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May 27, 2005

VIA EDGAR AND FACSIMILE

Mr. Jay Webb

Reviewing Accountant

Securities and Exchange Commission

Division of Corporate Finance

450 Fifth Street, N.W.

Washington, D.C. 20549

RE:  Electro-Sensors, Inc.

Form 10-KSB for
Fiscal Year Ended December 31, 2004

File No. 000-09587

Dear Mr. Webb:

This letter is being filed to respond on
behalf of Electro-Sensors, Inc., a Minnesota corporation formed in July 1968
(the “Company”), to the comments raised by your letter dated May 9, 2005
regarding the above-referenced filing.
For ease of reference, we have included each of your comments followed
by the Company’s responses.

Form 10-KSB
for the fiscal year ended December 31, 2004

General

1.               SEC COMMENT:  Please explain whether you are an investment
company under Section 3(a)(1)(C) of the Investment Company Act of
1940 (“Investment Company Act”). Please explain how you have made this
determination and provide data indicating the value of your “investment
securities” and total assets on an unconsolidated basis as of the fiscal year
ended December 25, 2004.

2.               SEC COMMENT:  If you are an investment company under Section 3(a)(1)(C),
please explain how you are in compliance with the Investment Company Act. For
example, please explain fully whether you can rely on Rule 3a-l of the
Investment Company Act.

COMPANY RESPONSE:   The Company acknowledges that its asset and
income compositions have exceeded the quantitative factors of

Section 3(c)(1) of the Investment
Company Act and Rule 3a-1 adopted thereunder.  However, the Company believes that the
limited number of investment securities it owns and the circumstances
surrounding its two primary securities holdings, together with the nature of
its historical operations, the activities of its management and its consistent
characterization of its business to the public, are consistent with a
conclusion that the Company is primarily engaged in a business other than that
of investing, reinvesting, owning, holding or trading in securities.  The Company, therefore, is entitled to rely
upon Section 3(b)(1) of the Investment Company Act and is not an
investment company.

The Investment Company Act

Section 3(a)(1)(C) of
the Investment Company Act defines “investment company” to include any company
that: (i) is engaged or proposes to engage in the business of investing,
reinvesting, owning, holding, or trading in securities and (ii) that owns
investment securities (essentially all securities except federal government
securities and securities of majority-owned subsidiaries) with a value
exceeding 40% of its total assets (excluding cash items, money market accounts
and federal government securities).  The Securities
and Exchange Commission (“SEC”) often interprets this statute solely as a
quantitative test, though some federal courts consider the quantitative test to
be primarily a “red flag” and view the “primary business” test as the ultimate
determinant of investment company status.(1)

Section 3(b)(1) exempts
any company from the provisions of Section 3(a)(1)(C) if the company
is primarily engaged in a business other than that of investing,
reinvesting, owning, holding or trading in securities.  The determination of whether a company is
eligible to rely upon Section 3(b)(1) is based upon an analysis of a
five-part, facts-and-circumstances standard involving the following criteria:

(1)                                  the company’s
historic development;

(2)                                  the company’s public
representations of policy;

(3)                                  the activities of the
company’s officers and directors;

(4)                                  the nature of the
company’s present assets; and

(5)                                  the source of the
company’s present  income.(2)

(1)  See Allison Lynne Siimes v. Salvatore
Giordana (1992 U.S. Dist. LEXIS 16235) (Dist. N.J. Oct. 8, 1992).  See also
Wilkie Farr & Gallagher, SEC No-Action Letter (publicly available Oct. 23,
2000).

(2)  See Tonopah Mining
Co. of Nevada, SEC No-Action Letter (publicly available July 21, 1947).

2

The SEC has stated that it considers the
fourth and fifth factors to be the most important.(3)

Section 3(b)(1) is an “automatic”
exemption; reliance on Section 3(b)(1) is not conditioned upon obtaining
affirmative relief from the SEC.(4)

The Company’s Classification Under the
Investment Company Act

The Company
believes that an application of the foregoing five-part facts-and-circumstances
standard supports a conclusion that it is entitled to rely upon Section 3(b)(1) and
therefore is not an investment company.

(1)                                  The issuer’s historic development.  This factor considers whether a company has
established a pattern of ordinary operations.

The Company
has historically actively conducted two distinct operating businesses: its
Controls Division and its AutoData® Systems Division.

Controls
Division

The Company’s
Controls Division manufactures and sells several different types of monitoring
systems that measure actual machine production and operation rates, as well as
systems that regulate the speed of related machines in production processes.

