Table of Contents





# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, 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, 2005

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

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
DriveMinnetonka, Minnesota 55343-9108 (Address of principal executive offices)

(952) 930-0100(Issuers telephone number)

---

Check whether the issuer (1) 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   
Noo

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

The number of shares outstanding of
the registrants Common Stock, $0.10 par value, on November 14, 2005 was 3,248,516.

Transitional Small
Business Disclosure Format (check one): Yes
o   
Nox





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# ELECTRO-SENSORS, INC.Form 10-QSB
For the Period Ended September 30, 2005

# TABLE OF CONTENTS

# PART I  FINANCIAL
INFORMATION

Item 1.   Financial
Statements

Consolidated Balance
Sheet  As of September 30, 2005Consolidated Statements of Operations  For the Three and Nine Month Periods Ended September 30, 2005 and September 30, 2004Consolidated Statements of Cash Flows  For the Nine Month Periods Ended September 30, 2005 and September 30, 2004Notes to Consolidated Financial Statements

Item 2.   Managements Discussion and Analysis or Plan of Operation
Item 3.   Controls and Procedures

# PART II  OTHER
INFORMATION

Item 6.   Exhibits

# SIGNATURES

# EXHIBITS

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Table of Contents

# PART I.   FINANCIAL
INFORMATION

# Item 1. Financial
Statements

# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET

|                                                                                       |  | September 30,
2005
(unaudited)
|-------------------------------------------------------------------------------------- |  | ------------------------------
|                                                                                       |  |                               
|ASSETS                                                                                 |  |                               
|                                                                                      
|CURRENT ASSETS                                                                         |  |                               
|                                                                                      
|Cash and cash equivalents                                                              |  |                               
|Investments                                                                            |  |                               
|Trade receivables, less allowance for doubtful accounts of $9,000                      |  |                               
|Inventories                                                                            |  |                               
|Other current assets                                                                   |  |                               
|                                                                                       |  |                               
|                                                                                      
|Total current assets                                                                   |  |                               
|                                                                                       |  |                               
|                                                                                      
|Property and equipment, net                                                            |  |                               
|                                                                                       |  |                               
|                                                                                      
|TOTAL ASSETS                                                                           |  |                               
|                                                                                       |  |                               
|                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                   |  |                               
|                                                                                      
|LIABILITIES                                                                            |  |                               
|                                                                                      
|Accounts payable                                                                       |  |                               
|Accrued expenses                                                                       |  |                               
|Deferred revenue                                                                       |  |                               
|Income taxes payable                                                                   |  |                               
|Deferred income tax                                                                    |  |                               
|                                                                                       |  |                               
|                                                                                      
|TOTAL LIABILITIES                                                                      |  |                               
|                                                                                       |  |                               
|                                                                                      
|STOCKHOLDERS EQUITY                                                                   |  |                               
|                                                                                      
|Common stock par value $0.10 per share; authorized 10,000,000 shares; issued 3,241,016 |  |                               
|Additional paid-in capital                                                             |  |                               
|Retained earnings                                                                      |  |                               
|Accumulated other comprehensive income                                                 |  |                               
|                                                                                       |  |                               
|                                                                                      
|TOTAL STOCKHOLDERS EQUITY                                                             |  |                               
|                                                                                       |  |                               
|                                                                                      
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                             |  |                               
|                                                                                       |  |                               

