does not discriminate in scope, terms or operation, in favor of
named executive officers or directors and is generally available to all
salaried employees. As a

-38-

result, the information regarding health insurance premiums paid to the
named executive officers has been omitted from the Summary Compensation
Table, except as noted in footnote 12 below.

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

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

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

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

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

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

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

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

-39-

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

(14) Gary Watson was granted options to purchase (i) 50,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.00 per limited
partnership interest on March 15, 1999, (ii) 50,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.05 per limited
partnership interest on July 1, 2000, (iii) 50,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.05 per limited
partnership interest on May 15, 2001 and (iv) 25,000 limited partnership
interests of Electronic Sensor Technology, L.P. at $1.05 per limited
partnership interest on September 15, 2002. Such options were terminated in
connection with the merger whereby Electronic Sensor Technology, L.P.
became an indirect subsidiary of Electronic Sensor Technology, Inc., and
were replaced with an option to purchase 50,000 shares of common stock at
$1.00 per share and an option to purchase 125,000 shares of common stock at
$1.05 per share. Such options were accounted for at the time of the
original grants of Electronic Sensor Technology, L.P. options and no dollar
amount was recognized in connection therewith for financial statement
reporting purposes with respect to the 2005 fiscal year.

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND ADDITIONAL NARRATIVE
DISCLOSURE

EMPLOYMENT AND CONSULTING AGREEMENTS

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

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

SEVERANCE AND TERMINATION AGREEMENTS

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

-40-

Exhibit 10.2 to our annual report on Form 10-KSB for the fiscal year ended
December 31, 2004 filed with the Commission on April 15, 2005, for the granting
of the option to purchase 500,000 shares of common stock at an exercise price of
$0.64 per share. Mr. Collier's option would have vested, 33% annually (and 34%
in the third year), provided Mr. Collier was still employed by Electronic Sensor
Technology at the end of each such annual period.

On January 25, 2006, the letter agreement with Mr. Collier was mutually
terminated by Mr. Collier and Electronic Sensor Technology (other than that
portion of the letter agreement relating to indemnification of Mr. Collier for
liability incurred within the scope of his employment with the company, embodied
in Section 7 of the letter agreement), by way of a Settlement Agreement, Mutual
Release and Amendment of Option Agreement entered into between Mr. Collier and
Electronic Sensor Technology in connection with the resignation of Mr. Collier
as President and Chief Executive Officer and a director of Electronic Sensor
Technology, effective January 25, 2006. The Settlement Agreement, Mutual Release
and Amendment of Option Agreement is attached as Exhibit 10.1 to our current
report on Form 8-K filed January 31, 2006 and is incorporated herein by
reference. The terms of the Settlement Agreement, Mutual Release and Amendment
of Option Agreement in large part carried out the terms of the letter agreement
dated May 16, 2005 with Mr. Collier. Specifically, the Settlement Agreement,
Mutual Release and Amendment of Option Agreement provided for (i) the payment of
six months' base salary to Mr. Collier, totaling $110,000, over the course of 13
biweekly payroll periods, (ii) the payment of a bonus in the sum of $18,334
earned through the date of Mr. Collier's resignation, (iii) the acceleration by
six months of the vesting schedule of Mr. Collier's option to purchase 500,000
shares of common stock, each of (i) through (iii) as provided for in the letter
agreement in the event of a termination without cause and (iv) the issuance of
75,000 shares of restricted common stock, as contemplated in the letter
agreement. The Settlement Agreement, Mutual Release and Amendment of Option
Agreement also provided for the vesting of an option to purchase 200,000 shares
of common stock in the first vesting period of the vesting schedule of Mr.
Collier's option to purchase 500,000 shares of common stock, described above. As
a result of the six-month acceleration of the vesting schedule, such vesting of
the option to purchase 200,000 shares of common stock was deemed to occur on
November 26, 2005. In accordance with the terms of Mr. Collier's Option
Agreement, Mr. Collier's resignation resulted in the forfeiture of the remaining
unvested option to purchase 300,000 shares of common stock, and Mr. Collier had
three months from January 25, 2006 in which to exercise the vested option to
purchase 200,000 shares of common stock. Mr. Collier did not exercise the vested
option within three months from January 25, 2006 and the option expired.

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

RETIREMENT AGREEMENTS

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

401(K) PLAN

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

-41-

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

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

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

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (1)

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

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

DIRECTOR COMPENSATION

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

-42-

DIRECTOR COMPENSATION (1)

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

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

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

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

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

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

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

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

(8) Includes $4,500 paid to Lewis Larson in exchange for consulting services.
The company also reimbursed Mr. Larson $1,150 for his out-of-pocket
expenses associated with providing such consulting services.

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

NARRATIVE TO DIRECTOR COMPENSATION

AGREEMENTS WITH DIRECTORS

On October 3, 2005, Electronic Sensor Technology entered into a letter
agreement with James Frey, Chairman of the Board of Directors, which is attached
as Exhibit 10.1 to our current report on Form 8-K filed October 7, 2005 and is
incorporated herein by reference. The letter agreement superseded and replaced a
prior letter agreement dated February 21, 2005 (and an addendum thereto dated
April 1, 2005). The letter agreement dated October 3, 2005 also provides that
Mr. Frey will continue to

-43-

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

The company also has agreements with each of the directors listed in the
Director Compensation table, with the exception of Lewis Larson and Michel
Amsalem, to continue to pay the retainer fees and meeting attendance fees set
forth in such table, as well as to reimburse such directors for reasonable
out-of-pocket expenses for attending board meetings. Lewis Larson and the
company have agreed that beginning January 1, 2007 Lewis Larson will no longer
receive meeting attendance fees, but will be compensated for consulting services
provided to the company from time to time, and will receive reimbursement for
reasonable out-of-pocket expenses incurred in connection with the provision of
such services.
-44-

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheet as of December 31, 2006 F-2

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

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

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

Notes to Consolidated Financial Statements F-6

UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2007

Consolidated Balance Sheet (Unaudited) as of March 31, 2007 F-20

Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2007 and 2006 F-21

Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 2007 and 2006 F-22

Notes to Consolidated Financial Statements F-23

-45-

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Electronic Sensor Technology, Inc.

We have audited the accompanying balance sheet of Electronic Sensor
Technology, Inc. as of December 31, 2006 and the related consolidated statements
of operations, changes in stockholders' deficit and cash flows for the years
ended December 31, 2006 and 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
the consolidated financial position of Electronic Sensor Technology, Inc., as of
December 31, 2006 and the consolidated results of its operations and its cash
flows for the years ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of America.

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

New York, New York
February 16, 2007

F-1

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

CURRENT ASSETS:
Cash and cash equivalents $ 1,094,141
Certificate of deposit 702,082
Certificate of deposit-restricted 250,000
Accounts receivable, net of allowance for doubtful accounts of $24,362 300,413
Prepaid expenses 78,770
Inventories 1,285,690
------------
TOTAL CURRENT ASSETS 3,711,096
------------
DEFERRED FINANCING COSTS, net of amortization of $198,845 529,515

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $960,650 197,788

SECURITY DEPOSITS 12,817
------------
$ 4,451,216
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 403,918
Deferred revenues 91,667
Derivative liabilities 3,356,473
------------
TOTAL CURRENT LIABILITIES 3,852,058
------------
CONVERTIBLE DEBENTURES, net of unamortized discount of $4,472,223 2,527,777
------------
TOTAL LIABILITIES 6,379,835
------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value 50,000,000 shares authorized,
none issued and outstanding -
Common stock, $.001 par value, 200,000,000
shares authorized, 54,173,745 issued and outstanding 54,174
Additional paid-in capital 8,516,354
Accumulated deficit (10,499,147)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,928,619)
------------
$ 4,451,216
============

See notes to consolidated financial statements

F-2

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended
December 31,
--------------------------------
2006 2005
-------------- --------------

REVENUES $ 2,180,208 $ 2,122,349

COST OF SALES 1,085,056 1,302,602
-------------- --------------
GROSS PROFIT 1,095,152 819,747
-------------- --------------
OPERATING EXPENSES:
Research and development 833,791 260,125
Selling 822,954 653,092
Compensation 655,045 466,421
General and administrative 1,200,800 1,522,451
-------------- --------------
TOTAL OPERATING EXPENSES 3,512,590 2,902,089
-------------- --------------
LOSS FROM OPERATIONS (2,417,438) (2,082,342)
-------------- --------------
OTHER INCOME AND EXPENSE:
Other income - derivative liabilities 2,414,605 7,577,929
Other expense - derivative liabilities - (2,401,358)
Other income 2,140
Gain (loss) on sale of property and equipment (1,615) 9,287
Interest expense (2,809,682) (324,540)
-------------- --------------
TOTAL OTHER INCOME (EXPENSE) (394,552) 4,861,318
-------------- --------------
NET INCOME (LOSS) $ (2,811,990) $ 2,778,976
============== ==============
Earnings (loss) per share, basic $ (0.05) $ 0.05
============== ==============
Weighted average number of shares, basic 54,166,872 53,636,560
============== ==============
Earnings (loss) per share, diluted $ (0.10) $ (0.04)
============== ==============
Weighted average number of shares, diluted 54,166,872 53,636,560
============== ==============

