UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-QSB

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

FOR THE TRANSITION PERIOD FROM          TO          

Commission File Number 0-9587

ELECTRO-SENSORS, INC.

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

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

6111 Blue Circle Drive
Minnetonka, 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 ý  No o

The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, on November 12, 2003 was 3,174,522.

Transitional Small Business Disclosure Format (check one): o Yes   ý No

ELECTRO-SENSORS, INC.

Form 10-QSB

For the Period Ended September 30, 2003

TABLE OF CONTENTS

2

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3

ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2003		December 31, 2002
	(unaudited)		(audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	6,192,746	$	6,723,160
Investments	10,927,856		4,202,210
Trade receivables	585,358		550,252
Less allowance for doubtful accounts of $20,820 and $7,000, respectively
Inventories	728,304		738,012
Prepaid income taxes	217,926		342,735
Other current assets	77,053		69,748
Total current assets	18,729,243		12,626,117
Property and equipment, net	1,490,476		1,544,146
Investment in equity method investee	192,318		502,181
TOTAL ASSETS	$	20,412,037	$	14,672,444
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	121,782	$	285,539
Accrued expenses	164,036		211,912
Deferred revenue	35,684		50,398
Deferred income taxes	3,855,694		1,424,600
Total current liabilities	4,177,195		1,972,449
Deferred income taxes	35,000		30,000
Total liabilities	4,212,195		2,002,449
STOCKHOLDERS’ EQUITY
Common stock par value $0.10 per share; authorized 10,000,000 shares; issued 3,174,522 and 3,155,260 shares, respectively.	317,452		315,526
Additional paid-in capital	999,762		966,447
Retained earnings	8,115,484		8,860,476
Accumulated other comprehensive income	6,767,144		2,527,546
Total stockholders’ equity	16,199,842		12,669,995
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	20,412,037	$	14,672,444

See accompanying notes to consolidated financial statements

4

ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net sales	$	1,147,210		$	1,154,287		$	3,157,996		$	3,417,382
Cost of goods sold	429,515			480,038			1,215,441			1,451,111
Gross profit	717,695			674,249			1,942,555			1,966,271
Operating expenses:
Selling and marketing	268,218			300,650			879,448			838,542
General and administrative	205,108			245,555			741,639			688,379
Research and development	157,189			272,100			574,813			818,279
Total operating expenses	630,515			818,305			2,195,901			2,345,200
Operating income (loss)	87,180			(144,056		)	(253,346		)	(378,929		)
Non-operating income (expense):
Gain on sale of investment securities	516,639			121,313			546,168			2,218,886
Interest income	11,633			27,840			43,146			197,801
Other income (expense)	870			(29		)	5,598			(26,191		)
Equity in losses of equity method investee	(207,303		)	(245,697		)	(694,222		)	(245,697		)
Total non-operating income (expense)	321,839			(96,573		)	(99,310		)	2,144,799
Income (loss) before income taxes	409,019			(240,629		)	(352,656		)	1,765,870
Federal and state income tax provision (benefit)	260,187			(85,328		)	107,659			(665,996		)
Net income (loss)	$	148,832		$	(155,301	)	$	(460,315	)	$	1,099,874
Per share data:
Weighted average basic shares outstanding	3,168,938			3,154,627			3,162,792			3,155,047
Basic net income (loss) per share	$	0.05		$	(0.05	)	$	(0.15	)	$	0.35
Weighted average diluted shares outstanding	3,235,272			3,154,627			3,162,792			3,240,137
Diluted net income (loss) per share	$	0.05		$	(0.05	)	$	(0.15	)	$	0.34

See accompanying notes to consolidated financial statements

5

ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities
Net income (loss)	$	(460,315	)	$	1,099,874
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation	76,336			36,534
Deferred taxes	0			(200		)
Realized gain on sale of investments	(546,168		)	(2,218,886		)
Equity in loss of equity method investee	694,222			245,697
(Increase)/decrease in:
Trade receivables	(35,106		)	(127,069		)
Inventory	9,708			81,679
Other current assets	(7,305		)	(69,833		)
Prepaid income taxes	124,809			(303,739		)
Increase/(decrease) in:
Accounts payable	(163,758		)	156,585
Accrued expenses	(47,876		)	110,218
Deferred revenue	(14,714		)	0
Accrued income taxes	(91,650		)	(1,647,470		)
Net cash used in operating activities	(461,817		)	(2,636,610		)
Cash flows from investing activities:
Proceeds from sale of investments	587,864			2,237,706
Additional investment in equity method investee	(384,359		)	(1,108,684		)
Purchase of property and equipment	(22,666		)	(61,922		)
Principal payments received on note receivable	0			8,709
Net cash provided by investing activities	180,839			1,075,809
Cash flows from financing activities:
Proceeds from issuance of stock	35,241			75,675
Dividends paid	(284,677		)	(282,964		)
Net cash used in financing activities	(249,436		)	(207,289		)
Net decrease in cash & cash equivalents	(530,414		)	(1,768,090		)
Cash & cash equivalents, beginning	6,723,160			8,389,691
Cash & cash equivalents, ending	$	6,192,746		$	6,621,601
Supplemental schedule of non-cash investing and financing activities
Net change in unrealized gain/ (loss) on investments	$	4,181,048		$	(4,693,016	)

