Table of Contents

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|------------------------------------------------------------------------------------------ |  | 
|UNITED STATES                                                                             
|SECURITIES AND EXCHANGE COMMISSION                                                        
|Washington, DC 20549                                                                      
|                                                                                           |  | 
|                                                                                           |  | 
|                                                                                          
|Form 10-Q                                                                                 
|                                                                                           |  | 
|                                                                                           |  | 
|                                                                                          
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934 
|                                                                                          
|For the quarterly period ended
 June 30, 2010                                             
|                                                                                          
|oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|                                                                                          
|For the transition period from ______ to
 ______                                          
|                                                                                          
|Commission File Number 0-9587                                                             
|                                                                                           |  | 
|                                                                                           |  | 
|                                                                                          
|ELECTRO-SENSORS, INC.                                                                     
|(Exact name of registrant as specified in its
 charter)                                   

|                                                 |  |                                  
|------------------------------------------------ |  | ---------------------------------
|Minnesota                                        |  | 41-0943459                       
|(State or other jurisdiction of incorporation or |  | (IRS Employer Identification No.)
|organization)                                    |  |                                  

|                                                      |  | 
|----------------------------------------------------- |  | 
|6111 Blue
 Circle Drive                              
|Minnetonka,
 Minnesota 55343-9108                    
|(Address of principal executive offices)             
|                                                     
|(952) 930-0100                                       
|(Registrants telephone number, including area
 code)
|                                                      |  | 
|                                                      |  | 

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 of 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 o

Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o

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 o                                             | Accelerated
 filer o        
|Non-accelerated
 filer o (Do not check if a smaller reporting company) | Smaller
 reporting company x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o No x

The number of shares outstanding of the registrants common stock,
$0.10 par value, on August 10, 2010 was 3,381,999.

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ELECTRO-SENSORS,
INC.
Form 10-Q
For the Period Ended June 30, 2010

TABLE OF
CONTENTS

|                                                                                                                       |  |   
|---------------------------------------------------------------------------------------------------------------------- |  | --
|PART I 
 FINANCIAL INFORMATION                                                                                        |  |   
|                                                                                                                       |  |   
|Item 1. Financial Statements:                                                                                          |  |   
|                                                                                                                       |  |   
|Condensed
 Consolidated Balance Sheet  As of June 30, 2010 and December 31, 2009                                      |  | 3 
|Condensed
 Consolidated Statements of Operations  For the Three and Six months ended
 June 30, 2010 and June 30, 2009 |  | 4 
|Condensed
 Consolidated Statements of Cash Flows  For the Six months ended June 30,
 2010 and June 30, 2009           |  | 5 
|Notes
 to Condensed Consolidated Financial Statements                                                                  |  | 6 
|                                                                                                                       |  |   
|Item 2. Managements Discussion and
 Analysis of Financial Condition and Results of Operations                         |  | 12
|Item 3. Quantitative and Qualitative
 Disclosures About Market Risk                                                    |  | 15
|Item 4. Controls and Procedures                                                                                        |  | 15
|                                                                                                                       |  |   
|PART II 
 OTHER INFORMATION                                                                                           |  |   
|                                                                                                                       |  |   
|Item 1. Legal Proceedings                                                                                              |  | 16
|Item 1A. Risk Factors                                                                                                  |  | 16
|Item 2. Unregistered Sales of Equity
 Securities and Use of Proceeds                                                   |  | 16
|Item 3. Defaults Upon Senior Securities                                                                                |  | 16
|Item 4. [Removed and Reserved]                                                                                         |  | 16
|Item 5. Other Information                                                                                              |  | 16
|Item 6. Exhibits                                                                                                       |  | 16
|                                                                                                                       |  |   
|SIGNATURES                                                                                                             |  | 17
|                                                                                                                       |  |   
|EXHIBITS                                                                                                               |  | 18

2

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Table of Contents

PART I.
FINANCIAL INFORMATION

Item 1. Financial
Statements

ELECTRO-SENSORS,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET(in thousands
except share and per share amounts)

|                                                                                                                                            |  |                |        |                    |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------ | 
|                                                                                                                                            |  | June 30,
 2010 |        | December 31,
 2009 |  
|                                                                                                                                            |  | (unaudited)    |        |                    |  
|ASSETS                                                                                                                                      |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Current
 assets                                                                                                                             |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Cash and cash equivalents                                                                                                                   |  | $              | 843    |                    | $ | 746    | 
|Treasury bills                                                                                                                              |  |                | 5,050  |                    |   | 4,980  | 
|Available for sale securities                                                                                                               |  |                | 2,595  |                    |   | 2,311  | 
|Trade receivables, less allowance for doubtful accounts of $11                                                                              |  |                | 769    |                    |   | 777    | 
|Inventories                                                                                                                                 |  |                | 961    |                    |   | 908    | 
|Other current assets                                                                                                                        |  |                | 78     |                    |   | 84     | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Total
 current assets                                                                                                                       |  |                | 10,296 |                    |   | 9,806  | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Property
 and equipment, net                                                                                                                |  |                | 1,181  |                    |   | 1,228  | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Total
 assets                                                                                                                               |  | $              | 11,477 |                    | $ | 11,034 | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                                       |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Current
 liabilities                                                                                                                        |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Accounts payable                                                                                                                            |  | $              | 126    |                    | $ | 79     | 
|Accrued expenses                                                                                                                            |  |                | 280    |                    |   | 172    | 
|Deferred revenue                                                                                                                            |  |                | 73     |                    |   | 76     | 
|Accrued income tax                                                                                                                          |  |                | 80     |                    |   | 15     | 
|Deferred income tax                                                                                                                         |  |                | 973    |                    |   | 877    | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Total
 current liabilities                                                                                                                  |  |                | 1,532  |                    |   | 1,219  | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Commitments
 and contingencies                                                                                                              |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Stockholders
 equity                                                                                                                       |  |                |        |                    |   |        | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Common stock par value $0.10 per share; authorized 10,000,000
 shares; issued and outstanding: 3,380,290 and 3,376,794 shares, respectively |  |                | 338    |                    |   | 338    | 
|Additional paid-in capital                                                                                                                  |  |                | 1,536  |                    |   | 1,529  | 
|Retained earnings                                                                                                                           |  |                | 6,525  |                    |   | 6,578  | 
|Accumulated other comprehensive income (unrealized gain on available
 for sale securities, net of income tax)                               |  |                | 1,546  |                    |   | 1,370  | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Total
 stockholders equity                                                                                                                 |  |                | 9,945  |                    |   | 9,815  | 
|                                                                                                                                            |  |                |        |                    |   |        | 
|Total
 liabilities and stockholders equity                                                                                                 |  | $              | 11,477 |                    | $ | 11,034 | 

