ESNR Electronic Sensor Technology Inc (CE)

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

Form 10-K

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

For the fiscal year ended DECEMBER 31, 2008

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

For the transition period from __________ to __________

Commission file number 000-51859

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

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

Registrant's telephone number, including area code (805) 480-1994

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

None. N/A

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ]

Non accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008 was $3,235,226.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. On April 8, 2009, there were 155,853,385 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). N/A

Certain statements in this annual report on Form 10-K, including those relating to the company's plans regarding business and product development; product sales and distribution; market demands and developments in the homeland security, analytical instrumentation/quality control and environmental monitoring markets; and the sufficiency of the company's resources to satisfy operation cash requirements are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may contain the words "believe," "anticipate," "expect," "predict," "estimate," "project," "will be," "will continue," "will likely result," or other similar words and phrases.

Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: risks related to changes in technology, our dependence on key personnel, our ability to protect our intellectual property rights, emergence of future competitors, changes in our largest customer's business and government regulation of homeland security companies. The forward-looking statements speak only as of the date they are made. The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

PART I

Item 1. Business.

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

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

We believe that our products have broad applications in the homeland security, analytical instrumentation/quality control, and environmental monitoring and detection 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

(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 homeland security market is a multi-billion dollar market and is projected to remain as such in the foreseeable future. We believe that detection and analysis of chemical compounds will aid greatly in various homeland security efforts including:

o Cargo Containers. Over 46.3 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. The zNose(R) was used by the China Environmental Protection Agency (China EPA) to detect and monitor toxic flows in a river caused by a chemical spill after a chemical plant explosion in northeastern China. This industrial accident contaminated the major water sources located near the plant. The zNose(R) is also used by the China Environmental Protection Agency (EPA) to determine the safety of drinkable 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.

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

OUR PRODUCTS

zNose(R)

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

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

We currently manufacture and sell four zNose(R) models designated as Model 4200 (Handheld Unit), Model 4300 (Portable Unit), Model 7100 (Bench Top Unit), and Model 8100 (Fixed Installation 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. Model 8100 is designed for indoor ambient air monitoring and can be used for building security monitoring applications. 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 weighs approximately 24 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". The Model 8100 is designed as a fixed installation unit for indoor ambient air monitoring and is designed to be operated remotely from a central control station via a Bluetooth control link. The dimensions of the Model 8100 unit are 15" x 37" x 36". The Models 4200, 7100, and 8100 are powered by a standard AC electrical outlet, and all 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). All four 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.

During 2008, we developed the Model 4500. The Model 4500 is a two-piece portable unit that is similar in configuration to the Model 4300 except for the laptop computer that is required by the Model 4300 has been replaced by an embedded processor in the Model 4500.

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.

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, customer referrals, and GSA contracted suppliers. 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 agreement, eScreen paid us an up-front fee of $250,000 in 2004. 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 Macrochem 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. Also, on December 3, 2007, we entered into an agreement with Breckbuhler, AG to be a distributor in the countries of Switzerland, France, Austria, and Italy.

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 continuing to work on building a dedicated marketing and sales team. We historically generated sales from both domestic and international customers, with international customers accounting for approximately 66% and 62% of our sales for the fiscal years ending December 31, 2007 and December 31, 2008, respectively. We expect future sales to domestic and international customers to be more balanced. All of our customers pay us in U.S. dollars. Major domestic customers include Security Pro USA, Proctor & Gamble, Rubbermaid Home Products, and S.C. Johnson. Major international customers include Beijing R&D Technology Company Ltd. in China, Petroleum Services Co. in Kuwait, Dynex Technologies in the Czech Republic and Brechbuhler, AG in Switzerland.

COMPETITION

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

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

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

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

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

MANUFACTURING AND RAW MATERIALS

We design, prototype and manufacture our products at our headquarters. Our manufacturing facilities adhere to ISO9001 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 300 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 Aldrich Co. of Bellefonte, Pennsylvania, American Precision of Chatsworth, California, Machine Works LLC of Santa Paula California, Clayton Controls of Costa Mesa, California, and Syncor Industries, Inc. of Ventura, California.

CUSTOMERS

In 2008, we had approximately 61 customers. Our largest customer in 2008, Beijing R&D Technology Company Ltd. (which is our exclusive distributor in China), purchased 22 of the total 56 zNose(R) units sold by us in 2008, constituting approximately 39% of the zNose(R) units sold in 2008. Our largest customers are (1) Beijing R&D Technology Company Ltd. of China, (2) Petroleum Services Co. and (3) Security Pro USA.

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.

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 $745,000 in 2007 and $658,000 in 2008 on research and development activities, none of which was borne directly by customers.

EMPLOYEES

As of December 31, 2008 we had a total of 15 full-time employees and 3 consultants. 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.

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2008. The figures in the table are derived from our audited financial statements and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. All information below excludes any securities issued subsequent to December 31, 2008.

 December 31, 2008

Long-term debt .......................................... $ 1,951,017
Stockholders' deficit:
 Common stock; $0.001 par value; 200,000,000 Shares
 authorized; 155,853,385 shares issued and outstanding. $ 155,854
 Additional paid-in capital ............................ $ 15,207,301
 Accumulated deficit ................................... $ (16,175,273)
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Total Stockholders' deficit ............................. $ (812,118)
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Total capitalization .................................... $ 1,138,899
 ===============

Item 1A. Risk Factors.

This item is not applicable to smaller reporting companies.

Item 1B. Unresolved Staff Comments.

This item is not applicable to smaller reporting companies.

Item 2. Properties.

We lease approximately 12,700 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 $12,127 per month, and increase by 3% per annum on October 1, 2009. The facility serves as our headquarters and research and development and manufacturing facility. This property is in good condition and is suitable and adequate for our uses. We do not believe this property is subject to any material competitive conditions. Our management is of the opinion that this property is adequately covered by insurance.

INVESTMENT POLICIES

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

Item 3. Legal Proceedings.

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

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

MARKET FOR COMMON EQUITY

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

 2008
 --------------
 QUARTER ENDED HIGH LOW
------------------- ----- ------
December 31 $ .05 $ .003
September 30 .05 .02
June 30 .06 .02
March 31 .09 .04

 2007
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 QUARTER ENDED HIGH LOW
------------------- ----- ------
December 31 $ .19 $ .04
September 30 .22 .06
June 30 .26 .18
March 31 .29 .13

Source: AOL Money & Finance.

There were 46 record holders of our common stock as of April 8, 2009. 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, 2008, information relating to all of our equity compensation plans:

EQUITY COMPENSATION PLAN INFORMATION

 Number of securities
 Number of securities to be Weighted average remaining available
 issued upon exercise of exercise price of for future issuance
 outstanding options, outstanding options, under the equity
Plan Category warrants and rights warrants and rights compensation plan
----------------------------- -------------------------- -------------------- --------------------
Equity compensation plans
 approved by security holders 0 N/A 0

Equity compensation plans not
 approved by security holders 3,146,900 $.19 1,853,100 (1)

Total 3,146,900 $.19 1,853,100

(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 3,146,900, the number of shares of common stock underlying outstanding options granted pursuant to the Stock Incentive Plan as of December 31, 2008.

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 5 to the company's consolidated financial statements under the heading "Options" included in this annual report and is incorporated herein by reference.

RECENT SALES OF UNREGISTERED SECURITIES

All recent sales of unregistered equity securities during the period covered by this annual report have previously been included on our current report on Form 8-K filed January 16, 2008, our current report on Form 8-K filed April 3, 2008, our amended current report on Form 8-K/A filed January 2, 2009 and our amended current report on Form 8-K/A filed January 5, 2009.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER

We did not repurchase any of our equity securities during the three months ended December 31, 2008.

Item 6. Selected Financial Data.

This item is not applicable to smaller reporting companies.

Item 7. 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 annual report.

CRITICAL ACCOUNTING POLICIES

Electronic Sensor Technology records revenue from direct sales of products to end-users when the products are shipped, collection of the purchase price is probable and Electronic Sensor Technology has no significant further obligations to the customer. Costs of remaining insignificant obligations of Electronic Sensor Technology, if any, are accrued as costs of revenue at

the time of revenue recognition. Cash payments received in advance of product shipment or service revenue are recorded as deferred revenue.

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

Electronic Sensor Technology reviews long-lived assets, such as property and equipment, to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. At December 31, 2008 no assets were impaired.

The company accounts for its liquidated damages pursuant to FASB Staff Position No. EITF 00-19-2 "Accounting for Registration Payment Arrangements" ("FSP 00-19-2"). 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. The company had registered all shares underlying the 8% convertible debentures as well as all shares underlying the warrants related to the 8% convertible debentures, but no longer maintains such registration, in light of the partial conversion and partial cancellation of the debentures and a portion of the warrants.

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 $3,700,000 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, 2008 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

Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007

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 %
 ---------------------------- 2008 vs 2008 vs
 2008 2007 2007 2007
 ------------ ------------ ------------ ------------
In $
REVENUES $ 1,724,897 $ 2,198,204 (473,307) (21.5%)
COST OF SALES 1,042,825 1,356,719 (313,894) (23.1%)
 ------------ ------------ ------------
 GROSS PROFIT 682,072 841,485 (159,413) (18.9%)

OPERATING EXPENSES:
 Research and development 658,111 744,646 (86,535) (11.6%)
 Selling 472,310 664,838 (192,528) (29.0%)
 Compensation 632,009 787,114 (155,105) (19.7%)
 General and administrative 913,967 1,078,651 (164,684) (15.3%)
 ------------ ------------ ------------
 TOTAL OPERATING EXPENSES 2,676,397 3,275,249 (598,852) (18.3%)
 ------------ ------------ ------------
LOSS FROM OPERATIONS (1,994,325) (2,433,764) 439,439 18.1%

OTHER INCOME AND EXPENSE:
 Other income - derivative liabilities 323,210 987,805 (664,595) (67.3%)
 Other income - 1,854 (1,854) (100.0%)
 Gain from extinguishment of debt 1,261,864 - 1,261,864 -
 Loss on sale of property and equipment (5,357) (6,051) 694 11.5%
 Interest expense (886,876) (2,924,486) 2,037,610 69.7%
 ------------ ------------ ------------
 TOTAL OTHER INCOME (EXPENSE) 692,841 (1,940,878) 2,633,719 135.7%
 ------------ ------------ ------------

 Year Ended
 December 31, Variation $ Variation %
 ---------------------------- 2008 vs 2008 vs
 2008 2007 2007 2007
 ------------ ------------ ------------ ------------
NET LOSS $ (1,301,484) $ (4,374,642) 3,073,158 70.2%
 ============= ============ ============

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,
 ---------------------
 2008 2007
 -------- --------
As a % of revenues

REVENUES 100% 100%
COST OF SALES 60% 62%
GROSS PROFIT 40% 38%
OPERATING EXPENSES 155% 149%
LOSS FROM OPERATIONS (115%) (111%)
OTHER INCOME AND EXPENSE 40% (88%)
NET LOSS (75%) (199%)

Revenues are derived from sales and support services on our zNose product line. Revenues for 2008 were approximately $473,000 or 22% below 2007. The decrease in revenues was due to a significant drop in business from our Chinese distributor in the first two quarters of the year. Even though business from this customer recovered in the second half of the year, it was not enough to offset the first half drop in business. Shipments picked up in the second half of the year, its impact on revenues; however, was somewhat offset by aggressive pricing on the Model 4200 which is being discontinued in its current configuration at the end of the production run. The aggressive pricing also prompted several customers to "buy down" from our higher priced model to the Model 4200. As in the prior year, over 60% of our revenues were from international customers who generate very little training and after-sales support revenues. This is because most training and all after-sales support needs for international customers are performed by the respective sales representative or distributor servicing their respective accounts. Training and after-sales support functions for domestic customers are performed by the company.

