Edgar Filing: ESPEY MFG & ELECTRONICS CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10 - KSB

[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2008

[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934. For the transition period from to

Commission File No. 1-4383

ESPEY MFG. & ELECTRONICS CORP.
------------------------------
(Exact name of registrant as specified in its charter)

NEW YORK 14-1387171
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

233 Ballston Avenue, Saratoga Springs, NY 12866
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(Address of principal executive offices including Zip Code)

(Registrant's telephone number including area code) (518)245-4400
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Name of Each Exchange
Title of Each class on Which Registered
------------------- -------------------
Common Stock $.33-1/3 par value American Stock Exchange
Common Stock Purchase Rights American Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to the filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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.
[ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No

Revenues for fiscal year ended June 30, 2008 were $25,701,739

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $27,908,407 based upon the closing sale price of $18.99 on the
American Stock Exchange on June 30, 2008.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at September 8, 2008
------- --------------------------------
Common stock, $.33-1/3 par value 2,328,902 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to the 2008
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III, Items 10 through 14 on
Form 10-KSB as indicated herein.

Introductory Statement

In accordance with SEC Release No. 33-8876, the registrant is eligible to file
the within Annual Report on Form 10-KSB because it qualified as a "small
business issuer" on the effective date of the amendments adopted pursuant to
said Release.

Forward-Looking Statements

This Annual Report on Form 10-KSB contains forward-looking statements that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "scheduled,"
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended. These statements are not guarantees of future
performance and involve certain risks and uncertainties that are difficult to
predict. Therefore, actual future results and trends may differ materially from
what is forecast in forward-looking statements due to a variety of factors,
including, without limitation:

o Changing priorities in the U.S. government's defense budget (including
changes in priorities in response to terrorist threats or to improve
homeland security);
o Termination of government contracts due to unilateral government action;
o Differences in anticipated and actual program performance, including the
ability to perform under long-term fixed-price contracts within estimated
costs, and performance issues with key suppliers and subcontractors;
o Potential of changing prices for energy and raw materials.

All forward-looking statements speak only as of the date of this report or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable to the
Company or any person acting on the Company's behalf are qualified by the
cautionary statements in this section. The Company does not undertake any
obligation to update or publicly release any revisions to forward-looking
statements to reflect events, circumstances or changes in expectations after the
date of this report.

PART I

Item 1. Description of Business

General

Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New
York, is engaged principally in the development, design, production and sale of
specialized electronic power supplies, a wide variety of transformers and other
types of iron-core components, and electronic system components. In some cases,
the Company manufactures such products in accordance with pre-developed
mechanical and electrical requirements ("build to print"). In other cases, the
Company is responsible for both the overall design and manufacture of the
product. The Company does not generally manufacture standardized components. The
Company operates a one-segment business and was incorporated in 1928.

The electronic power supplies and components manufactured by the Company find
application principally in (i) shipboard and land based radar, (ii) locomotives,
(iii) aircraft, (iv) short and medium range communication systems, (v)
navigation systems and (vi) land based military vehicles.

The Company's iron-core components include (i) transformers of the audio, power
and pulse types, (ii) magnetic amplifiers and (iii) audio filters. The
electronic system components manufactured by the Company include antenna systems
and high power radar transmitters. These system components utilize the Company's
own electronic power supplies, transformers and other iron-core components and
mechanical assemblies.

In the fiscal years ended June 30, 2008 and 2007, the Company's total sales were
$25,701,739 and $27,656,359, respectively. Sales to two customers accounted for
31% and 25% of total sales in 2008. Sales to two customers accounted for 30% and
29% of total sales in 2007.

Export sales in 2008 and 2007 were approximately $5,538,000 and $3,747,000,
respectively.

Sources of Raw Materials

The Company has never experienced any significant delay or shortage with respect
to the purchase of raw materials and components used in the manufacture of its
products, and has at least two potential sources of supply for a majority of its
raw materials. However, certain components used in our products are available
from only a limited number of sources, and other components are only available
from a single source. Despite the risk associated with limited or single source
suppliers, the benefits of higher quality goods and timely delivery minimize and
often limit any potential risk and can eliminate problems with part failures
during production.

Sales Backlog

At September 8, 2008, the Company's backlog was approximately $46 million. The
total backlog at June 30, 2008 was approximately $44.8 million compared to
approximately $36.3 million at June 30, 2007. The Company's total backlog
represents the estimated remaining sales value of work to be performed under
firm contracts. The Company's backlog and risks associated with government
contracts is discussed in greater detail in Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in Item 7 below.

It is presently anticipated that a minimum of $27.7 million of orders comprising
the June 30, 2008 backlog will be filled during the fiscal year ending June 30,
2009. The minimum of $27.7 million does not include any shipments, which may be
made against orders subsequently received during the fiscal year ending June 30,
2009. The estimate of the June 30, 2008 backlog to be shipped in fiscal 2009 is
subject to future events, which may cause the amount of the backlog actually
shipped to differ from such estimate.

Marketing and Competition

The Company markets its products primarily through its own direct sales
organization. Business is solicited from large industrial manufacturers and
defense companies, the government of the United States and foreign governments
and major foreign electronic equipment companies. In certain countries the
Company has external sales representatives to help solicit and coordinate
foreign contracts. The Company is also on the eligible list of contractors of
many agencies of the United States Department of Defense and generally is
automatically solicited by such agencies for procurement needs falling within
the major classes of products produced by the Company.

There is competition in all classes of products manufactured by the Company,
including from divisions of the largest electronic companies, as well as many
small companies. The Company's sales do not represent a significant share of the
industry's market for any class of its products. The principal methods of
competition for electronic products of both a military and industrial nature
include, among other factors, price, product performance, the experience of the
particular company and history of its dealings in such products. The Company, as
well as other companies engaged in supplying equipment for military use, is
subject to various risks, including, without limitation, dependence on U.S. and
foreign government appropriations and program allocations, the competition for
available military business, and government termination of orders for
convenience.