See accompanying notes to consolidated financial statements

6

ELECTRO-SENSORS, INC. AND SUBSIDIARIES

NOTES 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.  Senstar has substantially no assets and no operations.  Intercompany accounts, transactions and earnings have been eliminated in consolidation.  The consolidated entity is referred to as “the Company.”

Electro-Sensors, Inc. (ESI) operates two distinct businesses.  The first is the Controls Division, a division of ESI.  This division 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 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), also a division of ESI.  ADS designs and markets desktop software systems that read 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 marketed to end users, resellers and developers in the United States, Canada, Europe and Asia.

In both divisions, the Company grants credit to customers under normal industry terms, generally 45 days.

ESI Investment Company (INV) owns marketable securities, primarily equity securities in August Technology, Inc. and PPT Vision, Inc (PPTV).  The value of INV’s marketable securities have experienced significant appreciation in value since the IPO of August Technology in 2000.  During May 2002, INV participated in a rights offering by PPTV.  As a result of the additional investment in PPTV, the Company has changed its reporting of this investment to the equity method of accounting.  See Note 6 for additional information about the Company’s investments and this change to the equity method.

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, 2003 and 2002. The results of interim periods may not be indicative of results to be expected for the year.

The Balance Sheet at December 31, 2002 has been derived from the Company’s audited financial statements for the year ended December 31, 2002, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2002.

7

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.

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 (loss) and basic and diluted net income (loss) per common share would have been changed to the following pro forma amounts:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003			2002
Net income (loss):
As reported	$	148,832	$	(155,301	)	$	(460,315	)	$	1,099,874
Pro forma	$	141,199	$	(165,519	)	$	(478,954	)	$	1,063,744
Basic net income (loss) per common share:
As reported	$	.05	$	(.05	)	$	(.15	)	$	.35
Pro forma	$	.04	$	(.05	)	$	(.15	)	$	.34
Diluted net income (loss) per common share:
As reported	$	.05	$	(.05	)	$	(.15	)	$	.34
Pro forma	$	.04	$	(.05	)	$	(.15	)	$	.33
Stock based compensation:
As reported	0		0			0			0
Pro forma	$	7,633	$	10,218		$	18,639		$	36,130

8

In determining the compensation cost of options granted during the three and nine months ended September 30, 2003 and 2002, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2003	2002		2003	2002
Risk-free interest rate	N/A	4.62	%	N/A	4.62	%
Expected life of options granted	N/A	5 years		N/A	5 years
Expected volatility	N/A	52.2	%	N/A	52.2	%
Expected dividend yield	N/A	2.67	%	N/A	2.67	%

Note 5.  Net Income (loss) Per Share

The Company’s basic net income (loss) per share amounts have been computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company’s diluted net income (loss) per share is computed by dividing net income (loss) 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, 2003, 66,334 shares of common stock equivalents were included in the computation of diluted net income (loss) per share. For the nine months ended September 30, 2003, the shares were anti-dilutive.

Options to purchase 36,500 shares of common stock with a weighted average exercise price of $4.28 were outstanding for the three months ending September 30, 2003, but were excluded from the computation of common share equivalents because their exercise prices were greater than the average market price of the common shares for the period

Note 6.  Investments

INV’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 investments in anticipation of short-term fluctuations in market prices, investments in marketable equity securities are 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.  Investments in unregistered securities are reported at original cost. Dividends on equity securities held for investment are recognized in income when declared.

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 in the period realized.

9

At September 30, 2003, the Company owned 2,207,036 shares of PPTV, which is 21.8% of PPTV’s outstanding common stock.  The fair value of its holdings based on the quoted market price at September 30, 2003 was approximately $1,655,277.  The Company exercised its warrants to purchase 549,084 additional shares of PPTV common stock at a per share price of $0.70 on September 29, 2003.  The Company holds no more warrants to purchase additional PPTV common stock.