See notes to consolidated financial statements

F-3

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

Common Stock Preferred Stock Additional
---------------------------------- ----------------------- Paid-In
Shares Amount Shares Amount Capital
--------------- --------------- ---------- ---------- ---------------

BALANCE - January 1, 2005 81,279,000 $ 81,279 - - $ 4 ,763,774
Cancellation of common stock (54,279,147) (54,279) - - 54,279
Notes payable converted to
common stock 1,272,000 1,272 - - 1,270,728
Reverse acquisition - - - - (89,325)
Sale of common stock 3,985,000 3,985 - - (3,985)
Deferred compensation
contributed to capital - - - - 934,957
Officers loans converted to
common stock 1,198,630 1,199 - - 1,197,431
Issuance of shares for
services 130,000 130 - - 74,820
Accrued interest converted to
common stock 313,262 313 - - 312,950
Common stock issued for
acquisition of EST 20,200,000 20,200 - - (20,200)
Net income - - - - -
--------------- --------------- ---------- ---------- ---------------
BALANCE - December 31, 2005 54,098,745 54,099 - - 8,495,429
Issuance of shares for
services 75,000 75 - - 20,925
Net (loss) - - - - -
--------------- --------------- ---------- ---------- ---------------
BALANCE - December 31, 2006 54,173,745 $ 54,174 - $ - $ 8,516,354
=============== =============== ========== ========== ===============

Total
Accumulated Stockholders'
Deficit Deficit
--------------- ---------------

BALANCE - January 1, 2005 $ (10,466,133) $ (5,621,080)
Cancellation of common stock - -
Notes payable converted to
common stock - 1,272,000
Reverse acquisition - (89,325)
Sale of common stock - -
Deferred compensation
contributed to capital - 934,957
Officers loans converted to
common stock - 1,198,630
Issuance of shares for
services - 74,950
Accrued interest converted to
common stock - 313,263
Common stock issued for
acquisition of EST - -
Net income 2,778,976 2,778,976
--------------- ---------------
BALANCE - December 31, 2005 (7,687,157) 862,371
Issuance of shares for
services - 21,000
Net (loss) (2,811,990) (2,811,990)
--------------- ---------------
BALANCE - December 31, 2006 $ (10,499,147) $ (1,928,619)
=============== ===============

See notes to consolidated financial statements.

F-4

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended
December 31,
--------------------------------
2006 2005
-------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,811,990) $ 2,778,976
Adjustments to reconcile net income (loss) to net
cash provided by (used in)operating activities:
Depreciation and amortization 43,756 21,300
Increase in reserve for obsolescence 36,483 --
Issuance of shares for services 21,000 74,950
Recognition of derivative liabilities 2,401,358
Amortization of debt discount 2,333,333 194,444
Amortization of deferred financing costs 181,547 17,297
Decrease in fair value of derivative liability (2,414,606) (7,577,929)
Changes in assets and liabilities:
Accounts receivable 165,363 (435,089)
Inventories (382,551) (458,974)
Prepaid expenses (8,834) (55,679)
Security deposits - 140
Accounts payable and accrued expenses (76,881) 266,578
Deferred revenues (50,000) (50,000)
Due to related party - (60,000)
Interest payable - (26,961)
Other current liabilities - (35,665)
-------------- --------------
Net cash provided by (used in) operating activities (2,963,380) (2,945,254)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted certificate of deposit (33,404) (918,678)
Proceeds from sale of property and equipment -- 43,933
Purchase of property and equipment (128,997) (126,582)
-------------- --------------
Net cash provided by (used in) investing activities (162,401) (1,001,327)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in line of credit - (1,969,137)
Repayment of partners' loans payable - (110,000)
Proceeds from issuance of common stock - 3,811,708
Proceeds from convertible debentures - 7,000,000
Payment of deferred financing costs - (592,500)
-------------- --------------
Net cash provided by financing activities - 8,140,071
-------------- --------------
NET INCREASE (DECREASE) IN CASH (3,125,780) 4,193,491
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,219,921 26,430
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,094,141 $ 4,219,921
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 578,280 $ 102,928
============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Notes payable, loans payable and accrued expenses converted into common stock and
additional paid-in capital $ - $ 3,718,849
============== ==============
Fair value of derivative liability recorded as debt discount on convertible
debentures $ - $ 7,000,000
============== ==============
Fair value of derivative liability recorded as deferred financing costs $ - $ 7,000,000
============== ==============

See notes to consolidated financial

F-5

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

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

NATURE OF BUSINESS

Electronic Sensor Technology, Inc. develops and manufactures electronic
devices used for vapor analysis. It markets its products through
distribution channels in over 20 countries.

BASIS OF CONSOLIDATION

The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. Bluestone Ventures,
Inc. ("Bluestone") executed an Agreement and Plan of Merger ("Merger
Agreement") by and among Bluestone, Amerasia Technology, Inc.,
("Amerasia"), holder of approximately 55% of the partnership interests of
Electronic Sensor Technology, L.P., ("EST"), L & G Sensor Technology, L.P.,
("L&G"), holder of approximately 45% of the partnership interests of EST,
Amerasia Acquisition Corp., ("AAC") a wholly-owned subsidiary of Bluestone,
and L & G Acquisition Corp., ("LAC") a wholly-owned subsidiary of Bluestone
on January 31, 2005. Under the Merger Agreement (i) AAC merged with and
into Amerasia such that Amerasia became a wholly-owned subsidiary of
Bluestone, (ii) LAC merged with and into L&G such that L&G became a
wholly-owned subsidiary of Bluestone, (iii) as a result of the merger of
(i) and (ii), Bluestone indirectly acquired all of the partnership
interests of EST and (iv) Bluestone issued 20,000,000 shares of its common
stock to the shareholders of Amerasia and L&G. This merger has been treated
as a purchase only of the partnership interests of Electronic Sensor
Technology L.P.

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

CASH AND CASH EQUIVALENTS

The Company considers highly liquid financial instruments with maturities
of three months or less at the time of purchase to be cash equivalents. The
Company had cash and cash equivalents amounting to $1,094,141 at December
31, 2006.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, certificate of deposit,
accounts receivables, accounts payable and accrued expenses approximate
their fair value due to their short-term maturities. The fair value of the
convertible debentures issued by

F-6

the Company in December 2005 amounts to $7,000,000, based on the Company's
incremental borrowing rate. The carrying value of the derivative
liabilities associated with the convertible debentures represents its fair
value.

CONCENTRATION OF CREDIT RISKS

The Company is subject to concentrations of credit risk primarily from cash
and cash equivalents and accounts receivable. The Company maintains
accounts with financial institutions, which at times exceeds the insured
limit of approximately $100,000. The Company minimizes its credit risks
associated with cash by periodically evaluating the credit quality of its
primary financial institutions. The Company's accounts receivables are due
from distributors in all other countries in which it markets its products.
The Company does not require collateral to secure its accounts receivables.
The Company's largest customer accounted for 91% of its net accounts
receivable at December 31, 2006. No other customers accounted for more than
5% of its net accounts receivables.

PRODUCT CONCENTRATION RISK

Substantially all of the Company's revenues derive from the sale of
electronic devices used for vapor analysis.

CUSTOMER CONCENTRATION RISK

One of the Company's customers accounted for 42% of its revenues during
2006. This same customer accounted for 29% of the Company's revenues in
2005. No other customers accounted for more than 10% of its revenues.

INVENTORIES

Inventories are stated at the lower of cost or market, cost determined by
the first-in, first-out (FIFO) method. The Company writes down its
inventory for estimated obsolescence or unmarketable inventory using the
difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. The
Company writes down inventory during the period in which such products are
no longer marketable in any of their markets due to governmental
regulations as well as inventory which matures within the next three
months.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of five years.
Maintenance and repairs are charged to expense as incurred. Significant
renewals and betterments are capitalized.

Property and equipment consist of the following as of December 31, 2006:

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

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

DEFERRED FINANCING COSTS

Deferred financing costs consist of direct costs incurred by the Company in
connection with the issuance of its convertible debentures. The direct
costs include cash payments and fair value of warrants issued to the
placement agent which secured the financing. Deferred financing costs are
amortized over the term of the related convertible debentures using the
effective interest rate method.