The Company's business is not considered to be seasonal. Also, management
believes that due to the nature of the Company's business the Company will not
be adversely affected by recessionary factors in the U.S. economy generally.

Research and Development

The Company's expenditures for research and development were approximately
$53,586 and $79,836 in fiscal 2008 and 2007, respectively. Some of the Company's
engineers and technicians spend varying degrees of time on either development of
new products or improvements of existing products.

Employees

The Company had 167 employees as of September 8, 2008. Some of these employees
are represented by the International Brotherhood of Electrical Workers Local
#1799. A new collective bargaining agreement was approved in June 2008. The
four-year agreement expires on June 30, 2012. The contract includes pay
increases of 4%, 3.75%, 3.75% and 4% for each year, respectively, of the
four-year contract. Relations with the Union are considered good. Union
membership at September 8, 2008 was 66 people.

Government Regulations

Compliance with federal, state and local provisions that have been enacted or
adopted to regulate the discharge of materials into the environment, or
otherwise relating to the protection of the environment, did not in fiscal year
2008, and the Company believes will not in fiscal year 2009, have a material
effect upon the capital expenditures, net income, or competitive position of the
Company.

The Company's U.S. government contract and subcontract orders are funded by
government budgets, which operate on an October-to-September fiscal year. In
February of each year, the President of the United States presents to Congress a
proposed budget for the upcoming fiscal year. This budget includes recommended
appropriations for every federal agency and is the result of months of policy
and program reviews throughout the executive branch. From February through
September of each year, the appropriations and authorization committees of
Congress review the President's budget proposals and establish the funding
levels for the upcoming fiscal year in appropriations and authorization
legislation. Once these levels are enacted into law, the Executive Office of the
President administers the funds to the agencies.

There are two primary risks associated with this process. First, the process may
be delayed or disrupted because of congressional schedules, negotiations over
funding levels for programs or unforeseen world events, which could, in turn,
alter the funding for a program or contract. Second, funding for multi-year
contracts can be changed by future appropriations, which could affect the timing
of funds, schedules and program content.

Also, our international sales are denominated in United States currency.
Consequently, changes in exchange rates that strengthen the United States dollar
could increase the price in local currencies of our products in foreign markets
and make our products relatively more expensive than competitors' products.

U.S. Government Defense Contracts and Subcontracts

Generally, U.S. government contracts are subject to procurement laws and
regulations. Some of the Company's contracts are governed by the Federal
Acquisition Regulation (FAR), which lays out uniform policies and procedures for
acquiring goods and services by the U.S. government, and agency-specific
acquisition regulations that implement or supplement the FAR. For example, the
Department of Defense implements the FAR through the Defense Federal Acquisition
Regulation (DFAR).

The FAR also contains guidelines and regulations for managing a contract after
award, including conditions under which contracts may be terminated, in whole or
in part, at the government's convenience or for default. If a contract is
terminated for the convenience of the government, a contractor is entitled to
receive payments for its allowable costs and, in general, the proportionate
share of fees or earnings for the work done. If a contract is terminated for
default, the government generally pays for only the work it has accepted. These
regulations also subject the company to financial audits and other reviews by
the government of its costs, performance, accounting and general business
practices relating to its contracts, which may result in adjustment of the
company's contract-related costs and fees.

Item 2. Description of Property

The Company's manufacturing and engineering facilities are located in Saratoga
Springs, New York.

The Saratoga Springs plant, which the Company owns, consists of various
adjoining one-story buildings on a 22 acre site, approximately eight acres of
which is unimproved. The property is not subject to mortgage indebtedness or any
other material encumbrance. The plant has a sprinkler system throughout and
contains approximately 151,000 square feet of floor space, of which 90,000 is
used for manufacturing, 24,000 for engineering, 33,000 for shipping and
climatically secured storage, and 4,000 for offices. The offices, engineering
and some manufacturing areas are air-conditioned. In addition to assembly and
wiring operations, the plant includes facilities for varnishing, potting,
plating, impregnation and spray-painting operations. The manufacturing operation
also includes a complete machine shop, with welding and sheet metal fabrication
facilities adequate for substantially all of the Company's current operations.
Besides normal test equipment, the Company maintains a sophisticated on-site
environmental test facility. In addition to meeting all of the Company's
in-house needs, the plating, machine shop and environmental facilities are
available to other companies on a contract basis.

Item 3. Legal Proceedings

None

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

None

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Price Range of Common Stock

The table below shows the range of high and low prices for the Company's common
stock on the American Stock Exchange (ticker symbol "ESP"), the principal market
for trading in the common stock, for each quarterly period for the last two
fiscal years ended June 30:

2008 High Low
First Quarter 24.08 19.71
Second Quarter 24.00 17.60
Third Quarter 23.75 14.75
Fourth Quarter 23.20 17.40

2007 High Low
First Quarter 18.30 16.10
Second Quarter 19.05 16.65
Third Quarter 19.91 16.85
Fourth Quarter 24.30 19.61

Holders

The approximate number of holders of record of the common stock was 110 on
September 8, 2008 according to records of the Company's transfer agent. Included
in this number are shares held in "nominee" or "street" name and, therefore, the
number of beneficial owners of the common stock is believed to be substantially
in excess of the foregoing number.

Dividends

The Company paid cash dividends on common stock of $2.25 and $.56 per share for
the fiscal years ended June 30, 2008 and 2007, respectively. The dividends paid
during the fiscal year ended June 30, 2008 included a special dividend of $1.50
per share that was paid on March 20, 2008. The Board of Directors has authorized
the payment of a fiscal 2009 first quarter dividend of $.225 payable September
25, 2008 to shareholders of record on September 4, 2008.

During fiscal 2008, the Company sold common stock to certain employees and
directors as they exercised existing stock options granted under a shareholder
approved plan. During the year, 45,100 shares were sold at prices that ranged
from $6.63 a share to $17.80 a share. The securities were sold for cash.
Proceeds are used for general working capital purposes.

The Company made open market purchases of equity securities in the fiscal 2008
fourth quarter totaling 2,871 shares for $53,080.

