Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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Form 10-QSB

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xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2007



oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

EXCHANGE ACT



For the transition period from ______ to ______



Commission File Number 0-9587



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ELECTRO-SENSORS, INC.

(Exact name of small business issuer as specified in its charter)



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




6111 Blue Circle Drive

Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)



(952) 930-0100

(Issuers telephone number)



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



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



The number of shares outstanding of the registrants common stock, $0.10 par value, on November 2, 2007 was 3,362,013

Transitional Small Business Disclosure Format (check one):  YesoNox







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ELECTRO-SENSORS, INC.

Form 10-QSB

For the Period Ended September 30, 2007



TABLE OF CONTENTS





PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheet  As of September 30, 2007
        3Condensed Consolidated Statements of Operations 
For the Three and Nine-month Periods Ended September 30, 2007 and September 30, 2006
        4Condensed Consolidated Statements of Cash Flows For the Nine-month Periods Ended September 30, 2007 and September 30, 2006
        5Notes to Condensed Consolidated Financial Statements
        6Item 2. Managements Discussion and Analysis or Plan of Operation
        9Item 3. Controls and Procedures
        12PART II  OTHER INFORMATIONItem 1. Legal Proceedings
        13Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        13Item 3. Defaults Upon Senior Securities
        13Item 4. Submission of Matters to a Vote of Security Holders
        13Item 5. Other Information
        13Item 6. Exhibits
        13SIGNATURES
        14EXHIBIT INDEX
        15






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PART I.FINANCIAL INFORMATION



Item 1.Financial Statements



ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(unaudited)



September 30,2007ASSETSCurrent assetsCash and cash equivalents
        
        $
        5,562,000Available for sale securities
        
        
        4,756,000Trade receivables, less allowance for doubtful accounts of $16,000
        
        
        918,000Inventories
        
        
        1,028,000Other current assets
        
        
        138,000Total current assets
        
        
        12,402,000Property and equipment, net
        
        
        1,303,000Total assets
        
        $
        13,705,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
        
        $
        137,000Accrued expenses
        
        
        261,000Deferred revenue
        
        
        77,000Accrued income tax
        
        
        499,000Deferred income tax
        
        
        1,737,000Total current liabilities
        
        
        2,711,000Commitments and contingenciesStockholders equityCommon stock par value $0.10 per share; authorized 10,000,000 shares; issued and outstanding: 3,361,392 shares
        
        
        336,000Additional paid-in capital
        
        
        1,499,000Retained earnings
        
        
        6,296,000Accumulated other comprehensive income (unrealized gain on available for sale securities, net of income tax
        
        
        2,863,000Total stockholders equity
        
        
        10,994,000Total liabilities and stockholders equity
        
        $
        13,705,000




See accompanying notes to unaudited condensed consolidated financial statements



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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



Three months EndedSeptember 30,
        
        Nine months EndedSeptember 30,2007
        
        2006
        
        2007
        
        2006Net Sales
        
        $
        2,041,000
        
        $
        1,544,000
        
        $
        5,209,000
        
        $
        4,329,000Cost of Goods Sold
        
        
        680,000
        
        
        545,000
        
        
        1,831,000
        
        
        1,565,000Gross Profit
        
        
        1,361,000
        
        
        999,000
        
        
        3,378,000
        
        
        2,764,000Operating Expenses:Selling and Marketing
        
        
        366,000
        
        
        322,000
        
        
        1,034,000
        
        
        963,000General and Administrative
        
        
        303,000
        
        
        256,000
        
        
        878,000
        
        
        931,000Research and Development
        
        
        131,000
        
        
        126,000
        
        
        421,000
        
        
        398,000Total Operating Expenses
        
        
        800,000
        
        
        704,000
        
        
        2,333,000
        
        
        2,292,000Operating Income
        
        
        561,000
        
        
        295,000
        
        
        1,045,000
        
        
        472,000Non-operating Income (Expense):Gain on Sale of Investment Securities
        
        
        0
        
        
        0
        
        
        0
        
        
        1,276,000Interest Income
        
        
        64,000
        
        
        57,000
        
        
        188,000
        
        
        230,000Other Income/(Expense)
        