Speed Monitoring Systems. The Company’s
original products, speed monitoring systems, compare machine revolutions per
minute or speed against acceptable rates as determined by the customer.  The monitors generally have the same relative
operating principle, and use a non-contacting sensing head that translates the
speed of a rotating shaft into analog readouts.
The systems include a signal-generating pulser disc or wrap that
attaches to a rotating shaft, the sensing device, and a control unit.  The systems vary in complexity, from a simple
system that detects slow-downs or stoppages, to more sophisticated systems that
warn of deviations from precise tolerances and that permit various subsidiary
operations to be determined through monitoring the shaft speed.

The Company’s
speed monitoring systems include a line of digital products that translate
sensor impulses from its production monitoring systems into digital readouts
indicating production counts or rates, such as parts, gallons, or board
feet.  These speed monitoring systems also include alarm systems, tachometers,
and other devices that translate impulses from the sensors into alarm signals,
computer inputs, or digital displays that are usable by the customer.

(3)  See Investment Company Act Release No. 10937
(Nov. 13, 1979).

(4)  See Margaret A. Bancroft &
Lawrence B. Stoller, Avoiding Classification
As an Investment Company: Exemptions and Exclusions for Business Corporations,
65 C.P.S. (BNA).

3

Two
production-monitoring devices that do not operate by measuring shaft speeds are
also in the Company’s speed monitoring systems product line. These devices are
the tilt switch and vibration monitor.  A
tilt switch is designed to alert the operator when a storage bin or production
system reaches a certain capacity (i.e. when grain fills a silo).  A
vibration monitor will alert an operator when the vibration in a production
system exceeds or is below a specified level.

Drive Control Systems.  In 1987, the
Company expanded its speed monitoring systems product line to include products
that regulate and synchronize machine speeds.  Drive control system
products not only monitor machine operation levels, but also regulate the speed
of motors on related machines in a production sequence to ensure that the
performance of the various machine(s) is coordinated.  The product line consists of a line of
digital control products for motors that require a complete closed loop PID
(Proportional Integral Derivative) control. The closed-loop controllers
coordinate production speed among process motors and reduce waste.

In 1988, the
Company entered into a sales agreement with MKS Maschinen Kontroll Systeme GmbH
(“MKS”), the West German manufacturer of a Synchronous Drive Controller (“SDC”)
product line, giving the Company exclusive rights to distribute in the United
States the drive control products manufactured by MKS.  The SDC product
line manufactured by MKS coordinates motors in a production machine with other
parts of the machine process. The SDC products were designed for use as a
precision speed reference for use with variable speed drives and enable
manufacturers to match speed/velocity and phase/position of independently
driven machines so they operate together. Applications include synchronizing
overhead and floor conveyors and load sharing of multiple motors.

AutoData®
Systems Division

In 1993, the
Company began development of its AutoData® Systems as a development project
chartered to create opportunities using proprietary pattern recognition
technology. The outcome of the project was a Microsoft® Windows®
based software system that reads hand printed characters, checkmarks, and
barcodes from scanned forms.

The Company’s
system offers an alternative to manual data entry, by automatically extracting
information from paper forms and converting it into a format compatible with
most computer databases. This intelligent data entry alternative saves time,
strain, and money compared to the method of manual data entry. The basis of the
handprint reading capability is Associative Pattern Memory™ (APM), a patented
pattern recognition algorithm. APM is a trainable, neural network-based memory
that was incorporated in a Dynamic Link Library (DLL). This DLL is the
foundation of the four products currently sold by AutoData® Systems Division.  The Company periodically develops and
releases upgrades to its software programs, as discussed in more detail in its Form 10-KSB.

4

The historical
nature of the Company’s businesses supports a conclusion that the Company is
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities.

(2)                                  The
issuer’s public representations of policy.
This factor considers a
company’s presentation of its primary business to the public.  In its periodic reports filed with the SEC,
the Company has consistently characterized its business in a manner consistent
with the description of its business outlined in the first factor above.  Although the Company’s asset and income composition
have exceeded the quantitative asset and income factors, the Company has
affirmatively stated in its periodic reports that it does not intend to be an
investment company, and that it intended to pursue a liquidation strategy with
respect to its investment in August Technology Corporation (discussed more
below).  The Company has also stated in
its periodic reports that it does not purchase securities based upon an
expectation in short-term fluctuations in values, and as a result is entitled
to classify its two primary investment as available-for-sale (which entitles
the Company to record unrealized gains and losses as a separate component of
its stockholders’ equity rather than recording changes in value in its income
statement).  Each of these facts support
a conclusion that the Company is primarily engaged in a business other
than investing, reinvesting, owning, holding or trading in securities.