Cost of Sales consist of product costs and expenses associated with product support services. Consistent with the decrease in revenues, cost of sales was approximately $314,000 or 23% lower in 2008 than in 2007. As a percentage of revenues, cost of sales were 60% and 62% for 2008 and 2007, respectively. Cost of sales continue to be negatively impacted by manufacturing variances resulting from a slow down in production to reflect lower sales activities and to work-off existing inventory. Excluding the impact of the variances and other adjustments, cost of sales would be 49% of revenues, 1% worse than in 2007.

Research and development expenses primarily consist of salaries and related benefits, material and supplies associated with our efforts in developing and enhancing our products. In 2008, research and development expenses decreased approximately $86,000 or 12% from 2007. The decrease is attributable to a reduction of personnel expenses due to a reduction of census ($100,000), reduction in patent attorney fees and consultants' expenses ($15,000), offset by expenses associated with the development of the Model 4500.

Selling expenses primarily consist of salaries, commissions and related benefits associated with our selling and marketing efforts. Selling expenses were approximately $193,000 lower in 2008 than in 2007. The decrease in selling expenses resulted from savings through reduction of commission and consulting expenses ($103,000), selective attendance at trade shows ($40,000), reduction in personnel costs ($88,000), offset by an increase in promotional ($29,000) and facility ($9,000) expenses.

Compensation expenses primarily consist of salaries and related benefits of our general and administrative personnel. The decrease in compensation expenses of approximately $155,000 during 2008 when compared to 2007 is attributable to a decrease in stock based compensation expense ($18,000), decrease in personnel expenses through census reduction ($58,000), decrease in severance paid to departed company officers ($53,000), and lower employee benefits expenses ($26,000).

General and administrative expenses for 2008 were approximately 15% less than 2007. The improvement of approximately $165,000 resulted from reductions of legal and professional expenses ($32,000), deferred financing fees ($111,000), Board of Directors meeting expenses ($92,000), travel and lodging ($17,000), offset by increases in operating expenses ($6,000) and facilities cost ($81,000).

Other income - derivative liabilities primarily consists of the decrease in the fair value of derivative liabilities between the measurement dates which are balance sheet dates. On March 31, 2008, we satisfied our obligations under the 8% convertible debentures and as a result, the company can assert that it has a sufficient amount of authorized and unissued shares to settle its obligations which can be settled in shares. Accordingly, the company reclassified all contracts, warrants, and other convertible instruments outstanding at March 31, 2008 from liability to equity.

Other income - gain from extinguishment of debt resulted from the early retirement of the 8% convertible debentures on March 31, 2008 (see Item 8).

Interest expense primarily consists of debt discount amortization and interest on certain debt. The $2,037,000 reduction in interest expense is due to retirement of the $7.0 million 8% convertible debentures, and related debt discount, on March 31, 2008. Previously, interest expense included both interest accrued on the 8% convertible debentures as well as amortization of the related debt discount. Since the beginning of the second quarter, interest expense pertains mostly to the interest accrued on the $2.0 million 9% convertible debenture, which was issued on March 28, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents amounted to approximately $484,000 at December 31, 2008.

During 2008, we used approximately $1.755 million in our operating activities which is the result of the following:

o A net loss of approximately $1.301 million adjusted for:

o depreciation and amortization of approximately $48,000, increase in the reserve for obsolescence of approximately $7,000, amortization of debt discount of approximately $592,000, amortization of deferred financing costs of approximately $45,000, issuance of shares for payment of interest of $160,000, and stock based compensation of approximately $96,000; and

o decreases in the fair value of the derivative liabilities of approximately $323,000, allowance for doubtful accounts of $1,500 and gain on extinguishment of debt of approximately $1.262 million.

o Decreases in inventories of approximately $254,000, prepaid expenses of approximately $22,000, deferred revenues of approximately $42,000, accounts payable and accrued expenses of approximately $48,000 due to better management of cash expenditures, and increases in accounts receivable of approximately $2,000.

During 2008, investing activities provided approximately $12,000 from proceeds received from the sale of property and equipment, less property and equipment purchased.

During 2008, we generated approximately $1.979 million from financing activities. The company received $5.5 million from an investor, $3.5 million for the purchase of common stock of the company (at $0.0405 per share), and $2.0 million for a 9% convertible debenture. The 9% convertible debenture has a five
(5)-year term, and the conversion rate of the debenture is at $0.0486. A condition of the new investment required the company to use $3.5 million to extinguish the company's 8% convertible debentures. A Conversion and Termination Agreement with the 8% convertible debenture holders on February 26, 2008, provided that in exchange for $3.5 million, the debenture holders would convert $3.5 million of the principal amount of their 8% convertible debentures, together with interest thereon, at a conversion price of $0.35 per share of Common Stock. Additionally, the agreement

provided that upon receipt of the foregoing sum and the conversion shares of Common Stock, the debenture holders would cancel the remainder of their 8% convertible debenture and 50% of the shares of Common Stock underlying warrants. On March 31, 2008, upon payment of $3.5 million and remittance of the conversion shares to the 8% convertible debenture holders, the entire $7.0 million 8% convertible debentures was extinguished.

Certificates of deposits, aggregating $15,500 at December 31, 2008, are used to secure and collateralize the company's credit card liability and to provide a performance guarantee for a sale to an oversea customer.

During 2007, we used approximately $1.807 million in our operating activities which is the result of the following:

o A net loss of approximately $4.375 million adjusted for:

o the amortization of debt discount of approximately $2.333 million, amortization of deferred financing costs of approximately $182,000, issuance of shares for payment of interest of $311,000, and stock based compensation of $115,000, and a decrease in the fair value of the derivative liabilities of approximately $980,000.

o A decrease in inventories of approximately $410,000 due to an extended slow down of production to work-off on-hand materials, and an increase in accounts payable and accrued expenses of approximately $117,000 due to better management of cash expenditures.

During 2007, investing activities provided approximately $22,000 from proceeds received from the sale of property and equipment.

During 2007, we generated approximately $940,000 from financing activities by liquidating a certificate of deposit that was used to satisfy collateral requirement of our line of credit which we cancelled.

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, 2008, our cash balance and working capital were $484,000 and $1,028,000, respectively. The cash balance and working deficit as December 31, 2007 were $249,000 and $3,848,000.

SEASONALITY AND QUARTERLY RESULTS

We have not experienced and 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 have not experienced and do not foresee any material inflationary trends for our product sources.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

This item is not applicable to smaller reporting companies.

Item 8. Financial Statements and Supplementary Date.

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheet as of December 31, 2008 and December 31, 2007 F-2

Consolidated Statements of Operations for the Years Ended December
 31, 2008 and December 31, 2007 F-3

Consolidated Statement of Changes in Stockholders' Deficit for the
 Period from January 1, 2007 to December 31, 2008 F-4

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 2008 and December 31, 2007 F-5

Notes to Consolidated Financial Statements F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Electronic Sensor Technology, Inc.

We have audited the accompanying balance sheets of Electronic Sensor Technology, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended December 31, 2008 and 2007. 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, 2008 and 2007 and the consolidated results of its operations and its cash flows for the years ended December 31, 2008 and 2007 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
April 14, 2009

ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET

 December 31, December 31,
 2008 2007
 -------------- --------------
 ASSETS

CURRENT ASSETS:
 Cash and cash equivalents $ 484,028 $ 248,587
 Certificate of deposit-restricted 15,500 12,384
 Accounts receivable, net of allowance for uncollectible
 of $0 at December 31, 2008 and $1,500 at December 31, 2007 284,644 281,400
 Prepaid expenses 59,219 80,761
 Inventories 557,454 818,989
 -------------- --------------
 TOTAL CURRENT ASSETS 1,400,845 1,442,121
 -------------- --------------
DEFERRED FINANCING COSTS, net - 347,967

PROPERTY AND EQUIPMENT, net 114,213 174,111

SECURITY DEPOSITS 12,817 12,817
 -------------- --------------
 $ 1,527,875 $ 1,977,016
 ============== ==============
 LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
 Accounts payable and accrued expenses $ 352,369 $ 520,685
 Deferred revenues - 41,667
 Derivative liabilities - 2,376,543
 Convertible debentures - current portion - 2,333,333
 Obligation under capital lease due within one year 20,024 17,875
 -------------- --------------
 TOTAL CURRENT LIABILITIES 372,393 5,290,103
 -------------- --------------
CONVERTIBLE DEBENTURES - long-term portion, net of
 unamortized discount 1,951,017 2,527,777
LONG-TERM OBLIGATION UNDER CAPITAL LEASE 16,583 36,607
 -------------- --------------
 TOTAL LIABILITIES 2,339,993 7,854,487
 -------------- --------------
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, 155,853,385 issued and outstanding at
 December 31, 2008 and 56,756,098 issued and outstanding
 at December 31, 2007 155,854 56,756
 Additional paid-in capital 15,207,301 8,939,562
 Accumulated deficit (16,175,273) (14,873,789)
 -------------- --------------
 TOTAL STOCKHOLDERS' DEFICIT (812,118) (5,877,471)
 -------------- --------------
 $ 1,527,875 $ 1,977,016
 ============== ==============

See notes to consolidated financial statements

ELECTRONIC SENSOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 Year Ended
 December 31,
 --------------------------------
 2008 2007
 -------------- --------------
REVENUES $ 1,724,897 $ 2,198,204