        
        3,000
        
        
        2,000
        
        
        0
        
        
        11,000Total Non-operating Income
        
        
        67,000
        
        
        59,000
        
        
        188,000
        
        
        1,517,000Income before Income Taxes
        
        
        628,000
        
        
        354,000
        
        
        1,233,000
        
        
        1,989,000Federal and State Income Tax Provision
        
        
        250,000
        
        
        145,000
        
        
        490,000
        
        
        798,000Net Income
        
        $
        378,000
        
        $
        209,000
        
        $
        743,000
        
        $
        1,191,000Other Comprehensive Income/(Loss):Change in unrealized value of investments, net of income tax
        
        $
        (593,000
        )
        $
        888,000
        
        $
        (445,000
        )
        $
        882,000Reclassification adjustment for gains included in Net Income
        
        
        0
        
        
        0
        
        
        0
        
        
        (769,000
        )Total Comprehensive Income/(Loss)
        
        $
        (215,000
        )
        $
        1,097,000
        
        $
        298,000
        
        $
        1,304,000Net Income per Share Data:BasicNet Income per Share
        
        $
        0.11
        
        $
        0.06
        
        $
        0.22
        
        $
        0.36Weighted Average Shares
        
        
        3,361,785
        
        
        3,345,596
        
        
        3,423,661
        
        
        3,303,890DilutedNet Income per Share
        
        $
        0.11
        
        $
        0.06
        
        $
        0.21
        
        $
        0.36Weighted Average Shares
        
        
        3,397,515
        
        
        3,375,898
        
        
        3,459,391
        
        
        3,340,900Dividends paid per Share
        
        $
        .04
        
        $
        .04
        
        $
        .11
        
        $
        1.12




See accompanying notes to unaudited condensed consolidated financial statements



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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



Nine months EndedSeptember 30,2007
        
        2006Cash Flows from Operating ActivitiesNet Income
        
        $
        743,000
        
        $
        1,191,000Adjustments to reconcile Net Income to net cash used in operating activities:Compensation recognized for stock option issuance
        
        
        9,000
        
        
        0Depreciation
        
        
        57,000
        
        
        52,000Allowance for doubtful accounts
        
        
        (7,000
        )
        
        0Realized gain on Sale of Marketable Securities
        
        
        0
        
        
        (1,276,000
        )(Increase)/decrease in:Trade Receivables
        
        
        (314,000
        )
        
        (204,000
        )Inventories
        
        
        (28,000
        )
        
        (114,000
        )Other Current Assets
        
        
        (63,000
        )
        
        (15,000
        )Accounts Payable
        
        
        (2,000
        )
        
        54,000Accrued Expenses
        
        
        104,000
        
        
        40,000Deferred Revenue
        
        
        12,000
        
        
        12,000Accrued Income Taxes
        
        
        206,000
        
        
        269,000Deferred Income Taxes
        
        
        (154,000
        )
        
        0Net Cash From (Used in) Operating Activities
        
        
        563,000
        
        
        9,000Cash Flows From Investing ActivitiesProceeds from Sale of Marketable Securities
        
        
        0
        
        
        1,291,000Purchase of Property and Equipment
        
        
        (86,000
        )
        
        2Net Cash Provided by (Used in) Investing Activities
        
        
        (86,000
        )
        
        1,293,000Cash Flows From Financing ActivitiesProceeds From Issuance of Stock
        
        
        37,000
        
        
        263,000Dividends Paid
        
        
        (403,000
        )
        
        (3,741,000
        )Net Cash Used in Financing Activities
        
        
        (366,000
        )
        
        (3,478,000
        )Net Increase (Decrease) in Cash & Cash Equivalents
        
        
        111,000
        
        
        (2,176,000
        )Cash & Cash Equivalents, Beginning
        
        
        5,451,000
        
        
        7,060,000Cash & Cash Equivalents, Ending
        
        $
        5,562,000
        
        $
        4,884,000Supplemental Schedule of Non-Cash Investing and Financing ActivitiesNet Change in Unrealized Loss on Investments
        
        $
        (717,000
        )
        $
        (183,000
        )Cash Paid for:Income Taxes
        
        $
        440,000
        
        $
        529,000




See accompanying notes to unaudited condensed consolidated financial statements



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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Note 1. 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 Corporation 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 Controls Division, which manufactures and markets a complete line of speed monitoring and motor control systems for industrial machinery. The Controls Division utilizes leading-edge technology to continuously improve its products and make them easier to use. The Controls Divisions goal is to manufacture the industry-preferred product for every market served. These products are sold through an internal sales staff, manufacturers representatives, and distributors to a wide variety of manufacturers, OEMs and processors to monitor process machinery operations. The Controls Division markets its products to a number of different industries located throughout the United States and abroad.