See accompanying notes to unaudited condensed
consolidated financial statements

3

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Table of Contents

|                                                  
|--------------------------------------------------
|ELECTRO-SENSORS, INC. AND SUBSIDIARIES            
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   
|(in
 thousands except share and per share amounts)
|(unaudited)                                       

|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|------------------------------------------------------------ |  | ---------------------------- | --------- | -------------------------- | - | --------- | - | ---- | --------- |  | - | --------- | -
|                                                             |  | Three Months Ended
 June 30, |           | Six Months Ended
 June 30, |  
|                                                             |  | 2010                         |           | 2009                       |   | 2010      |   | 2009 |          
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Net sales                                                    |  | $                            | 1,700     |                            | $ | 1,262     |   | $    | 3,257     |  | $ | 2,541     |  
|Cost of goods sold                                           |  |                              | 678       |                            |   | 522       |   |      | 1,298     |  |   | 1,043     |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Gross profit                                                 |  |                              | 1,022     |                            |   | 740       |   |      | 1,959     |  |   | 1,498     |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Operating expenses:                                          |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Selling and marketing                                        |  |                              | 344       |                            |   | 311       |   |      | 698       |  |   | 651       |  
|General and administrative                                   |  |                              | 278       |                            |   | 288       |   |      | 588       |  |   | 591       |  
|Research and development                                     |  |                              | 161       |                            |   | 160       |   |      | 307       |  |   | 328       |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Total operating expenses                                     |  |                              | 783       |                            |   | 759       |   |      | 1,593     |  |   | 1,570     |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Operating income (loss)                                      |  |                              | 239       |                            |   | (19       | ) |      | 366       |  |   | (72       | )
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Non-operating income:                                        |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Interest income                                              |  |                              | 2         |                            |   | 4         |   |      | 2         |  |   | 7         |  
|Other income                                                 |  |                              | 2         |                            |   | 3         |   |      | 4         |  |   | 5         |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Total non-operating income                                   |  |                              | 4         |                            |   | 7         |   |      | 6         |  |   | 12        |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Income (loss) before income taxes                            |  |                              | 243       |                            |   | (12       | ) |      | 372       |  |   | (60       | )
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Income taxes (benefit)                                       |  |                              | 97        |                            |   | (5        | ) |      | 155       |  |   | (24       | )
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Net income (loss)                                            |  | $                            | 146       |                            | $ | (7        | ) | $    | 217       |  | $ | (36       | )
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Other comprehensive income (loss):                           |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Change in unrealized value of investments, net of income tax |  | $                            | (224      | )                          | $ | 530       |   | $    | 176       |  | $ | 424       |  
|Total comprehensive income (loss)                            |  | $                            | (78       | )                          | $ | 523       |   | $    | 393       |  | $ | 388       |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Net Income per Share Data:                                   |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Basic                                                        |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Net income (loss) per share                                  |  | $                            | 0.04      |                            | $ | (0.00     | ) | $    | 0.06      |  | $ | (0.01     | )
|Weighted average shares                                      |  |                              | 3,380,290 |                            |   | 3,368,450 |   |      | 3,380,213 |  |   | 3,368,407 |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Diluted                                                      |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Net income (loss) per share                                  |  | $                            | 0.04      |                            | $ | (0.00     | ) | $    | 0.06      |  | $ | (0.01     | )
|Weighted average shares                                      |  |                              | 3,405,070 |                            |   | 3,368,450 |   |      | 3,404,993 |  |   | 3,368,407 |  
|                                                             |  |                              |           |                            |   |           |   |      |           |  |   |           |  
|Dividends paid per share                                     |  | $                            | .04       |                            | $ | .04       |   | $    | .08       |  | $ | .08       |  

See
accompanying notes to unaudited condensed consolidated financial statements

4

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Table of Contents

|                                               
|-----------------------------------------------
|ELECTRO-SENSORS, INC. AND SUBSIDIARIES         
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|(in
 thousands)                                
|(unaudited)                                    