COST OF SALES 1,042,825 1,356,719
 -------------- --------------
 GROSS PROFIT 682,072 841,485
 -------------- --------------
OPERATING EXPENSES:
 Research and development 658,111 744,646
 Selling 472,310 664,838
 Compensation 632,009 787,114
 General and administrative 913,967 1,078,651
 -------------- --------------
 TOTAL OPERATING EXPENSES 2,676,397 3,275,249
 -------------- --------------
LOSS FROM OPERATIONS (1,994,325) (2,433,764)
 -------------- --------------
OTHER INCOME AND EXPENSE:
 Other income - derivative liabilities 323,210 987,805
 Other income - 1,854
 Gain from extinguishment of debt 1,261,864 -
 Loss on sale of property and equipment (5,357) (6,051)
 Interest expense (886,876) (2,924,486)
 -------------- --------------
 TOTAL OTHER INCOME (EXPENSE) 692,841 (1,940,878)
 -------------- --------------
NET LOSS $ (1,301,484) $ (4,374,642)
 ============== ==============
 Loss per share, basic $ (0.01) $ (0.08)
 ============== ==============
 Weighted average number of shares, basic 132,900,656 54,884,012
 ============== ==============
 Loss per share, diluted $ (0.01) $ (0.10)
 ============== ==============
 Weighted average number of shares, diluted 132,900,656 54,884,012
 ============== ==============

See notes to consolidated financial statements

ELECTRONIC SENSOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

 Common Stock Preferred Stock Additional Total
 --------------------------- --------------- Paid-In Accumulated Stockholders'
 Shares Amount Shares Amount Capital Deficit Deficit
 ------------ ------------ ------ ------ -------------- -------------- --------------
BALANCE - January 1, 2007 54,173,745 $ 54,174 - $ - $ 8,516,354 $ (10,499,147) $ (1,928,619)

 Shares issued for interest 2,582,353 2,582 - - 308,529 - 311,111
 Stock based compensation - - - - 114,679 - 114,679
 Net (loss) - - - - - (4,374,642) (4,374,642)
 ------------ ------------ ------ ------ -------------- -------------- --------------
BALANCE - December 31, 2007 56,756,098 56,756 - - 8,939,562 (14,873,789) (5,877,471)

 Shares issued for interest 2,677,534 2,678 - - 157,322 - 160,000
 Shares issued for
 conversion of 8%
 debentures 10,000,000 10,000 - - 490,000 - 500,000
 Sales of common stock 86,419,753 86,420 - - 3,413,580 - 3,500,000
 Reclassification of
 derivative liability in
 connection with
 retirement and
 conversion of 8%
 debentures - - - - 2,053,333 - 2,053,333
 Beneficial feature
 pertaining to the
 convertible shares on
 the 9% debentures - - - - 57,613 - 57,613
 Stock based compensation - - - - 95,891 - 95,891
 Net (loss) - - - - - (1,301,484) (1,301,484)
 ------------ ------------ ------ ------ -------------- -------------- --------------
BALANCE - December 31, 2008 155,853,385 $ 155,854 - $ - $ 15,207,301 $ (16,175,273) $ (812,118)
 ============ ============ ====== ====== ============== ============== ==============

See notes to consolidated financial statements.

ELECTRONIC SENSOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 Year Ended
 December 31,
 -------------------------------
 2008 2007
 -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Loss $ (1,301,484) $ (4,374,642)
 Adjustments to reconcile net income (loss) to net
 cash provided by (used in) operating activities:
 Depreciation and amortization 48,276 56,511
 Decrease in allowance for doubtful accounts (1,500) (22,862)
 Increase in reserve for obsolescence 7,197 56,320
 Issuance of shares for payment of interest 160,000 311,111
 Amortization of stock based compensation 95,891 114,679
 Amortization of debt discount 591,963 2,333,334
 Amortization of deferred financing costs 45,387 181,548
 Decrease in fair value of derivative liability (323,210) (979,930)
 Gain on extinguishment of debt (1,261,864) -
 Changes in assets and liabilities:
 Accounts receivable (1,744) 41,875
 Inventories 254,338 410,381
 Prepaid expenses 21,542 (1,991)
 Accounts payable and accrued expenses (48,315) 116,767
 Deferred revenues (41,667) (50,000)
 -------------- --------------
 Net cash provided by (used in) operating activities (1,755,190) (1,806,899)
 -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from sale of property and equipment 15,242 21,647
 Purchase of property and equipment (3,620) -
 -------------- --------------
 Net cash provided by (used in) investing activities 11,622 21,647
 -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Decrease (increase) in certificate of deposit - restricted (3,116) 939,698
 Decrease in capital lease obligation (17,875) -
 Proceeds from issuance of 9% convertible debentures 2,000,000 -
 Proceeds from issuance of common stock 3,500,000 -
 Repayment of 8% convertible debentures (3,500,000) -
 -------------- --------------
 Net cash provided by (used in) financing activities 1,979,009 939,698
 -------------- --------------
NET INCREASE (DECREASE) IN CASH 235,441 (845,554)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 248,587 1,094,141
 -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 484,028 $ 248,587
 ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid during the period for interest $ 102,153 $ 147,888
 -------------- --------------
 Cash paid for taxes $ - $ -
 ============== ==============


NON-CASH INVESTING AND FINANCING ACTIVITIES
 Reclassification of derivative liability to paid-in-capital $ 2,053,333 $ -
 ============== ==============
 Conversion of 8% convertible debenture into equity $ 500,000 $ -
 ============== ==============
 Debt discount related to 9% convertible debentures $ 57,613 $ -
 ============== ==============
 Purchase of property and equipment under capital lease $ - $ 54,482
 ============== ==============

See notes to consolidated financial statements.

ELECTRONIC SENSOR TECHNOLOGY, INC.

Notes to Financial Statements
December 31, 2008 and 2007

(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.

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 $484,028 and $248,587 at December 31, 2008 and 2007, respectively.

Certificate of Deposit - Restricted

The Company had two certificates of deposit in place at December 31, 2008. One, in the amount of $12,000, was used to secure and collateralize the Company's credit card liability. The other certificate of deposit in the amount of $3,500 was used to provide a performance guarantee for a sale to an oversea customer.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on the Company's assessment of the collectability 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 collectability 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 9% convertible debentures issued by the Company on March 28, 2008 amounts to $2,000,000, based on the Company's incremental borrowing rate.

Risk Factors

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, they may have a material adverse effect on the Company's liquidity and financial condition if its ability to borrow money to finance its operations from its existing lenders or from other sources, or obtain credit from trade creditors were to be impaired. In addition, the recent economic crisis could also adversely impact our customers' ability to finance the purchase of electronic

instruments from us or our suppliers' ability to provide us with product, either of which may negatively impact the Company's business and results of operations.

a. Concentration of Credit

The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable. The Company's cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 at December 31, 2008. For the years ended December 31, 2008 and 2007, the Company has reached bank balances exceeding the FDIC insurance limit. While the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits, it cannot reasonably alleviate the risk associated with the sudden failure of such 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.

b. Product Concentration

Substantially all of the Company's revenues were derived from the sale of electronic devices and related accessories used for vapor analysis.

c. Customer Concentration

The Company's largest customer accounted for approximately 33% and 47% of its revenues during 2008 and 2007, respectively. This same customer and another customer accounted for approximately 96% and 86% of the gross accounts receivable balance at December 31, 2008 and 2007, respectively. No other customers accounted for more than 10% of its revenues or more than 10% of its net accounts receivable.

d. Geographic Concentration

The Company sells its products internationally in 20 countries. Sales to these countries were approximately 63% and 66% for the years ended December 31, 2008 and 2007, respectively.

Inventories

Inventories are comprised of raw materials, work-in-process, and finished goods. 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.

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. Leasehold improvements are recorded at cost and are amortized on a straight-line basis over the lesser of five years or the remaining lease-life. 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, 2008:

Machinery and equipment $ 260,500
Leasehold improvements 39,500
Office furniture and equipment 125,900
 ----------
 425,900
Accumulated depreciation (311,700)
 ----------
 $ 114,200
 ==========

Machinery and equipment includes a capital lease for $74,000. Depreciation expense amounted to approximately $48,300 and $56,500 during 2008 and 2007, respectively.

Capital Lease

On June 28, 2007, the Company entered into a capital lease under which the present value of the minimum lease payments amounted to $59,200. The lease expires in September 2010. The present value of the minimum lease payments was calculated using a discount rate of 11.41%. The principal balance of the capital lease obligation amounted to approximately $36,600 at December 31, 2008, of which approximately $20,000 is included in the current portion of capital lease obligations in the accompanying consolidated balance sheet. As of December 31, 2008, the total future minimum lease payments on this lease is approximately $36,600 (if stated by year, the minimum lease payments are approximately: 2009 - $20,000, and 2010 - $16,600).

Deferred Financing Costs

Deferred financing costs consist of direct costs incurred by the Company in connection with the issuance of its 8% 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. On March 31, 2008, $3.5 million of the $7.0 million 8% convertible debentures was retired and the remaining $3.5 million was converted into equity. As such, the unamortized deferred financing costs related to the 8% convertible debentures were fully amortized as of March 31, 2008.

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, recognition of stock based compensation and the valuation of the derivative liability. Actual results may differ from these estimates.

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 by dividing income available to stockholders, adjusted for interest savings on the convertible debenture and changes in income or loss associated with the derivative contract that would result if the contract had been recorded as an equity instrument for accounting purposes during the period, by the weighted average number of common shares outstanding during the period plus the net effect of stock options and warrants, effect of the convertible debentures, and embedded conversion features.

The outstanding options, warrants and shares equivalent issuable pursuant to embedded conversion features and warrants at December 31, 2008 are excluded from the loss per share computation for that period due to their antidilutive effect.

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

 2008 2007
 -------------- --------------
Numerator:
 Net (loss) $ (1,301,484) $ (4,374,642)

 2008 2007
 -------------- --------------
 Net other (income) expense associated with derivative contracts (323,210) (987,805)
 -------------- --------------
 Net (loss) for diluted earnings per share purposes $ (1,624,694) $ (5,362,447)
 ============== ==============
Denominator:
 Denominator for basic earnings per share - Weighted average
 shares outstanding 132,900,656 54,884,012
 Effect of dilutive stock options and warrants, determined under the
 treasury stock method - -
 Assume issued common shares for convertible debentures, determined
 under the if-converted method - -
 -------------- --------------
 Denominator for diluted earnings per share - Weighted average shares
 outstanding 132,900,656 54,884,012
 ============== ==============
Basic earnings (loss) per share $ (0.01) $ (0.08)
 ============== ==============
Diluted earnings (loss) per share $ (0.01) $ (0.10)
 ============== ==============

Stock-Based Compensation

The Company adopted SFAS No. 123R, "Share Based Payments." SFAS No. 123R requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company's stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company's forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company's actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying SFAS No. 123R approximated $95,900 in additional compensation expense during the year ended December 31, 2008. Such amount is included in general and administrative expenses on the statement of operations.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2008 consist primarily of vendor payables.

Deferred Revenues

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 $41,667 and $50,000 pursuant to this agreement during 2008 and 2007, respectively.

Derivative Liabilities

The Company accounts for its liquidated damages pursuant to FASB Staff Position No. EITF 00-19-2 "Accounting for Registration Payment Arrangements" ("FSP 00-19-2"). 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. The Company had registered all shares underlying the 8% convertible debentures as well as all shares underlying the warrants related to the 8% convertible debentures, but no longer maintains such registration, in light of the partial conversion and partial cancellation of the debentures and a portion of the warrants (see Notes 3 and 4).

