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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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# Form 10-KSB/A

# Amendment No. 2

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|x |  | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------

# For the fiscal year
ended December 31, 2004

|o |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------

For
the transition period from __________ to
__________

# Commission File Number
0-9587

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ELECTRO-SENSORS, INC.
(Name of Small Business Issuer in its Charter)

|Minnesota                                                      | 41-0943459                          
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number)

6111 Blue Circle DriveMinnetonka, Minnesota
55343-9108(Address of Principal
Executive Offices, including Zip Code)

(952) 930-0100 (Registrants
Telephone Number, including Area Code)

Securities registered
pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.10 par value

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Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the 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. Yesx   
Noo

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.o

The
issuers revenues for the fiscal year ended December 31, 2004 were $4,799,000.

The aggregate
market value of the voting stock held by non-affiliates (persons other than officers,
directors, or holders of more than 5% of the outstanding stock) of the registrant was
approximately $8,157,000 based upon the closing price of the Common Stock as reported on
The Nasdaq Stock Market® on February 21, 2005.

The
number of shares outstanding of the registrants Common Stock, $0.10 par value, on
February 21, 2005 was 3,219,212.

# DOCUMENTS INCORPORATED
BY REFERENCE

Portions
of the registrants Proxy Statement for its Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-KSB.

Transitional
Small Business Disclosure Format (check one): Yeso   
Nox





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# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESForm 10-KSB/A for the
Year Ended December 31, 2004

# TABLE OF CONTENTS

PART IIItem 7          Financial
Statements

PART IIIItem 13        Exhibits



# SIGNATURES

2

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# Explanatory Note

This
Amendment No. 2 to Form 10-KSB is being filed solely to correct a typographical error
affecting the date for one of the fiscal years covered by one of the reports issued by the
companys independent registered public accounting firm with respect to the
companys audited financial statements.

# Item 7Financial
Statements and Supplementary Data

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

Report of Registered
Independent Public Accounting FirmFinancial Statements
   Consolidated Balance Sheets
   Consolidated Statements of Operations
   Consolidated Statements of Changes in Stockholders Equity
   Consolidated Statements of Cash Flows
   Notes to Consolidated Financial Statements

3

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
and StockholdersElectro-Sensors, Inc.Minneapolis, Minnesota

We
have audited the accompanying consolidated balance sheet of Electro-Sensors, Inc. and
Subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, changes in stockholders equity, and cash flows for the
years ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Electro-Sensors, Inc. and
Subsidiaries as of December 31, 2004, and 2003, and the results of their operations and
their cash flows for the years ended December 31, 2004, and 2003 in conformity with
accounting principles generally accepted in the United States of America.

VIRCHOW, KRAUSE &
COMPANY, LLP

Minneapolis, MinnesotaJanuary
28, 2005

4

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
and StockholdersElectro-Sensors, Inc.Minneapolis, Minnesota

We
have audited Electro-Sensors, Inc. and Subsidiaries statements of income, changes in
stockholders equity, and cash flows for the period ended December 31, 2002.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Electro-Sensors, Inc. and Subsidiaries,
the results of their operations and their cash flows for the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United States of
America.

MAYER HOFFMAN MCCANN P.C. (formerly known as SCHWEITZER, KARON & BREMER, LLC)
Certified Public Accountants
Minneapolis, Minnesota
March 14, 2005

5

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# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESCONSOLIDATED BALANCE
SHEETS

|                                                                                                                           |  | December 31,
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------
|
|ASSETS                                                                                                                     |  |             
|                                                                                                                          
|CURRENT ASSETS:                                                                                                            |  |             
|                                                                                                                          
|Cash and cash equivalents                                                                                                  |  |             
|Available for sale securities                                                                                              |  |             
|Trade receivables, less allowance for doubtful accounts, 2004: $6,000 and 2003: $6,000                                     |  |             
|Inventories                                                                                                                |  |             
|Other current assets                                                                                                       |  |             
|Prepaid income taxes                                                                                                       |  |             
|                                                                                                                           |  |             
|Total current assets                                                                                                       |  |             
|                                                                                                                          
|PROPERTY AND EQUIPMENT, net                                                                                                |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|INVESTMENT IN EQUITY METHOD INVESTEE                                                                                       |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|TOTAL ASSETS                                                                                                               |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                       |  |             
|                                                                                                                          
|CURRENT LIABILITIES:                                                                                                       |  |             
|                                                                                                                          
|Accounts payable                                                                                                           |  |             
|Accrued expenses                                                                                                           |  |             
|Accrued income taxes                                                                                                       |  |             
|Deferred income tax                                                                                                        |  |             
|Deferred revenue                                                                                                           |  |             
|                                                                                                                           |  |             
|Total current liabilities                                                                                                  |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|DEFERRED INCOME TAXES                                                                                                      |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)                                                                              |  |             
|                                                                                                                          
|STOCKHOLDERS EQUITY                                                                                                       |  |             
|                                                                                                                          
|Common stock, par value $0.10 per share; authorized 10,000,000 shares; issued 3,218,345 and 3,174,522 shares, respectively |  |             
|Additional paid-in capital                                                                                                 |  |             
|Retained earnings                                                                                                          |  |             
|Accumulated other comprehensive income                                                                                     |  |             
|                                                                                                                           |  |             
|Total stockholders equity                                                                                                 |  |             
|                                                                                                                           |  |             
|                                                                                                                          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |             
|                                                                                                                           |  |             