|                                                                                             |  |                            |        |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------ | -
|                                                                                             |  | Six Months Ended
 June 30, |       
|                                                                                             |  | 2010                       |        | 2009 |  
|Cash flows
 from operating activities                                                        |  |                            |        |      |   |        |  
|                                                                                             |  |                            |        |      |   |        |  
|Net income
 (loss)                                                                           |  | $                          | 217    |      | $ | (36    | )
|                                                                                             |  |                            |        |      |   |        |  
|Adjustments to reconcile
 net income (loss) to net cash from (used in) operating activities: |  |                            |        |      |   |        |  
|                                                                                             |  |                            |        |      |   |        |  
|Depreciation                                                                                 |  |                            | 49     |      |   | 57     |  
|Provision for losses on trade receivables                                                    |  |                            | 0      |      |   | 1      |  
|Deferred income taxes                                                                        |  |                            | (12    | )    |   | 0      |  
|Interest accrued on investments                                                              |  |                            | (2     | )    |   | (7     | )
|(Increase)/decrease in:                                                                      |  |                            |        |      |   |        |  
|Trade receivables                                                                            |  |                            | 8      |      |   | 59     |  
|Inventories                                                                                  |  |                            | (53    | )    |   | 129    |  
|Other current assets                                                                         |  |                            | 6      |      |   | 13     |  
|Income taxes receivable                                                                      |  |                            | 0      |      |   | (8     | )
|Accounts payable                                                                             |  |                            | 47     |      |   | 0      |  
|Accrued expenses                                                                             |  |                            | 108    |      |   | 9      |  
|Deferred revenue                                                                             |  |                            | (3     | )    |   | (17    | )
|Accrued income taxes                                                                         |  |                            | 65     |      |   | 0      |  
|                                                                                             |  |                            |        |      |   |        |  
|Net cash
 provided by operating activities                                                   |  |                            | 430    |      |   | 200    |  
|                                                                                             |  |                            |        |      |   |        |  
|Cash flows
 from (used in) investing activities                                              |  |                            |        |      |   |        |  
|                                                                                             |  |                            |        |      |   |        |  
|Purchase of treasury bills                                                                   |  |                            | (5,048 | )    |   | (4,972 | )
|Proceeds from the sale of treasury bills                                                     |  |                            | 4,980  |      |   | 0      |  
|Purchase of property and equipment                                                           |  |                            | (2     | )    |   | (2     | )
|                                                                                             |  |                            |        |      |   |        |  
|Net cash
 used in investing activities                                                       |  |                            | (70    | )    |   | (4,974 | )
|                                                                                             |  |                            |        |      |   |        |  
|Cash flows
 from (used in) financing activities                                              |  |                            |        |      |   |        |  
|                                                                                             |  |                            |        |      |   |        |  
|Proceeds from issuance of stock                                                              |  |                            | 7      |      |   | 4      |  
|Dividends paid                                                                               |  |                            | (270   | )    |   | (270   | )
|                                                                                             |  |                            |        |      |   |        |  
|Net cash
 used in financing activities                                                       |  |                            | (263   | )    |   | (266   | )
|                                                                                             |  |                            |        |      |   |        |  
|Net
 increase (decrease) in cash and cash equivalents                                        |  |                            | 97     |      |   | (5,040 | )
|                                                                                             |  |                            |        |      |   |        |  
|Cash and cash equivalents, beginning                                                         |  |                            | 746    |      |   | 5,529  |  
|Cash and cash equivalents, ending                                                            |  | $                          | 843    |      | $ | 489    |  
|                                                                                             |  |                            |        |      |   |        |  
|Supplemental
 schedule of non-cash investing and financing activities                        |  |                            |        |      |   |        |  
|Net change in unrealized
 gain on investments                                                |  | $                          | 176    |      | $ | 424    |  
|Cash paid for income taxes                                                                   |  | $                          | 35     |      | $ | 0      |  

See
accompanying notes to unaudited condensed consolidated financial statements

5

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Table of Contents

ELECTRO-SENSORS, INC. AND SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

Note 1. Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions and regulations of the Securities and Exchange Commission to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements.

This report
should be read together with the Companys annual report on Form 10-K for the
year ended December 31, 2009, including the audited financial statements and
footnotes therein.

It is the
opinion of management that the unaudited condensed consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
necessary to fairly state the financial position and results of operations for
the three and six months ended June 30, 2010. The results of interim periods
may not be indicative of results to be expected for the year.

Nature of Business

The
accompanying condensed consolidated financial statements include the accounts
of Electro-Sensors, Inc. and its wholly-owned subsidiaries, ESI Investment
Company and Senstar Corporation. Senstar has no operations. Intercompany
accounts, transactions and earnings have been eliminated in consolidation. The
consolidated entity is referred to as the Company.

Electro-Sensors,
Inc. operates two distinct businesses. The first is the Production Monitoring
Division, which manufactures and markets a complete line of speed monitoring
and motor control systems for industrial machinery. The division utilizes
leading-edge technology to continuously improve its products and make them
easier to use. The divisions goal is to manufacture the industry-preferred
product for every market served. These products are sold through an internal
sales staff, manufacturers representatives, and distributors to a wide variety
of manufacturers, original equipment manufacturers and processors to monitor
process machinery operations. The division markets its products to a number of different
industries located throughout the United States and abroad.

The second
business is AutoData Systems. AutoData designs and markets desktop software
based systems that read hand printed characters, checkmarks and bar code
information from scanned or faxed forms, in addition to collecting and
reporting data from web forms. AutoData products are designed to provide
capabilities to automate data collection and are sold by internal sales staff
to end users, resellers and developers in the United States, Canada, Europe and
Asia.

In addition,
through its subsidiary ESI Investment Company, the Company periodically makes
strategic investments in other businesses and companies, primarily when the
Company believes that such investments will facilitate development of
technology complementary to the Companys products. Although ESI, through ESI
Investment Company, invests in other businesses or companies, ESI does not
intend to become an investment company and intends to remain primarily an
operating company. The Companys primary investments are 343,267 shares of
Rudolph Technologies, Inc. (Rudolph) and 551,759 shares of PPT Vision Inc
(PPT). The Rudolph investment is accounted for using the available-for-sale
method. The PPT investment is accounted for under the equity method of
accounting. See Note 5 for additional information regarding its investments.
The Companys investments in securities are subject to normal market risks.

Revenue recognition of production monitoring
equipment

The Company
recognizes revenue from the sale of its production monitoring equipment when
persuasive evidence of an arrangement exists, the product has been delivered,
the fee is fixed and determinable and collection of the resulting receivable is
reasonably assured. The Company may offer discounts to its distributors or
quantity discounts that are recorded at the time of sale. The Company
recognizes revenue on products sold to customers and distributors upon shipment
because the contracts do not include post-shipment obligations. In addition to
exchanges and warranties, customers have refund rights. Our standard products
are used in a wide variety of industries, returns are minimal and insignificant
to the consolidated financial statements and are recognized when the returned
product is received by the Company. In some situations, the Company receives
advance payments from its customers. Revenue associated with these advance
payments is deferred until the product is shipped or services performed.

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Table of Contents

Software revenue recognition

The Company
recognizes revenue upon shipment of its automated data collection software. The
product is sold to the end user and risk of loss is transferred, and the
Company has no continuing obligations, once its products are delivered to the
shipper. To recognize revenue, it must also be probable that the Company will
collect the accounts receivable from its customers. AutoData customers pay an
annual maintenance fee for software support, which is recognized as deferred
revenue on the balance sheet and is recognized in income, on a monthly basis,
over the life of the contract. The Company recognizes hardware shipped with
software when persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed and determinable, and collection of the
resulting receivable is reasonably assured.

Available for Sale Securities

ESI Investment
Companys investments consist of equity securities, primarily common stocks,
government debt securities and money market funds. The estimated fair value of
publicly traded equity securities (other than those accounted for based upon
the equity method of accounting) is based on quoted market prices, and
therefore subject to the inherent risk of market fluctuations. Management
determines the appropriate classification of securities at the date individual
investments are acquired, and evaluates the appropriateness of such
classification at each balance sheet date.