See accompanying notes
to consolidated financial statements

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Table of Contents

# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                             |  | Three Months Ended
September 30, |   | Nine Months Ended
September 30,
|-------------------------------------------- |  | -------------------------------- | - | -------------------------------
|
|                                             |  |                                  |   |                                
|Net sales                                    |  |                                  | $ | 1,206,000                      
|Cost of goods sold                           |  |                                  |   | 470,000                        
|                                             |  |                                  |   |                                
|                                            
|Gross profit                                 |  |                                  |   | 736,000                        
|                                             |  |                                  |   |                                
|                                            
|Operating expenses:                          |  |                                 
|                                            
|Selling and marketing                        |  |                                  |   | 318,000                        
|General and administrative                   |  |                                  |   | 246,000                        
|Research and development                     |  |                                  |   | 205,000                        
|                                             |  |                                  |   |                                
|                                            
|Total operating expenses                     |  |                                  |   | 769,000                        
|                                             |  |                                  |   |                                
|                                            
|Operating loss                               |  |                                  |   | (33,000                        
|                                             |  |                                  |   |                                
|                                            
|Non-operating income (expense):              |  |                                 
|                                            
|Gain (loss) on sale of investment securities |  |                                  |   | 543,000                        
|Interest income                              |  |                                  |   | 52,000                         
|Other income                                 |  |                                  |   | 3,000                          
|Equity in losses of equity method investee   |  |                                  |   | (129,000                       
|                                             |  |                                  |   |                                
|                                            
|Total non-operating income (loss)            |  |                                  |   | 469,000                        
|                                             |  |                                  |   |                                
|                                            
|Income (loss) before income taxes            |  |                                  |   | 436,000                        
|                                            
|Federal and state income tax provision       |  |                                  |   | 175,000                        
|                                             |  |                                  |   |                                
|                                            
|Net income (loss)                            |  |                                  | $ | 261,000                        
|                                             |  |                                  |   |                                
|                                            
|Net income per share data:                   |  |                                 
|                                            
|Basic                                        |  |                                 
|Net income (loss) per share                  |  |                                  | $ | 0.08                           
|                                            
|Weighted average shares                      |  |                                  |   | 3,234,472                      
|                                            
|Diluted                                      |  |                                 
|Net income (loss) per share                  |  |                                  | $ | 0.08                           
|                                            
|Weighted average shares                      |  |                                  |   | 3,330,726                      
|                                            
|Dividends paid per share                     |  |                                  | $ | 0.04                           

See accompanying notes
to consolidated financial statements

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# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                                              |  | Nine Months EndedSeptember 30,
|----------------------------------------------------------------------------- |  | ------------------------------
|
|                                                                              |  |                               
|Cash flows from operating activities                                          |  |                               
|                                                                             
|Net income                                                                    |  |                               
|                                                                             
|Adjustments to reconcile net income to net cash used in operating activities: |  |                               
|                                                                             
|Depreciation                                                                  |  |                               
|Realized gain on sale of investments                                          |  |                               
|Equity in loss of equity method investee                                      |  |                               
|(Increase)/decrease in:                                                       |  |                               
|Trade receivables                                                             |  |                               
|Inventory                                                                     |  |                               
|Other current assets                                                          |  |                               
|Prepaid income taxes                                                          |  |                               
|Increase/(decrease) in:                                                       |  |                               
|Accounts payable                                                              |  |                               
|Accrued expenses                                                              |  |                               
|Deferred revenue                                                              |  |                               
|Prepaid income taxes                                                          |  |                               
|                                                                              |  |                               
|                                                                             
|Net cash used in operating activities                                         |  |                               
|                                                                              |  |                               
|                                                                             
|Cash flows from investing activities:                                         |  |                               
|                                                                             
|Proceeds from sale of investments                                             |  |                               
|Purchase of equity securities                                                 |  |                               
|Payment for purchase of investments                                           |  |                               
|Purchase of property and equipment                                            |  |                               
|                                                                              |  |                               
|                                                                             
|Net cash provided by investing activities                                     |  |                               
|                                                                              |  |                               
|                                                                             
|Cash flows from financing activities:                                         |  |                               
|                                                                             
|Proceeds from issuance of stock                                               |  |                               
|Dividends paid                                                                |  |                               
|                                                                              |  |                               
|                                                                             
|Net cash used in financing activities                                         |  |                               
|                                                                              |  |                               
|                                                                             
|Net increase/(decrease) in cash & cash equivalents                            |  |                               
|                                                                             
|Cash & cash equivalents, beginning                                            |  |                               
|Cash & cash equivalents, ending                                               |  |                               
|                                                                              |  |                               
|                                                                             
|Supplemental schedule of non-cash investing and financing activities          |  |                               
|Net change in unrealized loss on investments                                  |  |                               

See accompanying notes
to consolidated financial statements

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Table of Contents

# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

# Note 1. Nature of
Business

The accompanying consolidated
financial statements include the accounts of Electro-Sensors, Inc. and its wholly owned
subsidiaries, ESI Investment Company and Senstar Corporation. Senstar Corporation does not
have any business transactions. Intercompany accounts, transactions and earnings have been
eliminated in consolidation. The consolidated entity is referred
to as the Company.

The Company 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, manufacturers 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 Companys second primary
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.