See Notes to
Consolidated Financial Statements

6

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

|                                           |  | Years Ended December 31,
|------------------------------------------ |  | ------------------------
|
|                                          
|Net Sales                                  |  |                         
|Cost of Goods Sold                         |  |                         
|                                           |  |                         
|Gross Profit                               |  |                         
|                                           |  |                         
|                                          
|Operating Expenses:                        |  |                         
|                                          
|Selling and Marketing                      |  |                         
|General and Administrative                 |  |                         
|Research and Development                   |  |                         
|                                           |  |                         
|Total Operating Expenses                   |  |                         
|                                           |  |                         
|                                          
|Operating Loss                             |  |                         
|                                           |  |                         
|                                          
|Non-operating Income (Expense):            |  |                         
|                                          
|Gain on Sale of Investment Securities      |  |                         
|Interest Income                            |  |                         
|Equity in losses of equity method investee |  |                         
|                                           |  |                         
|Total Non-operating Income (Expense)       |  |                         
|                                           |  |                         
|                                          
|Income (Loss) Before Income Taxes          |  |                         
|Federal and State Income Taxes             |  |                         
|                                           |  |                         
|Net Income (Loss)                          |  |                         
|                                           |  |                         
|                                          
|Net Income (Loss) Per Share Data:          |  |                         
|                                          
|Basic                                      |  |                         
|Net Income (Loss) Per Share                |  |                         
|Weighted Average Shares                    |  |                         
|Diluted                                    |  |                         
|Net Income (Loss) Per Share                |  |                         
|Weighted Average Shares                    |  |                         
|                                          
|Dividends Paid Per Common Share            |  |                         

See Notes to
Consolidated Financial Statements

7

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# ELECTRO-SENSORS, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS EQUITY

|                                                                            |  |  |  |           |  |   |         |  |   |           |  | Accumulated |           |  
|--------------------------------------------------------------------------- |  |  |  | --------- |  | - | ------- |  | - | --------- |  | ----------- | --------- | -
|
|
|
|
|                                                                           
|Balance, December 31, 2001                                                  |  |  |  | 3,121,263 |  | $ | 311,000 |  | $ | 895,000   |  | $           | 8,592,000 |  
|                                                                           
|Exercise of stock options                                                   |  |  |  | 33,350    |  |   | 3,000   |  |   | 70,000    |  |             |           |  
|Unrealized gains (losses) on investments net of reclassification adjustment |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Stock issued through the employee stock purchase plan                       |  |  |  | 647       |  |   | 1,000   |  |   | 2,000     |  |             |           |  
|Dividend on common stock                                                    |  |  |  |           |  |   |         |  |   |           |  |             | (378,000  | )
|Net income                                                                  |  |  |  |           |  |   |         |  |   |           |  |             | 646,000   |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Total comprehensive loss                                                    |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|                                                                           
|Balance, December 31, 2002                                                  |  |  |  | 3,155,260 |  |   | 315,000 |  |   | 967,000   |  |             | 8,860,000 |  
|                                                                           
|Exercise of stock options                                                   |  |  |  | 15,750    |  |   | 1,000   |  |   | 25,000    |  |             |           |  
|Unrealized gains (losses) on investments net of reclassification adjustment |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Stock issued through the employee stock purchase plan                       |  |  |  | 3,512     |  |   | 1,000   |  |   | 8,000     |  |             |           |  
|Dividend on common stock                                                    |  |  |  |           |  |   |         |  |   |           |  |             | (411,000  | )
|Net loss                                                                    |  |  |  |           |  |   |         |  |   |           |  |             | (144,000  | )
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Total comprehensive income                                                  |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|                                                                           
|Balance, December 31, 2003                                                  |  |  |  | 3,174,522 |  |   | 317,000 |  |   | 1,000,000 |  |             | 8,305,000 |  
|                                                                           
|Exercise of stock options                                                   |  |  |  | 40,750    |  |   | 4,000   |  |   | 95,000    |  |             |           |  
|Unrealized gains (losses) on investments net of reclassification adjustment |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Stock issued through the employee stock purchase plan                       |  |  |  | 3,073     |  |   | 1,000   |  |   | 9,000     |  |             |           |  
|Dividend on common stock                                                    |  |  |  |           |  |   |         |  |   |           |  |             | (513,000  | )
|Net income                                                                  |  |  |  |           |  |   |         |  |   |           |  |             | 172,000   |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Total comprehensive loss                                                    |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  
|Balance, December 31, 2004                                                  |  |  |  | 3,218,345 |  | $ | 322,000 |  | $ | 1,104,000 |  | $           | 7,964,000 |  
|                                                                            |  |  |  |           |  |   |         |  |   |           |  |             |           |  