Small Business Issuer Purchases of Equity Securities

Total Number of Maximum Dollar
Shares Purchased as Value of Shares that
Part of Publicly May Yet Be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Period Shares Purchased per Share Programs Plans or Programs
----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
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April 1 - April 30 - - - $ 1,283,637
May 1 - May 31 - - - 1,283,637
June 1 - June 30 2,871 $18.49 2,871 1,230,557
----- ------ ----- -----------
Total 2,871 $18.49 2,871 $ 1,230,557
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The following table sets forth information as of June 30, 2008 with respect to
compensation plans under which equity securities of the Company may be issued.

Equity Compensation Plan Information

Number of securities to Weighted-average Number of Securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plan (excluding
Plan Category warrants and rights warrants and rights securities reflected in column (a))
----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------

Equity compensation
plans approved by
security holders 126,500 $18.40 365,600
Equity compensation
plans not approved
by security holders
--------- ---------
Total 126,500 365,600
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Business Outlook

The business outlook for the Company is excellent. The order backlog, together
with potential new orders realized from outstanding quotations by the Company,
remain at a high level. Expectations are for product mix and margins to remain
favorable for fiscal year 2009, and management expects revenues to increase in
fiscal year 2009 over fiscal year 2008. During fiscal 2008 new orders received
by the Company were approximately $34.3 million. The near record order backlog
of approximately $44.8 million at June 30, 2008 gives the Company a solid base
of future sales. It is presently anticipated that a minimum of $27.7 million of
orders comprising the June 30, 2008 backlog will be filled during the fiscal
year ending June 30, 2009. The minimum of $27.7 million does not include any
shipments, which may be made against orders subsequently received during the
fiscal year ending June 30, 2009. The backlog represents the estimated remaining
sales value of work to be performed under firm contracts.

In addition to the backlog, the Company currently has outstanding quotations
representing in excess of $33.2 million in the aggregate for both repeat and new
programs. Many potential orders are currently being discussed and negotiated
with existing and potential new customers. The outstanding quotations encompass
various new and previously manufactured power supplies, transformers, and
subassemblies. However, there can be no assurance that the Company will acquire
any or all of the anticipated orders described above, many of which are subject
to allocations of the United States defense spending and factors affecting the
defense industry and military procurement generally.

Two significant customers in fiscal 2008 represented 56% of the Company's total
sales. These sales represent significant programs which the Company is a
significant supplier of parts. While the Company has always had a small number
of customers that make up its total sales in any given year, management is
pursuing business opportunities involving significant product programs with new
and current customers with an objective of lowering the overall concentration of
sales, and minimizing the impact of loss of a significant customer or excessive
reliance upon a single major product program of a particular customer.

Management continues to invest in capital equipment to upgrade its technology
and stay current with the industry. Capital expenditures are expected to be
approximately $350,000 for fiscal 2009. Also, management along with the
Company's Board of Directors continues to look for potential opportunities to
expand the Company's business through acquisitions.

Results of Operations

Net Sales for fiscal years ended June 30, 2008 and 2007, were $25,701,739 and
$27,656,359, respectively, a 7.1% decrease. This decrease can be attributed to
the contract specific nature of the Company's business and the delivery dates on
these contracts. Also, one significant customer program experienced vendor
delivery delays for material needed to produce power supplies. This delay slowed
production efforts and helped cause a decrease in sales for the year. New orders
received in fiscal 2008 were approximately $34.3 million, representing a 30.6%
increase over the amount of new orders received in fiscal 2007. As discussed
above, the order backlog at June 30, 2008 was $44.8 million compared to $36.3
million at June 30, 2007.

For the fiscal years ended June 30, 2008 and 2007 gross profits were $6,862,246
and $6,059,967, respectively. Gross profit as a percentage of sales was 26.7%
and 21.9%, for fiscal 2008 and 2007, respectively. The primary factor in
determining gross profit and net income is product mix. The gross profits on
mature products and build to print contracts are higher as compared to products
which are still in the engineering development stage or in the early stages of
production. In any given accounting period the mix of product shipments between
higher margin mature programs and less mature programs including loss contracts,
has a significant impact on gross profit and net income. The improved gross
profit and gross profit percentage was the result of shipping more mature
products with favorable margins during fiscal 2008. Management continues to
evaluate the Company's workforce to ensure that production and overall execution
of the backlog orders and additional anticipated orders are successfully
obtained and executed. Employment of full time equivalents at June 30, 2008 was
170 compared to 179 people at June 30, 2007.

Selling, general and administrative expenses were $2,623,313 for the fiscal year
ended June 30, 2008, a decrease of $208,052, or 7.3% as compared to the prior
year. This decrease is primarily due to reduced headcount.

Other income for the fiscal years ended June 30, 2008 and 2007 was $712,252 and
$677,888, respectively, a 5.1% increase. This increase is due to increased
interest income on the Company's cash and cash equivalents and short-term
investments due to higher cash and cash equivalent and short-term investment
balances for a majority of the

year as well as an increase in scrap metal income offset by lower interest rates
on the Company's investments. The Company does not believe that there is
significant risk associated with its investment policy, since at June 30, 2008
all of the investments were primarily represented by short-term liquid
investments including certificates of deposit and money market accounts.

The effective income tax rate was 30.9% in fiscal 2008 and 34.9% in fiscal 2007.
The effective tax rate was impacted in fiscal 2008 mainly due to the qualified
production activities benefit, ESOP dividend payment deduction, offset by ESOP
differences between book expense and tax expense for currently allocated shares
and state taxes.

Net income for fiscal 2008, was $3,421,869 or $1.65 and $1.63 per share, basic
and diluted, respectively, compared to net income of $2,544,720 or $1.24 and
$1.23 per share, basic and diluted, respectively, for fiscal 2007. The increase
in net income per share was due to the decrease in both, cost of sales and
selling, general and administrative expenses, offset partially by the decrease
in sales.