Since the
Company generally does not make investments in anticipation of short-term
fluctuations in market prices, investments in equity securities are classified
as available-for-sale (unless accounted for on the equity method of
accounting). Available-for-sale securities with readily determinable values are
stated at fair value, and unrealized holding gains and losses, net of the
related deferred tax effect, are reported as separate component of
stockholders equity.

Realized gains
and losses on securities, including losses from declines in value of specific
securities determined by management to be other-than-temporary (unless
accounted for on the equity method of accounting), are included in income in
the period realized.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The
 Companys policies incorporate the guidance for accounting for fair value
 measurements of financial assets and financial liabilities and for fair value
 measurements of nonfinancial items that are recognized or disclosed at fair
 value in the consolidated financial statements on a recurring basis. The
 Companys policies also incorporate the guidance for fair value measurement
 related to nonfinancial items that are recognized and disclosed at fair value
 in the consolidated financial statements on a nonrecurring basis. The
 guidance establishes a fair value hierarchy that prioritizes the inputs to
 valuation techniques used to measure fair value. The hierarchy gives the
 highest priority to unadjusted quoted prices in active markets for identical
 assets or liabilities (Level 1 measurements) and the lowest priority to
 measurements involving significant unobservable inputs (Level 3
 measurements). The three levels of the fair value hierarchy are as follows:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Level 1
 inputs are quoted prices (unadjusted) in active markets for identical assets
 or liabilities that the Company has the ability to access at the measurement
 date.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Level 2
 inputs are inputs other than quoted prices included within Level 1 that are
 observable for the asset or liability, either directly or indirectly.               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Level 3
 inputs are unobservable inputs for the asset or liability.                                                                                                       

The level in
the fair value hierarchy within which a fair measurement in its entirety falls
is based on the lowest level input that is significant to the fair value
measurement in its entirety.

The carrying
value of cash and equivalents, treasury bills, investments, trade receivables,
accounts payable, and other working capital items approximate fair value at
June 30, 2010 and December 31, 2009 due to the short maturity nature of these
instruments.

Income taxes

Deferred
income taxes are provided on an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed for those differences that have future tax
consequences using the currently enacted tax laws and rates that apply to the
periods in which they are expected to affect taxable income. Income tax expense
is the current tax payable or refundable for the period plus or minus the net
change in the deferred tax assets and liabilities, excluding the portion of the
deferred liability allocated to other comprehensive income. Deferred taxes are
reduced by a valuation allowance to the extent that realization of the related
deferred tax asset is not assured.

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Use of Estimates

The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Significant estimates,
including the underlying assumptions, consist of economic lives of property and
equipment, realizability of accounts receivable, valuation of deferred tax
assets/liabilities, valuation of inventory, and valuation of investments. It is
at least reasonably possible that these estimates may change in the near term.

Note 2. Stock-Based Compensation

The Company
records compensation expense for employee stock options based on the estimated
fair value of the options on the date of grant using the Black-Scholes-Merton
model. The Company uses historical data among other factors to estimate the
expected price volatility, the expected option life and the expected forfeiture
rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at
the time of grant for the estimated life of the option. At June 30, 2010, the
Company had one stock-based employee compensation plan. During the six months
ended June 30, 2010, there were no stock options exercised. There were no
option grants in the six months ended June 30, 2010 and 2009.

Note 3. Net Income (Loss) Per Share

Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding and common stock equivalents outstanding
during the period. For the three-month and six-month periods ended June 30,
2009, 30,780 common stock equivalents were not included in the diluted weighted
average shares of common stock outstanding as the result would have been
anti-dilutive.

Note 4. Treasury Bills

On January 14,
2010, the Company had $4,980,000 in Treasury Bills mature. With the proceeds,
in February 2010, the Company purchased $5,048,000 in Treasury Bills with a
maturity date more than three months in the future. The Treasury Bills matured
on July 15, 2010. With the proceeds, in July 2010, the Company purchased
$4,300,000 in Treasury Bills with a maturity date in October 2010. It is the intention
of management to hold the Treasury Bills until maturity.

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Note 5. Investments

The cost and
estimated fair value of the Companys investments (other than an investment
accounted for under the equity method of accounting) are as follows:

|                                     |  |      |           |                         |   |                         |  |             |         |   |   |           | 
|------------------------------------ |  | ---- | --------- | ----------------------- | - | ----------------------- |  | ----------- | ------- | - | - | --------- | 
|                                     |  | Cost |           | Gross
 unrealized
 gain |   | Gross
 unrealized
 loss |  | Fair
 value |        
|December 31, 2009                    |  |      |           |                         |   |                         |  |             |         |   |   |           | 
|Treasury
 Bills                      |  | $    | 4,980,000 |                         | $ | 0                       |  | $           | 0       |   | $ | 4,980,000 | 
|Money Market
 Funds                  |  |      | 385,000   |                         |   | 0                       |  |             | 0       |   |   | 385,000   | 
|Equity
 Securities                   |  |      | 101,000   |                         |   | 2,264,000               |  |             | (54,000 | ) |   | 2,311,000 | 
|                                     |  |      | 5,466,000 |                         |   | 2,264,000               |  |             | (54,000 | ) |   | 7,676,000 | 
|Less Cash
 and Cash Equivalents      |  |      | 385,000   |                         |   | 0                       |  |             | 0       |   |   | 385,000   | 
|Total Investments, December 31, 2009 |  | $    | 5,081,000 |                         | $ | 2,264,000               |  | $           | (54,000 | ) | $ | 7,291,000 | 
|                                     |  |      |           |                         |   |                         |  |             |         |   |   |           | 
|June 30, 2010                        |  |      |           |                         |   |                         |  |             |         |   |   |           | 
|Treasury
 Bills                      |  | $    | 5,050,000 |                         | $ | 0                       |  | $           | 0       |   | $ | 5,050,000 | 
|Money Market
 Funds                  |  |      | 317,000   |                         |   | 0                       |  |             | 0       |   |   | 317,000   | 
|Equity
 Securities                   |  |      | 101,000   |                         |   | 2,548,000               |  |             | (54,000 | ) |   | 2,595,000 | 
|                                     |  |      | 5,468,000 |                         |   | 2,548,000               |  |             | (54,000 | ) |   | 7,962,000 | 
|Less Cash
 and Cash Equivalents      |  |      | 317,000   |                         |   | 0                       |  |             | 0       |   |   | 317,000   | 
|Total Investments, June 30, 2010     |  | $    | 5,151,000 |                         | $ | 2,548,000               |  | $           | (54,000 | ) | $ | 7,645,000 | 

At June 30,
2010 and December 31, 2009, the Companys significant investment in equity
securities was 343,267 shares of Rudolph Technologies, Inc. (Rudolph),
accounted for under the available-for-sale method. As of June 30, 2010 and
December 31, 2009, the aggregate value of the Companys Rudolph shares as
reported on the Nasdaq Stock Exchange was approximately $2,592,000 and
$2,307,000, respectively, with an approximate cost of $45,000.