See Notes to
Consolidated Financial Statements

8

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

|                                                                                     |  | Years Ended December 31,
|------------------------------------------------------------------------------------ |  | ------------------------
|
|                                                                                    
|Cash flows from operating activities                                                 |  |                         
|                                                                                    
|Net income (loss)                                                                    |  |                         
|                                                                                    
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                         
|                                                                                    
|Depreciation                                                                         |  |                         
|Realized (gain)/loss on sale of investments                                          |  |                         
|Deferred taxes                                                                       |  |                         
|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                                                                     |  |                         
|Accrued income taxes                                                                 |  |                         
|                                                                                     |  |                         
|                                                                                    
|Net cash used in operating activities                                                |  |                         
|                                                                                     |  |                         
|                                                                                    
|Cash flows from investing activities:                                                |  |                         
|                                                                                    
|Proceeds from sale of available for sale securities                                  |  |                         
|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 gain/(loss) on investments                                  |  |                         

See Notes to
Consolidated Financial Statements

9

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

# Note 1. Nature of
Business and Significant Accounting Policies

# 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.
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, 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
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.

ESI
Investment Company 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. Since then, the Company has recognized income
from the sale of its holdings in August Technology Corporation. See Note 2 for additional
information regarding its investments. The Companys investments in marketable
securities are subject to normal market risks.

# Significant accounting
policies of the Company are summarized below:

# 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. Actual results could differ from those estimates.

# Cash and cash
equivalents:

The
Company considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents are carried at cost plus accrued
interest which approximates fair value.

The
Company maintains its cash in bank deposit accounts, which, at times, may exceed federally
insured limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant credit risk on cash.

# Receivables and Credit
Policies:

Accounts
receivable are uncollateralized customer obligations due under normal trade terms
requiring payment within 30 days from the invoice date. Accounts receivables are stated at
the amount billed to the customer. Customer account balances with invoices over 90 days
are considered delinquent. The Company does not accrue interest on delinquent accounts
receivable.

Payments
of accounts receivable are allocated to the specific invoices identified on the
customers remittance advice or, if unspecified, are applied to the earliest unpaid
invoices.

The
carrying amount of accounts receivable is reduced by a valuation allowance that reflects
managements best estimate of the amounts that will not be collected. Management
individually reviews all accounts receivable balances that exceed 90 days from the invoice
date and based on an assessment of current creditworthiness, estimates the portion, if
any, of the balance that will not be collected. Management uses this information to
estimate the valuation allowance.

10

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# Available for sale
securities:

The
Companys investments consist of marketable equity securities, primarily common
stocks, government debt securities, money market funds, and unregistered equity
securities. The estimated fair value of marketable equity securities is based on quoted
market prices and therefore subject to the inherent risk of market fluctuations.

Management
determines the appropriate classification of securities at the date individual investments
are acquired, and evaluates the appropriateness of such classification at each balance
sheet date.

Since
the Company does not buy and sell investments with the objective of generating profits on
short-term fluctuations in market price, the investments in marketable equity securities
have been classified as available-for-sale. Available-for-sale securities 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. Dividends on
marketable equity securities are recognized in income when declared. Investments in
unregistered securities are reported at original cost.

Realized
gains and losses, including losses from declines in value of specific securities
determined by management to be other-than-temporary, are included in income. Realized
gains and losses are determined on the basis of the specific securities sold.

# Inventories:

Inventories
include material, labor and overhead and are valued at the lower of cost (first-in,
first-out) or market.

# Fair value of financial
instruments:

The
Companys financial instruments consist of cash and cash equivalents, investments,
short-term trade receivables and payables for which current carrying amounts approximate
fair market value.

# Property and equipment:

Property
and equipment are recorded at cost. Expenditures for renewals and betterments are
capitalized and repairs and maintenance costs are charged to expense as incurred. When
items are disposed of, the cost and accumulated depreciation are eliminated from the
accounts, and any gain or loss is reflected in the results of operations.

# Impairment of long-lived
assets:

The
Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to undiscounted future net cash flows expected to be generated by the
assets. If these assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets.

# Software costs:

The
Company capitalizes software production costs after technological feasibility has been
established and prior to general release to clients. Annual amortization of capitalized
software will be based on the greater amount computed using the straight-line method over
the estimated 36-month economic product life or using the ratio that current gross revenue
for the software product bears to the total of current and anticipated future gross
revenues for that product. The capitalized software production costs of the Companys
existing technology were fully amortized prior to 2002. Software maintenance and
modification costs are expensed as incurred.

# Revenue recognition of
production monitoring equipment:

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. 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.

11

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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 moved to
income over the life of the contract.

# Advertising costs:

The
Company expenses advertising costs as incurred. Total advertising expense was $184,000,
$109,000 and $233,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.