Liquidity and Capital Resources

The Company's working capital is an appropriate indicator of the liquidity of
its business, and during the past two fiscal years, the Company has funded all
of its operations with cash flows resulting from operating activities and when
necessary from its existing cash and investments. The Company did not borrow any
funds during the last three fiscal years. Management had available a $3,000,000
line of credit to help fund further growth or working capital needs, but did not
anticipate the need for any borrowed funds in the foreseeable future and
therefore did not renew the line of credit which expired November 30, 2007.

The Company's working capital as of June 30, 2008 and 2007 was $27,448,722 and
$28,301,566, respectively. During 2008 and 2007 the Company repurchased 36,091
and 16,269 shares, respectively, of its common stock from the Company's Employee
Retirement Plan and Trust ("ESOP") and in other open market transactions, for a
total purchase price of $769,443 and $298,064 respectively. At the Company's
Board of Directors meeting held on August 15, 2008 the Board of Directors
increased management's authorization to purchase an additional $2 million of
Company stock.

The table below presents the summary of cash flow information for the fiscal
year indicated:

2008 2007
---- ----
Net cash provided by operating activities......... $ 4,147,247 $ 6,075,626
Net cash used in investing activities............. (3,598,961) (948,993)
Net cash used in financing activities ............ (4,792,644) (1,103,137)

Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchase of inventory, receipt of progress payments, level
of sales and payments of accounts payable. Net cash used in investing activities
increased in fiscal 2008 due to the purchase of short-term investments. The
increase in cash used in financing activities is due primarily to the purchase
of treasury shares and an increase in dividends paid on common stock, including
a special dividend of $1.50 per share that was paid in March 2008.

The Company believes that the cash generated from operations and when necessary,
from existing cash and cash equivalents, will be sufficient to meet its
long-term funding requirements for the foreseeable future.

Management believes that the Company's reserve for bad debts of $3,000 is
adequate given the customers with whom the Company does business. Historically,
bad debt expense has been minimal.

During fiscal year 2008 and fiscal 2007, the Company expended $517,959 and
$565,003, respectively, for plant improvements and new equipment. The Company
has budgeted approximately $350,000 for new equipment and plant improvements in
fiscal 2009. Management anticipates that the funds required will be available
from current operations.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in note 2 to the financial
statements. We believe our most critical accounting policies include revenue
recognition and cost estimation on our contracts.

Revenue Recognition and Estimates

A significant portion of our business is comprised of development and production
contracts. Generally revenues on long-term fixed-price contracts are recorded on
a percentage of completion basis using units of delivery as the measurement
basis for progress toward completion.

Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedules. Contract costs include material, subcontract costs, labor
and an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of contract costs could be recorded if different
assumptions were used, based on changes in circumstances, in the estimation of
cost at completion. When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.

Item 7. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Espey Mfg. & Electronics Corp.
Saratoga Springs, New York

We have audited the accompanying balance sheet of Espey Mfg. &
Electronics Corp. as of June 30, 2008, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the two-year
period ended June 30, 2008. Espey Mfg. & Electronics Corp.'s management is
responsible for these financial statements. 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. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present
fairly, in all material respects, the financial position of Espey Mfg. &
Electronics Corp. as of June 30, 2008, and the results of its operations and its
cash flows for each of the years in the two-year period ended June 30, 2008 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Rotenberg & Co., LLP
------------------------
Rochester, New York
September 8, 2008

Espey Mfg. & Electronics Corp.
Balance Sheet
June 30, 2008
-------------------------------------------------------------------------------------

ASSETS
Cash and cash equivalents ....................................... $ 6,851,753
Short term investments .......................................... 7,336,000
Trade accounts receivable, net .................................. 3,646,127
Income tax receivable ........................................... 276,087
ESOP receivable due to dividends on unallocated shares .......... 36,809
Other receivables ............................................... 4,348

Inventories:
Raw materials and supplies ............................. 1,575,116
Work-in-process ........................................ 1,151,332
Costs related to contracts in process, net of progress
payments of $959,175 ................................. 7,461,786
------------
Total inventories ......................... 10,188,234

Deferred income taxes ........................................... 169,853
Prepaid expenses and other current assets ....................... 355,688
------------
Total current assets ...................... 28,864,899
------------
Property, plant and equipment, net .............................. 2,956,590
Loan receivable ................................................. 65,003
------------

Total assets .............................. $ 31,886,492
============

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable ................................................ $ 600,931
Accrued expenses:
Salaries, wages and commissions ........................ 184,377
Vacation ............................................... 542,441
Other .................................................. 46,253
Payroll and other taxes withheld and accrued .................... 42,175
Income taxes payable ............................................ --
------------
Total current liabilities ................. 1,416,177
------------
Deferred income taxes ........................................... 132,578
------------
Total liabilities ......................... 1,548,755
------------

Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; Issued 3,029,874 shares in
2008. Outstanding 2,325,902 (includes 225,000
Unearned ESOP Shares) ............................. 1,009,958
Capital in excess of par value .................................. 13,476,609
Retained earnings ............................................... 25,796,703
------------
40,283,270

Less: Unearned ESOP shares ................................... (3,251,248)
Cost of 703,972 shares of common stock in treasury ..... (6,694,285)
------------
Total stockholders' equity ................ 30,337,737
------------

Total liabilities and stockholders' equity $ 31,886,492
============

The accompanying notes are an integral part of the financial statements.

Espey Mfg. & Electronics Corp.
Statements of Income
Years Ended June 30, 2008 and 2007
--------------------------------------------------------------------------------

2008 2007
---- ----
Net sales .................................... $25,701,739 $27,656,359
Cost of sales ................................ 18,839,493 21,596,392
----------- -----------
Gross profit ........................ 6,862,246 6,059,967

Selling, general and administrative expenses . 2,623,313 2,831,365
----------- -----------
Operating income .................... 4,238,933 3,228,602

Other income (expense)
Interest and dividend income ........ 640,412 614,229
Other ............................... 71,840 63,659
----------- -----------
Total other income, net ...... 712,252 677,888
----------- -----------

Income before income taxes ................... 4,951,185 3,906,490

Provision for income taxes ................... 1,529,316 1,361,770
----------- -----------

Net income ........ $ 3,421,869 $ 2,544,720
=========== ===========

Net income per share:
Basic ............................... $ 1.65 $ 1.24
Diluted ............................. $ 1.63 $ 1.23
----------- -----------

Weighted average number of shares outstanding:
Basic ............................... 2,079,734 2,048,626
Diluted ............................. 2,103,836 2,077,664
=========== ===========

The accompanying notes are an integral part of the financial statements.