In connection with a 2002 additional investment in PPTV, it was determined, solely for financial accounting purposes, that the Company could likely exercise significant influence over the operations of PPTV.  As a result, its ownership interest is now reported using the equity method of accounting for investments.  The investment was previously reported as an available-for-sale security, showing the market value on the balance sheet and recording any unrealized gains and losses in other comprehensive income.

Under the equity method of accounting, the Company’s proportionate share of PPTV 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.

Note 7.  Comprehensive Income

Comprehensive income includes the Company’s net income (loss) plus other comprehensive income items that are excluded from net income (loss).  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 (loss).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net Income (Loss)	$	148,832		$	(155,301	)	$	(460,315	)	$	1,099,874
Other Comprehensive Gain (Loss):
Change in unrealized value of investments, net of income taxes	4,025,841			(2,628,252		)	5,246,081			(4,277,335		)
Less:
Reclassification adjustment for gains included in net income (loss)	(516,639		)	(102,756		)	(546,168		)	(1,565,555		)
Total comprehensive income (loss)	$	3,658,034		$	(2,886,309	)	$	4,239,598		$	(4,693,016	)

10

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 marketable and non-marketable 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 Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
External sales
Production monitoring	$	1,038,542		$	974,886		$	2,760,872		$	2,828,457
Character recognition	108,668			179,401			397,124			588,925
Investments	0			0			0			0
Total	$	1,147,210		$	1,154,287		$	3,157,996		$	3,417,382
Income (loss) before income taxes
Production monitoring	$	216,009		$	(20,759	)	$	109,517		$	(46,499	)
Character recognition	(35,214		)	(85,500		)	(78,046		)	(154,568		)
Investments	228,222			(134,370		)	(384,130		)	1,966,937
Total	$	409,019		$	(240,629	)	$	(352,656	)	$	1,765,870

11

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

RESULTS OF OPERATIONS

Net Sales

Net sales for the three-month period ended September 30, 2003 decreased $7,077 or 0.60% when compared to net sales for the same period in 2002. For the nine-month period ended September 30, 2003, net sales decreased $259,386 or 8.2% for the same period in 2002.

The decrease from the three-months ending September 30, 2003 when compared to the same period in 2002, includes an increase in Net sales from the Controls Division of $63,655 or 6.1% offset by a decrease of $70,733 from ADS.  For the nine-months ending September 30, 2003, net sales from the Controls Division decreased $67,585 and net sales from ADS decreased $191,801.  The Controls Division increase in net revenues for the three months ended September 30, 2003 reflects, we believe, a gradual improvement in the economic conditions of the businesses in its core markets.  In addition, we have hired four manufacturer representation firms across the country to work with Controls Division products to better market the products in certain areas of the USA.  Our inside sales reps have increasingly been personally traveling to meet with current and prospective customers to attempt to increase net sales.  This decrease in ADS net sales for the three and nine-month periods is primarily due to the decrease in sales of ExpertScan, which was released for BETA sale in September 2002.

Cost of Goods Sold

The Company’s cost of goods sold decreased $50,523 or 11.7% for the three months ended September 30, 2003 when comparing the same period in 2002.  This decrease is a direct result of decreased sales in the three months ended September 30, 2003, but is offset by decreased cost savings from improved operating efficiencies resulting in increased gross profit percentages.

When comparing the nine-month period ending September 30, 2003 to the same period in 2002, the decrease is $235,620 or 19.4%.  In addition to the decrease resulting from the lower sales volume, cost of sales was reduced as a result of staff reduction and the Company’s efforts to reduce production costs.

Gross Profit

Gross margins for the three-month period ended September 30, 2003 were 62.6% versus 58.4% for the same period of the prior fiscal year.  Gross margins for the nine-month period ended September 30, 2003 were 61.5% versus 57.5% for the same period of the prior fiscal year.  In line with the cost of sales decrease, the increases in margins are due to the Company’s efforts to reduce production costs.  There are less personnel involved in production when comparing the nine-month period ending September 30, 2003 to the same period ending September 30, 2002.  Also, business insurance premiums have decreased by 14.3%, a significant decrease when comparing the three- and nine-month periods ending September 30, 2003 to the same periods ending September 30, 2002.

12

Operating Expenses

Total operating expenses decreased $187,790 or 29.8% for the three months ended September 30, 2003 when compared to the same period of the prior year.  Operating expenses for the nine-month period ended September 30, 2003 decreased $149,300 or 6.8%.