Investment Reported on Equity Method

At June 30,
2010 and December 31, 2009, the Company owned 551,759 shares of PPT Vision,
Inc. (PPT), which is 1.4% of PPTs outstanding common stock. The fair value
of its holdings based on the quoted market price at June 30, 2010 and December
31, 2009 was approximately $44,000 and $39,000, respectively, with an
approximate cost of $2,434,000.

While the
Company owns only approximately 1.4% of PPTs outstanding stock, the Companys
Secretary owns a controlling interest. Therefore, it has been determined that
the Company has significant influence over the operations of PPT, and as a
result its ownership interest should be reported using the equity method of
accounting for investments.

Under the
equity method of accounting, the Companys proportionate share of PPTs net
loss would ordinarily be directly reflected on the Companys income statement,
along with a corresponding reduction in the PPT investment account on the
Companys balance sheet. However, where net losses exceed the value of the
initial investment, these losses are no longer recognized in the financial
statements, but rather are suspended and applied against the investors
proportionate share in any future net earnings for the investee. Accordingly,
since the Companys proportionate share of PPTs previous net losses have
already reduced the PPT investment account on its balance sheet to $0, the
Companys proportionate share of PPTs net loss through June 30, 2010 has not
been recognized on its current financial statements. At June 30, 2010 and December
31, 2009, the Company had approximately $1,520,000 and $1,517,000,
respectively, in suspended losses from its investment in PPT that will be used
to offset future recognition of equity method earnings from the investment, of
which there may be none.

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Note 6. Fair Value Measurements

The following
table provides information on the Companys investment assets measured at fair
value on a recurring basis.

|                           |  |                                                                               |                             |         |                              |           |  |         |           |  |   |   |  |   |   | 
|-------------------------- |  | ----------------------------------------------------------------------------- | --------------------------- | ------- | ---------------------------- | --------- |  | ------- | --------- |  | - | - |  | - | - | 
|                           |  | Carrying amount
 in condensed
 consolidated
 Balance Sheet
 December 31, 2009 |                             |         |                              |           |  |         |           |  |  
|                           |  |                                                                               | Fair ValueDecember 31, 2009 |         | Fair Value Measurement Using |          
|                           |  |                                                                               |                             | Level 1 |                              | Level 2   |  | Level 3 |          
|Assets:                    |  |                                                                               |                             |         |                              |           |  |         |           |  |   |   |  |   |   | 
|Cash and cash equivalents: |  |                                                                               |                             |         |                              |           |  |         |           |  |   |   |  |   |   | 
|Money Market Funds         |  | $                                                                             | 385,000                     |         | $                            | 385,000   |  | $       | 385,000   |  | $ |  |  | $ |  | 
|Treasury Bills             |  | $                                                                             | 4,980,000                   |         | $                            | 4,980,000 |  | $       | 4,980,000 |  | $ |  |  | $ |  | 
|Available-for-sale:        |  |                                                                               |                             |         |                              |           |  |         |           |  |   |   |  |   |   | 
|Equity Securities          |  | $                                                                             | 2,311,000                   |         | $                            | 2,311,000 |  | $       | 2,311,000 |  | $ |  |  | $ |  | 

|                           |  |                                                                    |                         |         |                              |             |  |         |           |  |   |   |  |   |   | 
|-------------------------- |  | ------------------------------------------------------------------ | ----------------------- | ------- | ---------------------------- | ----------- |  | ------- | --------- |  | - | - |  | - | - | 
|                           |  | Carrying amountin condensedconsolidated
balance sheetJune 30, 2010 |                         |         |                              |             |  |         |           |  |  
|                           |  |                                                                    | Fair ValueJune 30, 2010 |         | Fair Value Measurement Using |            
|                           |  |                                                                    |                         | Level 1 |                              | Level 2     |  | Level 3 |          
|Assets:                    |  |                                                                    |                         |         |                              |             |  |         |           |  |   |   |  |   |   | 
|Cash and cash equivalents: |  |                                                                    |                         |         |                              |             |  |         |           |  |   |   |  |   |   | 
|Money Market Funds         |  | $                                                                  | 317,000                 |         | $                            | 317,000     |  | $       | 317,000   |  | $ |  |  | $ |  | 
|Treasury Bills             |  | $                                                                  | 5,050,000               |         | $                            | 5,050,000   |  | $       | 5,050,000 |  | $ |  |  | $ |  | 
|Available-for-sale:        |  |                                                                    |                         |         |                              |             |  |         |           |  |   |   |  |   |   | 
|Equity Securities          |  | $                                                                  | 2,595,000               |         | $                            | 2,595,
 000 |  | $       | 2,595,000 |  | $ |  |  | $ |  | 

The fair value
of the money market funds, treasury bills, and equity securities are based on
quoted market prices in an active market. Closing stock prices are readily
available from active markets and are used as being representative of fair
value. The Company classifies these securities as level 1.

Note 7. Inventories

Inventories
used in the determination of cost of goods sold are as follows:

|                  |  |                |         |                    |   |         | 
|----------------- |  | -------------- | ------- | ------------------ | - | ------- | 
|                  |  | June 30,
 2010 |         | December 31,
 2009 |  
|Raw
 Materials    |  | $              | 622,000 |                    | $ | 624,000 | 
|Work In
 Process  |  |                | 184,000 |                    |   | 134,000 | 
|Finished
 Goods   |  |                | 155,000 |                    |   | 150,000 | 
|Total Inventories |  | $              | 961,000 |                    | $ | 908,000 | 

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Table of Contents

Note 8. Segment Information

The Company
has three reportable operating segments based on the nature of its product
lines: Production Monitoring, AutoData Systems, and Investments. The Production
Monitoring Division manufactures and markets a complete line of production
monitoring equipment, in particular speed monitoring and motor control systems
for industrial machinery. The AutoData Systems Division designs and markets
desktop software-based systems that read hand-printed characters, checkmarks,
and bar code information from scanned or faxed forms, in addition to collecting
and reporting data from web forms. Sales of these systems include software and
can include hardware. ESI Investment Company holds investments in marketable
and non-marketable securities.