F-7

INCOME TAXES

Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires the recognition of deferred tax
assets and liabilities to reflect the future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Measurement of the deferred items is based on enacted tax laws. In
the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
assets. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some or the entire deferred tax asset
will not be realized.

USE OF ESTIMATES

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates made by
management include, but are not limited to, the realization of receivables
and the valuation of the derivative liability. Actual results may differ
from these estimates.

BASIC AND DILUTED EARNINGS PER SHARE

Basic earnings per share is calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding
during each period. Diluted earnings per share is computed using the
weighted-average number of common and dilutive common share equivalents
outstanding during the period. Dilutive common share equivalents consist of
shares issuable upon the exercise of stock options and warrants embedded
conversion features (calculated using the reverse treasury stock method).
The outstanding options, warrants and shares equivalent issuable pursuant
to embedded conversion features amounted to 54,190,546 and 45,612,115 at
December 31, 2006 and 2005, respectively. The outstanding options, warrants
and shares equivalent issuable pursuant to embedded conversion features and
warrants at December 31, 2006 and 2005, respectively, are excluded from the
loss per share computation for that period due to their antidilutive
effect. The Company adjusted the numerator for any changes in income or
loss that would result if the contract had been reported as an equity
instrument for accounting purposes during the period. However, the Company
did not adjust the numerator for interest charges during the period on the
convertible debentures because it would have been anti-dilutive.

The following sets forth the computation of basic and diluted earnings per
share for the year ended December 31:

2006 2005
-------------- --------------

Numerator:
Net (loss) income $ (2,811,990) $ 2,778,976
Net other income (expense) associated with derivative contracts (2,414,605) (5,176,571)
-------------- --------------
Net loss for diluted earnings per share purposes $ (5,226,595) $ (2,397,595)
============== ==============
Denominator:
Denominator for basic earnings per share - Weighted average shares
outstanding 54,166,872 53,636,560
Effect of dilutive warrants, embedded conversion features and
liquidated damages - -
-------------- --------------
Denominator for diluted earnings per share - Weighted average shares
outstanding 54,166,872 53,636,560
============== ==============
Basic earnings (loss) per share $ (0.05) $ 0.05
============== ==============
Diluted earnings (loss) per share $ (0.10) $ (0.04)
============== ==============

F-8

STOCK-BASED COMPENSATION

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

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

DEFERRED REVENUES

Deferred revenues at December 31, 2006 amounted to $91,667. The deferred
revenues consist of a one-time licensing fee received by the Company during
2004 and is recognized over the term of the agreement which is five years.
The Company recognized revenues of $50,000 and $50,000 pursuant to this
agreement during 2006 and 2005, respectively.

DERIVATIVE LIABILITIES

The Company accounted for its liquidated damages during 2006 and 2005
pursuant to Emerging Issue Task Force ("EITF") 05-04, View C, "The Effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".
In December 2006, FASB issued FASB Staff Position No. EITF 00-19-2
"Accounting for Registration Payment Arrangements" ("FSP 00-19-2"), which
superseded EITF 05-04. FSP 00-19-2 provides that the contingent obligation
to make future payments or otherwise transfer consideration under a
registration payment arrangement, should be separately recognized and
measured in accordance with FASB Statement No.5, "Accounting for
Contingencies". The registration statement payment arrangement should be
recognized and measured as a separate unit of account from the financial
instrument(s) subject to that arrangement. If the transfer of consideration
under a registration payment arrangement is probable and can be reasonably
estimated at inception, such contingent liability is included in the
allocation of proceeds from the related financing instrument. Pursuant to
EITF 05-04, View C, the liquidated damages paid in cash or stock are
accounted for as a separate derivative, which requires a periodical
valuation of its fair value and a corresponding recognition of liabilities
associated with such derivative. FSP00-19-2 did not have an impact on the
Company's accounting of the liquidated damages.

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

F-9

other expense in the accompanying consolidated financial statements. The
recognition of derivative liabilities related to the issuance of
convertible debt is applied first to the proceeds of such issuance as a
debt discount, at the date of issuance, and the excess of derivative
liabilities over the proceeds is recognized as other expense in the
accompanying consolidated financial statements. Any subsequent increase or
decrease in the fair value of the derivative liabilities, which are
measured at the balance sheet date, are recognized as other expense or
other income, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred and
consists primarily of salaries and related benefits, raw materials and
supplies.

SEGMENT REPORTING

The Company operates in one segment, manufacturing of electronic devices
used for vapor analysis. The Company's chief operating decision-maker
evaluates the performance of the Company based upon revenues and expenses
by functional areas as disclosed in the Company's statements of operations.

REVENUE RECOGNITION

The Company records revenue from direct sales of products to end-users when
the products are shipped, collection of the purchase price is probable and
the Company has no significant further obligations to the customer. Costs
of remaining insignificant Company obligations, if any, are accrued as
costs of revenue at the time of revenue recognition. Cash payments received
in advance of product or service revenue are recorded as deferred revenue.

SHIPPING AND HANDLING

The Company accounts for shipping and handling costs as a component of
"Cost of Sales".

INVENTORIES

Inventories are comprised of raw materials, work in process, and finished
goods. Inventories are stated at the lower of cost or market and are
determined using the first-in, first-out method.

LONG-LIVED ASSETS

The Company reviews long-lived assets, such as property and equipment, to
be held and used or disposed of, for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and
without interest, is less than the carrying amount of the asset, an
impairment loss is recognized as the amount by which the carrying amount of
the asset exceeds its fair value. At December 31, 2006 no assets were
impaired.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

F-10

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

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

(2) INVENTORY

Inventory at December 31, 2006 consist of the following:

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

Inventories are stated at the lower of cost or market, cost determined by
the first-in, first-out (FIFO) method. The Company writes down its
inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. The
Company writes down inventory during the period in which such products are
no longer marketable in any of their markets due to governmental
regulations as well as inventory which matures within the next three months
of the measurement date.

(3) CONVERTIBLE DEBENTURES

During December 2005, we issued in a private offering, $7,000,000 aggregate
principal amount of convertible debentures due December 7, 2009. The
convertible debentures are convertible at any time on or prior to the
maturity date at the option of the debenture holder at a conversion price
of $0.4544, which was subsequently reduced to $0.4000 as per a Forbearance
and Amendment Agreement, dated September 7, 2006, with the holders of the
convertible debentures (see Note 5), and can be redeemed at the lesser of
$0.4000 or 90% of the average of the volume weighted average price for the
20 consecutive trading days immediately prior to the conversion date. The
Company received $7,000,000 in cash as consideration. The convertible
debentures bear interest at 8%, payable in cash or stock, at the Company's
option, and are required to be redeemed in 9 equal quarterly payments
commencing January 1, 2008, in cash or stock, at the Company's option. If
the Company chooses to pay interest on or redeem the debentures in shares
of the Company's common stock, rather than in cash, the conversion rate for
such stock payment is the lesser of $0.4544, which was subsequently reduced
to $0.4000 as per a Forbearance and Amendment Agreement, dated September 7,
2006, with the holders of the convertible debentures (see Note 5), or 90%
of the

F-11

average of the volume weighted average price for the 20 consecutive trading
days immediately prior to the interest payment or redemption date, as
applicable.

In connection with the issuance of the convertible debentures, the Company
issued five-year warrants to purchase 12,130,314 shares of common stock at
an exercise price of $0.4761 per share, which was subsequently reduced to
$0.4300 per share as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the warrants (see Note 5).
Furthermore, the Company granted liquidated damages pursuant to a
registration rights agreement.