ESI Investment Company (INV) owns
marketable securities which have experienced significant appreciation in value since the
IPO of August Technology in 2000. August Technology Corporation designs, manufactures, and
sells automated defect inspection systems used in the manufacture of microelectronic
devices. The Company has recognized income from the sale of its holdings in August
Technology Corporation. See Note 6 for additional information regarding its investments.
The Companys investments in marketable securities are subject to normal market
risks, and are extremely concentrated in one security.

# Note 2. Basis of
Presentation

The accompanying unaudited
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. 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 month periods ended
September 30, 2005 and September 30, 2004. The results of interim periods may not be
indicative of results to be expected for the year.

This report should be read together
with the Companys annual report on Form 10-KSB for the year ended December 31, 2004,
including the audited financial statements and footnotes therein.

# Note 3. Revenue
Recognition

# Revenue recognition of
production monitoring equipment:

All production monitoring equipment
is shipped without an evaluation or acceptance period. Revenues from the sale of the
products and any related warranty costs are recognized at the time of shipment. The
Companys distributors are not granted any price protection. Sales to all customers,
including distributors, are final and no right of return after shipment exists.

# 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. The Company recognizes revenue upon shipment, net
of return reserves based on historical experience. 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.

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Table of Contents

# Note 4. Stock-Based
Compensation

In accordance with Accounting
Principles Board (APB) Opinion No. 25 and related interpretations, the Company uses the
intrinsic value-based method for measuring stock-based compensation cost which measures
compensation cost as the excess, if any, of quoted market price of the Companys
common stock at the grant date over the amount the employee must pay for the stock. The
Companys general policy is to grant stock options at fair value at the date of
grant.

Had compensation cost been recognized
based on the fair values of options at the grant dates consistent with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, the Companys net income and basic and diluted net income
per common share would have been changed to the following pro forma amounts:

|                                            |  | Three Months
EndedSeptember 30, |   | Nine Months
EndedSeptember 30,
|------------------------------------------- |  | ------------------------------- | - | ------------------------------
|                                            |  |                                 |   |                               
|
|                                            |  |                                 |   |                               
|Net income (loss):                          |  |                                 |   |                               
|As reported                                 |  |                                 | $ | 261,000                       
|Pro forma                                   |  |                                 | $ | 247,000                       
|                                            |  |                                 |   |                               
|Basic net income (loss) per common share:   |  |                                
|As reported                                 |  |                                 |   | 0.08                          
|Pro forma                                   |  |                                 |   | 0.08                          
|                                            |  |                                 |   |                               
|Diluted net income (loss) per common share: |  |                                
|As reported                                 |  |                                 |   | 0.08                          
|Pro forma                                   |  |                                 |   | 0.07                          
|                                            |  |                                 |   |                               
|Stock based compensation:                   |  |                                
|As reported                                 |  |                                 |   | 0                             
|Pro forma                                   |  |                                 | $ | 14,000                        
|                                            |  |                                 |   |                               

The company did not grant any options
during the nine months ended September 30, 2005. Please read the information in
Recent Accounting Standards elsewhere in this report for additional
information on our stock option accounting.

# Note 5. Net Income Per
Share

The Companys basic net income
per share amounts have been computed by dividing net income by the weighted average number
of outstanding common shares. The Companys diluted net income per share is computed
by dividing net income by the weighted average number of outstanding common shares and
common share equivalents relating to stock options and warrants, when dilutive. For the
three months ended September 30, 2005, 96,254 shares of common stock equivalents were
included in the computation of diluted net income per share. For the nine months ended
September 30, 2005, 100,686 shares of common stock equivalents were included in the
computation of diluted net income per share. For the three months ended September 30,
2004, 108,566 shares of common stock equivalents were included in the computation of
diluted net income per share. For the nine months ended September 30, 2004, 110,746 shares
of common stock equivalents were included in the computation of diluted net income per
share.

# Note 6. Investments

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.

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. The Companys significant
investment in equity securities is 600,115 shares of August Technology Corporation whose
shares are traded on the Nasdaq Stock Exchange with a September 30, 2005 market value of
approximately $6,403,000 with an approximate cost of $60,000.

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Table of Contents

# Investment Reported on
Equity Method:

At September 30, 2005, the Company
owned 551,759 shares of PPT, which is approximately 18.4% of PPTs outstanding common
stock. The fair value of its holdings based on the quoted market price at September 30,
2005 was approximately $684,000 with an approximate cost of $2,434,000.