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.

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".

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, 2008 no assets were impaired.

Recently Issued Accounting Pronouncements

FASB Statement Number 160

In December 2007, the FASB issued FASB Statement No. 160 - Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No.
51. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Not-for-profit organizations should continue to apply the guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the amendments made by this Statement, and any other applicable standards, until the Board issues interpretative guidance.

This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity.

A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require: (a) The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent's equity,
(b) The amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, (c) Changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent's ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar, and this Statement requires that they be accounted for similarly, as equity transactions, (d) When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment, (e) Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. Management believes this Statement will have no impact on the financial statements of the Company once adopted.

FASB 161 - Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued FASB Statement No. 161, which amends and expands the disclosure requirements of FASB Statement No. 133 with the intent to provide users of financial statements with an enhanced understanding of; how and why an entity uses derivative instruments, how the derivative instruments and the related hedged items are accounted for and how the related hedged items affect an entity's financial position, performance and cash flows. This Statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008. Management believes this Statement will have no impact on the financial statements of the Company once adopted.

FASB 161 - The Hierarchy of Generally Accepted Accounting Principles

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. We are currently evaluating the effects, if any, that SFAS No. 162 may have on our financial reporting.

(2) Inventory

Inventory consists of the following:

 December 31, 2008 December 31, 2007
 ----------------- -----------------
Finished goods $ 341,530 $ 475,091
Work-in-process 4,816 360,671
Raw materials 311,108 76,030
Reserve for obsolescence (100,000) (92,803)
 ---------- ----------
 $ 557,454 $ 818,989
 ========== ==========

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

8% Convertible Debentures

During December 2005, we issued in a private offering, $7,000,000 aggregate principal amount of 8% convertible debentures due December 7, 2009. The convertible debentures were 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 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. Interest on the convertible debentures was payable in cash or stock, at the Company's option.

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.

We paid professional fees of approximately $592,000 and issued 485,213 warrants with a fair value of approximately $136,000 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, were recorded as deferred financing costs.

A Conversion and Termination Agreement was entered into with the debenture holders on February 26, 2008. Pursuant to the agreement, the convertible debenture holders agreed that in exchange for $3,500,000, the debenture holders would convert $3,500,000 of the principal amount of their 8% convertible debentures, together with accrued interest thereon, at a conversion price of $0.35 per share of Common Stock. Upon receipt of the foregoing sum and the conversion shares of Common Stock, the debenture holders agreed to cancel the remainder of their 8% convertible debentures and 50% of the shares of Common Stock underlying warrants. With respect to the remaining 6,065,157 shares of Common Stock underlying the warrants, they will otherwise continue in full force and effect in accordance with their terms. On March 31, 2008, we remitted $3,500,000 in cash and transferred 10,400,000 shares of common stock to the debenture holders to completely retire the 8% convertible debentures.

The extinguishment of the convertible debentures resulted in a gain of approximately $1,261,900, which included the write off of related unamortized deferred financing costs of approximately $302,600.

9% Convertible Debentures

On March 28, 2008, we received $5,500,000 from an investor, $3,500,000 of which was for Common Stock of the Company, and $2,000,000 for a convertible debenture bearing an interest rate of 9%, payable semi-annually in cash. The common stock shares were issued at a price of $0.0405 per share. The 9% convertible debenture has a five (5)-year term, and the conversion rate of the debenture is $0.0486 (equaled to 41,152,263 common shares). The difference between the conversion rate of the debenture and the closing price of the Company's common stock on the date of issuance resulted in a note discount of approximately $58,000. The note discount will be amortized over the term of the convertible debenture. The unamortized balance at December 31, 2008 was approximately $49,000.

A condition of the new investment required the Company to use $3,500,000 to extinguish the 8% convertible debentures and this event occurred on March 31, 2008.

(4) Derivative Liabilities

In connection with the issuance of the 8% convertible debentures in December 2005, 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.

A Conversion and Termination Agreement was entered into with the 8% convertible debenture holders on February 26, 2008. Pursuant to the agreement, the convertible debenture holders agreed that in exchange for $3,500,000, the debenture holders would convert $3,500,000 of the principal amount of their 8% convertible debentures, together with accrued interest thereon, at a conversion price of $0.35 per share of Common Stock. Upon receipt of the foregoing sum and the conversion shares of Common Stock, the debenture holders agreed to cancel the remainder of their 8% convertible debentures and 50% of the shares of Common Stock underlying warrants. With respect to the remaining shares of Common Stock underlying the warrants, they will otherwise continue in full force and effect in accordance with their terms. On March 31, 2008, we remitted $3,500,000 in cash and transferred 10,400,000 shares of Common Stock to the debenture holders.

As a result of the satisfaction of the Company's obligations under its 8% convertible debentures, the Company reclassified the derivative liabilities balance outstanding at March 31, 2008 from liability to equity. The amount of derivative liabilities that was reclassified to equity approximated $2,053,000.

(5) Stockholders' Deficit

Common Stock

Shares issued for payment of interest

During 2008, the Company elected interest accrued on the 8% convertible debentures in shares of the Company's common stock, rather than in cash. The Company issued 2,677,534 shares of the Company's common stock to the holders of the 8% convertible debentures.

Shares issued to private investor

On March 28, 2008, we received $5,500,000 from an investor, $3,500,000 of which was for Common Stock of the Company, and $2,000,000 for a convertible debenture bearing an interest rate of 9%, payable semi-annually in cash (see Note 3). The common stock shares were issued at a price of $0.0405 per share. The number of common shares issued to this investor was 86,419,753.

Shares issued for conversion of 8% convertible debentures

A Conversion and Termination Agreement was entered into with the debenture holders on February 26, 2008. Pursuant to the agreement, the convertible debenture holders agreed that in exchange for $3,500,000, the debenture holders would convert $3,500,000 of the principal amount of their 8% convertible debentures, together with accrued interest thereon, at a conversion price of $0.35 per share of Common Stock (see Note 3). On March 31, 2008, we remitted $3,500,000 in cash and transferred 10,400,000 (of which 400,000 common shares pertained to accrued interest) shares of common stock to the debenture holders to retire $3,500,000 of the 8% convertible debentures.

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.

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.

Management used Black Scholes methodology to determine the fair value of the options on the date of issue based on the following assumptions. The expected volatility was based on the average historical volatility of comparable publicly-traded companies.

 2008 2007
 ---- ----
Exercise price $0.02 - $0.24 $0.19 - $0.24
Market value $0.02 - $0.24 $0.19 - $0.24
Expected dividend yield 0% 0%
Expected volatility 36% - 47% 36% - 39%
Risk free interest rate 3.81% - 4.54% 4.03% - 4.54%
Expected life of option 5 years 5 years

The fair value of the granted stock options shares was approximately $258,000 or $0.06 per share. Approximately $96,000 was charged to compensation expense in 2008. The remaining amount will be amortized to compensation expense over future periods based on the vesting schedule of the respective stock option shares. The total compensation cost related to nonvested awards not yet recognized amounted to approximately $36,000 and $112,000 at December 31, 2008 and 2007, respectively. This compensation cost will be recognized over the weighted average period of the remaining terms of the stock options, unless the options are terminated sooner.

The following tables summarize all stock option grants to employees and non-employees as of December 31, 2008:

 Weighted
 Average
 Number of Exercise
 Stock Options Options Price
---------------------------------------- ------------ ------------
Balance at December 31, 2006 1,219,500 $ 0.93
Granted 2,657,950 $ 0.22
Exercised - $ -

 F-14

 Weighted
 Average
 Number of Exercise
 Stock Options Options Price
---------------------------------------- ------------ ------------
Forfeited (439,500) $ 0.73
 ------------ ------------
Balance at December 31, 2007 3,437,950 $ 0.41
Granted 2,000,000 $ 0.03
Exercised - $ -
Forfeited (2,291,050) $ 0.37
 ------------ ------------
Balance at December 31, 2008 3,146,900 $ 0.19
 ============ ============
Options exercisable at December 31, 2008 898,850 $ 0.53
 ============ ============
Weighted average fair value of options
 granted during 2008 2,000,000 $ 0.03
 ============ ============

A summary of the status of the Company's nonvested shares as of December 31, 2008, and changes during the fiscal year then ended as presented below.

 Weighted
 Average
 Grant Date
 Nonvested Shares Shares Fair Value
---------------------------------------- ------------ ------------
Nonvested at December 31, 2006 - -
 Granted 2,657,950 $ 0.22
 Vested (898,250) $ 0.09
 Cancelled (161,500) $ 0.09
 ------------ ------------
Nonvested at December 31, 2007 1,598,200 $ 0.09
 Granted 2,000,000 $ 0.03
 Vested (191,850) $ 0.24
 Cancelled (1,158,300) $ 0.21
 ------------ ------------
Nonvested at December 31, 2008 2,248,050 $ 0.05
 ============ ============

 Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------
 Number Weighted
 Outstanding Average Weighted Number Weighted
 as of Remaining Average Exercisable Average
 Exercise December 31, Contractual Exercise at December Exercise
 Price 2008 Years Price 31, 2008 Price
------------ ------------ ------------ ---------- ------------- ----------
 $ 0.02 1,000,000 9.90 $ 0.02 - $ 0.02
 $ 0.03 1,000,000 9.56 $ 0.03 - $ 0.03
 $ 0.19 161,500 8.18 $ 0.19 161,500 $ 0.19
 $ 0.24 632,400 8.04 $ 0.24 384,350 $ 0.24
 $ 1.00 353,000 7.62 $ 1.00 353,000 $ 1.00
 ------------ ------------ ---------- ------------- ----------
 3,146,900 7.82 $ 0.19 898,850 $ 0.53
 ============ ============ ========== ============= ==========

Warrants

The following table summarizes the warrants outstanding at December 31, 2008:

 Number of
 Expiration Shares of
Issue Date Date Common Stock Price Basis for Warrant Issuance
---------- ---------- ------------- ------- --------------------------
 03/09/05 03/08/10 200,000 2.40 Media consulting services
 05/09/05 05/08/10 75,000 2.40 Media consulting services
 08/09/05 08/08/10 75,000 2.40 Media consulting services

 Number of
 Expiration Shares of
Issue Date Date Common Stock Price Basis for Warrant Issuance
---------- ---------- ------------- ------- --------------------------
 12/07/05 12/06/10 485,213 0.4761 Investment advisor
 12/07/05 12/06/10 2,166,128 0.43 Convertible debenture
 12/07/05 12/06/10 3,899,030 0.43 Convertible debenture
 -------------
 6,900,371 Outstanding at December 31, 2008
 =============

(6) Commitments and Contingencies

Leases

The Company rents office space and production facilities in Newbury Park, California. The lease expires in September 2011. The rental expense associated with this lease was approximately $182,800 and $180,000 in 2008 and 2007, respectively. As of December 31, 2008, the total future minimum rental payments on this lease is approximately $259,000 (if stated by year, the minimum rental payments are: 2009 - 146,600, and 2010 - 112,400).