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

a. Liquidated damages amounting to 2% per month of the outstanding
principal amount, payable in cash or stock, to the debenture holders
in the event that a registration statement covering the shares
underlying the convertible debentures is not declared effective within
150 days of the date the debentures were issued (which was
subsequently extended to February 28, 2007 as per a Forbearance and
Amendment Agreement, dated September 7, 2006, with the holders of the
convertible debentures and warrants - see Note 5). The registration
statement covering the shares underlying the convertible debentures
was declared effective on November 21, 2006;

b. Default interest rate of 18% and a default premium of 30% of the
principal amount of the debentures, payable in cash or stock. Events
of default include, among other things, if a payment, whether cash or
stock is not paid on time and cured within three days, if the
Company's common stock is not quoted for trading for at least five
trading days, if a registration is not effective within 180 days after
December 7, 2005 (which was subsequently extended to February 28, 2007
as per a Forbearance and Amendment Agreement, dated September 7, 2006
with the holders of the convertible debentures and warrants (see Note
5) - the registration statements covering the shares underlying the
convertible debentures and warrants were declared effective on
November 21 and December 21, 2006, respectively). The default interest
rate and the default premium may be converted in shares of common
stock at the same prevailing rate as the remaining principal amount of
the convertible debentures;

c. A reset feature of the conversion price in the event of a subsequent
equity or convertible financing with an effective price lower than the
debenture conversion price, whereby the aforementioned variable
conversion price of the convertible debentures is adjusted to the new
lower effective price of the subsequent equity or convertible
financing; and

d. The warrants require that the Company reimburse any holder of a
warrant in respect of any trading loss resulting from the failure of
the Company to timely deliver shares issued pursuant to the exercise
of warrants. This compensation may be paid in shares of common stock
or cash. The exercise price of the warrants, which is $0.4761 per
share at the date of the agreement (and was subsequently reduced to
$0.4300 per share as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the warrants - see Note 5), may
be further reduced if the registration statement we are required to
file at the request of the warrant holders with respect to the common
stock underlying the warrants is not declared effective within six
months of the date of issuance of the warrants (which was subsequently
extended to February 28, 2007 as per a Forbearance and Amendment
Agreement, dated September 7, 2006 with the holders of the warrants -
see Note 5). The registration statement covering the shares underlying
the warrants was declared effective on December 21, 2006.

In connection with the issuance of the convertible debentures, we issued
485,213 warrants to a company in partial consideration for financial
advisory services, as well as paid $490,000 to this company. The warrants
have the same terms as those granted to the debenture holders. The fair
value of the warrants at the date of issuance amounted to approximately
$136,000. We also incurred approximately $102,500 in additional
professional fees relating to the issuance of the convertible debentures
and warrants. The payments of professional fees and the fair value of the
warrants, aggregating approximately $729,000 have been recorded as deferred
financing costs. The deferred financing costs are amortized over the term
of the convertible debentures. The amortization of deferred financing costs
approximated $181,500 for the year ending December 31, 2006.

See Note 4 - Derivative Liabilities for further information on the
accounting and measurement of the derivative liabilities associated with
the issuance of the convertible debentures and related agreements.

F-12

We recognized a debt discount of $7,000,000 at the date of issuance of the
convertible debentures and the excess amount has been recorded as liability
and a corresponding increase to other expense. The debt discount is
recognized over the term of the convertible debentures.

(4) DERIVATIVE LIABILITIES

FEBRUARY 2005 TRANSACTION

During February 2005, we recognized derivative liabilities of approximately
$6.0 million pursuant to the issuance of 3,985,000 freestanding warrants
and granting certain registration rights which provided for liquidated
damages in the event of failure to timely register the shares in connection
with the issuance of shares of common stock and the related warrants.

There are no liquidated damages provided for untimely effectiveness of the
registration of shares pursuant to piggy-back registration rights. The
Company intends to register all shares and warrants pursuant to the
subscriber piggy-back registration rights.

The agreement pursuant to which the warrants were issued and the
registration rights were granted provided for liquidated damages pursuant
to demand registration rights in the event of a failure to timely register
the shares after demand is made by the holders of a majority of the
warrants and shares of common stock issued pursuant to such agreement. The
demand registration rights of these investors are such that if the Company
fails to register the investors shares, including the shares underlying the
warrants, the Company will pay a cash penalty amounting to 1% of the amount
invested per month, $39,850, if the registration statement is not filed
within 60 days of demand or is not declared effective within 150 days from
the date of initial filing. The maximum liability associated with the
liquidated damages amounts to 49% of the gross proceeds associated with the
issuance of shares of common stock, which amounts to $1,952,650. The
percentage of liquidated damages amounts to the difference between 60
months, which is the inherent time limitation under which the underlying
shares would be free-trading (three year term and two year holding period)
and 11 months, which is the grace period for registering the shares (no
demand permitted for four months, two-month period to file and five-month
period to become effective), times the penalty percentage, which is 1%. The
Company believes that the likelihood that it will incur any liabilities
resulting from the liquidated damages pursuant to the demand registration
rights is remote considering that it will register the shares and the
shares underlying the warrants pursuant to piggy-back registration rights,
which do not contain liquidated damages.

Because the registration rights were not granted under a separate
registration rights agreement, we considered those features in evaluating
whether the associated warrants should be classified as derivative
liabilities. Considering that the amount of the maximum penalty is 49%, the
Company cannot conclude that that this discount represents a reasonable
approximation of the difference between registered and unregistered shares
under paragraph 16 of EITF 00-19. Accordingly, the warrants issued in
connection with the February 2005 transaction are considered derivative
liabilities.

The fair value of the warrants issued in connection with the February 2005
transaction at the date of issuance of the warrants and the granting of
registration rights and at December 31, 2006 is as follows:

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

The Company used the following assumptions, using the Black Scholes Model
to measure the identified derivatives as follows:

F-13

Freestanding warrants

At issuance At December
31, 2006
------------- ---------------
Market price: $ 2.40 $ 0.24
Exercise price: $ 1.00 $ 1.00
Term: 3 years 1.33 years
Volatility: 39% 39%
Risk-free interest rate: 2.78% 4.74%
Number of warrants: 3,985,000 3,985,000

DECEMBER 2005 TRANSACTION

During December 2005, in connection with the issuance of the convertible
debentures, the Company determined that the conversion feature of the
convertible debentures represents an embedded derivative since the
debentures are convertible into a variable number of shares upon
conversion. Because there is no explicit number of shares that are to be
delivered upon satisfaction of the convertible debentures and that there is
no cap on the number of shares to be delivered upon expiration of the
contract to a fixed number, the Company is unable to assert that it had
sufficient authorized and unissued shares to settle its obligations under
the convertible debentures and therefore, net-share settlement is not
within the control of the Company. Accordingly, the convertible debentures
are not considered to be conventional debt under EITF 00-19 and the
embedded conversion feature must be bifurcated from the debt host and
accounted for as a derivative liability.

The embedded conversion features are as follows:

Default Interest Rate and Premium: The default interest rate is 18% while
the stated rate of the convertible debentures is 8%. Additionally, the
Company is liable to pay for a premium amounting to 30% of the principal
amount of the convertible debentures in the event of default. This embedded
derivative could at least double the investor's initial rate of return on
the host contract and could also result in a rate of return that is at
least twice what otherwise would be the market return for a contract that
has the same terms as the host contract and that involves a debtor with a
similar credit quality. Furthermore, the default interest rate may be
triggered by certain events of defaults which are not related to
credit-risk-related covenants or the Company's creditworthiness (e.g., if a
registration statement is not timely filed). The default provisions are
effective, at the holders' option, upon an event of default.

Reset Feature Following Subsequent Financing: The debenture provides for a
reset feature of the conversion price in the event of a subsequent equity
or convertible financing with an effective price lower than the debenture
conversion price, whereby the aforementioned variable conversion price of
the convertible debentures is adjusted to the new lower effective price of
the subsequent equity or convertible financing, which amounts to 10% of the
shares issuable pursuant to the convertible debentures, which is the
effective discount to market value we would offer in the event we provide
for a subsequent private placement financing. This reset does not
constitute a standard anti-dilution provision and is indexed to an
underlying other than an interest rate or credit risk.

Conversion Rate: The convertible debentures are convertible at a variable
conversion price, which is the lesser of $0.4544, which was subsequently
reduced to $0.4000 as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the convertible debentures (see Note
5), or 90% of the average of the volume weighted average price for the 20
consecutive trading days immediately prior to the conversion date. The
convertible debentures are convertible at any time on or prior to the
maturity date at the option of the debenture holder. The implied conversion
embedded feature amounts to a conversion discount of 10% to market.

The Company believes that the aforementioned embedded derivatives meet the
criteria of SFAS 133, including Implementation issue No. B16 and EITF
00-19, when appropriate, and should be accounted for as derivatives with a
corresponding value recorded as a liability.

failure of the Company to timely deliver shares issued pursuant to the
exercise of warrants. This compensation may be paid in shares of common
stock or cash. Accordingly, we have accounted for such warrants as
derivatives.

In connection with the issuance of the convertible debentures, the Company
granted liquidated damages pursuant to a registration rights agreement. The
liquidated damages results in the event that a registration statement
covering the shares underlying the convertible debentures is not declared
effective within 150 days of the date the debentures were issued (which was
subsequently extended to February 28, 2007 as per a Forbearance and
Amendment Agreement, dated September 7, 2006 with the holders of the
convertible debentures - see Note 5). The registration statement covering
the shares underlying the convertible debentures was declared effective on
November 21, 2006.