# Research and development:

Expenditures
for research and development are expensed as incurred.

# Depreciation:

The
cost of property and equipment is depreciated on the straight-line method over the
estimated useful lives.

# Estimated useful lives
are as follows:

|                       | Years
|---------------------- | -----
|
|Equipment              |      
|Furniture and Fixtures |      
|Building               |      

Depreciation
expense for the years ended December 31, 2004, 2003 and 2002 was $83,000, $98,000, and
$98,000, respectively.

# Income taxes:

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

12

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# Net income (loss) per
common share:

EPS
excludes dilution and is determined by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common stock were
exercised or converted into common stock.

The
following information presents the Companys computations of basic and diluted EPS
for the periods presented in the statements of operations.

|                                          |  | Income/(loss) |   | Shares   |   | Per Share Amount
|----------------------------------------- |  | ------------- | - | -------- | - | ----------------
|
|2004:                                     |  |               |   |          |   |                 
|Basic EPS                                 |  |               | $ | 172,000  |   |                 
|Effect of dilutive employee stock options |  |               |   |          |   |                 
|                                          |  |               |   |          |   |                 
|Diluted EPS                               |  |               | $ | 172,000  |   |                 
|                                          |  |               |   |          |   |                 
|2003:                                     |  |              
|Basic EPS                                 |  |               | $ | (144,000 | ) |                 
|Effect of dilutive employee stock options |  |               |   |          |   |                 
|                                          |  |               |   |          |   |                 
|Diluted EPS                               |  |               | $ | (144,000 | ) |                 
|                                          |  |               |   |          |   |                 
|2002:                                     |  |              
|Basic EPS                                 |  |               | $ | 645,000  |   |                 
|Effect of dilutive employee stock options |  |               |   |          |   |                 
|                                          |  |               |   |          |   |                 
|Diluted EPS                               |  |               | $ | 645,000  |   |                 
|                                          |  |               |   |          |   |                 

For
the years ended December 31, 2004, 2003 and 2002, options to purchase 319,500, 259,250,
and 60,000 shares, respectively, of the Companys common stock were not included in
the calculation of diluted earnings per share. As the Company had a net loss for 2003, the
inclusion of the aforementioned shares would have been anti-dilutive for 2003.

# Comprehensive income
(loss):

Comprehensive
income includes the Companys net income (loss) plus other comprehensive income
(loss) items, which are excluded from net income. The Companys comprehensive income
consists of unrealized gains (losses) on available for sale securities, net of income
taxes and reclassification adjustment for gains and losses included in net income (loss).
The reclassification adjustment for gains and losses included in net income (loss) was
$304,000, $753,000 and $1,420,000, for 2004, 2003 and 2002, respectively. The Company does
not have any additional transactions or other economic events that qualify as
comprehensive income as defined under SFAS No. 130. Income taxes expense (benefit)
included in other comprehensive income was ($2,193,000), $3,452,000, and $1,446,000 for
2004, 2003, and 2002 respectively.

# Stock Compensation:

The
Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
in accounting for employee stock options.  Under the intrinsic value method,
compensation expense is recorded only to the extent that the market price of the common
stock exceeds the exercise price of the stock option on the date of grant.

In
December 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.  SFAS No. 148 is an amendment to
SFAS No. 123 providing alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation and also
provides requires additional disclosures about the method of accounting for stock-based
employee compensation.   The amendments are effective for financial statements
for fiscal years ending after December 31, 2002 and for the interim periods beginning
after December 15, 2002.  The Company adopted the annual disclosure provision of
SFAS No. 148 and chose not to adopt the voluntary change to the fair value based method of
accounting for stock-based employee compensation, pursuant to SFAS No. 148.

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The
Company has adopted the disclosure-only provisions of SFAS No. 148, Accounting for
Stock-Based Compensation.  Accordingly, no compensation cost has been recognized with
respect to stock options.  Had compensation cost for stock options been determined
based on the fair value methodology prescribed by SFAS 123, the Companys net loss
and net loss per share would have been reduced to the pro forma amounts indicated below:

|                                   |  | Years Ended December 31,
|---------------------------------- |  | ------------------------
|
|Net Income (Loss)                  |  |                         
|As Reported                        |  |                         
|Pro Forma                          |  |                         
|Net Income (Loss) Per Common Share |  |                         
|As Reported                        |  |                         
|Pro Forma                          |  |                         
|Stock Based Compensation           |  |                         
|As Reported                        |  |                         
|Pro Forma                          |  |                         

The
weighted average fair values of options and Employee Stock Plan shares granted were as
follows. There were no grants in fiscal 2003:

|            |  | 1987 and 1997 Plan
|----------- |  | ------------------
|
|           
|2002 Grants |  |                   
|2003 Grants |  |                   
|2004 Grants |  |                   

The
fair value of options granted were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in fiscal 2004 (there
were no grants in fiscal 2003):

|                         |  | 2004 |          | 2003
|------------------------ |  | ---- | -------- | ----
|                        
|Risk-free Interest Rate  |  |      | 3.00%    |     
|Expected Life of Options |  |      | 10 years |     
|Expected Volatility      |  |      | 52.19%   |     
|Expected Dividend Yield  |  |      | 0.00%    |     

The
tax benefits associated with the exercise of stock options or issuance of shares under the
Companys stock option plans, not related to expenses recognized for financial
reporting purposes, have been credited to capital in excess of par value in the
accompanying consolidated balance sheets.