Espey Mfg. & Electronics Corp.
Statements of Changes in Stockholders' Equity
Years Ended June 30, 2008 and 2007
-----------------------------------------------------------------------------------------------------------------

Outstanding Capital in Unearned
Common Excess of ESOP Retained
Shares Amount Par Value Shares Earnings
------------ ------------ ------------ ------------ ------------
Balance as of June 30, 2006 2,304,562 $ 1,009,958 $ 12,506,749 $(3,961,079) $ 25,651,945
------------ ------------ ------------ ------------ ------------

Net income, 2007 2,544,720

Stock options exercised 28,600 51,620

Stock option expense 170,698

Dividends paid on common stock
$.56 per share (1,142,340)

Tax effect of stock options exercised 49,697

Purchase of treasury stock (16,269)

Reduction of unearned ESOP shares 111,505 360,620
------------ ------------ ------------ ------------ ------------

Balance as of June 30, 2007 2,316,893 $1,009,958 $12,890,269 $(3,600,459) $27,054,325
------------ ------------ ------------ ------------ ------------

Net income, 2008 3,421,869

Stock options exercised 45,100 200,744

Stock option expense 143,530

Dividends paid on common stock
$2.25 per share (4,679,491)

Tax effect of stock options exercised 83,471

Purchase of treasury stock (36,091)

Reduction of unearned ESOP shares 158,595 349,211
------------ ------------ ------------ ------------ ------------

Balance as of June 30, 2008 2,325,902 $1,009,958 $13,476,609 $(3,251,248) $25,796,703
============ ============ ============ ============ ============

The accompanying notes are an integral part of the financial statements.

(Continued)

Treasury Stock Total
--------------------------- Stockholders'
Shares Amount Equity
------------ ------------ ------------

Balance as of June 30, 2006 725,312 $ (6,234,803) $ 28,972,770
============ ============ ============

Net income, 2007 2,544,720

Stock options exercised (28,600) 235,950 287,570

Stock option expense 170,698

Dividends paid on common stock
$.56 per share (1,142,340)

Tax effect of stock options exercised 49,697

Purchase of treasury stock 16,269 (298,064) (298,064)

Reduction of unearned ESOP shares 472,125
------------ ------------ ------------

Balance as of June 30, 2007 712,981 $ (6,296,917) $ 31,057,176
------------ ------------ ------------

Net income, 2008 3,421,869

Stock options exercised (45,100) 372,075 572,819

Stock option expense 143,530

Dividends paid on common stock (4,679,491)
$2.25 per share

Tax effect of stock options exercised 83,471

Purchase of treasury stock 36,091 (769,443) (769,443)

Reduction of unearned ESOP shares 507,806
------------ ------------ ------------

Balance as of June 30, 2008 703,972 $ (6,694,285) $ 30,337,737
============ ============ ============

The accompanying notes are an integral part of the financial statements.

Espey Mfg. & Electronics Corp.
Statements of Cash Flows
Years Ended June 30, 2008 and 2007
------------------------------------------------------------------------------------

2008 2007
---- ----

Cash Flows From Operating Activities:
Net income ....................................... $ 3,421,869 $ 2,544,720

Adjustments to reconcile net income to net cash
provided by operating activities:

Excess tax benefits from share-based compensation 83,471 49,697

Stock-based compensation ......................... 143,530 170,698

Depreciation ..................................... 491,526 504,243

ESOP compensation expense ........................ 507,805 472,125

Loss on disposal of assets ....................... 4,353 8,692

Deferred income tax benefit ...................... (38,510) (60,449)

Changes in assets and liabilities:

(Increase) decrease in trade receivables, net (625,646) 1,192,747

Increase in income tax receivable (276,087) --

(Increase) decrease in other receivables .... (900) 3,436

Increase in ESOP receivable due to dividends
on unallocated shares .................... (36,809) --

Decrease in inventories, net ................ 961,093 1,255,052

Decrease in prepaid expenses and other
current assets ........................... 192,524 5,915

(Decrease) increase in accounts payable ..... (380,020) 365,365

Increase in accrued salaries,
wages and commissions .................... 22,175 34,195

Increase (decrease) in other accrued expenses 200 (5,365)

(Decrease) increase in vacation accrual ..... (40,040) 37,058

Increase in payroll and
other taxes withheld and accrued ......... 127 1,469

Decrease in income taxes payable ............ (283,414) (503,972)
----------- -----------

Net cash provided by
operating activities ......... $ 4,147,247 $ 6,075,626
----------- -----------

The accompanying notes are an integral part of the financial statements.

(Continued)

Cash Flows From Investing Activities:

Additions to property, plant and equipment ...... (517,959) (565,003)

Payment for loan receivable ..................... (80,000) --

Proceeds from return of loan receivable ......... 14,998 --

Purchase of short term investments .............. (8,135,000) (4,896,000)

Proceeds from maturity of short term investments 5,119,000 4,512,000

Proceeds on sale of assets, net ................. -- 10
------------ ------------

Net cash used in
investing activities ........ (3,598,961) (948,993)
------------ ------------

Cash Flows From Financing Activities:

Dividends on common stock ....................... (4,679,491) (1,142,340)

Purchase of treasury stock ...................... (769,443) (298,064)

Proceeds from exercise of stock options ......... 572,819 287,570

Excess tax benefits from share-based compensation 83,471 49,697
------------ ------------

Net cash used in
financing activities ........ (4,792,644) (1,103,137)
------------ ------------

(Decrease) increase in cash and cash equivalents ..... (4,244,358) 4,023,496

Cash and cash equivalents, beginning of the year ..... 11,096,111 7,072,615
------------ ------------

Cash and cash equivalents, end of the year ........... $ 6,851,753 $ 11,096,111
============ ============

Supplemental Schedule of Cash Flow Information:

Income taxes paid ............................... $ 1,970,000 $ 1,826,746
============ ============

The accompanying notes are an integral part of the financial statements.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 1. Nature of operations

Espey Mfg. & Electronics Corp. (the Company) is a manufacturer of electronic
equipment used primarily in military and industrial applications. The principal
markets for the Company's products are companies that provide electronic support
to both military and industrial applications.