Additionally, because there is no explicit number of shares that are to be
delivered upon satisfaction of the convertible debentures, the Company is
unable to assert that it had sufficient amount of authorized and unissued
shares to settle its obligations under the convertible debentures.
Accordingly, all of the Company's previously issued and outstanding
instruments, such as warrants, as well as those issued in the future, would
be classified as liabilities as well, effective with the issuance of the
convertible debentures and until the Company is able to assert that it has
a sufficient amount of authorized and unissued shares to settle its
obligations under all outstanding instruments. At the date of the issuance
of the convertible debentures, the Company had 1,941,871 warrants
outstanding which were classified as derivatives.

The fair value of the derivative liabilities at the date of issuance of the
convertible debentures and at December 31, 2006 are as follows:

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

The Company used the following methodology to value the embedded conversion
features and liquidated damages:

It estimated the discounted cash flows payable by the Company, using
probabilities and likely scenarios, for event of defaults triggering the
30% penalty premium and 18% interest accrual, subsequent financing reset,
and liquidated damages, such as the untimely effectiveness of a
registration statement. If the additional cash consideration was payable in
cash or stock, it determined the amount of additional shares that would be
issuable pursuant to its assumptions. The Company revisits the weight of
probabilities and the likelihood of scenarios at each measurement date of
the derivative liabilities, which are the balance sheet dates.

The Company used the following assumptions to measure the identified
derivatives, using the Lattice valuation model, as follows:

Embedded conversion features

At issuance At December
31, 2006
------------- ---------------

Market price: $ 0.4880 $ 0.24
Conversion price: $ 0.4544 $ 0.22
Term: 4 years 2.92 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 4.74%

Freestanding warrants

The derivative liability amounts to the fair value of the warrants issuable
upon exercise. We computed the fair value of this embedded derivative using
the Black Scholes valuation model with the following assumptions:

F-15

At issuance At December
31, 2006
------------- ---------------
Market price: $ 0.488 $ 0.24
Exercise price: $ 0.4761 $ 0.43
Term: 5 years 3.92 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 4.74%

Liquidated Damages

The liquidated damages, payable in cash, are valued using the weighting
probabilities and likely scenarios to estimate the amount of liquidated
damages and were valued at approximately $192,500 and $0 at the date of the
grant of the registration rights and at December 31, 2006, respectively.

The aggregate fair value of the derivative liabilities associated with the
warrants, embedded conversion features, and liquidated damages in
connection with the issuance of the convertible debentures and related
agreements amounted to approximately $7.05 million at the date of issuance
which exceeded the principal amount of the convertible debentures by
approximately $50,000. The Company recognized $7,000,000 as debt discount
and the excess amount was recorded as other expenses in December 2005.
Additionally, approximately $136,000 of the fair value of the warrants was
recorded as deferred financing costs.

The aggregate fair value of all derivative liabilities upon their issuance
in 2005 of the various debt and equity instruments amounted to $13.3
million, of which $10.7 million was allocated to the net proceeds of the
issuance of common stock and convertible debentures, $2.4 million was
allocated and charged to other expenses (in 2005), and approximately
$136,000 was allocated to deferred financing costs (in 2005).

The decrease in fair value of the derivative liabilities between
measurement dates, which are the date of issuance of the various debt and
equity instruments and the balance sheet date, which is December 31,
amounted to approximately $2.4 million and $5.2 million, and have been
recorded as other income in 2006 and 2005, respectively.

(5) FORBEARANCE AND AMENDMENT AGREEMENT

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

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

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

F-16

(6) LINE OF CREDIT

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

(7) STOCKHOLDERS' DEFICIT

COMMON STOCK

Shares issued pursuant to services

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

OPTIONS

In 2005, the Board of Directors adopted the Electronic Sensor Technology,
Inc. 2005 Stock Incentive Plan. The purpose of the Stock Incentive Plan is
to attract and retain the services of experienced and knowledgeable
individuals to serve as our employees, consultants and directors. On the
date the Stock Incentive Plan was adopted, the total number of shares of
common stock subject to it was 5,000,000. The Stock Incentive Plan is
currently administered by the Board of Directors, and may be administered
by any Committee authorized by the Board of Directors, so long as any such
Committee is made up of Non-Employee Directors, as that term is defined in
Rule 16(b)-3(b) of the Securities Exchange Act of 1934.

The Stock Incentive Plan is divided into two separate equity programs: the
Discretionary Option Grant Program and the Stock Issuance Program. Under
the Discretionary Option Grant Program, eligible persons may, at the
discretion of the administrator, be granted options to purchase shares of
common stock and stock appreciation rights. Under the Stock Issuance
Program, eligible persons may, at the discretion of the administrator, be
issued shares of common stock directly, either through the immediate
purchase of such shares or as a bonus for services rendered for Electronic
Sensor Technology (or a parent or subsidiary of Electronic Sensor
Technology).

Pursuant to the terms of the Discretionary Option Grant Program, the
exercise price per share is fixed by the administrator, but may not be less
than 85% of the fair market value of the common stock on the date of grant,
unless the recipient of a grant owns 10% or more of Electronic Sensor
Technology's common stock, in which case the exercise price of the option
must not be less than 110% of the fair market value. An option grant may be
subject to vesting conditions. Options may be exercised in cash, with
shares of the common stock of Electronic Sensor Technology already owned by
the person or through a special sale and remittance procedure, provided
that all applicable laws relating to the regulation and sale of securities
have been complied with. This special sale and remittance procedure
involves the optionee concurrently providing irrevocable written
instructions to: (i) a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to Electronic Sensor Technology, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable federal, state and local income and employment taxes
required to be withheld by Electronic Sensor Technology by reason of such
exercise and (ii) Electronic Sensor Technology to deliver the certificates
for the purchased shares directly to such brokerage firm in order to
complete the sale. The term of an option granted pursuant to the
Discretionary Option Grant Program may not be more than 10 years.

The Discretionary Option Grant Program also allows for the granting of
Incentive Options to purchase common stock, which may only be granted to
employees, and are subject to certain dollar limitations. Any options
granted under the Discretionary Option Grant Program that are not Incentive
Options are considered Non-Statutory Options and are governed by the
aforementioned terms. The exercise price of an Incentive Option must be no
less than 100% of the fair market value of the common stock on the date of
grant, unless the recipient of an award owns 10% or more of Electronic
Sensor Technology's common stock, in which case the exercise price of an
incentive stock option must not be less than 110% of the fair market value.
The term of an Incentive Option granted may not be more than five years if
the option is granted to a recipient who owns 10% or more of Electronic
Sensor Technology's common stock, or 10 years for all other recipients of
Incentive Options. Incentive Options are otherwise governed by the general
terms of the Discretionary Option Grant Program.

F-17

Pursuant to the terms of the Stock Issuance Program, the purchase price per
share of common stock issued is fixed by the administrator, but may not be
less than 85% of the fair market value of the common stock on the issuance
date, unless the recipient of a such common stock owns 10% or more of
Electronic Sensor Technology's common stock, in which case the purchase
price must not be less than 100% of the fair market value. Common stock may
be issued in exchange for cash or past services rendered to Electronic
Sensor Technology (or any parent or subsidiary of Electronic Sensor
Technology). Common stock issued may be fully and immediately vested upon
issuance or may vest in one or more installments, at the discretion of the
administrator.

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

(8) COMMITMENTS AND CONTINGENCIES

LEASES

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

(9) RETIREMENT SAVINGS PLAN

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

(10) INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the net deferred taxes, as of December 31, 2006,
are as follows:

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

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

SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported, if any, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. Management has determined that a valuation allowance of $
2,000,000 at December 31, 2006 is necessary to reduce the deferred tax
assets to the amount that will more likely than not be realized. The change
in the valuation allowance during 2006 and 2005 was a decrease of
approximately $1.100,000 and $900,000 respectively.