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# Recent accounting
standards:

In
December 2004, FASB issued SFAS No. 123R which requires companies to recognize in the
income statement the grant-date fair value of stock options and other equity-based
compensation issued to employees, but expressed no preference for the type of valuation
model. FASB No. 123R is effective for small business issuers as of the beginning of
interim or annual reporting periods that begin after December 15, 2005. The impact of SFAS
NO. 123R has not been determined at this time.

In
November 2004, FASB issued SFAS No. 151 Inventory Costs which amends the
guidance in ARB No. 43, Chapter 4 Inventory Pricing, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that under some
circumstances, items such as idle facility expense, excessive spoilage, double freight,
and rehandling costs may be so abnormal as to require treatment as current period
charges. SFAS No. 151 requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In
addition, SFAS No, 151 requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS No. 151
shall be effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during fiscal
years beginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be applied
prospectively. The Company does not expect the adoption of SFAS No. 151 to have a material
effect on its consolidated financial statements.

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# Note 2. Investments

The
cost and estimated fair value of the investments are as follows:

|                      |  | Cost |   | GrossUnrealizedGain |   | GrossUnrealizedLoss |            | FairValue
|--------------------- |  | ---- | - | ------------------- | - | ------------------- | ---------- | ---------
|
|December 31, 2004     |  |      |   |                     |   |                     |            |          
|Treasury Bills        |  |      | $ | 6,365,000           |   | $                   | 0          |          
|Money Market Funds    |  |      |   | 14,000              |   |                     | 0          |          
|Equity Securities     |  |      |   | 217,000             |   |                     | 7,225,000  |          
|                      |  |      |   |                     |   |                     |            |          
|                      |  |      |   | 6,596,000           |   |                     | 7,225,000  |          
|Less Cash Equivalents |  |      |   | (6,379,000          | ) |                     | 0          |          
|                      |  |      |   |                     |   |                     |            |          
|Total Investments     |  |      | $ | 217,000             |   | $                   | 7,225,000  |          
|                      |  |      |   |                     |   |                     |            |          
|                     
|December 31, 2003     |  |     
|Treasury Bills        |  |      | $ | 6,472,000           |   | $                   | 0          |          
|Money Market Funds    |  |      |   | 133,000             |   |                     | 0          |          
|Equity Securities     |  |      |   | 238,000             |   |                     | 13,285,000 |          
|                      |  |      |   |                     |   |                     |            |          
|                      |  |      |   | 6,843,000           |   |                     | 13,285,000 |          
|Less Cash Equivalents |  |      |   | (6,605,000          | ) |                     | 0          |          
|                      |  |      |   |                     |   |                     |            |          
|Total Investments     |  |      | $ | 238,000             |   | $                   | 13,285,000 |          
|                      |  |      |   |                     |   |                     |            |          
|                     
|December 31, 2002     |  |     
|Treasury Bills        |  |      | $ | 6,344,000           |   | $                   | 0          |          
|Money Market Funds    |  |      |   | 77,000              |   |                     | 0          |          
|Equity Securities     |  |      |   | 229,000             |   |                     | 4,081,000  |          
|                      |  |      |   |                     |   |                     |            |          
|                      |  |      |   | 6,650,000           |   |                     | 4,081,000  |          
|Less Cash Equivalents |  |      |   | (6,421,000          | ) |                     | 0          |          
|                      |  |      |   |                     |   |                     |            |          
|Total Investments     |  |      | $ | 229,000             |   | $                   | 4,081,000  |          
|                      |  |      |   |                     |   |                     |            |          

Realized
gains and losses on investments are as follows:

|                      |  | December 31,
|--------------------- |  | ------------
|
|Gross Realized Gains  |  |             
|Gross Realized Losses |  |             
|                      |  |             
|Net Realized Gain     |  |             
|                      |  |             

The
Companys significant investment in equity securities is 669,715 shares of August
Technology Corporation whose shares are traded on the Nasdaq Stock Exchange with a
December 31, 2004 market value of approximately $7,052,000 with an approximate cost of
$67,000.

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# Investment Reported on
Equity Method:

At
December 31, 2004, the Company owned 2,207,036 shares of PPT, which is 18.4% of PPTs
outstanding common stock. The fair value of its holdings based on the quoted market price
at December 31, 2004 was approximately $2,163,000 with an approximate cost of $2,434,000.