Selling and marketing costs decreased $32,432 or 12.1% for the three months ended September 30, 2003 when compared to the same period in 2002.  Of this decrease, the Controls Division contributed $38,455, which is offset by an increase from ADS of $6,023.  For the nine-month period ended September 30, 2003, the selling and marketing costs increased $40,906 or 4.7% when compared to the same period for 2002.  Of this increase, the Controls Division contributed a decrease of  $20,743 and ADS contributed an increase of  $61,649.  Marketing communications development for product launches, a greater number of field sales trips, new literature, and ad development are the predominant expenses in the increases.  Salaries and personnel expenses are up due to sales and marketing personnel being hired in the second half of 2002 in both divisions when comparing 2003 versus 2002.

General and administrative costs decreased $40,447 or 19.7% for the three months ended September 30, 2003 compared to the same period in 2002. Of this decrease, the Controls Division contributed $48,886 offset by and increase of $8,439 from ADS.  For the nine-month period ended September 30, 2003, the general and administrative costs increased $53,260 or 7.2%.  Of this increase, the Controls Division contributed $5,163 and ADS contributed $48,097.  The increase is primarily due to a change in procedure for accounting for general company expenses.  Historically, the company divided general expenses such as liability insurance, office supplies, and building expenses over the various departments based on a set percentage.  Beginning January 2003, we have determined to classify such general expenses into General and Administrative costs.

Research and development costs decreased $114,911 or 73.1% for the three months ended September 30, 2003 compared to the same period in 2002.  Of this decrease, ESI contributed $62,805 and ADS contributed $52,106.  The decrease in ESI is due to reduced outside development costs in both contract engineering and prototype development.  The decrease in ADS is due to reduced development expenses for the ExpertScan products, which were released in December 2002.  Software personnel for on-going product development have been brought in-house at a lower cost than external services.

Non-Operating Income (Loss)

Non-operating income increased by $418,412 for the three-month period ending September 30, 2003 compared to the same period for 2002.  For the nine-month period ending September 30, 2003, non-operating income decreased $2,244,109.  Non-operating income decreased primarily due to reduced sales of investment securities.  As the market value of August Technology stock recovered from previous lows, management decided to increase the number of August Technology shares sold during the three-months ended September 30, 2003.

Income (Loss) Before Income Taxes

Income (loss) before income taxes increased $649,648 to an income of $409,019 for the three-month period ended September 30, 2003 compared to the same period in 2002.  When comparing the nine-month period ended September 30, 2003 to the same period in 2002, income (loss) before income taxes decreased $2,118,526, to a loss of $352,656.

The Controls Division had income before income taxes of $216,011 for the three months ended September 30, 2003 compared to a net loss of $20,769 for the same period in 2002.  For the nine-month period ended September 30, 2003, the Controls Division had income before income taxes of $109,517, compared to a net loss before income taxes of $22,267 for the same period in 2002.  This difference is due to sales revenue declines that occurred at a faster rate than did expense reductions.  However, the Controls Division experienced increased sales during the three months ending September 30, 2003.

13

ADS had a net loss before income taxes of $35,214 for the three months ending September 30, 2003 compared to the net loss before income taxes of $85,500 for same period in 2002. For the nine-month period ended September 30, 2003, ADS had a net loss before income taxes of $78,046, compared to a net loss before income taxes of $154,568 for the same period in 2002. These decreases are mainly attributable to reduced research and development costs following the ExpertScan software release in December 2002.

Investment income from investment securities increased $362,582 for an income before income taxes of $228,222 for the three months ended September 30, 2003 compared to the same period in 2002.  For the nine-month period ended September 30, 2003, the investment income decreased $2,326,835 to a net loss before income taxes of $384,130.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $6,192,746 at September 30, 2003 and $6,621,601 at September 30, 2002. Cash used in operating activities of $461,817 for the nine months ended September 30, 2003 was primarily a result of our net loss adjusted for non-cash charges.

Cash provided by investing activities was $180,839 for the nine-month period ended September 30, 2003 and $1,075,809 at September 30, 2002.  Cash used for capital expenditures was $22,666 and $61,922 for the nine months ended September 30, 2003 and 2002, respectively.  Proceeds from the sale of investments for the nine months ended September 30, 2003 declined to $587,864 from $2,237,706 when compared to the same period in 2002.

Cash used in financing activities was $249,436 and $207,289 for the nine months ended September 30, 2003 and 2002, respectively.  During the nine months ended September 30, 2003 and 2002, the Company paid aggregate dividends of $284,677 and $282,964, 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.

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 upon historical facts should be 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, 2002, 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 and Reports on Form 8-K
(a)	Exhibits
	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.
(b)	Reports on Form 8-K – None.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Electro-Sensors, Inc.
November 14, 2003	/s/ Bradley D. Slye
	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, 2003

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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