Note 2. Summary of Significant Accounting Policies

Inventory Valuation, Cost Estimation and Revenue Recognition Raw materials are
valued at weighted average cost.

Inventoried work relating to contracts in process and work in process is valued
at actual production cost, including factory overhead incurred to date. Work in
process represents spare units; parts and other inventory items acquired or
produced to service units previously sold or to meet anticipated future orders.
The cost elements of contracts in process and work in process consist of
production costs of goods and services currently in process and overhead.
Provision for losses on contracts is made when the existence of such losses
becomes probable and estimateable. The costs attributed to units delivered under
contracts are based on the estimated average cost of all units expected to be
produced. Certain contracts are expected to extend beyond twelve months.

Revenue is recognized on contracts in the period in which the units are
delivered and billed (units-of-delivery method). A significant portion of our
business is comprised of development and production contracts. Generally,
revenues on long-term fixed-price contracts are recorded on a percentage of
completion basis using units of delivery as the measurement basis for progress
toward completion.

Depreciation
Depreciation of plant and equipment is computed on a straight-line basis over
the estimated useful lives of the assets.

Estimated useful lives of depreciable assets are as follows:

Buildings and improvements 10 - 35 years
Machinery and equipment 3 - 25 years
Furniture, fixtures and office equipment 5 - 10 years

Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes."

Under the provisions of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes and liabilities of a change in tax rates is recognized
in earnings in the period that includes the enactment date. In addition, SFAS
No. 109 requires that the tax benefit of tax-deductible dividends on unallocated
ESOP shares be recorded as a direct addition to retained earnings rather than as
a reduction of income tax expense.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 2. Summary of Significant Accounting Policies, Continued

Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of deposit, and
money market accounts. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.

Short-term investments include certificates of deposit with maturities greater
than three months to a year.

Accounts receivable and allowance for doubtful accounts
The Company extends credit to its customers in the normal course of business and
collateral is generally not required for trade receivables. Exposure to credit
risk is controlled through the use of credit approvals, credit limits and
monitoring procedures. Accounts receivable are reported net of an allowance for
doubtful accounts. The Company estimates the allowance based on its analysis of
specific balances, taking into consideration the age of the past due account and
anticipated collections resulting from legal issues. An account is generally
considered past due after thirty (30) days from the invoice date. Based on these
factors, there was an allowance for doubtful accounts of $3,000 at June 30,
2008. Changes to the allowance for doubtful accounts are charged to expense and
reduced by charge-offs, net of recoveries.

Per Share Amounts
SFAS 128 "Earnings Per Share" requires the Company to calculate net income
(loss) per share based on basic and diluted net income (loss) per share, as
defined. Basic EPS excludes dilution and is computed by dividing net income
(loss) by the weighted average number of shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. The dilutive effect of outstanding options issued by the Company are
reflected in diluted EPS using the treasury stock method. Under the treasury
stock method, options will only have a dilutive effect when the average market
price of common stock during the period exceeds the exercise price of the
options.

Comprehensive Income
Comprehensive Income for the years ended June 30, 2008 and 2007 is equal to net
income.

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 reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Investment Tax Credits
Investment tax credits are accounted for as a reduction of income tax expense in
the year taxes payable are reduced.

Reclassifications
Certain reclassifications may have been made to the prior year financial
statements to conform to the current year presentation.

Recently Issued Accounting Standards
In May 2008, the FASB issued Statement of Financial Accounting Standard No. 162
("SFAS 162"), The Hierarchy of Generally Accepted Accounting Principals. SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company is
currently evaluating the impact of SFAS 162 on its financial statements but does
not expect it to have a material effect.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 2. Summary of Significant Accounting Policies, Continued

In February 2007, the FASB issued Statement of Financial Accounting Standard No.
159 ("SFAS 159"), The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 provides companies with an option to report selected
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. SFAS 159 is effective beginning July
1, 2008. The adoption of the provisions of SFAS 159 is not expected to have a
material effect on the Company's Financial Statements.

In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. In particular, this interpretation requires uncertain tax
positions to be recognized only if they are "more-likely-than-not" to be upheld
based on their technical merits. Additionally, the measurement of the tax
position will be based on the largest amount that is determined to have greater
than a 50% likelihood of realization upon ultimate settlement. Any resulting
cumulative effect of applying the provisions of FIN 48 upon adoption would be
reported as an adjustment to the beginning balance of retained earnings in the
period of adoption. FIN 48 was effective beginning July 1, 2007. The adoption of
FIN 48 did not have a material effect on the Company's financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157 ("SFAS 157"), Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements, but does not require any new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those years. The Company is currently evaluating the effect of the guidance
contained in SFAS 157 and does not expect the implementation to have a material
effect on the Company's financial statements.

Impairment of Long-Lived Assets
Long-lived assets, including property, plant, and equipment, are reviewed 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 estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and no longer depreciated.
The assets and liabilities of a disposed group classified as held for sale are
presented separately in the appropriate asset and liability sections of the
balance sheet

Concentrations of Risk
The market for our defense electronics products is largely dependent on the
availability of new contracts from the United States and foreign governments to
prime contractors to which we provide components. Any decline in expenditures by
the United States or foreign governments may have an adverse effect on our
financial performance.