Since the Company owns approximately
18.4% of PPTs outstanding stock, and the Companys Secretary, Peter R Peterson
owns approximately 22.2% of PPTs outstanding stock, 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/(loss) is included in
the Companys net income/(loss) with a corresponding increase or decrease in the
carrying value of its investment. 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, 2005, the Company had
approximately $1,024,000 in suspended losses from its investment in PPT that will be used
to offset future recognition of equity method earnings from the investment.

In April 2004, INV purchased 20% of a
la mode, LLCs outstanding membership interests for $160,000. As of July 2005, a la
mode, LLC ceased operations. The company wrote off its investment in a la mode, LLC during
the third quarter of 2005.

# Note 7. Comprehensive
Income

Comprehensive income includes the
Companys net income plus other comprehensive income items that are excluded from net
income. The Companys other income consists of unrealized gains (losses), net of
income taxes and reclassification adjustments for gains and losses included in net income.

|                                                             |  | Three Months
EndedSeptember 30, |   | Nine Months
EndedSeptember 30,
|------------------------------------------------------------ |  | ------------------------------- | - | ------------------------------
|                                                             |  |                                 |   |                               
|
|                                                             |  |                                 |   |                               
|Net Income (Loss)                                            |  |                                 | $ | 261,000                       
|                                                            
|Other Comprehensive Gain (Loss):                             |  |                                
|Change in unrealized gain on investments, net of tax         |  |                                 |   | (353,000                      
|                                                            
|Less:                                                        |  |                                
|Reclassification adjustment for gains included in net income |  |                                 |   | (330,000                      
|                                                             |  |                                 |   |                               
|                                                            
|Total comprehensive income (loss)                            |  |                                 | $ | (422,000                      
|                                                             |  |                                 |   |                               

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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,
character recognition, and investments. The production monitoring division (or Controls
Division) manufactures and markets a complete line of speed monitoring and motor control
systems for industrial machinery. The character recognition division (or ADS) designs and
markets a desktop software-based 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. The investments division (or INV) holds investments in
freely tradable and restricted securities.

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:

|                        |  | Three Months
EndedSeptember 30, |   | Nine Months
EndedSeptember 30,
|----------------------- |  | ------------------------------- | - | ------------------------------
|                        |  |                                 |   |                               
|
|                        |  |                                 |   |                               
|External sales          |  |                                 |   |                               
|Production monitoring   |  |                                 | $ | 1,076,000                     
|Character recognition   |  |                                 |   | 130,000                       
|Investments             |  |                                 |   | 0                             
|                        |  |                                 |   |                               
|Total                   |  |                                 | $ | 1,206,000                     
|                        |  |                                 |   |                               
|                       
|Net income before taxes |  |                                
|Production monitoring   |  |                                 | $ | 117,000                       
|Character recognition   |  |                                 |   | (16,000                       
|Investments             |  |                                 |   | 335,000                       
|                        |  |                                 |   |                               
|Total                   |  |                                 | $ | 436,000                       
|                        |  |                                 |   |                               

Certain expenses related to the
conduct of our investment activities are included in general and administrative expenses
in the accompanying consolidated statements of operations, but have been allocated to net
income from our INV segment in the above table.

# Recent Accounting
Standards:

In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based Payment, that focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based
payment transactions. This statement replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Beginning January 1, 2006, we will be required to expense
the fair value of employee stock options and similar awards. As a public company, we are
allowed to select from two alternative transition methods, each having different reporting
implications. The impact of SFAS No. 123R has not been determined at this time.

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

# RESULTS OF OPERATIONS

We set forth below a discussion of
certain aspects of our results of operations for the three and nine month periods ended
September 30, 2005 compared to the same periods in 2004. Percentage changes for each item
discussed below are shown in the aggregate for the Company on a consolidated basis, as
well as separately (i.e., on a non-consolidated basis) for the Controls Division and ADS.

Net Sales

Net sales for the three month period
ended September 30, 2005 were $1,206,000, a decrease of $37,000 or 3.0% from $1,243,000
for the same period in 2004. The decrease from the three months ended September 30, 2005
compared the same period in 2004 includes an increase in net sales from the Controls
Division of $45,000 or 4.4%. ADS had a decrease in net sales of $82,000 or 38.7% for the
three months ended September 30, 2005 compared to the same period in 2004.