(3)                                  The activities of the issuer’s officers and directors.  This factor considers the activities of a company’s
officers, directors and other management personnel.  If such persons spend their time managing and
seeking investments rather than managing operating businesses, a company is
more likely to be primarily engaged in investment activities.

The Company’
officers, directors and other management personnel principally spend their time
managing and operating the Company’s operations in a manner consistent with the
Company’s representations to the public regarding its primary businesses.  Although the Company’s officers may from time
to time evaluate whether to make investments pending their investment in the
Company’s businesses, these activities are incidental  to their primary activities and must  be taken preserve value for the Company’s
shareholders consistent with management’s fiduciary duties.  As a result, the nature of the Company’s
management team activities is consistent with a conclusion that the Company is
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities.

(4)                                  The nature of a company’s present assets.  This factor evaluates the value of a company’s
investment in securities.  Generally,
under Rule 3a-1, if 45% or more of a company’s adjusted total asset value
is attributable to securities (other than government securities, among others),
a company has a heightened risk of being deemed an investment company.

5

  (in 000’s)

  3/31/05

  12/31/04

  9/30/04

  6/30/04

  3/31/04

  12/31/03

  9/30/03

  6/30/03

  3/31/03

  Rule 3a-1
  Securities(5)

  9,440

  9,637

  6,758

  11,929

  14,187

  16,238

  12,775

  6,397

  4,279

  Total
  Assets(5)

  18,912

  19,067

  16,297

  21,449

  20,582

  23,236

  20,412

  14,638

  13,083

  Less:
  Cash Items and Gov’t Securities

  6,516

  6,464

  6,620

  6,718

  6,895

  6,863

  6,193

  6,180

  6,355

  Adjusted
  Total Assets

  12,396

  12,603

  9,677

  14,731

  13,687

  16,373

  14,219

  8,458

  6,728

  Ratio

  76.2

  %

  76.5

  %

  69.8

  %

  81.0

  %

  83.2

  %

  85.3

  %

  80.5

  %

  65.9

  %

  56.6

  %

The Company’s
two primary securities holdings are August Technology Corporation and PPT
Vision, Inc.  As of March 31,
2005, the Company owned:

•                  657,765
shares of August Technology common stock, with a market value of
$7,709,000 million and a cost of $66,000; and

•                  2,207,036
shares of PPT Vision, with a book value of $0 (due to losses recorded under and
consistent with the equity method of accounting), a market value of $1,302,000
and a cost of $2,434,000.

Together, these investments account for
$9,011,000, or 95%, of the value of the Company’s securities at March 31,
2005.(6)

The Company
invested $150,000 in August Technology in June 1994, when August Technology
was a private company.  August Technology
undertook its initial public offering in August 2000, and the value of its
common stock has increased significantly since that time.  The Company has not made any additional
investments in August Technology since its initial investment in June 1994.  The Company has adopted a publicly-stated
strategy of liquidating its investment in August Technology over time as
appropriate to help fund the Company’s operations.

The Company’s
investment in PPT Vision has been made over time, but its initial investment
was made in connection with PPT Vision granting the Company an exclusive
license in January of 1992 to use an algorithm necessary for the Company’s
“reading”

(5)  The
Company has included the market value of PPT Vision securities (determined
consistent with Section 2(1)(41)(A)(i) of the Investment Company Act)
in these calculations.  The Company’s
investment in PPT Vision is recorded at $0 on the Company’s balance sheet due
to losses recorded under and consistent with the equity method of accounting.

(6)  For
purposes of this letter, we have assumed for argument’s sake that the Company’s
investment in PPT Vision, which is accounted for under the equity method, does
not satisfy the requirements of Rule 3a-1(a)(4) since the Company may
not be deemed to “control primarily” PPT Vision.  If the Company’s does in fact “control
primarily” PPT Vision, and the other requirements of Rule 3a-1(a)(4) are
satisfied, then the Company would be entitled to exclude PPT Vision from the
numerator in the above calculations, which would reduce the Company’s ratio of
securities to adjusted total assets.

6

technology.
The Company continues to use the algorithm in the Co