During 2007, the Company entered into a lease for equipment used in administration. Lease payments totaled approximately $2,400 and $2,200 for 2008 and 2007, respectively. As of December 31, 2008, the total future minimum lease payments on this lease is approximately $7,400 (if stated by year, the minimum lease payments are: 2009 - $2,400, 2010 - $2,400, 2011 - $2,400, and 2012 - $200).

(7) 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 2008 and 2007, the Company contributed approximately $33,300 and $32,300, respectively, to the Plan.

(8) 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 are as follows:

 2008 2007
 ---- ----
Deferred tax assets:
Net operating loss carryforward $ 3,700,000 $ 3,300,000
Less valuation allowance (3,700,000) (3,300,000)
 ------------ ------------
Total net deferred tax assets: $ - $ -
 ============ ============

The Company's net operating losses totaled approximately $9.1 million at December 31, 2008, and will expire in 2028.

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 $3,700,000 at December 31, 2008 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 2008 and 2007 was an increase of approximately $400,000 and $1,300,000 respectively.

The federal statutory tax rate reconciled to the effective tax rate during 2008 and 2007, respectively, is as follows:

 2008 2007
 -------- --------
 Tax at U.S. Statutory Rate: 35.0% 35.0%
 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%
 ======== ========

(9) Subsequent Events

On April 10, 2009, the Company received $1 million from an investor in exchange for a debenture bearing an interest rate of 9% with a maturity of one year. The debenture grants the investor a security interest in all of the intellectual property of the Company.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T). Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the company's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K, have concluded that, based on such evaluation, the company's disclosure controls and procedures were effective to ensure that material information relating to the company is recorded, processed, summarized, and reported in a timely matter. In designing and evaluating the disclosure controls and procedures, the company's management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the company's management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company's internal control over financial reporting includes those policies and procedures that:

o pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

o provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

o provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The company's management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, the company's management has concluded that, as of December 31, 2008, the company's internal control over financial reporting is effective based on those criteria. This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the quarter ended December 31, 2008, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers, Officers and Corporate Governance.

Teong C. Lim

Teong C. Lim, age 69, currently serves as President, Chief Executive Officer and interim Chief Scientist of Electronic Sensor Technology and as Chairman of the Board of Directors of Electronic Sensor Technology. Dr. Lim has served as President and Chief Executive Officer of Electronic Sensor Technology since July 25, 2008, as interim Chief Scientist of Electronic Sensor Technology since February 11, 2009 and as a director of Electronic Sensor Technology since January 31, 2005. Dr. Lim also served as President and Chief Executive Officer of Electronic Sensor Technology from January 26, 2006 through July 16, 2007, and served as Vice President of Corporate Development of Electronic Sensor Technology 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 also serves as a director of Chatsworth Data Solutions, Inc., which is a public reporting company. Dr. Lim received a Ph.D. in Electrical Engineering from McGill University in 1968 and an M.B.A. from Pepperdine University in 1982.

Thomas J. Dudley

Thomas J. Dudley, age 77, currently serves as a director of Electronic Sensor Technology. Dr. Dudley serves as the chairman of our audit committee and compensation committee. Dr. Dudley has served as a director of Electronic Sensor Technology since November 24, 2008. Dr. Dudley is currently an Emeritus Professor of Decision Sciences at the Pepperdine University, Graziadio School of Business and Management, and has been with Pepperdine's School of Business and Management for 40 years. Dr. Dudley's field of expertise is the application of quantitative methods to business and management problems. Dr. Dudley has consulted in major industries such as aerospace, health care, automotive, food products, computers and non-profit organizations as well as Indian Tribes in Montana and Arizona. He has been involved with a number of start-up companies as participant and advisor. Prior to beginning his Pepperdine tenure, Dr. Dudley was assistant to the president of Channing Financial Corporation, the first director of the computer facility, Graduate School of Business, University of Southern California, operations analyst at Capitol Records, Inc., and a management engineer at Convair Division of General Dynamics Corporation. Dr. Dudley served for 10 years on the board of SpaceLabs Medical, Inc., where he was chairman of the audit committee and a member of the compensation and executive committees. Dr. Dudley currently serves as a director of Auto Graphics, Inc., VantageILM, Inc. and is the chairman of the board of Liberty Building Maintenance and Services, Inc. He also served on the boards of Recording for the Blind and Dyslexic, Los Angeles unit, America-China Association for Science, and Technology Exchange. Dr. Dudley received a B.A. and an MBA from the University of Michigan. Dr. Dudley received his Doctorate in business from the University of Southern California.

Low Gay Teck

Low Gay Teck, age 44, currently serves as a director of Electronic Sensor Technology. Mr. Low has served as a director of Electronic Sensor Technology since September 1, 2008. Mr. Low has served as Managing Director of Land & General Berhad since January 1, 2008, after serving as a non-executive director of Land & General Berhad from October 15, 2007. Prior to joining Land & General Berhad, Mr. Low was the Managing Director of the Mayland Group from 2005-2007, after serving as a Director of the Mayland Group from 2002 and a Project Manager with the Mayland Group from 1996. Mr. Low holds a Bachelor of Civil Engineering from Footscray Institute of Technology, Australia (now known as Victoria University, Australia).

Maggie Tham

Maggie Tham, age 58, currently serves as a director of Electronic Sensor Technology. Ms. Tham serves on our audit committee and compensation committee. Ms. Tham has served as a director of Electronic Sensor Technology since May 1, 2008. Ms. Tham has over 25 years of experience in management and strategy consulting. Ms. Tham is the Co-Founder, Chief Executive Officer and Executive Director of eXS Network Technologies Sdn. Bhd., which provides innovative communication solutions to service providers in South East Asia. In 2004, Ms. Tham co-founded, with William Wittmeyer, eXS Inc., a wireless access company developing innovative and cost effective products for developing countries. Prior to founding eXS Network Technologies and eXS, Inc., Ms. Tham raised early-stage financing for companies and worked as a management consultant in the United States and Malaysia for companies including Peat, Marwick, Mitchell & Co. Ms. Tham received a B.Sc. (Economics) from the London School of Economics and an M.B.A. from Columbia University Graduate School of Business Administration. Ms. Tham was recommended to the Board of Directors by Halfmoon Bay, pursuant to the Securities Purchase Agreement dated March 28, 2008 between Electronic Sensor Technology and Halfmoon Bay.

William Wittmeyer

William Wittmeyer, age 59, currently serves as Chief Operating Officer of Electronic Sensor Technology and as a director of Electronic Sensor Technology. Mr. Wittmeyer also serves on our audit committee and compensation committee. Mr. Wittmeyer has served as Chief Operating Officer of Electronic Sensor Technology since November 24, 2008 and as a director of Electronic Sensor Technology since May 1, 2008. Mr. Wittmeyer has over 25 years of experience in high-technology business and investment management. In 1997, Mr. Wittmeyer co-founded, with Maggie Tham, eXS Network Technologies Sdn. Bhd. Mr. Wittmeyer is the co-founder, along with Ms. Tham, and Chief Executive Officer of eXS Inc., a wireless access company developing innovative and cost effective products for developing countries. Prior to founding eXS Network Technologies and eXS, Inc., Mr. Wittmeyer was active in technology investing in telecommunications and semi-conductor companies. Mr. Wittmeyer was employed by W.R. Grace and Exxon Enterprises. Mr. Wittmeyer received a B.Sc. (E.E.) from the Coast Guard Academy and an M.B.A. from Columbia University Graduate School of Business Administration. Mr. Wittmeyer was recommended to the Board of Directors by Halfmoon Bay, pursuant to the Securities Purchase Agreement dated March 28, 2008 between Electronic Sensor Technology and Halfmoon Bay.

Philip Yee

Philip Yee, age 59, currently serves as Secretary, Treasurer and Chief Financial Officer of Electronic Sensor Technology. Mr. Yee has served as Secretary, Treasurer and Chief Financial Officer of Electronic Sensor Technology since November 1, 2006. From April 2006 through November 1, 2006, Mr. Yee served as Controller of Electronic Sensor Technology. From February 2005 through April 2006, Mr. Yee was Corporate Controller of Sleepwell Laboratories, Inc., a regional healthcare provider, and its related companies. From 2001 through February 2005, Mr. Yee was Corporate Controller of BLT Enterprises, Inc., a regional recycling company and real estate developer, and its related companies. Mr. Yee received a B.A. and an M.B.A. from the University of Michigan.

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires that the company's officers, directors and persons who beneficially own more than ten percent (10%) of the company's outstanding common stock, file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons are required by the Securities and Exchange Commission to furnish the company with copies of all Section 16(a) reports they file.

To the best of our knowledge, based solely on review of copies of such reports, including Forms 3, 4 and 5 and amendments thereto, we are aware of the following persons who, during the period ended December 31, 2008, did not file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934:

o Halfmoon Bay Capital Ltd did not timely file an initial statement of beneficial ownership on Form 3 reporting ownership of more than ten percent (10%) of the company's outstanding common stock.

o Maggie Tham did not timely file one Form 3 reporting her appointment as a director of the company and one Form 4 reporting the grant of an option to purchase 500,000 shares of the company's common stock.

o William Wittmeyer did not timely file one Form 3 reporting his appointment as a director of the company and one Form 4 reporting the grant of an option to purchase 500,000 shares of the company's common stock.

o Low Gay Teck did not timely file one Form 3 reporting his appointment as a director of the company.

o Thomas Dudley did not timely file one Form 3 reporting his appointment as a director of the company.

CODE OF ETHICS

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

NOMINATING COMMITTEE

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

AUDIT COMMITTEE

We have a separately designated standing audit committee, which is comprised of William Wittmeyer, Maggie Tham and Thomas Dudley, who is the chairman of the audit committee. Our Board of Directors has determined that at least one person on the audit committee, Thomas Dudley, qualifies as a financial expert. Although there are no standards applicable to us regarding the independence of our audit committee members, Dr. Dudley would be considered independent using the standards contained in the NASDAQ Marketplace Rules, as described further below under "Item 13. Certain Relationships and Related Transactions, and Director Independence."

Item 11. 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, 2007 and December 31, 2008.