The accounting
policies of the segments are the same as those described in Note 1 of the Notes
to Consolidated Financial Statements included in the Companys annual report on
Form 10-K for the year ended December 31, 2009. In evaluating segment performance,
management focuses on sales and income before taxes. The Company has no
inter-segment sales.

The following
is financial information relating to the continuing operating segments (in
thousands):

|                                                  |  |                               |       |                             |   |       |   |      |       |   |   |       |  
|------------------------------------------------- |  | ----------------------------- | ----- | --------------------------- | - | ----- | - | ---- | ----- | - | - | ----- | -
|                                                  |  | Three
 Months Ended
 June 30, |       | Six Months
 Ended
 June 30, |  
|                                                  |  | 2010                          |       | 2009                        |   | 2010  |   | 2009 |      
|External sales                                    |  |                               |       |                             |   |       |   |      |       |   |   |       |  
|Production monitoring (products)                  |  | $                             | 1,580 |                             | $ | 1,167 |   | $    | 3,050 |   | $ | 2,356 |  
|AutoData systems (software and related
 hardware) |  |                               | 120   |                             |   | 95    |   |      | 207   |   |   | 185   |  
|Investments                                       |  |                               | 0     |                             |   | 0     |   |      | 0     |   |   | 0     |  
|Total                                             |  | $                             | 1,700 |                             | $ | 1,262 |   | $    | 3,257 |   | $ | 2,541 |  
|                                                  |  |                               |       |                             |   |       |   |      |       |   |   |       |  
|Net Income/(Loss) before taxes                    |  |                               |       |                             |   |       |   |      |       |   |   |       |  
|Production monitoring (products)                  |  | $                             | 229   |                             | $ | 4     |   | $    | 375   |   | $ | (24   | )
|AutoData systems (software and related
 hardware) |  |                               | 12    |                             |   | (19   | ) |      | (5    | ) |   | (42   | )
|Investments                                       |  |                               | 2     |                             |   | 3     |   |      | 2     |   |   | 6     |  
|Total                                             |  | $                             | 243   |                             | $ | (12   | ) | $    | 372   |   | $ | (60   | )

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Table of Contents

Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations

CRITICAL ACCOUNTING
ESTIMATES

The
preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make decisions based upon estimates, assumptions, and factors it
considers relevant to the circumstances. Such decisions include the selection
of applicable accounting principles and the use of judgment in their
application, the results of which impact reported amounts and disclosures.
Changes in economic conditions or other business circumstances may affect the
outcomes of managements estimates and assumptions. An
in-depth description of our accounting estimates can be found in the interim
financial statements included in this report and in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009. No new estimates exist other
than those discussed in our Annual Report.

RESULTS OF OPERATIONS

Net
Sales

Net sales for
the three-month period ended June 30, 2010 increased $438,000, or 34.7%, when
compared to net sales for the same period in 2009. Net sales for the six-month
period ended June 30, 2010 increased $716,000, or 28.2%, when compared to net
sales for the same period in 2009.

For the three
months ended June 30, 2010 compared to the same period in 2009, the Production
Monitoring Division had an increase in net sales of $413,000, or 35.4%, and the
AutoData Systems Division had an increase in net sales of $25,000, or 26.3%.

For the six
months ended June 30, 2010 compared to the same period in 2009, the Production
Monitoring Division had an increase in net sales of $694,000, or 29.5%, and the
AutoData Systems Division had an increase in net sales of $22,000, or 11.9%.

Sales have
increased in the Production Monitoring Division in most industries that we
serve across our various product lines. In addition to growth in domestic
sales, international sales also increased 64.0 %. We also had continued growth
in sales of our bearing temperature and belt misalignment sensors. Throughout
2010, we expect to continue to expand the number of manufacturers
representatives and exclusive distributors. Our corporate web site provides
significant information and product application knowledge to existing and
prospective customers and also direct knowledge to our sales partners, which we
believe has a positive impact on our sales.

The AutoData
Systems Division increase in net sales for the second quarter of 2010 was due
in part to the slow but steady recovery of the economy. We are seeing an
increase in existing customers purchasing additional licenses or copies of our
software, in addition to an increase in new customers purchasing our software.
We have also seen an increase in maintenance renewals from existing customers,
many of whom had allowed their maintenance contracts to lapse during the
economic downturn. This increase in maintenance revenue was not fully
recognized in sales at the time of sale, but will be recognized in sales over
the twelve-month term of the contract.

Cost
of Goods Sold

Our cost of goods
sold increased $156,000, or 29.9%, for the three months ended June 30, 2010
compared to the same period in 2009. For the six-month period ended June 30,
2010, the cost of goods sold increased $255,000, or 24.4%, compared to the same
period in 2009. This increase was primarily a result of increased sales.

Gross
Profit

Gross margin
for the three-month period ended June 30, 2010 was 60.1% versus 58.6% for the
same period in 2009. For the six-month periods ended June 30, 2010 and 2009,
gross margins were 60.1% and 59.0%, respectively. The increase in gross
margin was due to better utilization of production workers and facilities in
the production of products. During 2009, with sales slower, production workers
worked on other production projects.

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Table of Contents

Operating
Expenses

Total
operating expenses increased $24,000, or 3.2%, for the three months ended June
30, 2010 when compared to the same period of 2009. The Production Monitoring
Division had an increase of $28,000, or 4.2%, offset by a decrease in the
AutoData Systems Division of $4,000, or 4.0%.

For the six
months ended June 30, 2010 when compared to the same period of 2009, operating
expenses increased $23,000, or 1.5%. The Production Monitoring Division had an
increase of $38,000, or 2.8%, offset by a decrease in the AutoData Systems
Division of $15,000, or 7.3%.