For the nine month period ended
September 30, 2005, net sales were $3,557,000, a decrease of $107,000 or 2.9% from
$3,664,000 for the same period in 2004. For the nine months ended September 30, 2005, the
Controls Division contributed an increase in net sales of $68,000 or 2.2%. The Controls
Division has experienced an increase in sales for 2005 due in part to the recovery in the
US economy and increased capital spending by our installed customer base. The bulk of our
sales volume continues to be derived from the Speed Monitoring product lines to the grain
and feed markets, as well as other key industrial markets. For the nine months ended
September 30, 2005, ADS contributed a decrease in net sales of $175,000 or 30.5%. All
products contributed to this decrease.

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Table of Contents

Cost of Goods Sold

The Companys cost of goods sold
increased $17,000 or 3.8% for the three months ended September 30, 2005 compared to the
same period in 2004. For the nine months ended September 30, 2005, the cost of goods sold
remained the same when compared to the same period in 2004.

Gross Profit

Gross margins for the three month
period ended September 30, 2005 were 61.6% versus 63.6% compared to the same period in
2004. For the nine months ended September 30, 2005 gross margins were 61.5% versus 62.7%
compared to the same period in 2004. The decreases in margins are due primarily to the
decrease in sales and cost of living increase in wages and salaries for production
employees. The Company continues its efforts to effectively manage and reduce production
costs in both divisions.

Operating Expenses

Total operating expenses decreased
$32,000 or 4.0% for the three months ended September 30, 2005 compared to the same period
in 2004. Of this decrease, the Controls Division contributed an increase in operating
expenses of $23,000 or 4.0%, which was partially offset by a decrease in operating expense
for ADS. ADS contributed a decrease of $33,000 or 15.7%.

For the nine months ended September
30, 2005 operating expenses increased $86,000 or 3.7% compared to the same period for
2004. Of this increase, the Controls Division contributed an increase of $224,000 or
13.9%, which was partially offset by a decrease in operating expenses for ADS. ADS
decrease in operating expenses was $67,000 or 10.7%.

Selling and marketing costs decreased
$23,000 or 6.7% for the three months ended September 30, 2005 compared to the same period
in 2004. Of this decrease, the Controls Division contributed a decrease of $5,000 or 1.9%.
ADS contributed a decrease of $18,000 or 25.0%. For the nine months ended September 30,
2005, selling and marketing costs decreased $30,000 or 3.1% compared to the same period in
2004. Of this decrease, the Controls Division contributed an increase of $43,000 or 6.0%,
offset partially by a decrease in ADS of $73,000 or 29.3%. The increase in selling and
marketing costs for the Controls Division is primarily due to increased commission expense
for manufacturers representatives. The decrease in selling and marketing costs for
ADS is primarily due to fewer personnel.

General and administrative costs
decreased $8,000 or 3.1% for the three months ended September 30, 2005 compared to the
same period in 2004. For the nine months ended September 30, 2005, general and
administrative costs increased $58,000 or 7.5%. Of this decrease for the three months
ended September 30, 2005, the Controls Division contributed an increase of $15,000 or
7.1%, offset partially by a decrease in ADS of $1,000 or 4.5%. Of the increase for the
nine months ended September 30, 2005, the Controls Division contributed an increase of
$121,000 or 19.2%. ADS had an increase for the nine months ended September 30, 2005 of
$8,000 or 11.0%. The primary reason for the G&A increasing costs are due to additional
and heightened costs of being a publicly held company. We expect these costs to
significantly increase over the next 2 years as we prepare for our Sarbanes-Oxley Act
internal controls compliance costs.

Research and development costs
decreased $1,000 or 0.5% for the three months ended September 30, 2005 compared to the
same period in 2004. For the nine months ended September 30, 2005, research and
development costs increased $58,000 or 10.2% compared to the same period in 2004. Of the
decrease for the three months ended September 30, 2005, the Controls Division contributed
an increase of $14,000 or 15.7%, offset partially by a decrease in ADS of $15,000 or
12.8%. For the nine months ended September 30, 2005, the Controls Division contributed an
increase of $60,000 or 22.8%, offset by a decrease in ADS of $2,000 or 0.7%. The increase
in the Controls Division was due to additional lab testing and prototype development
including product testing and certification at nationally recognized test labs. The
decrease in ADS is due to fewer personnel.

Non-Operating Income
(Loss)

Non-operating income increased by
$489,000 for the three month period ended September 30, 2005 compared to the same period
for 2004. For the nine months ended September 30, 2005, compared to the same period in
2004, non-operating income increased $491,000.