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

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

F-18

State tax rate, net of federal benefits 5.7 5.7
Change in valuation allowance (40.7) (40.7)
---------- ----------
Effective tax rate 0.0% 0.0%
========== ==========

(11) SUBSEQUENT EVENTS

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

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

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

F-19

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(Unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 591,679
Certificate of deposit 712,467
Certificate of deposit-restricted 250,000
Accounts receivable, net of allowance for doubtful accounts of $16,366 223,735
Prepaid expenses 74,287
Inventories 1,277,843
------------------
TOTAL CURRENT ASSETS 3,130,011
------------------
DEFERRED FINANCING COSTS, net of amortization of $244,232 484,128

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $974,035 187,371

SECURITY DEPOSITS 12,817
------------------
$ 3,814,327
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 613,494
Deferred revenues 79,167
Derivative liabilities 3,238,193
Convertible debentures - current portion 777,778
------------------
TOTAL CURRENT LIABILITIES 4,708,632
------------------
CONVERTIBLE DEBENTURES- long-term portion, net of unamortized discount of $3,888,889 2,333,333
------------------
TOTAL LIABILITIES 7,041,965
------------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value 50,000,000 shares authorized,
none issued and outstanding -
Common stock, $.001 par value, 200,000,000 shares authorized,
54,173,745 issued and outstanding 54,174
Additional paid-in capital 8,570,763
Accumulated deficit (11,852,575)
------------------
TOTAL STOCKHOLDERS' DEFICIT (3,227,638)
------------------
$ 3,814,327
==================

See unaudited notes to consolidated financial statements

F-20

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended
March 31,
---------------------------------
2007 2006
--------------- ---------------
REVENUES $ 477,275 $ 532,817
COST OF SALES 253,843 301,592
--------------- ---------------
GROSS PROFIT 223,432 231,225

OPERATING EXPENSES:
Research and development 218,787 211,799
Selling, general and administrative 777,458 780,092
--------------- ---------------
TOTAL OPERATING EXPENSES 996,245 991,891
--------------- ---------------
LOSS FROM OPERATIONS (772,813) (760,666)
--------------- ---------------
OTHER INCOME (EXPENSE)
Other income - derivative 127,030 1,220,197
Other income 1,854 -
Other expense - (217)
Interest (expense) (709,499) (730,391)
--------------- ---------------
TOTAL OTHER INCOME AND EXPENSE (580,615) 489,589
--------------- ---------------
NET (LOSS ) $ (1,353,428) $ (271,077)
=============== ===============
Loss per share, basic $ (0.02) $ (0.01)
=============== ===============
Weighted average number of shares, basic 54,173,745 54,145,922
=============== ===============
Loss per share, diluted $ (0.03) $ (0.03)
=============== ===============
Weighted average number of shares, diluted 54,173,745 54,145,922
=============== ===============

See unaudited notes to consolidated financial statements

F-21

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended
March 31,
----------------------------------
2007 2006
--------------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,353,428) $ (271,077)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 13,385 8,666
Decrease in allowance for doubtful accounts (7,996) -
Issuance of shares for services - 21,000
Amortization of compensation expense related to issuance of stock options 54,409
Amortization of debt discount 583,334 583,333
Amortization of deferred financing costs 45,386 51,894
Decrease in fair value of derivative liability (118,280) (1,220,197)
Changes in assets and liabilities:
Accounts receivable 84,674 243,695
Inventories (68,476) (7,847)
Prepaid expenses 4,483 3,603
Accounts payable and accrued expenses 209,576 50,920
Deferred revenues (12,500) (12,500)
--------------- ---------------
Net cash provided by (used in) operating activities (489,110) (609,139)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted security deposit - 668,678
Increase in certificate of deposit (10,385)
Purchase of property and equipment (2,967) (62,924)
--------------- ---------------
Net cash provided by (used in) investing activities (13,352) 605,754
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities - -
--------------- ---------------
NET INCREASE (DECREASE) IN CASH (502,462) (3,385)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,094,141 4,219,921
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 591,679 $ 4,216,536
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 140,000 $ 140,000
=============== ===============

See unaudited notes to consolidated financial statements.

F-22

ELECTRONIC SENSOR TECHNOLOGY, INC.
Notes to Financial Statements
(Unaudited)
March 31, 2007

1) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-QSB and
Item 10 of Regulation S-B. Accordingly, they do not include all the
information and disclosures required for annual financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes for the year ended December 31,
2006, included in the Annual Report filed on Form 10-KSB for the year then
ended.

In the opinion of the management of Electronic Sensor Technology, Inc. (the
"Company"), all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of March
31, 2007, and the results of operations and cash flows for the three-month
period ending March 31, 2007 have been included. The results of operations
for the three-month period ended March 31, 2007 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report filed on Form 10-KSB as
filed with the Securities and Exchange Commission for the year ended
December 31, 2006, included in the Annual Report filed on Form 10-KSB for
the year then ended.

2) BASIS OF CONSOLIDATION

The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.

3) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) NATURE OF BUSINESS

The Company develops and manufactures electronic devices used for
vapor analysis. It markets its products through distribution channels
in over 20 countries.

b) CASH AND CASH EQUIVALENTS

The Company considers highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.

c) ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

F-23

d) LINE OF CREDIT

The Company has a revolving line of credit agreement for borrowings up
to $500,000. The line of credit is secured and collateralized with a
certificate of deposit in the amount of $250,000. No amounts were due
under this line of credit at March 31, 2007. The line of credit
expires on March 31, 2008.

e) REVENUE RECOGNITION

The Company records revenue from direct sales of products to end-users
when the products are shipped, collection of the purchase price is
probable and the Company has no significant further obligations to the
customer. Costs of remaining insignificant Company obligations, if
any, are accrued as costs of revenue at the time of revenue
recognition. Cash payments received in advance of product shipment or
service revenue are recorded as deferred revenue.

f) SHIPPING AND HANDLING

The Company accounts for shipping and handling costs as a component of
"Cost of Sales".

g) INVENTORIES

Inventories are comprised of raw materials, work in process, and
finished goods. Inventories are stated at the lower of cost or market
and are determined using the first-in, first-out method.

h) DEFERRED FINANCING COSTS

Deferred financing costs consist of direct costs incurred by the
Company in connection with the issuance of its convertible debentures.
The direct costs include cash payments and fair value of warrants
issued to the placement agent, which secured the financing. Deferred
financing costs are amortized over 48 months using the effective
interest rate method.

i) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of five years.

j) RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred
and consists primarily of salaries and related benefits, raw materials
and supplies.

k) Use of Estimates

The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the recorded amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.

l) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of certain financial instruments, including accounts
receivable, accounts payable and accrued liabilities, approximate
their carrying values due to the short maturity of these instruments.
The fair value of the convertible debentures issued by the Company in
December 2005 amounts to

F-24

$7,000,000, based on the Company's incremental borrowing rate. The
carrying value of the derivative liabilities associated with the
convertible debentures represents its fair value.

m) LONG-LIVED ASSETS

The Company reviews long-lived assets, such as property and equipment,
to be held and used or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. At March 31, 2007
no assets were impaired.

n) DERIVATIVE LIABILITIES

The Company accounts for its liquidated damages pursuant to Emerging
Issue Task Force ("EITF") 05-04, View C, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF
Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock". In
December 2006, FASB issued FASB Staff Position No. EITF 00-19-2
"Accounting for Registration Payment Arrangements" ("FSP 00-19-2"),
which superseded EITF 05-04. FSP 00-19-2 provides that the contingent
obligation to make future payments or otherwise transfer consideration
under a registration payment arrangement, should be separately
recognized and measured in accordance with FASB Statement No.5,
"Accounting for Contingencies". The registration statement payment
arrangement should be recognized and measured as a separate unit of
account from the financial instrument(s) subject to that arrangement.
If the transfer of consideration under a registration payment
arrangement is probable and can be reasonably estimated at inception,
such contingent liability is included in the allocation of proceeds
from the related financing instrument. Pursuant to EITF 05-04, View C,
the liquidated damages paid in cash or stock are accounted for as a
separate derivative, which requires a periodical valuation of its fair
value and a corresponding recognition of liabilities associated with
such derivative. FSP00-19-2 did not have an impact on the Company's
accounting of the liquidated damages.

The Company has registered all shares underlying the convertible
debentures as well as all shares underlying the warrants related to
the convertible debentures.

The Company accounts for its embedded conversion features and
freestanding warrants pursuant to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires a
periodic valuation of their fair value and a corresponding recognition
of liabilities associated with such derivatives. The recognition of
derivative liabilities related to the issuance of shares of common
stock is applied first to the proceeds of such issuance, at the date
of issuance, and the excess of derivative liabilities over the
proceeds is recognized as other expense in the accompanying
consolidated financial statements. The recognition of derivative
liabilities related to the issuance of convertible debt is applied
first to the proceeds of such issuance as a debt discount, at the date
of issuance, and the excess of derivative liabilities over the
proceeds is recognized as other expense in the accompanying
consolidated financial statements. Any subsequent increase or decrease
in the fair value of the derivative liabilities, which are measured at
the balance sheet date, are recognized as other expense or other
income, respectively.

o) BASIC AND DILUTED EARNINGS PER SHARE

Basic earnings per share are calculated by dividing income available
to stockholders by the weighted-average number of common shares
outstanding during each period. Diluted earnings per share are
computed using the weighted average number of common and dilutive
common share equivalents outstanding during the period. Dilutive
common share equivalents consist of shares issuable upon the exercise
of stock options and warrants embedded conversion features (calculated
using the reverse treasury stock method). The outstanding options,
warrants and shares equivalent issuable pursuant to embedded

F-25

conversion features amounted to 59,370,639 and 58,558,501 at March 31,
2007 and 2006, respectively. The outstanding options, warrants and
shares equivalent issuable pursuant to embedded conversion features
and warrants at March 31, 2007 and 2006, respectively, are excluded
from the loss per share computation for that period due to their
antidilutive effect. The Company adjusted the numerator for any
changes in income or loss that would result if the contract had been
recorded as an equity instrument for accounting purposes during the
period. However, the Company did not adjust the numerator for interest
charges during the period on the convertible debentures because it
would have been anti-dilutive.