SUMMARY COMPENSATION TABLE (1)

 Stock Option All Other
 Name and Salary Bonus Awards Awards Compensation Total
 Pincipal Position Year ($)(2) ($) ($) ($)(3) ($)(4) ($)
----------------------- ---- --------- ------- -------- ---------- ------------ ----------
Teong C. Lim, 2007 100,532 - - 10,000(6) 74,049(7) 184,581

 President and Chief
 Executive Officer
 (July 25, 2008 -
 Present) 2008 40,502(8) - - - 111,618(9) 152,120

 Interim Chief
 Scientist (February
 11, 2009 - Present)

 Former President and
 Chief Executive
 Officer (January 26,
 2006 - July 15, 2007)

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

 Director (January 31,
 2005 - Present)

 Chairman (May 1, 2008
 - Present)(5)

Barry S. Howe, 2007 116,923 - - 80,000(10) - 196,923

 Former President and
 Chief Executive
 Officer (July 16, 2007
 - July 25, 2008) 2008 122,647(11) - - - 85,850(12) 208,497

 Former Chief Operating
 Officer (April 11,
 2007 - July 15, 2007)
 Former Director (July
 16, 2007 - July 25,
 2008)(5)

 Gary Watson, 2007 142,773 _ _ 10,000(13) 4,283(14) 157,056

 Former Vice President
 of Engineering (May
 26, 2005 - February
 11, 2009) 2008 133,987 _ _ _ 4,020(14) 138,007

 Former Interim
 Chief Scientist

 Stock Option All Other
 Name and Salary Bonus Awards Awards Compensation Total
 Pincipal Position Year ($)(2) ($) ($) ($)(3) ($)(4) ($)
----------------------- ---- --------- ------- -------- ---------- ------------ ----------
 (March 8,
 2007 - February 11,
 2009)

Philip Yee, 2007 120,961 - - 10,000(15) 3,629(14) 134,590

 Secretary, Treasurer
 and Chief Financial
 Officer (November 1,
 2006 - Present) 2008 121,156 - - - 3,635(14) 124,791

 William Wittmeyer 2007 - - - - - -

 Chief Operating
 Officer (November 24, 2008 - - - 5,750(16) 28,167(17) 33,917
 2008 - Present)

 Director (May 1, 2008
 - Present)

(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" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report. We did not grant any stock awards to the named executive officers during our 2007 fiscal year or our 2008 fiscal year.

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

(5) Barry Howe and Teong Lim did not receive any compensation for their services as directors of the company in either 2007 or 2008.

(6) On January 16, 2007, Teong Lim was granted an option under our 2005 Stock Incentive Plan to acquire 100,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.24 per share. The option shares will vest as follows: one quarter vested on January 16, 2008, one quarter vested on January 16, 2009, one quarter will vest on January 16, 2010 and one quarter will vest on January 16, 2011. On March 5, 2007, Dr. Lim was granted an option under our 2005 Stock Incentive Plan to acquire 40,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.19 per share. The option shares were fully vested upon grant. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(7) Amount represents (i) $67,185 paid to Dr. Lim in exchange for consulting services, (ii) $3,016 in 401(k) contributions by the company and (iii) $3,848 paid to Dr. Lim as reimbursement for health insurance premiums.

(8) Amount represents salary paid to Dr. Lim in his capacity as President and Chief Executive Officer of the company for the period of July 25, 2008 through December 31, 2008.

(9) Amount represents (i) $100,261 paid to Dr. Lim in exchange for consulting services, (ii) $1,215 in 401(k) contributions by the company and (iii) $10,142 paid to Dr. Lim as reimbursement for health insurance premiums.

(10) On July 16, 2007, Barry Howe was granted an option to acquire 1,000,000 shares of our common stock, the option to acquire 500,000 of which were granted under our 2005 Stock Incentive Plan, par value $0.001 per share, at an exercise price of $0.20 per share, which is the average of the quoted closing price of our common stock over the five trading days ending on July 16, 2007. The option grant was evidenced by a Notice of Grant of Stock Option and Option Agreement 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. 100,000 of the option shares were fully vested upon grant and 225,000 vested on April 11, 2008. The remaining option shares would have vested 22.5% annually, provided that Mr. Howe was still employed by Electronic Sensor Technology at the end of each annual period. On July 25, 2008, Mr. Howe resigned from his position as President and Chief Executive Officer and as a director of Electronic Sensor Technology, and is no longer employed by Electronic Sensor Technology. In accordance with the terms of the Option Agreement, Mr. Howe's resignation resulted in the forfeiture of the unvested option to purchase 675,000 shares of common stock, and Mr. Howe had three months from July 25, 2008 in which to exercise the vested option to purchase 325,000 shares of common stock. Mr. Howe did not exercise the vested option within three months of July 25, 2008 and the option expired.

(11) Amount represents salary paid to Mr. Howe in his capacity as President and Chief Executive Officer of the company for the period of January 1, 2008 through July 25, 2008.

(12) Amount represents (i) $82,171 received as severance pursuant to the Severance Agreement and Mutual Release, as more fully described under the heading "Severance and Termination Agreements" below and (ii) $3,679 in 401(k) contributions by the company.

(13) On January 16, 2007, Gary Watson was granted an option under our 2005 Stock Incentive Plan to acquire 100,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.24 per share. 12,500 of the option shares vested on each of January 16, 2008 and January 16, 2009 and 12,500 of the option shares vested on each of September 8, 2007 and September 8, 2008. The remaining options shares would have vested as follows: 12,500 on January 16, 2010, 12,500 January 16, 2011, 12,500 on September 8, 2009 and 12,500 on September 8, 2010, provided that Mr. Watson was still employed by Electronic Sensor Technology at the end of each period. On March 5, 2007, Mr. Watson was granted an option under our 2005 Stock Incentive Plan to acquire 87,500 shares of our common stock, par value $0.001 per share, at an exercise price of $0.19 per share. The option shares were fully vested upon grant. Each of the option grants was evidenced by a Notice of Grant of Stock Option and Option Agreement 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. On February 11, 2009, Mr. Watson was terminated from his position as Vice President of Engineering and interim Chief Scientist of Electronic Sensor Technology, and is no longer employed by Electronic Sensor Technology. In accordance with the terms of the Option Agreements, Mr. Watson's termination resulted in the forfeiture of the unvested options to purchase 50,000 shares of common stock, and Mr. Watson has three months from February 11, 2008 in which to exercise vested options to purchase 50,000 shares of common stock and 87,500 shares of common stock. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

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

(15) On January 16, 2007, Philip Yee was granted an option under our 2005 Stock Incentive Plan to acquire 100,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.24 per share. The option shares granted to Mr. Yee will vest as follows: 15,000 of the option shares were fully vested upon grant of the options, 6,250 vested on January 16, 2008, 6,250 vested on January 16, 2009, 6,250 will vest on January 16, 2010, 6,250 will vest on January 16, 2011, 15,000 vested on April 3, 2007, 15,000 vested on April 3, 2008, 15,000 will vest on April 3, 2009 and 15,000 will vest on April 3, 2010. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(16) On July 25, 2008, William Wittmeyer was granted an option under our 2005 Stock Incentive Plan to acquire 500,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.03 per share (which was the closing price of the common stock on July 25, 2008). The option shares will vest as follows: 125,000 will vest on July 25, 2009, 125,000 will vest on July 25, 2010, 125,000 will vest on July 25, 2011 and 125,000 will vest on July 25, 2012. The manner in which the company

values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(17) Amount represents (i) $26,667 paid to Mr. Wittmeyer in exchange for consulting services and (ii) $1,500 as an attendance fee for attending a meeting of the Board of Directors. Mr. Wittmeyer was appointed Chief Operating Officer of the company on November 24, 2008 and he no longer receives compensation for attending Board meetings.

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. On September 1, 2008, Mr. Yee agreed to reduce his annual salary to $112,507.

Barry Howe. On March 28, 2007, Barry Howe accepted an offer letter extended by Electronic Sensor Technology regarding his employment with Electronic Sensor Technology as Chief Operating Officer, which is attached as Exhibit 10.1 to our current report on Form 8-K filed April 3, 2007 and is incorporated herein by reference. The offer letter provides that Mr. Howe will serve as Chief Operating Officer of Electronic Sensor Technology for a trial period of three months, at the end of which the Board of Directors will evaluate Mr. Howe and consider him for the position of Chief Executive Officer. The letter also contemplates nominating Mr. Howe to serve as a director of the Electronic Sensor Technology at such time. The offer letter sets Mr. Howe's salary at $150,000 per year, to be reviewed after the three-month trial period, and provides for an option to purchase 1 million shares of the company's common stock to be granted to Mr. Howe at the end of such trial period if Mr. Howe is appointed Chief Executive Officer at such time, of which 100,000 of the option shares will be vested on the date of the grant and 900,000 of the option shares will vest in installments of 25% per year on each anniversary of Mr. Howe's employment. On July 16, 2007, the Board of Directors appointed Mr. Howe to become President and Chief Executive Officer of the company. In connection with his appointment, Mr. Howe's annual salary was increased from $150,000 to $185,000. In addition, the Board of Directors approved the grant of an option to acquire 1 million shares of common stock of the company.

Teong C. Lim. On July 16, 2007, Teong C. Lim announced his retirement as President and Chief Executive Officer to the Board of Directors of the company, effective as of such date. Following such date, Dr. Lim continued to serve as a director of and a consultant to the company. On July 17, 2007, Dr. Lim and the company entered into a letter agreement regarding the company's engagement of Dr. Lim as a consultant through January 17, 2008 for a monthly fee of $13,437, as more fully described in Exhibit 10.1 to our current report on Form 8-K filed July 18, 2007 and is incorporated herein by reference. The consulting agreement with Dr. Lim was extended on January 17, 2008 on a month-to-month basis at the same retainer fee, and was subsequently terminated on July 25, 2008, when Dr. Lim resumed his position as President and Chief Executive Officer of the company. On September 1, 2008, Dr. Lim agreed to reduce his annual salary from $161,244 to $81,244.

William Wittmeyer. On November 24, 2008, the registrant, William Wittmeyer and Wittham, a California corporation wholly owned by Mr. Wittmeyer and employing Mr. Wittmeyer, entered into an Independent Contractor Agreement, which is attached as Exhibit 10.1 to our amended current report on Form 8-K/A filed January 5, 2009 and is incorporated herein by reference. Pursuant to the Independent Contractor Agreement, the registrant engaged Wittham to have Mr. Wittmeyer serve as an independent contractor to act as Chief Operating Officer and Wittham will be paid $6,666.67 per month in consideration of the services of Mr. Wittmeyer as Chief Operating Officer of the registrant.

Severance and Termination Agreements

Barry S. Howe. On July 25, 2008, the Board of Directors of Electronic Sensor Technology accepted Barry S. Howe's resignation as President and Chief Executive Officer and a director of the company. In connection and concurrently with such resignation, the company and Mr. Howe entered into a Severance Agreement and Mutual Release, which is attached as Exhibit 10.1 to our current report on Form 8-K filed on July 29, 2008 and is incorporated herein by reference. The Severance Agreement and Mutual Release provides for payment of five and one-third months' salary as severance to Mr. Howe (totaling $82,170.83) by the company.

Gary Watson. On February 11, 2009, Gary Watson's employment with Electronic Sensor Technology as Vice President of Engineering and interim Chief Scientist was terminated. In connection with Mr. Watson's departure, he received (i) payment of two weeks' salary (totaling $4,392.96) and (ii) payment for accrued but unused vacation time as of the Effective Date (totaling $13,254.62). Electronic Sensor Technology will also continue to provide Mr. Watson with medical benefits through April 30, 2009.