The second business is AutoData Systems (ADS). ADS designs and markets a desktop software based system that reads hand printed characters, checkmarks and bar code information from scanned or faxed forms. ADS 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 (INV), 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 the Company, through its subsidiary 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. See Note 7 for additional information regarding its investments. The Companys investments in securities are subject to normal market risks.



Note 2. 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 to Form 10-QSB. 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-KSB for the year ended December 31, 2006, 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 nine months ended September 30, 2007. The results of interim
periods may not be indicative of results to be expected for the year.



Note 3. Use of Estimates



The preparation of 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 financial statements and accompanying notes. These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of earnings in the period in which the change in estimate is identified. The impact of changes in estimates could materially affect results.



Note 4. Revenue Recognition



In recognizing revenue, the Company applies the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101 (as amended by SAB No. 104), Revenue Recognition.



Revenue recognition of production monitoring equipment:

The Company recognizes revenue from the sale of its products 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.



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Software revenue recognition



The Company recognizes revenue upon shipment of its character recognition 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. In some situations, the Company receives advance payments from its customers. Revenue associated with these advance payments is deferred until the product is shipped. ADS customers pay an annual maintenance fee for software support, which is recognized as deferred revenue on the balance sheet and on a monthly basis, it is recognized in income over the life of the contract.



Note 5. Stock-Based Compensation



On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No. 123R),Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. In accordance with the modified-prospective transition method, the Companys financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123R. The Company uses the Black-Scholes-Merton (BSM) option-pricing model to determine the fair-value of stock-based awards.



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 BSM model with the assumptions
included in the table below. 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 September 30, 2007, the Company had one stock-based employee
compensation plan. During the nine-months ended September 30, 2007, an executive exercised 15,000 options. On April 25, 2007 the
Company granted newly elected Board member Robert Heller 5,000 shares of common stock and recognized compensation expense of
approximately $9,000 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.



The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model are as follows:



Dividend yield
        0.00%Expected volatility
        36.74%Risk free interest rate
        4.93%Expected lives
        10 years




The Company calculates expected volatility for stock options and awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.



Note 6. Net Income Per Share



All common share equivalents relating to stock options and warrants are included in the diluted weighted average common shares.



Note 7. Available-for-Sale Securities



INV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. Shares of common stock for which there is no readily determinable value (i.e., no quoted market price) are accounted for on a historical cost method (unless accounted for based upon the equity method of accounting). 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 buy 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.



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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.



Prior to February 15, 2006, the Companys significant investment in equity securities consisted of 569,615 shares of common stock of August Technology Corporation (August), which had an approximate cost of $57,000. Rudolph Technologies, Inc. (Rudolph) acquired August on February 15, 2006. As a result of Rudolphs acquisition of August, the Company received 347,224 shares of Rudolph common stock and $1,015,891 in cash. At September 30, 2007, the Companys significant investment in equity securities is 343,267 shares of Rudolph. As of September 30, 2007, the aggregate value of the Companys Rudolph shares as reported on the Nasdaq Stock Exchange was approximately $4,747,000 with an approximate cost of $45,000.



Investment Reported on Equity Method:



At September 30, 2007, the Company owned 551,759 shares of PPT Vision, which is 7.4% of PPTs outstanding common stock. The fair value of its holdings based on the quoted market price at September 30, 2007 was approximately $149,000 with an approximate cost of $2,434,000.



Since the Company owns approximately 7.4% of PPTs outstanding stock, and the Companys Secretary, Peter R. Peterson, owns a controlling interest, 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 net income or loss through September 30, 2007 is not included in the Companys net income (loss) with a corresponding increase or decrease in the carrying value of its investment. As of 2004, the Company had exhausted its investment in PPT with its share of the loss. All losses in excess of invested amounts are not recognized in the financial statements, but rather are suspended and applied against future equity in earnings for the investee until exhausted. At September 30, 2007, the Company had approximately $2,862,000 in suspended losses from its investment in PPT that will be used to offset future recognition of equity method earnings from the investment.