The FAR also contains guidelines and regulations for managing a contract after
award, including conditions under which contracts may be terminated, in whole or
in part, at the government's convenience or for default. If a contract is
terminated for the convenience of the government, a contractor is entitled to
receive payments for its allowable costs and, in general, the proportionate
share of fees or earnings for the work done. If a contract is terminated for
default, the government generally pays for only the work it has accepted. These
regulations also subject the Company to financial audits and other reviews by
the government of its costs, performance, accounting and general business
practices relating to its contracts, which may result in adjustment of the
Company's contract-related costs and fees.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 3. Contracts in Process

Contracts in process at June 30, 2008 and 2007 are as follows:

2008 2007
---- ----

Gross contract value $44,784,584 $36,265,636

Costs related to contracts in process, net
of progress payments of $959,175 in fiscal
2008 and $206,238 in fiscal 2007 $ 7,461,786 $ 7,255,422

Included in costs relating to contracts in process at June 30, 2008 and 2007 are
costs of $1,911,986 and $865,097, respectively, relative to contracts that may
not be completed within the ensuing year. Under the units-of-delivery method,
the related sale and cost of sales will not be reflected in the statement of
income until the units under contract are shipped.

Note 4. Property, Plant and Equipment

A summary of the original cost of property, plant and equipment at June 30, 2008
and 2007 is as follows:

2008 2007
---- ----
Land $ 45,000 $ 45,000
Building and improvements 4,639,626 4,478,437
Machinery and equipment 6,706,541 6,528,069
Furniture, fixtures and office equipment 156,884 143,221
------------ ------------
11,548,050 11,194,727
Accumulated depreciation (8,591,460) (8,260,217)
------------ ------------
$ 2,956,590 $ 2,934,510
============ ============

Depreciation expense was $491,526 and $504,243, during the years ended June 30,
2008 and 2007, respectively.

Note 5. Line of credit

Management had available a $3,000,000 line of credit to help fund further growth
or working capital needs, but did not anticipate the need for any borrowed funds
in the foreseeable future and therefore did not renew the line of credit which
expired November 30, 2007.

Note 6. Pension Expense

Under terms of a negotiated union contract, the Company is obligated to make
contributions to a union-sponsored defined benefit pension plan covering
eligible employees. Such contributions and expenses are based upon hours worked
at a specified rate and amounted to $87,159 in fiscal 2008 and $94,890 in fiscal
2007.

The Company sponsors a 401(k) plan with employee and employer matching
contributions. The employer match is 10% of the employee contribution and was
$30,125 and $32,262, for fiscal years 2008 and 2007, respectively.

Note 7. Provision for Income Taxes

A summary of the components of the provision for income taxes for the years
ended June 30, 2008 and 2007 is as follows:

2008 2007
---- ----
Current tax expense - federal $ 1,561,918 $ 1,282,953
Current tax expense - state 5,909 139,265
Deferred tax (benefit) expense (38,511) (60,448)
----------- -----------
$ 1,529,316 $ 1,361,770
=========== ===========

Deferred income taxes reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts measured by tax laws and regulations. These "temporary differences" are
determined in accordance with SFAS No. 109.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 7. Provision for Income Taxes, Continued

The combined U.S. federal and state effective income tax rates of 30.9% and
34.9%, for 2008 and 2007 respectively, differed from the statutory U.S. federal
income tax rate for the following reasons:

2008 2007
------ ------
U.S. federal statutory income tax rate 34.0% 34.0%
Increase (reduction) in rate resulting from:
State franchise tax, net of federal income tax
benefit 0.1 2.4
Foreign exportation benefit -- (0.2)
ESOP cost versus Fair Market Value 1.1 1.0
Dividend on allocated ESOP shares (1.6) (1.2)
Qualified Production Activities (2.0) (1.0)
Stock-based compensation (0.7) 0.4
Other -- (0.5)
------ ------
Effective tax rate 30.9% 34.9%
====== ======

For the years ended June 30, 2008 and 2007 deferred income tax benefit of
$(38,511) and $(60,448), respectively, result from the changes in temporary
differences for each year. The tax effects of temporary differences that give
rise to deferred tax assets and deferred tax liabilities as of June 30, 2008 and
2007 are presented as follows:

2008 2007
---- ----

Deferred tax assets:
Accrued expenses .............................. $ 126,808 $ 159,204
ESOP .......................................... 77,987 56,323
Stock-based compensation ...................... 6,775 4,850
Inventory - effect on uniform capitalization .. 26,699 --
Other ......................................... 9,572 13,612
--------- ---------
Total deferred tax assets ....... 247,841 233,989
--------- ---------

Deferred tax liabilities:
Property, plant and equipment - principally due
to differences in depreciation methods ... 210,564 235,224
--------- ---------
Total deferred tax liabilities .. 210,564 235,223
--------- ---------
Net deferred tax liability ........................ $ (37,277) $ 1,235
========= =========

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projection for future taxable income over the
period in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
temporary differences without consideration of a valuation allowance.

As the result of the implementation of the FASB interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109, the Company recognized no material adjustments to
unrecognized tax benefits. At the adoption date of July 1, 2007, and as of June
30, 2008, the Company has no unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions
in general and administrative expense. As of June 30, 2008, the Company has not
recorded any provision for accrued interest and penalties related to uncertain
tax positions.

By statute, tax years ending June 30, 2006 and 2007 remain open to examination
by the major taxing jurisdictions to which the Company is subject.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 8. Significant Customers

A significant portion of the Company's business is the production of military
and industrial electronic equipment for use by the U.S. and foreign governments
and certain industrial customers. Sales to two domestic customers accounted for
31% and 25% of total sales in fiscal 2008. Sales to two domestic customers
accounted for 30% and 29% of total sales in fiscal 2007.

Export sales in fiscal 2008 and fiscal 2007 were approximately $5,538,000 and
$3,747,000, respectively.

Note 9. Stock Rights Plan

The Company has a Shareholder Rights Plan that expires on December 31, 2009.
Under this plan, common stock purchase rights were distributed as a dividend at
the rate of one right for each share of common stock outstanding as of or issued
subsequent to April 14, 1989. Each right entitles the holder thereof to buy
one-half share of common stock of the Company at an exercise price of $25 per
share subject to adjustment. The rights are exercisable only if a person or
group acquires beneficial ownership of 15% or more of the Company's common stock
or commences a tender or exchange offer which, if consummated, would result in
the offeror individually or, together with all affiliates and associates
thereof, being the beneficial owner of 15% or more of the Company's common
stock.