Selling and
marketing costs increased $33,000, or 10.6%, for the three months ended June
30, 2010 when compared to the same period in 2009. For the six months ended
June 30, 2010, selling and marketing costs increased $47,000, or 7.2%, when
compared to the same period in 2009. Of the increase for the three months ended
June 30, 2010, the Production Monitoring Division had an increase of $32,000,
or 11.4%, and the AutoData Systems Division had an increase of $1,000, or 3.2%.
Of the increase for the six months ended June 30, 2010, the Production
Monitoring Division had an increase of $47,000, or 8.0%, and the AutoData
Systems Division costs remained unchanged. For the three months ended June 30,
2010, the increase in selling and marketing costs of the Production Monitoring
Division was due to increased commission expense due to increased sales, travel
expense due to a sales trip to China, and advertising expenses, offset by
decreases in salaries and benefits (due to changes in our compensation package)
and website development expense (due to translation of our corporate website
into Chinese and Spanish during 2009). For the six months ended June 30, 2010,
the increase in selling and marketing costs of the Production Monitoring
Division was due to increased commission expense due to increased sales, travel
expense due to additional international and domestic sales trips, and
advertising expenses, offset by a decrease in website development expense. For
the three months ended June 30, 2010, the increase in selling and marketing
costs of the AutoData Systems Division was due to increased commission expense
due to increased sales. During the six months ended June 30, 2010, the AutoData
Systems Division had an increase in wages due to hiring a part-time sales
person, offset by a decrease in advertising expenses.

General and
administrative costs decreased $10,000, or 3.5%, for the three months ended
June 30, 2010 compared to the same period in 2009. For the six months ended
June 30, 2010, general and administrative costs decreased $3,000, or 0.5%, when
compared to the same period in 2009. Of the decrease for the three months ended
June 30, 2010, the Production Monitoring Division had a decrease of $7,000, or
2.6%, and the AutoData Systems Division had a decrease of $3,000, or 15.0%. Of
the decrease for the six months ended June 30, 2010, the AutoData Systems
Division had a decrease of $5,000, or 12.2%, offset by an increase in the
Production Monitoring Division of $2,000, or 0.4%. For the three months ended
June 30, 2010, the decrease in general and administrative costs from the
Production Monitoring Division resulted from a decrease in stock handling fees
due to the printing and filing expenses for year end being recognized in the
first quarter of 2010 as opposed to the second quarter during 2009 and
depreciation expense, offset by increases in wages and salary due to the hiring
of a part-time employee. For the six months ended June 30, 2010, the increase
in general and administrative expenses from the Production Monitoring Division
was due to increases in ISO (international production quality standards)
certification and audit expense, purchases of furnishings, and salaries and
wages, due to hiring a part-time employee, offset by decreases in computer
supplies and maintenance and depreciation expense. For the three months ended
June 30, 2010, the decrease in the AutoData System Division was due to
decreases in stock handling fees, due to the printing and filing expenses for
year end being recognized in the first quarter of 2010 as opposed to the second
quarter during 2009, and computer maintenance costs. For the six months ended
June 30, 2010, the decrease in the AutoData System Division was due to
decreases in computer maintenance costs.

Research and
development costs increased $1,000, or 0.6%, for the three months ended June
30, 2010 compared to the same period in 2009. For the six months ended June 30,
2010, research and development costs decreased $21,000, or 6.4%, when compared
to the same period in 2009. Of the increase for the three months ended June 30,
2010, the Production Monitoring Division contributed an increase of $3,000, or
2.7%, offset by a decrease in the AutoData Systems Division of $2,000, or 4.1%.
Of the decrease for the six months ended June 30, 2010, the Production
Monitoring Division had a decrease of $11,000, or 4.8%, and the AutoData
Systems Division of had a decrease of $10,000, or 10.1%. For the three months
ended June 30, 2010, the increase in the Production Monitoring Division was due
to an increase travel for service calls and salaries and wages, offset by
decreases in lab materials and lab testing. For the six months ended June 30,
2010, the decrease in the Production Monitoring Division was due to decreased
lab testing, lab materials, and legal fees for trademark and patent expenses,
offset by an increase in travel for service calls and salaries and wages. The
decrease in the AutoData Systems Division was due to a decrease in wages and
benefits and depreciation expense.

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Non-Operating
Income

Non-operating
income decreased by $3,000, or 42.9%, for the three-month period ended June 30,
2010 compared to the same period for 2009. For the six months ended June 30,
2010, non-operating income decreased $6,000, or 50.0%, when compared to the
same period in 2009. The decrease for the three-month and six month periods
ended June 30, 2010 was due to a decrease in interest income.

Interest
income decreased $2,000, or 50.0%, when comparing the three months ended June
30, 2010 to the same period in 2009. For the six months ended June 30, 2010,
interest income decreased $5,000, or 71.4%, when compared to the same period in
2009. These decreases were due to the decreased interest rate on Treasury
Bills, which was .053% at June 30, 2010, compared to .301% at June 30, 2009.

Income
Before Income Taxes

We had income
before income taxes of $243,000 for the three months ended June 30, 2010,
representing an increase in income before income taxes of $255,000, or 2125.0%,
when compared to a loss before income taxes of $12,000 for the three months
ended June 30, 2009. We had income before income taxes of $372,000 for the six
months ended June 30, 2010, representing an increase in income before income
taxes of $432,000, or 720.0%, when compared to a loss before income taxes of
$60,000 for the six months ended June 30, 2009.

The Production
Monitoring Division had income before income taxes of $229,000 for the three
months ended June 30, 2010 compared to $4,000 for the same period in 2009, an
increase of $225,000, or 5625.0%. For the six months ended June 30, 2010, the
Production Monitoring Division had income before income taxes of $375,000
compared to a loss before income taxes of $24,000 for the same period in 2009,
an increase of $399,000, or 1662.5%. This increase in income before income
taxes was mainly due to an increase in sales and gross margin.

The AutoData
Systems Division had income before income taxes of $12,000 for the three months
ended June 30, 2010 compared to a loss before income taxes of $19,000 for same
period in 2009, an increase of $31,000, or 163.2%. For the six months ended
June 30, 2010, AutoData Systems had a loss before income taxes of $5,000
compared to a loss before income taxes of $42,000 for the same period in 2009,
a decrease in the loss of $37,000, or 88.1%. This decrease in loss before
income taxes was due primarily to an increase in sales.