Note 8. Segment Information



The Company has three reportable operating segments based on the nature of its product lines: Production Monitoring, Character Recognition, and Investments. The Controls Division manufactures and markets a complete line of production monitoring equipment, in particular speed monitoring and motor control systems for industrial machinery. ADS designs and markets a desktop software-based character recognition system that reads hand printed characters, checkmarks, and bar code information from scanned or faxed forms. Sales of this system include software and can include hardware.  INV holds investments in marketable and non-marketable securities.



The accounting policies of the segments are the same as those described in Note 1. 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 EndedSeptember 30,
        
        Nine months EndedSeptember 30,2007
        
        2006
        
        2007
        
        2006External salesProduction monitoring
        
        $
        1,929,000
        
        $
        1,443,000
        
        $
        4,842,000
        
        $
        3,942,000Character recognition
        
        
        112,000
        
        
        101,000
        
        
        367,000
        
        
        387,000Investments
        
        
        0
        
        
        0
        
        
        0
        
        
        0Total
        
        $
        2,041,000
        
        $
        1,544,000
        
        $
        5,209,000
        
        $
        4,329,000Net Income/(Loss) before taxesProduction monitoring
        
        $
        652,000
        
        $
        364,000
        
        $
        1,275,000
        
        $
        789,000Character recognition
        
        
        (24,000
        )
        
        (5,000
        )
        
        (33,000
        )
        
        (13,000
        )Investments
        
        
        0
        
        
        (5,000
        )
        
        (9,000
        )
        
        1,213,000Total
        
        $
        628,000
        
        $
        354,000
        
        $
        1,233,000
        
        $
        1,989,000




Recent accounting standards:

Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Companys financial statements.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157) to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and is effective for the fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the effect, if any, that the adoption of SFAS No. 157 will have on its results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159) which included an amendment of FASB Statement 115. This Statement provides companies with an option to report selected financial assets and liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Company is in the process of evaluating the effect, if any, that the adoption of SFAS No. 159 will have on its results of operations and financial condition.



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Item 2.Managements Discussion and Analysis or Plan of Operation



FORWARD-LOOKING STATEMENTS



This Form 10-QSB 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 regarding our intent to keep ESI an operating company rather than an investment company, our intent to develop distribution and independent representative partners domestically and internationally; the timing for release of our products; our expectations with respect to general and administrative costs; our expected use of cash on hand; 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. It is important to note that our actual results could differ materially from such forward-looking statements. The forward-looking statements we make are subject to risks and uncertainties. In addition to the risk factors detailed in the companys Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the Securities and Exchange Commission, some of the factors that could cause future results to differ materially from our  recent results or those projected in the forward-looking statements are the following:  our ability to identify and commence relationships with effective partners; unforeseen delays in our product development process; the extent and timing of future revenues and expenses and
customer demand; the market value of our investment securities; changes in worldwide general economic conditions; cyclical capital spending by customers; our ability to keep pace with technological developments and evolving industry standards; worldwide competition;  and our ability to protect our existing intellectual property from challenges from third parties and other factors.



CRITICAL ACCOUNTING ESTIMATES



Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. There are no significant accounting estimates described in the notes to the financial statements that are critical at this time. A more 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-KSB for the fiscal year ended December 31, 2006.



RESULTS OF OPERATIONS



Net Sales



Net sales for the three-month period ended September 30, 2007 increased $497,000, or 32.2%, when compared to net sales for the same period in 2006. Net sales for the nine-month period ended September 30, 2007 increased $880,000, or 20.3%, when compared to net sales for the same period in 2006.



For the three-months ended September 30, 2007 compared to the same period in 2006, the Controls Division contributed an increase in net sales of $486,000, or 33.7%, and ADS contributed an increase in net sales of $11,000, or 11.0%.



For the nine-months ended September 30, 2007 compared to the same period in 2006, the Controls Division contributed an increase in net sales of $900,000, or 22.8%, offset by a decrease in ADS net sales of $20,000, or 5.1%.



The Controls Division has had continued success as
sales continued to increase during the third quarter and year-to-date. Continued growth in the biofuels industry and growth in
other market segments such as power generation and machinery builders contributed to our increase in sales. The division has also
been able to benefit from building relationships with new customers and distributors. The bulk of our sales volume is derived from
the Speed Monitoring product lines to the grain, feed, biofuels, power generation, and mining industries, as well as
other key industrial markets and equipment builders. Products sold into these markets include shaft speed sensors and switches,
ratemeters and counters, motor controllers, vibration switches, and position monitors. In our sales and marketing efforts, we are
developing additional channel partners in the form of distributors and independent representatives both domestically and
internationally and expect to continue adding sales partners in key locations.