Gain on the sale of investment
securities increased $544,000 for the three month period ended September 30, 2005 compared
to the same period in 2004. For the nine month period ended September 30, 2005, gain on
sale of investment securities increased $382,000 compared to the same period in 2004.
These increases are a direct result of increased August Technology stock sales.

Interest income increased $33,000
when comparing the three months ended September 30, 2005 to the same period in 2004. For
the nine months ended September 30, 2005, the increase was $82,000 compared to the same
period in 2004. This increase was due to the higher interest rates received on treasury
bills.

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Equity in losses of equity method
investee increased $89,000 for the three months ended September 30, 2005 compared to the
same period in 2004. For the nine months ended September 30, 2005, the loss decreased
$25,000. The increase for the three month period ended September 30, 2005 is due to the
write off of the investment in a la mode, LLC.

Income Before Income Taxes

Income before income taxes increased
$467,000, to an income before income tax of $436,000 for the three-month period ended
September 30, 2005 compared to the same period in 2004. For the nine month period ended
September 30, 2005, income before income taxes was $597,000, an increase of $298,000
compared to the same period for 2004.

The Controls Division had income
before income tax of $117,000 for the three months ended September 30, 2005 compared to
$97,000 for the same period in 2004, an increase of $20,000. For the nine months ended
September 30, 2005, the Controls Division had income before taxes of $268,000 compared to
$373,000 for the same period in 2004, a decrease of $105,000. This decrease is primarily
due to increased operating expenses.

ADS had net loss before income taxes
of $16,000 for the three months ended September 30, 2005 compared to the net income before
income taxes of $9,000 for same period in 2004. For the nine months ended September 30,
2005, ADS had a loss of $76,000 compared to a loss of $42,000 for the same period in 2004.
These losses are a direct result of decreased sales.

# LIQUIDITY AND CAPITAL
RESOURCES

Cash and cash equivalents were
$6,856,000 at September 30, 2005 and $6,619,000 at September 30, 2004. Cash used in
operating activities of $67,000 for the nine months ended September 30, 2005 was
primarily a result of our net operating loss adjusted for non-cash charges.

Cash provided by investing activities
was $790,000 for the nine month period ended September 30, 2005 and $265,000 for the same
period in 2004.  Proceeds from the sale of investments for the nine months ended
September 30, 2005 increased to $825,000 from $772,000 compared to the same period in 2004
and cash used for the purchase of investments decreased to $0 from $160,000 compared to
the same period in 2004.

Cash used in financing activities was
$331,000 and $276,000 for the nine months ended September 30, 2005 and September 30,
2004, respectively. During the nine months ended September 30, 2005 and 2004, the Company
paid aggregate dividends of $387,000 and $385,000, respectively.

Our ongoing cash requirements will be
primarily for capital expenditures, acquisitions, research and development 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.

INVs primary investments are
600,115 shares of August Technology Corporation and 551,759 shares of PPT Vision, Inc.
both of which are traded on the Nasdaq Stock Exchange. The investment in PPTV is accounted
for under the equity method of accounting. These stocks are subject to fluctuations in
price and could have a negative effect on the liquidity of the Company.

# 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 the
Companys expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, but are not limited to, statements regarding the
extent and timing of future revenues and expenses and customer demand, the market value of
our investment securities, future financial condition and availability of capital
resources, changes in worldwide general economic conditions, cyclical capital spending by
customers, the Companys ability to keep pace with technological developments and
evolving industry standards, worldwide competition, and the Companys ability to
protect its existing intellectual property from challenges from third parties and other
factors. 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 the Company as of the date hereof, and
the Company assumes no obligation to update any such forward-looking statements. It is
important to note that the Companys actual results could differ materially from
those in such forward-looking statements. The forward-looking statements of the Company
are subject to risks and uncertainties. Some of the factors that could cause future
results to differ materially from the Companys recent results or those projected in
the forward-looking statements are detailed in the Companys Annual Report on Form
10-KSB for the year ended December 31, 2004, filed with the Securities and Exchange
Commission.

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# 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 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 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.

# PART II.   OTHER INFORMATION

# Item 6. 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.                                   
|----- | --------------------------------------------------------
|     
|     
|Date: | November 14, 2005                                       
|      | Bradley D. Slye                                         
|      | Chief Executive Officer and
Principal Accounting Officer

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# EXHIBIT INDEX

# ELECTRO-SENSORS, INC.

# FORM 10-QSB FOR
QUARTER ENDED September 30, 2005

|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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