The following sets forth the computation of basic and diluted earnings
per share at March 31:

2007 2006
------------ ------------

Numerator:
Net income (loss) $ (1,353,428) $ (271,077)
Net other income/expense associated with
derivative contracts 127,030 1,220,197
------------ ------------
Net (loss) for diluted earnings per share purposes $ (1,480,458) $ (1,491,274)
============ ============
Denominator:
Denominator for basic earnings per share-
Weighted average shares outstanding 54,173,745 54,145,922
Effect of dilutive warrants, embedded
conversion features and liquidated damages 0 0
------------ ------------
Denominator for diluted earnings per share-
Weighted average shares outstanding 54,173,745 54,145,922
============ ============
Basic earnings (loss) per share $(0.02) $(0.01)
============ ============
Diluted earnings (loss) per share $(0.03) $(0.03)
============ ============

p) STOCK BASED COMPENSATION

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

During the quarter, 1,520,450 stock option shares, with varying
vesting terms, were granted to directors and employees of the company.
The fair value of the stock options at March 31, 2007, as calculated
using Black Scholes methodology, was $145,430. The fair value amount
is amortized over a 48 month period with $54,409 charged to
compensation expense for the first quarter of 2007.

F-26

Additionally, 137,500 stock option shares, of which 87,500 option
shares were fully vested, were issued to a consultant during the
quarter. The fair value of the fully vested shares, as calculated
using Black Scholes methodology, was $8,750 and charged to consulting
expense. The remaining 50,000 stock option shares will vest over a 48
month period with the fair value of the respective stock option shares
charged to expense when they become vested.

q) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities -- including an
amendment of FAS 115 ("SFAS No. 159"). SFAS No. 159 allows companies
to choose, at specified election dates, to measure eligible financial
assets and liabilities at fair value that are not otherwise required
to be measured at fair value. Unrealized gains and losses shall be
reported on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and will
be applied prospectively. The Company is currently evaluating the
impact of adopting SFAS No. 159 on our consolidated financial
position, results of operations and cash flows.

4) CONVERTIBLE DEBENTURES

F-27

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

In connection with the issuance of the convertible debentures, the Company
issued five-year warrants to purchase 12,130,314 shares of common stock at
an exercise price of $0.4761 per share, which was subsequently reduced to
$0.4300 per share as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the warrants (see Note 7).
Furthermore, the Company granted liquidated damages pursuant to a
registration rights agreement.

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

1) Liquidated damages amounting to 2% per month of the outstanding
principal amount, payable in cash or stock, to the debenture holders
in the event that a registration statement covering the shares
underlying the convertible debentures is not declared effective within
150 days of the date the debentures were issued (which was
subsequently extended to February 28, 2007 as per a Forbearance and
Amendment Agreement, dated September 7, 2006, with the holders of the
convertible debentures and warrants - see Note 7). The registration
statements covering the shares underlying the convertible debentures
were declared effective on November 21, 2006 and December 21, 2006,
respectively.

2) Default interest rate of 18% and a default premium of 30% of the
principal amount of the debentures, payable in cash or stock. Events
of default include, among other things, if a payment, whether cash or
stock is not paid on time and cured within three days, if the
Company's common stock is not quoted for trading for at least five
trading days, if a registration is not effective within 180 days after
December 7, 2005 (which was subsequently extended to February 28, 2007
as per a Forbearance and Amendment Agreement, dated September 7, 2006
with the holders of the convertible debentures and warrants (see Note
7) - the registration statements covering the shares underlying the
convertible debentures and warrants were declared effective on
November 21 and December 21, 2006, respectively). The default interest
rate and the default premium may be converted in shares of common
stock at the same prevailing rate as the remaining principal amount of
the convertible debentures;

3) A reset feature of the conversion price in the event of a subsequent
equity or convertible financing with an effective price lower than the
debenture conversion price, whereby the aforementioned variable
conversion price of the convertible debentures is adjusted to the new
lower effective price of the subsequent equity or convertible
financing; and

4) The warrants require that the Company reimburse any holder of a
warrant in respect of any trading loss resulting from the failure of
the Company to timely deliver shares issued pursuant to the exercise
of warrants. This compensation may be paid in shares of common stock
or cash. The exercise price of the warrants, which is $0.4761 per
share at the date of the agreement (and was subsequently reduced to
$0.4300 per share as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the warrants - see Note 7), may
be further reduced if the registration statement we are required to
file at the request of the warrant holders with respect to the common
stock underlying the warrants is not declared effective within six
months of the date of issuance of the warrants (which was subsequently
extended to February 28, 2007 as per a Forbearance and Amendment
Agreement, dated September 7, 2006 with the holders of the warrants -
see Note 7). The registration statement covering the shares underlying
the warrants was declared effective on December 21, 2006.

F-28

value of the warrants, aggregating approximately $729,000 have been
recorded as deferred financing costs. The deferred financing costs are
amortized over the term of the convertible debentures. The amortization of
deferred financing costs approximated $45,400 for the three-month period
ending March 31, 2007.

See Note 5- Derivative Liabilities for further information on the
accounting and measurement of the derivative liabilities associated with
the issuance of the convertible debentures and related agreements.

Amounts due on the convertible debentures within the next twelve months are
classified as a current liability. The amount of convertible debentures
payable within the next twelve months at March 31, 2007 is $777,778.

5) DERIVATIVE LIABILITIES

FEBRUARY 2005 TRANSACTION

The fair value of the warrants issued in connection with the February 2005
transaction at the date of issuance of the warrants and the granting of
registration rights and at March 31, 2007 is as follows:

F-29

At issuance At March 31, 2007
-------------- -----------------
Freestanding warrants $ 6,017,350 $ 0

The Company used the following assumptions, using the Black Scholes Model
to measure the identified derivatives as follows:

Freestanding warrants

At issuance At March 31, 2007
-------------- -----------------
Market price: $ 2.40 $ 0.21
Exercise price: $ 1.00 $ 1.00
Term: 3 years 1.00 years
Volatility: 39% 39%
Risk-free interest rate: 2.78% 4.54%
Number of warrants: 3,985,000 3,985,000

DECEMBER 2005 TRANSACTION

The embedded conversion features are as follows:

F-30

The convertible debentures are convertible at any time on or prior to the
maturity date at the option of the debenture holder. The implied conversion
embedded feature amounts to a conversion discount of 10% to market.

In connection with the issuance of the convertible debentures, the Company
issued warrants to the debenture holders. The related warrants require that
the Company reimburse any holder of a warrant in respect of any trading
loss resulting from the failure of the Company to timely deliver shares
issued pursuant to the exercise of warrants. This compensation may be paid
in shares of common stock or cash. Accordingly, we have accounted for such
warrants as derivatives.

In connection with the issuance of the convertible debentures, the Company
granted liquidated damages pursuant to a registration rights agreement. The
liquidated damages results in the event that a registration statement
covering the shares underlying the convertible debentures is not declared
effective within 150 days of the date the debentures were issued (which was
subsequently extended to February 28, 2007 as per a Forbearance and
Amendment Agreement, dated September 7, 2006 with the holders of the
convertible debentures - see Note 7). The registration statement covering
the shares underlying the convertible debentures was declared effective on
November 21, 2006.

The fair value of the derivative liabilities at the date of issuance of the
convertible debentures and at March 31, 2007 are as follows:

At Issuance At March 31, 2007
----------- -----------------
Freestanding warrants $ 3,532,348 $ 378,466
Embedded conversion features 3,463,542 2,851,852
Liquidated damages 192,500 0
Other outstanding warrants 143,268 0

The Company used the following methodology to value the embedded conversion
features and liquidated damages:

F-31

The Company used the following assumptions to measure the identified
derivatives, using the Lattice valuation model, as follows:

Embedded conversion features

FREESTANDING WARRANTS [TABLE]

Embedded conversion features

At issuance At March 31, 2007
---------------- -----------------------
Market price: $ 0.4880 $ 0.21
Conversion price: $ 0.4544 $ 0.19
Term: 4 years 2.67 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 4.54%

Freestanding warrants

At issuance At March 31, 2007
---------------- -----------------------
Market price: $ 0.488 $ 0.21
Exercise price: $ 0.4761 $ 0.43
Term: 5 years 3.67 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 4.54%

Liquidated damages

The decrease in fair value of the derivative liabilities between
measurement dates, which are the date of issuance of the various debt and
equity instruments and the balance sheet date, which is March 31, amounted
to approximately $0.1 million and $1.2 million, and have been recorded as
other income in 2007 and 2006, respectively.