The ADS Divisions increase in net sales for the third quarter of 2007 was due to increased sales of our ExpertScan product. For the nine-months ended September 30, 2007, compared to the same period in 2006, ADS experienced a decrease in net sales due to a reduction in multiple unit orders and scanner bundled systems. ADS developed an on-line web module for its ExpertScan software product. ExpertScan currently permits automated data collection from surveys and other paper forms. The new web capability will enable ExpertScan to automatically create an electronic version of a new or existing ExpertScan document, thereby allowing a combination of paper and electronic data collection from the same form. This new software module is called NetEnable and has received positive feed back from the initial customers.



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Cost of Goods Sold



Our cost of goods sold increased $135,000 or 24.6% for the three-months ended September 30, 2007, compared to the same period in 2006. For the nine-month period ended September 30, 2007, the cost of goods sold increased $266,000, or 17.0%, compared to the same period in 2006. This increase is primarily the result of increased material costs due to increased sales.



Gross Profit



Gross profit margin for the three-month period ended September 30, 2007 was 66.3% as compared to 64.7% for the same period in 2006. For the nine-month period ended September 30, 2007, gross margin was 64.9% as compared to 63.8% for the same period in 2006. The variances are due to the sales increase for the three and nine-month periods ending September 30, 2007 as compared to the same periods last year.



Operating Expenses



Total operating expenses increased $96,000, or 13.6%, for the three-months ended September 30, 2007, when compared to the same period of the prior year. Of this increase, the Controls Division contributed an increase of $286,000, or 95.4%, which was offset by a decrease in ADS operating expenses of $19,000, or 358.5%.



For the nine-months ended September 30, 2007, when compared to the same period of 2006, operating expenses increased $573,000, or 121.7%. Of this increase, the Controls Division contributed an increase of $592,000 or 122.2%, which was offset by a decrease in ADS operating expenses of $19,000 or 139.0%.



Selling and marketing costs increased $44,000, or 13.6%, for the three-months ended September 30, 2007, when compared to the same period in 2006. For the nine-months ended September 30, 2007, selling and marketing costs increased $71,000, or 7.3%, when compared to the same period in 2006. Of the increase for the three-months ended September 30, 2007, the Controls Division contributed an increase of $29,000, or 9.8%, and ADS contributed an increase of $15,000, or 49.0%. Of the increase for the nine-months ended September 30, 2007, the Controls Division contributed the majority with an increase of $55,000 or 6.5%. An increase in marketing costs related to tradeshows, sales calls, and marketing materials development caused the increase in selling and marketing costs for the Controls Division. ADS contributed an increase of $15,000, or 13.9%, for the nine-months ended September 30, 2007. The increase in ADS is due
to increased marketing due to the ExpertScan product launch expenses and wages due to additional personnel.



General and administrative costs increased $47,000, or 18.3%, for the three-months ended September 30, 2007 compared to the same period in 2006. For the nine-months ended September 30, 2007, general and administrative costs decreased $53,000, or 5.7%. Of the increase for the three-months ended September 30, 2007, the Controls Division contributed an increase of $30,000 or 12.5% and ADS contributed an increase of $17,000 or 112.7%. The results for the nine-months ended September 30, 2007 can be attributed to a decrease in general and administrative costs of $81,000, or 9.2% from the Controls Division, which was slightly offset by an increase in ADS general and administrative costs of $28,000, or 50.6%. The overall decrease in general and administrative costs from the Controls Division was due to a one time bonus of $100,000 paid to Peter R. Peterson, Corporate Secretary, in 2006. The increase in ADS is due to
additional personnel expenses. We expect general and administrative costs to remain relatively flat with any additional expenses coming primarily from an increase in legal and accounting costs related to Sarbanes-Oxley Section 404 compliance.



Research and development costs increased $5,000, or 4.0%, for the three-months ended September 30, 2007, compared to the same period in 2006. For the nine-months ended September 30, 2007, research and development costs increased $23,000, or 5.8%. Of the decrease for the three-months ended September 30, 2006, the Controls Division contributed an increase of $4,000, or 4.9%, and ADS contributed an increase of $1,000, or 2.5%.  Of the increase for the nine-months ended September 30, 2007, the Controls Division contributed $15,000 or 5.8%, and ADS contributed $8,000 or 5.8%. The increase in the Controls Division is due to UL (Underwriters Laboratories) certification expenses. The increase in ADS is primarily due to the costs related to new product development and the purchasing of related assets.