ESI Investment Company had
income before taxes of $2,000 for the three-month period ended June 30, 2010 compared
to income before taxes of $3,000 for the three-month period ended June 30,
2009, a decrease of $1,000, or 33.3%. ESI Investment Company had income
before taxes of $2,000 for the six-month period ended June 30, 2010 compared to
income before income taxes of $6,000 for the same period in 2009, a decrease of
$4,000, or 66.7%. This decrease was a result of the lower interest rate
available on Treasury Bills in 2010 as compared to 2009 (See Non-Operating
Income). However, ESI Investment Company does have approximately $2,547,000 in
unrealized gain on the Rudolph Technologies, Inc. investment that is reported
in Other Comprehensive Income (See Note 5 Investments in the notes to the
accompanying condensed consolidated financial statements).

LIQUIDITY AND CAPITAL RESOURCES

Cash
and cash equivalents were $843,000 at June 30, 2010, $746,000 at December 31,
2009, and $489,000 at June 30, 2009.

Cash
provided by operating activities was $430,000 and $200,000 for the six
months ended June 30, 2010 and 2009, respectively. The increase was primarily
the result of the net operating income in 2010, instead of the operating loss
in 2009. The operating income is adjusted for depreciation expense on capital
assets (a non-cash expense), increases in accrued expenses, and accrued income
taxes as compared to the December 31, 2009 balances.

Cash
used in investing activities was $70,000 and $4,974,000 for the six-month
periods ended June 30, 2010 and 2009, respectively. The significant
decrease in cash used by investing activities was due to proceeds from the
maturity of Treasury Bills in the aggregate amount of $4,980,000 in 2010, while
there were no such maturities in 2009. Prior to February 2009, the Company
purchased Treasury Bills that had a maturity date of three months or less and
were, therefore, accounted for as cash equivalents and not investments.

Cash
used in financing activities was $263,000 and $266,000 for the six months ended
June 30, 2010 and 2009, respectively. During the six-month periods ended June
30, 2010 and 2009, we had $7,000 and $4,000, respectively, in stock purchases
under the Employee Stock Purchase Plan. We paid dividends of $270,000 in each
year.

Our ongoing cash requirements will be primarily for
capital expenditures, research and development in both the Production
Monitoring and AutoData Systems divisions, and working capital. Management believes that cash on hand and any
cash provided by operations will be sufficient to meet our cash requirements
through at least the next 12 months.

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Our primary
investments are 343,267 shares of Rudolph Technologies, Inc. (Rudolph),
listed on the Nasdaq stock market and 551,759 shares of PPT Vision, Inc (PPT),
listed on the Pink Sheets. The Rudolph investment, which was valued at
$2,592,000 as of June 30, 2010, is accounted for using the available-for-sale
method. The PPT investment is accounted for under the equity method of
accounting. The Rudolph stock is subject to fluctuations in market price and
could have a negative effect on our liquidity, if the market price declines.

Off-balance Sheet Arrangements

As of June 30, 2010, the Company had no
off-balance sheet arrangements or transactions.

FORWARD-LOOKING STATEMENTS

This Form 10-Q
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, but are
not limited to, statements relating to our marketing efforts; statements
relating to managements beliefs with respect to the economic recovery; our
beliefs with respect to the impact of certain factors on our operating results;
our intention to hold our Treasury Bills until maturity; managements intention
that we not become an investment company; our expected use of cash on hand; our
cash requirements; and the sufficiency of our cash flows. Any statement that is
not based solely upon historical facts, including strategies for the future and
the outcome of events that have not yet occurred, is considered a
forward-looking statement.

All
forward-looking statements in this document are based on information available
to us as of the date hereof, and we assume no obligation to update any such
forward-looking statements, other than as required by law. It is important to
note that our actual results could differ materially from those in such
forward-looking statements. The forward-looking statements we make in this
Quarterly Report are subject to certain risks and uncertainties that could
cause future results to differ materially from our recent results or those
projected in the forward-looking statements, including the accuracy of
managements assumptions with respect to industry trends, fluctuations in
industry conditions, the impact of worsening of the global economy, the impact
of stimulus packages, the uncertainty of the impact of the recently-enacted
healthcare reform, the accuracy of managements assumptions regarding expenses
and our cash needs and those listed under the heading Cautionary Statements
under Item 1Business, in our Annual Report on Form 10-K for the year
ended December 31, 2009.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Not
Applicable.

Item 4.
Controls and Procedures

Evaluation
of Disclosure Controls and Procedures

Based on an evaluation under
the supervision and with the participation of the Companys management, the
Companys principal executive officer and principal financial officer have
concluded that the Companys disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (Exchange Act) were effective as of June 30, 2010 to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to the
Companys management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Control Over Financial
Reporting

There were no changes in the
Companys internal control over financial reporting during the second quarter
of 2010, which were identified in connection with managements evaluation
required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange
Act, that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.

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|                            |                                                                      | 
|--------------------------- | -------------------------------------------------------------------- | 
|PART II  OTHER INFORMATION
|                            |                                                                      | 
|Item 1.                     | Legal Proceedings - None.                                           
|Item 1A.                    | Risk Factors - Not Applicable.                                      
|Item 2.                     | Unregistered Sales of Equity
 Securities and Use of Proceeds - None.
|Item 3.                     | Defaults Upon Senior Securities -
 None.                            
|Item 4.                     | [Removed and Reserved]                                              
|Item 5.                     | Other Information - None.                                           
|Item 6.                     | Exhibits                                                            
|                            | (a)   Exhibits -
 See Exhibit Index following signature page.       

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SIGNATURES

Pursuant to
the requirements 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.

|                 |  |                                                     | 
|---------------- |  | --------------------------------------------------- | 
|                 |  | Electro-Sensors, Inc.                               | 
|                 |  |                                                     | 
|August 13,
 2010 |  | /s/ Bradley D. Slye                                 | 
|                 |  | Bradley D. Slye                                     | 
|                 |  | Chief Executive Officer and Chief Financial Officer | 

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EXHIBIT INDEX

ELECTRO-SENSORS, INC.

FORM 10-Q FOR QUARTER ENDEDJUNE 30, 2010

|        |  |                                                                                        
|------- |  | ---------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                            
|        |  |                                                                                        
|31.1    |  | Certification
 of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                        
|32.1    |  | Certification
 of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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