Since
the Company owns approximately 18.4% 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
or loss through December 31, 2004 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 December 31, 2004, the Company had approximately $698,000 in suspended losses from its
investment in PPT that will be used to offset future recognition of equity method earnings
from the investment.

Summary
financial information of PPT Vision, Inc. as of October 31, 2004 and 2003 is as follows:

|Balance Sheet                            |  |  |   | 2004       |   |   | 2003       |  
|---------------------------------------- |  |  | - | ---------- | - | - | ---------- | -
|                                         |  |  |   |           
|Current assets                           |  |  | $ | 5,949,000  |   | $ | 5,269,000  |  
|Fixed assets                             |  |  |   | 323,000    |   |   | 582,000    |  
|Intangible and other assets              |  |  |   | 162,000    |   |   | 205,000    |  
|Assets of discontinued operations        |  |  |   | 0          |   |   | 2,391,000  |  
|                                         |  |  |   |           
|Total assets                             |  |  | $ | 6,434,000  |   | $ | 8,447,000  |  
|                                         |  |  |   |           
|                                        
|Current liabilities                      |  |  | $ | 1,511,000  |   | $ | 1,767,000  |  
|Stockholder equity                       |  |  |   | 4,923,000  |   |   | 6,680,000  |  
|                                         |  |  |   |           
|Total liabilities and equity             |  |  | $ | 6,434,000  |   | $ | 8,447,000  |  
|                                         |  |  |   |           
|                                        
|Income statement, years ended October 31 |  |  |   | 2004       |   |   | 2003       |  
|                                         |  |  |   |           
|Net revenues                             |  |  | $ | 8,671,000  |   | $ | 7,501,000  |  
|Gross profit                             |  |  |   | 4,517,000  |   |   | 4,082,000  |  
|Total expenses                           |  |  |   | 5,572,000  |   |   | 6,692,000  |  
|Net loss from continuing operations      |  |  |   | (1,055,000 | ) |   | (2,610,000 | )
|Net loss from discontinued operations    |  |  |   | (817,000   | ) |   | (1,513,000 | )
|                                         |  |  |   |           
|Net loss                                 |  |  | $ | (1,872,000 | ) | $ | (4,123,000 | )
|                                         |  |  |   |           

In
April 2004, ESI Investment purchased 20% of a la mode, LLCs outstanding membership
interests for $160,000. The Company has adopted the equity method of
accounting for this investment.

Under
the equity method of accounting, the Companys proportionate share of a la mode
income or loss is included in the Companys net income (loss) with a corresponding
increase or decrease in the carrying value of its investment.

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# Note 3. Inventories

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

|                  |  | December 31,
|----------------- |  | ------------
|
|Raw Materials     |  |             
|Work In Process   |  |             
|Finished Goods    |  |             
|                  |  |             
|Total Inventories |  |             
|                  |  |             

# Note 4. Property and
Equipment

The following is a
summary of property and equipment:

|                              |  | December 31,
|----------------------------- |  | ------------
|
|Equipment                     |  |             
|Furniture and Fixtures        |  |             
|Building                      |  |             
|Land                          |  |             
|                              |  |             
|                              |  |             
|Less Accumulated Depreciation |  |             
|                              |  |             
|Total Property and Equipment  |  |             
|                              |  |             

# Note 5. Accrued Expenses

Accrued
expenses include the following:

|                       |  | 2004 |   | 2003   
|---------------------- |  | ---- | - | -------
|                      
|Wages and Commissions  |  |      | $ | 245,000
|Other                  |  |      |   | 3,000  
|                       |  |      |   |        
|Total Accrued Expenses |  |      | $ | 248,000
|                       |  |      |   |        

# Note 6. Commitments

# Lease commitments:

The
Company is leasing office equipment under operating leases expiring at various dates
through 2008.

Minimum
lease payments required under non-cancelable operating leases are as follows:

|Year                         |  | Amount
|---------------------------- |  | ------
|2005                         |  |       
|2006                         |  |       
|2007                         |  |       
|2008                         |  |       
|                             |  |       
|Total Minimum Lease Payments |  |       
|                             |  |       

Rental
expense charged to operations was $35,000, $31,000 and $26,000 for years ended December
31, 2004, 2003 and 2002, respectively.

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# Note 7. Common Stock
Options and Stock Purchase Plan

# Stock-based compensation:

The
Company has a stock option plan and an employee stock purchase and bonus plan. Under the
1997 Stock Option Plan, the Company is authorized to grant up to 450,000 shares of its
common stock. The Company granted 101,000 options under this plan during 2004, and at
December 31, 2004, 15,250 shares remained available for grant under this plan. Under the
Employee Stock Purchase and Bonus Plan, the Company is authorized to sell and issue up to
150,000 shares of its common stock to its full-time employees. During 2004, 2003 and 2002,
3,073, 3,512 and 647 shares, respectively, were issued under this plan. At December 31,
2004, 92,740 shares were available for future issuance.