Non-Operating Income



Non-operating income increased by $8,000, or 11.7%, for the three-month period ended September 30, 2007 compared to the same period for 2006. For the nine-months ended September 30, 2007, non-operating income decreased $1,327,000, or 87.6%. The three-month period increase is due to an increase in interest income. For the nine-months ended September 30, 2007, the decrease is driven by a decrease in the sale of marketable securities, as there were none for the third quarter year-to-date.



Interest income increased $7,000, or 11.5%, when comparing the three-months ended September 30, 2007 to the same period in 2006. For the nine-months ended September 30, 2007, interest income decreased $42,000, or 18.1%. The three-month period increase is due to more interest being earned this period when compared to the same period in 2006. The nine-month decrease is due to fewer of our funds being invested in Treasury Bills when compared to the same periods in 2006.



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Income Before Income Taxes



Income before income taxes increased $273,000 to $627,000 for the three-month period ended September 30, 2007 compared to the same period in 2006. For the nine-month period ended September 30, 2007, income before income tax decreased $755,000 to $1,233,000 when compared to the same period in 2006.



The Controls Division had income before income taxes of $651,000 for the three-months ended September 30, 2007, an increase of $287,000 compared to the same period in 2006. For the nine-months ended September 30, 2007, the Controls Division had income before income taxes of $1,274,000, an increase of $486,000 compared to the same period in 2006. The increased sales for the Controls Division drove the increase in net income before income taxes.



ADS had a loss before income taxes of $24,000 for the three-months ended September 30, 2007, a decrease of $19,000 compared to the same period in 2006. For the nine-months ended September 30, 2007, ADS had a loss of $33,000, a decrease of $19,000 compared to the same period in 2006.



INV had income before income taxes of $400 for the three-month period ended September 30, 2007, an increase of $6,000 compared to the same period in 2006. INVs income before income taxes decreased $1,222,000 to a loss before income taxes of $9,000 for the nine-months ended September 30, 2007 compared to the same period in 2006. This decrease is primarily due to no sales of marketable securities during the first nine months of 2007 and the cash received from Rudolph Technology for the acquisition of August Technology in February 2006.



LIQUIDITY AND CAPITAL RESOURCES



Our ongoing cash requirements will be primarily for capital expenditures, acquisitions, research and development and working capital. Our primary source of capital is cash provided by operating activities of the Controls Division and ADS.



Cash and cash equivalents were $5,562,000 at September 30, 2007 and $4,884,000 at September 30, 2006. Cash provided by operating activities of $563,000 for the nine-months ended September 30, 2007 is primarily a result of our net operating income adjusted for non-cash charges.



Cash used for investing activities was $86,000 for the nine-month period ended September 30, 2007 which was primarily used for  the purchase of property and equipment.



Cash used for financing activities was $366,000 for the nine-months ended September 30, 2007. During the nine-months ended September 30, 2007 and 2006, we paid aggregate dividends of $403,000 and $3,741,000, respectively.



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.



INVs primary investments are 343,267 shares of Rudolph Technology Corporation. Rudolph Technology Corporation is listed on the Nasdaq stock market and is subject to market fluctuations in its price per share that could have a negative effect on our capital resources.



Off-balance Sheet Arrangements



As of September 30, 2007, the Company had no off-balance sheet arrangements or transactions.



Item 3. Controls and Procedures



As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the person serving as the principal executive officer and principal financial officer, of 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 (the Exchange Act)). Based on this evaluation, the person serving as the principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



There was no change in the Companys internal control over financial reporting during the Companys most recently completed fiscal quarter that has materially affected, or is 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 2.Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3.Defaults Upon Senior Securities



None.



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



None.



Item 5.Other Information



None.



Item 6.Exhibits

(a)
        Exhibits - See Exhibit Index following signature page.






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SIGNATURES



In accordance with 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.November 14, 2007
        /s/ Bradley D. SlyeBradley D. SlyeChief Executive Officer and Chief Financial Officer






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EXHIBIT INDEX



ELECTRO-SENSORS, INC.



FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 2007



Exhibit
        
        Description31.1
        
        Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
        
        Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002






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