F-32

6) Stockholders' Deficit

Options

During the quarter ended March 31, 2007, 1,520,450 stock option shares,
with varying vesting terms, were granted to directors and employees of the
company. The fair value of the granted stock options shares, as calculated
using

F-33

Black Scholes methodology, at March 31, 2007 was approximately $145,000, of
which approximately $54,000 was charged to compensation expense in the
first quarter 2007. The remaining amount will be amortized to compensation
expense over future periods based on the vesting schedule of the respective
stock option shares.

Additionally, 137,500 stock option shares were granted to a consultant
during the quarter ended March 31, 2007, of which 87,500 were fully vested.
Consulting expense of $8,750 was recorded to reflect the fully vested stock
option shares. Consulting expense will be recorded in future periods as the
remaining stock option shares become fully vested. The fair value of the
unvested shares, as calculated using Black Scholes methodology, is included
in the derivative liability balance.

The fair value of the options issued was based on the following
assumptions: exercise price: $0.19-0.24, market value: $0.19-0.24,
risk-free interest rate: 4.54%, expected dividend rate: 0%, expected
volatility: 39%, term 5 years.

The expected volatility was based on the average historical volatility of
comparable publicly-traded companies.

The weighted-average grant-date fair value of options granted during the
three-month period ended March 31, 2007 amounted to $0.09 per option.

The total compensation cost related to nonvested awards not yet recognized
amounted to approximately $90,000 at March 31, 2007 and the Company expects
that it will be recognized over the following weighted-average period of 17
months.

There were a total of 2,774,450 stock option shares issued and outstanding
at March 31, 2007, of which 995,750 were fully vested. The remaining stock
option shares will vest as follows:

Number of stock
Year option Shares
----------------- --------------------
Remainder of 2007 140,000
2008 368,675
2009 143,675
2010 143,675
2011 116,175

7) Forbearance and Amendment Agreement

$0.4300 per share. The registration statements covering the shares
underlying the convertible debentures and warrants were declared effective
on November 21 and December 21, 2006, respectively.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

On April 18, 2005, Electronic Sensor Technology engaged Sherb & Co. LLP as
our independent registered public accounting firm.

Manning Elliott Chartered Accountants resigned as Electronic Sensor
Technology's auditors effective from April 18, 2005. Manning Elliott served as
Bluestone's (now Electronic Sensor Technology) independent auditors for fiscal
years ended December 31, 2004 and December 31, 2003. Manning Elliott's report on
Bluestone's (now Electronic Sensor Technology) consolidated financial statements
for the audit reports fiscal years ended December 31, 2004 and December 31, 2003
did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles
except as follows: In Manning Elliott's audit reports dated April 7, 2005 and
March 25, 2004 for Bluestone's (now Electronic Sensor Technology) fiscal years
ended December 31, 2004 and December 31, 2003, respectively, Manning Elliott
indicated that: "The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has not generated any revenue since
inception and will need additional financing to sustain operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty."

The decision to change accountants was approved and recommended by the
Board of Directors.

During the fiscal years ended December 31, 2004 and December 30, 2003 and
until Manning Elliott's resignation, there were no disagreements with Manning
Elliott within the meaning of item 304 of regulation S-B or any matter of
accounting principles or practices, financial disclosure, or auditing scope or
procedure, which disagreements if not resolved to Manning Elliott's
satisfaction, would have caused Manning Elliott to make reference to the subject
matter of the disagreements in connection with its reports. During the fiscal
years ended December 31, 2004 and December 31, 2003, until Manning Elliott's
resignation, there were no "reportable events" (as such term is defined in item
304(a)(1)(v) of regulation S-K).

During Electronic Sensor Technology's two most recent fiscal years and any
subsequent interim period prior to the engagement of Sherb & Co. LLP, neither
Electronic Sensor Technology nor anyone on Electronic Sensor Technology's behalf
consulted with Sherb & Co. LLP, regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on Electronic
Sensor Technology's financial statements or (ii) any matter that was either the
subject of a "disagreement" or a "reportable event."

Electronic Sensor Technology requested that Manning Elliott review the
disclosure contained in Electronic Sensor Technology's current report filed on
Form 8-K on April 19, 2005, which is reproduced herein, and Manning Elliott
furnished Electronic Sensor Technology with a letter addressed to the Commission
containing any new information, clarification of Electronic Sensor Technology's
expression of Manning Elliott's views, or the respects in which Manning Elliott
did not agree with the statements contained in Electronic Sensor Technology's
current report filed on Form 8-K on April 19, 2005. A copy of Manning Elliott's
letter is included as an Exhibit to this prospectus.

WHERE YOU CAN FIND MORE INFORMATION

We file annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and
current reports on Form 8-K with the SEC. You may read and copy any materials
that Electronic Sensor Technology files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC at: http://www.sec.gov. More information regarding
Electronic Sensor Technology

-46-

is available at our website: http://www.znose.com. The information on or that
can be accessed through our website is not part of this prospectus.

This prospectus is part of a registration statement on Form SB-2 that we
filed with the SEC. As allowed by SEC rules, this prospectus does not contain
all of the information that is in the registration statement and the exhibits to
the registration statement. For further information about Electronic Sensor
Technology, investors should refer to the registration statement and its
exhibits. A copy of the registration statement and its exhibits may be
inspected, without charge, at the SEC's Public Reference Room or on the SEC's
web site.

It is important for you to analyze the information in this prospectus, the
registration statement and the exhibits to the registration statement before you
make your investment decision.

Special Note of Caution Regarding Forward-looking Statements

Certain statements in this prospectus, including those relating to the
company's plans regarding business and product development; product sales and
distribution; market demands and developments in the homeland security,
analytical instrumentation/quality control and environmental monitoring markets;
and the sufficiency of the company's resources to satisfy operation cash
requirements are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may contain
the words "believe," "anticipate," "expect," "predict," "estimate," "project,"
"will be," "will continue," "will likely result," or other similar words and
phrases. Risks and uncertainties exist that may cause results to differ
materially from those set forth in these forward-looking statements. Factors
that could cause the anticipated results to differ from those described in the
forward-looking statements include: risks related to changes in technology, our
dependence on key personnel, our ability to protect our intellectual property
rights, emergence of future competitors, changes in our largest customer's
business and government regulation of homeland security companies. These risks
and uncertainties, along with other risks that related to our business and
investing in shares of our common stock, are described under the heading "Risk
Factors" beginning on page 2 and elsewhere in this prospectus.

Our actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements
and, accordingly no assurances can be given that any of the events anticipated
by the forward-looking statements will transpire or occur, or if any of them do
so, what impact they will have on the results of operations and financial
condition of Electronic Sensor Technology. The forward-looking statements speak
only as of the date they are made. We do not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.

LEGAL MATTERS

The validity of the common stock offered hereunder will be passed upon
by Snell & Wilmer LLP.

EXPERTS

The financial statements of Electronic Sensor Technology for the fiscal
years ended December 31, 2006 and 2005 included in this prospectus have been so
included in reliance on the report of Sherb & Co., LLP, an independent
registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.

* * *

-47-

[GRAPHIC OMITTED][ELECTRONIC SENSOR TECHNOLOGY]

ELECTRONIC SENSOR TECHNOLOGY, INC.
27,538,695 SHARES OF COMMON STOCK

----------
PROSPECTUS
----------

We have not authorized anyone to give you any information that differs from
the information in this prospectus. If you receive any different information,
you should not rely on it.

The delivery of this prospectus shall not, under any circumstances, create
an implication that Electronic Sensor Technology, Inc. is operating under the
same conditions that it was operating under on the date of this prospectus. Do
not assume that the information contained in this prospectus is correct at any
time past the date indicated.

This prospectus does not constitute an offer to sell, or the solicitation
of an offer to buy, any securities other than the securities to which it
relates.

This prospectus does not constitute an offer to sell, or the solicitation
of an offer to buy, the securities to which it relates in any circumstances in
which such offer or solicitation is unlawful.

Dated May 14, 2007