# Stock options:

The
1997 Stock Option Plan includes both nonqualified and incentive stock options. Payment for
the shares may be made in cash, shares of the Companys common stock or a combination
thereof. Under the terms of the plan, incentive stock options are granted at 100% of fair
market value on the date of grant and may be exercised at various times depending upon the
terms of the option. The nonqualified stock options were granted to directors to purchase
shares of the Companys common stock. All existing options expire 10 years from the
date of grant or one year from the date of death.

A
summary of stock options outstanding and exercisable under the plans are as follows:

|                                         |  | Number of Shares
|---------------------------------------- |  | ----------------
|
|
|Balance, December 31, 2001               |  |                 
|Granted                                  |  |                 
|Exercised                                |  |                 
|Expired                                  |  |                 
|Forfeited                                |  |                 
|                                         |  |                 
|Balance, December 31, 2002               |  |                 
|Granted                                  |  |                 
|Exercised                                |  |                 
|Expired                                  |  |                 
|Forfeited                                |  |                 
|                                         |  |                 
|Balance, December 31, 2003               |  |                 
|Granted                                  |  |                 
|Exercised                                |  |                 
|Expired                                  |  |                 
|Forfeited                                |  |                 
|                                         |  |                 
|Balance, December 31, 2004               |  |                 
|                                         |  |                 
|Options Exercisable At December 31, 2004 |  |                 
|                                         |  |                 

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Price
range of outstanding options:

|                 |  | As of December 31, 2004
|---------------- |  | -----------------------
|
|                
|Price Range      |  |                        
|Expiration Dates |  |                        

The
following table summarizes stock options outstanding at December 31, 2004:

|Exercise Price Range |  | Outstanding Options |  | ExercisableOptions |  | Weighted Avg. Contractual Life Remaining |         | Weighted Avg. Exercise Price
|-------------------- |  | ------------------- |  | ------------------ |  | ---------------------------------------- | ------- | ----------------------------
|
|                    
|$1.33 - $1.99        |  |                     |  | 30,000             |  |                                          | 30,000  |                             
|$2.00 - $2.99        |  |                     |  | 158,500            |  |                                          | 158,500 |                             
|$3.00 - $4.49        |  |                     |  | 131,000            |  |                                          | 61,840  |                             

# Stock purchase plan:

The Employee
Stock Purchase and Bonus Plan (the Employee Stock Plan) allows employees to
set aside up to 10% of their earnings for the purchase of shares of the Companys
common stock. The purchase price is the lower of 85% of the market value at the date of
the grant or the exercise date, which is six months from the date of the grant.

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# Note 8. Benefit Plans

# Employee stock ownership
plan:

The
Company sponsors an employee stock ownership plan (ESOP) that covers
substantially all employees who work 1,000 or more hours during the year. The ESOP has, at
various times, secured financing from the Company to purchase the Companys shares on
the open market. When the Plan purchases shares with the proceeds of the Company loans,
the shares are pledged as collateral for its debt. The shares are maintained in a suspense
account until released and allocated to participant accounts. The Plan owns 136,088 shares
of the Companys stock at December 31, 2004. All shares held by the Plan have
been released and allocated. The dividends paid by the Company on shares held by the Plan
are allocated to the participant accounts. The Plan had no debt to the Company at
December 31, 2004.

ESOP
compensation expense was $18,000, $18,000, and $18,000, for the years ended
December 31, 2004, 2003, and 2002, respectively.

In
the event a terminated ESOP participant desires to sell his or her shares of the
Companys stock and the shares are not readily tradable, the Company may be required
to purchase the shares from the participant at their fair market value. At
December 31, 2004, 136,088 shares of the Companys stock, with an aggregate fair
market value of approximately $554,000, are held by ESOP participants who, if terminated,
would be subject to the repurchase requirement.

# Profit sharing plan and
savings plan:

The
Company has a salary reduction and profit sharing plan which conforms to IRS provisions
for 401(k) plans. The Company may make profit sharing contributions with the approval of
the Board of Directors. The Board of Directors decided to make no contribution for the
years 2004, 2003 and 2002 other than its matching of 401(k) salary reductions.

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# Note 9. Income Taxes

The
components of the income tax provision for the years ended December 31, 2004, 2003, and
2002 are as follows:

|                                     |  | 2004 |   | 2003    |  | 2002
|------------------------------------ |  | ---- | - | ------- |  | ----
|                                    
|Current:                             |  |      |   |         |  |     
|Federal                              |  |      | $ | 99,000  |  | $   
|State                                |  |      |   | 18,000  |  |     
|Deferred:                            |  |     
|Federal                              |  |      |   | 5,000   |  |     
|State                                |  |      |   | 0       |  |     
|                                     |  |      |   |         |  |     
|Total Federal and State Income Taxes |  |      | $ | 122,000 |  | $   
|                                     |  |      |   |         |  |     