Retirement Agreements

The company has an agreement with Teong Lim under which, so long as he 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 Dr. Lim after retirement until his 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 2007 and 2008, the company contributed an amount equal to three percent (3%) of each employee's respective compensation to the 401(k) plan account of each eligible employee.

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

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table outlines all outstanding equity awards held by named executive officers as of the fiscal year ended December 31, 2008.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END(1)

 Option Awards
 ---------------------------------------------------------------------------------------------
 Equity
 Incentive Plan
 Number of Number of Awards: Number
 Securities Securities of Securities
 Underlying Underlying Underlying Option
 Unexercised Unexercised Unexercised Exercise Option
 Options Options (#) Unearned Price Expiration
Name (#) Exercisable Unexercisable Options (#) ($) Date
-------------------- ----------------- --------------- ---------------- ------------ ------------------
Teong C. Lim 80,000(2) - - $ 1.00 February 1, 2015
 50,000(3) 50,000 50,000 $ 0.24 January 16, 2017
 40,000(3) - - $ 0.19 March 5, 2017

Barry S. Howe -(4) - - - -

Gary Watson 175,000(5) - - $ 1.00 February 1, 2015
 50,000(3) 50,000 50,000 $ 0.24 January 16, 2017
 87,500(3) $ 0.19 March 5, 2017

Philip Yee 72,500(3) 27,500 27,500 $ 0.24 January 16, 2017

William Wittmeyer -(3) 500,000 500,000 $ 0.03 July 25, 2018

(1) 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, 2008.

(2) 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.

(3) For the vesting dates of such options, see the footnotes to the Summary Compensation Table.

(4) See footnote 10 to the Summary Compensation Table.

(5) 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 175,000 shares of common stock at $1.00 per share. Such option was 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.

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, 2008.

DIRECTOR COMPENSATION (1)

 Fees Earned or All Other
 Paid in Cash Option Awards Compensation Total
Name (2) ($) ($)(3) ($)(4) ($)
---------------------------------------- -------------- ---------------- -------------- ----------
Thomas Dudley - 4,600(5) - 4,600
(November 24, 2008 - Present)

Low Gay Teck - 4,600(6) - 4,600
(September 1, 2008 - Present)

Maggie Tham 1,500(7) 5,750(8) - 7,250
(May 1, 2008 - Present)

Lewis E. Larson 2,000(9) - - 2,000
(September 7, 2006 - February 19, 2009)

James Wilburn 14,000(10) - - 14,000
(September 2005 - November 24, 2008)

Rita Benoy Bushon 5,000(11) - - 5,000
(October 26, 2007 - September 1, 2008)

James Frey 10,000(12) - - 10,000
(February 21, 2005 - May 1, 2008)

Francis Chang 1,500(13) - 5,206(14) 6,706
(January 31, 2005 - May 1, 2008)

(1) The columns entitled "Stock 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) Barry Howe, Teong Lim and William Wittmeyer are not included in the Director Compensation Table because any compensation received by Mr. Howe, Dr. Lim and Mr. Wittmeyer as directors of Electronic Sensor Technology for the fiscal year ended December 31, 2008 is reflected in the Summary Compensation Table above.

(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" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report. We did not grant any stock awards to the directors during our 2007 fiscal year or our 2008 fiscal year.

(4) 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 2008, with respect to each director, the aggregate amount of such expenses amounted to less than $10,000.

(5) On November 24, 2008, Thomas Dudley was granted an option under our 2005 Stock Incentive Plan to acquire 500,000 shares of our common stock, par value $0.001, at an exercise price of $0.02 per share. The option shares will vest as follows: 125,000 will vest on November 24, 2009, 125,000 will vest on November 24, 2010, 125,000 will vest on November 24, 2011 and 125,000 will vest on November 24, 2012. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(6) On November 24, 2008, Low Gay Teck was granted an option under our 2005 Stock Incentive Plan to acquire 500,000 shares of our common stock, par value $0.001, at an exercise price of $0.02 per share. The option shares will vest as follows: 125,000 will vest on November 24, 2009, 125,000 will vest on November 24, 2010, 125,000 will vest on November 24, 2011 and 125,000 will vest on November 24, 2012. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(7) In 2008, Maggie Tham received an attendance fee of $1,500 per meeting.

(8) On July 25, 2008, Maggie Tham was granted an option under our 2005 Stock Incentive Plan to acquire 500,000 shares of our common stock, par value $0.001 per share, at an exercise price of $0.03 per share (which was the closing price of the common stock on July 25, 2008). The option shares will vest as follows:
125,000 will vest on July 25, 2009, 125,000 will vest on July 25, 2010, 125,000 will vest on July 25, 2011 and 125,000 will vest on July 25, 2012. The manner in which the company values the option awards is outlined in Note 1 to the company's consolidated financial statements under the heading "Stock-Based Compensation" as well as Note 5 under the heading "Stockholders' Deficit" included in this annual report.

(9) In 2008, Lewis Larson received an attendance fee of $2,000 per meeting.

(10) In 2008, James Wilburn received an attendance fee of $1,500 per meeting and a monthly retainer fee of $1,000, which was paid quarterly.

(11) In 2008, Rita Benoy Bushon received an attendance fee of $2,500 per meeting.

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

(13) In 2008, Francis Chang received an attendance fee of $1,500 per meeting.

(14) Amount represents $5,206 in health insurance premiums paid by the company on behalf of Francis Chang.

NARRATIVE TO DIRECTOR COMPENSATION

Agreements with Directors

The company has agreements with each of the directors listed in the Director Compensation Table to continue to pay the 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.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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

from other sources. 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 Beneficial Ownership Percentage
Title of Class of Beneficial Owner (1) (Shares of Stock) of Class (2)
-------------- ----------------------------------- -------------------- ------------
Common stock Teong Lim*+++ 8,495,025(3) 5.44%
Common stock Philip Yee+ 72,500(4) 0.05%
Common stock Thomas Dudley* 0 0.00%
Common stock Low Gay Teck* 0(5) 0.00%
Common stock Maggie Tham* 0 0.00%
Common stock William Wittmeyer+* 0 0.00%
Common stock L&G Resources (1994), Inc. (wholly
 owned by Land & General Berhad)++ 9,632,534(6) 6.18%
Common stock Midsummer Investment Ltd.++ 13,708,957(7) 8.58%
Common stock Halfmoon Bay Capital Ltd++ 127,572,016(8) 64.76%
Common stock Fairwind LLC++ 8,325,025(9) 5.34%
Common stock All directors and named executive
 officers as a group 8,567,525(10) 5.64%

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

(1) The address of each director and named executive officer and Fairwind LLC is c/o Electronic Sensor Technology, Inc., 1077 Business Center Circle, Newbury Park, California 91320. The address of Midsummer Investment Ltd. 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 Halfmoon Bay Capital Ltd is Trident Chambers, P.O. Box 146, Road Town Tortola, British Virgin Islands.

(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 155,853,385, which represents the total number of shares of common stock issued and outstanding as of the date of this annual report, plus, for each person or group, any shares of common stock that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.

(3) Includes 170,000 shares of common stock underlying options exercisable within 60 days of the date of this annual report held by Teong Lim and 4,729,112 shares of common stock held by TC Lim, LLC and 3,595,913 shares of common stock held by 3 Springs, LLC. Fairwind LLC is the sole member of each of TC Lim, LLC and 3 Springs, LLC and by virtue of such relationships, beneficially owns the shares of common stock held by TC Lim, LLC and 3 Springs, LLC. Teong Lim and Francis Chang are the

sole members of Fairwind LLC. By virtue of Dr. Lim's position as a member of Fairwind LLC, he shares ultimate beneficial ownership of the shares of common stock held by TC Lim, LLC and 3 Springs, LLC.

(4) Includes 72,500 shares of common stock underlying an option exercisable within 60 days of the date of this annual report.

(5) Mr. Low 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. Low may be deemed to share dispositive power over the 9,632,534 shares of common stock beneficially owned by Land & General Berhad and L&G Resources (1994), Inc. Mr. Low is one of ten 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 9,632,534 shares of common stock. Mr. Low disclaims beneficial ownership of such shares of common stock.

(6) Includes 9,632,534 shares of common stock held by L&G Resources (1994), Inc., a wholly-owned subsidiary of Land & General Berhad, of which Land & General Berhad is a beneficial owner. Low Gay Teck is President of L&G Resources
(1994), Inc. and Managing Director of Land & General Berhad. By reason of such relationships, Mr. Low may be deemed to share dispositive power over the shares of common stock beneficially owned by L&G Resources (1994), Inc. Mr. Low expressly disclaims beneficial ownership as Mr. Low is one of ten 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 9,632,534 shares of common stock.

(7) Includes 3,899,030 shares of common stock underlying a warrant exercisable within 60 days of this annual report. The exercise of the warrant is contractually capped such that such exercise 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 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.

(8) Includes 41,152,263 shares of common stock underlying a debenture convertible within 60 days of this annual report, held by Halfmoon Bay Capital Ltd and beneficially owned by each of Wan Azmi Wan Hamzah and Nik Anida Bte Nik Manshor by virtue of their positions as shareholders and directors of Halfmoon Bay Capital Ltd. Halfmoon Bay Capital Ltd has three shareholders, who are Wan Azmi Wan Hamzah, Nik Anida Bte Nik Manshor and Wan Afzal Bin Wan Azmi and two directors, who are Wan Azmi Wan Hamzah and Nik Anida Bte Nik Manshor. Wan Afzal Bin Wan Azmi may be deemed to share dispositive power over the shares of common stock beneficially owned by Halfmoon Bay Capital Ltd. Wan Afzal Bin Wan Azmi expressly disclaims beneficial ownership as Wan Afzal Bin Wan Azmi is not a director of Halfmoon Bay Capital Ltd and the Board of Directors of Halfmoon Bay Capital Ltd makes the ultimate voting and investment decisions with respect to the 127,572,016 shares of common stock.

(9) Includes 4,729,112 shares of common stock held by TC Lim, LLC and 3,595,913 shares of common stock held by 3 Springs, LLC, which are beneficially owned by Fairwind LLC by virtue of its position as the sole member of each of TC Lim, LLC and 3 Springs, LLC. Francis Chang and Teong Lim, Chairman of the Board of Directors of the company, are the sole members of Fairwind LLC. By virtue of such relationships, Francis Chang and Teong Lim share ultimate beneficial ownership of the shares of common stock beneficially owned by Fairwind LLC.