The
provision for income taxes for the years ended December 31, 2003, 2002, and 2001 differs
from the amount obtained by applying the U.S. federal income tax rate to pretax income due
to the following:

|                                             |  | 2004 |   | 2003    |   | 2002
|-------------------------------------------- |  | ---- | - | ------- | - | ----
|                                            
|Computed Expected Tax Expense              |  |      | $ | 100,000 |   | $   
|Increase (Decrease) in Taxes Resulting From: |  |     
|State Income Taxes, net of Federal Benefit   |  |      |   | 18,000  |   |     
|Credits                                      |  |      |   | (20,000 | ) |     
|Other                                        |  |      |   | (36,000 | ) |     
|Tax on losses of equity method investee      |  |      |   | 60,000  |   |     
|                                             |  |      |   |         |   |     
|Total Federal and State Income Taxes         |  |      | $ | 122,000 |   | $   
|                                             |  |      |   |         |   |     

The
components of the net deferred tax asset (liability) consist of:

|                                     |  | 2004 |   | 2003      
|------------------------------------ |  | ---- | - | ----------
|Deferred Tax Assets:                 |  |      |   |           
|Vacation Disallowance                |  |      | $ | 2,000     
|Depreciation                         |  |      |   | 14,000    
|Allowance for Doubtful Accounts      |  |      |   | 20,000    
|Investment in Equity Method Investee |  |      |   | 927,000   
|Valuation Allowance                  |  |      |   | (927,000  
|                                     |  |      |   |           
|Total Deferred Tax Assets            |  |      | $ | 36,000    
|                                     |  |      |   |           
|Deferred Tax Liabilities:            |  |     
|Depreciation                         |  |      | $ | 0         
|Net Unrealized Gain on Investments   |  |      |   | 2,659,000 
|                                     |  |      |   |           
|Total Deferred Tax Liabilities       |  |      | $ | (2,623,000
|                                     |  |      |   |           
|Net Deferred Tax Asset (Liability)   |  |      | $ | (2,623,000
|                                     |  |      |   |           

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# Note 10. 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 manufactures and markets a complete line of speed monitoring and motor control
systems for industrial machinery. The Character Recognition Division 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 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:

|                                  |  | 2004 |   | 2003       |   | 2002
|--------------------------------- |  | ---- | - | ---------- | - | ----
|Net Revenues                      |  |      |   |            |   |     
|Production Monitoring             |  |      | $ | 4,045,000  |   | $   
|Character Recognition             |  |      |   | 754,000    |   |     
|Investments                       |  |      |   | 0          |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 4,799,000  |   |     
|                                  |  |      |   |            |   |     
|Sales in Foreign Countries        |  |     
|Production Monitoring             |  |      |   | 311,000    |   |     
|Character Recognition             |  |      |   | 18,000     |   |     
|Investments                       |  |      |   | 0          |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 329,000    |   |     
|                                  |  |      |   |            |   |     
|Interest Income                   |  |     
|Production Monitoring             |  |      |   | 20,000     |   |     
|Character Recognition             |  |      |   | 0          |   |     
|Investments                       |  |      |   | 66,000     |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 86,000     |   |     
|                                  |  |      |   |            |   |     
|Depreciation Expense              |  |     
|Production Monitoring             |  |      |   | 81,000     |   |     
|Character Recognition             |  |      |   | 2,000      |   |     
|Investments                       |  |      |   | 0          |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 83,000     |   |     
|                                  |  |      |   |            |   |     
|Capital Purchases                 |  |     
|Production Monitoring             |  |      |   | 19,000     |   |     
|Character Recognition             |  |      |   | 0          |   |     
|Investments                       |  |      |   | 0          |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 19,000     |   |     
|                                  |  |      |   |            |   |     
|Total Assets                      |  |     
|Production Monitoring             |  |      |   | 5,119,000  |   |     
|Character Recognition             |  |      |   | 5,000      |   |     
|Investments                       |  |      |   | 11,780,000 |   |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 16,904,000 |   |     
|                                  |  |      |   |            |   |     
|Income (Loss) Before Income Taxes |  |     
|Production Monitoring             |  |      |   | 447,000    |   |     
|Character Recognition             |  |      |   | (32,000    | ) |     
|Investments                       |  |      |   | (121,000   | ) |     
|                                  |  |      |   |            |   |     
|Total                             |  |      |   | 294,000    |   |     
|                                  |  |      |   |            |   |     

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# PART III

# Item 13Exhibits

See
Exhibit Index on the page following the signatures.

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# SIGNATURES

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

| | ELECTRO-SENSORS, INC.                
| | -------------------------------------
|
|
| |                                      
| | Bradley D. Slye                      
| | President and Chief Executive Officer
|
| |                                      

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# SECURITIES AND
EXCHANGE COMMISSIONWashington, DC 20549

# EXHIBIT INDEX TO FORM
10-KSB

|For the Fiscal Year EndedDecember 31, 2004 | Commission File No. 0-9587
|------------------------------------------ | --------------------------

|ExhibitNumber |  | Exhibit Description                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|             
|31.1          |  | Certification of
Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
|32.1          |  | Certification of Chief
 Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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