(10) Includes 242,500 shares of common stock underlying options exercisable within 60 days of this annual report, as well as 4,729,112 shares of common stock held by TC Lim, LLC and 3,595,913 shares of common stock held by 3 Springs, LLC.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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

Item 13. Certain Relationships and Related Transactions, and Director Independence.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Halfmoon Bay Capital Ltd Debenture

On April 10, 2009, Electronic Sensor Technology received $1 million from Halfmoon Bay in exchange for a debenture bearing an interest rate of 9% with a maturity of one year. The debenture grants Halfmoon Bay a security interest in all of the intellectual property of the company. Halfmoon Bay owns approximately 55% of the outstanding common stock of the company and beneficially owns an additional 10% of the outstanding common stock of the company by virtue of the shares underlying a 9% convertible debenture issued by Electronic Sensor Technology to Halfmoon Bay on March 28, 2008, as described further below under the heading "Securities Purchase Agreement with Halfmoon Bay Capital Ltd." The 9% debenture issued to Halfmoon Bay on April 10, 2009 is attached as Exhibit 4.1 to, and is more fully described in, our current report on Form 8-K filed on April 15, 2009, which description is incorporated herein by reference.

Securities Purchase Agreement with Halfmoon Bay Capital Ltd

On March 28, 2008, Electronic Sensor Technology issued $2 million aggregate principal amount of 9% convertible debentures with a conversion price of $0.0486 to Halfmoon Bay and 86,419,753 shares of the company's common stock in exchange for $5.5 million from Halfmoon Bay, pursuant to a Securities Purchase Agreement dated March 28, 2008 between the company and Halfmoon Bay, pursuant to which, Halfmoon Bay acquired ownership of approximately 55% of the outstanding common stock of the company, and beneficial ownership of an additional 10% of the outstanding common stock of the company by virtue of the shares underlying its 9% convertible debenture. The Securities Purchase Agreement is attached as Exhibit 10.1 to, and is more fully described in, our current report on Form 8-K filed on April 3, 2008, which description is incorporated herein by reference.

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., which, at such time, each held an 8% convertible debenture and a warrant, the common stock underlying which represented more than 5% of the beneficial ownership of our outstanding shares of common stock. The Forbearance and Amendment Agreement is attached as Exhibit 10.1 to, and is more fully described in, our current report on Form 8-K filed September 8, 2006, which description is incorporated herein by reference. On December 27, 2007, Electronic Sensor Technology entered into a First Amendment Agreement with Midsummer and Islandia, which is attached as Exhibit 10.1 to, and is more fully described in, our amended current report on Form 8-K/A filed January 14, 2008, which description is incorporated herein by reference.

On February 26, 2008, the company entered into a Conversion and Termination Agreement with Midsummer and Islandia, which is attached as Exhibit 10.2 to, and is more fully described in, our current report on Form 8-K filed February 27, 2008, which description is incorporated herein by reference. Pursuant to the Conversion and Termination Agreement, on March 31, 2008, the company paid to Midsummer and Islandia an aggregate amount of $3.5 million of the $7 million outstanding principal amount of the convertible debentures. Further, pursuant to the Conversion and Termination Agreement, Midsummer and Islandia converted the remaining $3.5 million of the principal amount of their 8% convertible debentures, together with interest thereon, at a conversion price of $0.35 per share of common stock, and the remaining shares of common stock underlying the warrants held by Midsummer and Islandia were reduced by 50%.

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 that has director independence requirements, two of the five directors on our Board are independent using the definition of "independent director" contained in Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Our independent directors are Low Gay Teck and Thomas Dudley. Under Rule 5605(a)(2) 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 our compensation committee include Thomas Dudley, who is also the chairman of both committees, Maggie Tham and William Wittmeyer. In addition to being an independent director under Rule 5605(a)(2), the NASDAQ audit committee independence standards (which are also not applicable to us) contain NASDAQ Marketplace Rule 5605(c), which requires that audit committee members meet certain additional independence requirements. Thomas Dudley is independent under the NASDAQ audit committee independence standards.

Item 14. Principal Accountant Fees and Services.

AUDIT FEES

The aggregate fees billed for the 2007 and 2008 fiscal years for professional services rendered by our principal accountant, Sherb & Co., LLP, for the audit of our annual financial statements and review of financial statements included in our periodic reports on Form 10-Q and other services provided in connection with statutory and regulatory filings were $53,000 and $58,000 respectively.

AUDIT-RELATED FEES

No assurance or related services that are reasonably related to the performance of the audit or review of our financial statements were rendered by our principal accountants during the 2007 or 2008 fiscal year.

TAX FEES

The aggregate fees to be billed for professional services rendered by our current principal accountant, Sherb & Co., LLP, for tax compliance and tax advice were $7,500 and $5,000 for 2007 and 2008 fiscal years, respectively.

ALL OTHER FEES

No other products or services were provided by our principal accountants during the 2007 or 2008 fiscal year, other than the services outlined in the foregoing sections.

AUDIT COMMITTEE

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

Exhibit Index

Exhibit
Number Description
------- ----------------------------------------------------------------------
3.1 Articles of Incorporation of Electronic Sensor Technology, as amended
 (incorporated by reference from Exhibit 3.1 of the registration
 statement on Form SB-2 filed on January 6, 2006).

3.2 Bylaws of Electronic Sensor Technology, as amended (incorporated by
 reference from Exhibit 3.1 of the current report on Form 8-K filed on
 June 12, 2008).

4.1 Description of our common stock in Article Fourth of the Amendment to
 Electronic Sensor Technology's Articles of Incorporation dated January
 25, 2005 (incorporated by reference from Exhibit 3.1 of the
 registration statement on Form SB-2 filed on January 6, 2006).

4.2 Description of rights of shareholders of Electronic Sensor Technology
 in Article I and Article IX of Electronic Sensor Technology's Amended
 and Restated Bylaws (incorporated by reference from Exhibit 3.1 of the
 current report on Form 8-K filed on June 12, 2008).

4.3 Form of 9% Debenture dated April 10, 2009 issued by Electronic Sensor
 Technology in favor of Halfmoon Bay Capital Ltd (incorporated by
 reference from Exhibit 4.1 of the current report on Form 8-K filed on
 April 15, 2009).

10.1 Electronic Sensor Technology, Inc. 2005 Stock Incentive Plan
 (incorporated by reference from Exhibit 10.1 of the annual report on
 Form 10-KSB filed on April 15, 2005).

10.2 Form of Stock Option Agreement (incorporated by reference from Exhibit
 10.2 of the annual report on Form 10-KSB filed on April 15, 2005).

10.3 International Distributorship Agreement dated August 2005, between
 Electronic Sensor Technology, Inc. and Beijing R&D Technology Co.,
 Ltd. (incorporated by reference from Exhibit 10.12 of the amended
 registration statement on Form SB-2/A filed on February 15, 2006).

10.4 International Distributorship Agreement dated October 21, 2005,
 between Electronic Sensor Technology, Inc. and TechMondial, Ltd.
 (incorporated by reference from Exhibit 10.13 of the amended
 registration statement on Form SB-2/A filed on February 15, 2006).

10.5 Form of Securities Purchase Agreement dated as of December 7, 2005,
 among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
 and Islandia, L.P. (incorporated by reference from Exhibit 10.1 of the
 current report on Form 8-K filed on December 8, 2005).

10.6 Form of Registration Rights Agreement dated as of December 7, 2005,
 among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
 and Islandia, L.P. (incorporated by reference from Exhibit 10.2 of the
 current report on Form 8-K filed on December 8, 2005).

10.7 Form of Forbearance and Amendment Agreement dated as of September 7,
 2006, among Electronic Sensor Technology, Inc., Midsummer Investment,
 Ltd. and Islandia L.P. (incorporated by reference from Exhibit 10.1 of
 the current report on Form 8-K filed on September 8, 2006).

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

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

10.10 Offer letter dated March 28, 2007 between Electronic Sensor
 Technology, Inc. and Barry S. Howe (incorporated by reference from
 Exhibit 10.1 of the current report on Form 8-K filed on April 3,
 2007).

 34

Exhibit
Number Description
------- ----------------------------------------------------------------------
10.11 Offer letter dated July 17, 2007 between Electronic Sensor Technology,
 Inc. and Teong C. Lim (incorporated by reference from Exhibit 10.1 of
 the current report on Form 8-K filed on July 18, 2007).

10.12 First Amendment Agreement dated as of December 27, 2007, among
 Electronic Sensor Technology, Inc., Midsummer Investment, Ltd. and
 Islandia L.P. (incorporated by reference from Exhibit 10.1 of the
 amended current report on Form 8-K/A filed on January 14, 2008).

10.13 Conversation and Termination Agreement dated as of February 26, 2008,
 among Electronic Sensor Technology, Inc., Midsummer Investment, Ltd.
 and Islandia L.P. (incorporated by reference from Exhibit 10.2 of the
 current report on Form 8-K filed on February 28, 2008).

10.14 Securities Purchase Agreement dated as of March 28, 2008, between
 Electronic Sensor Technology, Inc. and Halfmoon Bay Capital Ltd
 (incorporated by reference from Exhibit 10.1 of the current report on
 Form 8-K filed on April 3, 2008).

10.15 Severance Agreement and Mutual Release dated as of July 25, 2008,
 between Electronic Sensor Technology and Barry S. Howe (incorporated
 by reference from Exhibit 10.1 of the current report on Form 8-K filed
 on July 28, 2008).

10.16 Independent Contractor Agreement dated as of November 24, 2008, among
 Electronic Sensor Technology, Wittham, a California corporation, and
 William Wittmeyer (incorporated by reference from Exhibit 10.1 of the
 amended current report on Form 8-K/A filed on January 5, 2009).

14.1 Code of Ethics (incorporated by reference from Exhibit 14 of the
 annual report on Form 10-KSB for the fiscal year ended December 31,
 2004 filed on April 15, 2005).

21.1 Subsidiaries of Electronic Sensor Technology (incorporated by
 reference from Exhibit 21.1 of the registration statement on Form SB-2
 filed on January 6, 2006).

24.1 Power of Attorney.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
 the Sarbanes-Oxley Act.

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

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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ELECTRONIC SENSOR TECHNOLOGY, INC.
(Registrant)

Date: April 15, 2009 By: /s/ Teong C. Lim
 -------------------------------------
 Teong C. Lim
 President and Chief Executive Officer
 (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: April 15, 2009 By: /s/ Teong C. Lim
 -------------------------------------
 Teong C. Lim
 President and Chief Executive Officer
 (Principal Executive Officer)


Date: April 15, 2009 By: /s/ Philip Yee
 -------------------------------------
 Philip Yee
 Secretary, Treasurer and Chief
 Financial Officer
 (Principal Financial Officer and
 Principal Accounting Officer)


Date: April 15, 2009 By: *
 -------------------------------------
 Teong Lim, Chairman


Date: April 15, 2009 By: *
 -------------------------------------
 Thomas Dudley, Director


Date: April 15, 2009 By: *
 --------------------------------
 Low Gay Teck, Director


Date: April 15, 2009 By: *
 -------------------------------------
 Maggie Tham, Director


Date: April 15, 2009 By: *
 -------------------------------------
 William Wittmeyer, Director


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

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