If a 15% or larger shareholder should engage in certain self-dealing
transactions or a merger with the Company in which the Company is the surviving
corporation and its shares of common stock are not changed or converted into
equity securities of any other person, or if any person were to become the
beneficial owner of 15% or more of the Company's common stock, then each right
not owned by such shareholder or related parties of such shareholder (all of
which will be void) will entitle its holder to purchase, at the right's then
current exercise price, shares of the Company's common stock having a value of
twice the right's exercise price. In addition, if the Company is involved in any
other merger or consolidation with, or sells 50% or more of its assets or
earning power to another person, each right will entitle its holder to purchase,
at the right's then current exercise price, shares of common stock of such other
person having a value of twice the right's exercise price.

The Company generally is entitled to redeem the rights at one cent per right at
any time until the 15th day (or 25th day if extended by the Company's Board of
Directors) following public announcement that a 15% position has been acquired
or the commencement of a tender or exchange offer which, if consummated, would
result in the offer or, together with all affiliates and associates thereof,
being the beneficial owner of 15% or more of the Company's common stock.

Note 10. Employee Stock Ownership Plan

The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that
covers all nonunion employees who work 1,000 or more hours per year and are
employed on June 30. Prior to July 15, 2005, the ESOP owned 230,120 shares, all
of which were allocated to employees. On July 15, 2005, pursuant to a Stock
Purchase Agreement dated as of such date, the Company, by selling 150,000 shares
of its common stock, par value $0.33-1/3 per share, to the Espey Mfg. &
Electronics Corp. Employee Stock Ownership Plan Trust, provided more shares to
be allocated to employees for services rendered over the next 15 years. The ESOP
paid $28.90 per share, for an aggregate purchase price of $4,335,000. The
determination of the purchase price was based on a fairness opinion obtained by
an independent valuation firm. The ESOP borrowed from the Corporation an amount
equal to the purchase price. The loan will be repaid in fifteen (15) equal
annual installments of principal and the unpaid balance will bear interest at a
fixed rate of 6.25% per annum, the "prime rate" as quoted in The Wall Street
Journal on the date of closing. The above ESOP information has not been adjusted
for the stock split completed December 30, 2005.

The Board of Directors of the Company had approved a purchase price per share
equal to a 5% discount on the average trading price of the Company's common
stock on the American Stock Exchange on the date before closing, but in no event
greater than the fair market value as determined by an independent valuation
firm retained by the ESOP. The average trading price of the Company's common
stock on the American Stock Exchange on July 14, 2005 was $30.72.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 10. Employee Stock Ownership Plan, Continued

In making the sale, the Company relied on the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, because the shares sold
were offered only to the ESOP.

After giving effect to the transaction, the ESOP owned 380,120 shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.

The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends on unallocated shares received by the ESOP. All dividends
on unallocated shares received by the ESOP are used to pay debt service.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. As the debt is repaid, shares are released and allocated to active
employees, based on the proportion of debt service paid in the year. The Company
accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP
Shares in the statement of financial position. As shares are released or
committed-to-be-released, the Company reports compensation expense equal to the
current average market price of the shares, and the shares become outstanding
for earnings-per-share (EPS) computations. ESOP compensation expense was
$507,805 for the year ended June 30, 2008. The ESOP shares as of June 30, 2008
were as follows:

Allocated Shares 442,243
Committed-to-be-released shares --
Unreleased shares 225,000
----------

Total shares held by the ESOP 667,243
==========

Fair value of unreleased shares at June 30, 2008 $4,272,750
==========

Note 11. Stock-based Compensation

Effective July 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004),"Share-Based Payment" ("SFAS No. 123 (R)"),
which amends SFAS No. 123 and supersedes Accounting Principles Board Opinion
("APB") No. 25 in establishing standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, as well
as transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that maybe settled by the issuance of those equity instruments. SFAS No. 123(R)
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements based on the fair value of the
share-based payment. SFAS No.123(R) establishes fair value as the measurement
objective in accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership plans. As allowed
under SFAS No. 123(R), the Company elected the modified prospective method of
adoption, under which compensation cost is recognized in the financial
statements beginning with the effective date of SFAS No. 123(R) for all
share-based payments granted after that date, and for all unvested awards
granted prior to the effective date of SFAS No. 123(R). Accordingly, prior
period amounts have not been restated.

Total stock-based compensation expense recognized in the Statement of Income for
the fiscal years ended June 30, 2008 and 2007, was $143,530 and $170,698,
respectively, before income taxes. The related total deferred tax benefit was
approximately $11,239 and $13,480, for the same periods. Prior to the adoption
of SFAS No. 123(R), the Company presented all tax benefits for deductions
resulting from the exercise of stock options as operating cash flows in the
Statements of Cash Flows. SFAS No. 123(R) requires the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options to be classified and reported as both an operating cash outflow and a
financing cash inflow on a prospective basis upon adoption.

As of June 30, 2008, there was approximately $148,068 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over the next 2 years. The total deferred tax benefit
related to these awards is approximately $13,099.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 11. Stock-based Compensation, Continued

The Company has one employee stock option plan under which options may be
granted, the 2007 Stock Option and Restricted Stock Plan (the "2007 Plan"). The
Board of Directors may grant options to acquire shares of common stock to
employees of the Company at the fair market value of the common stock on the
date of grant. Generally, options granted have a two-year vesting period based
on two years of continuous service and have a ten-year contractual life. Option
grants provide for accelerated vesting if there is a change in control. Shares
issued upon the exercise of options are from those held in Treasury. The 2007
Plan was approved by the Company's shareholders at the Company's Annual Meeting
on November 30, 2007 and supercedes the Company's 2000 Stock Option Plan (the
"2000 Plan"). Options covering 400,000 shares are authorized for issuance under
the 2007 Plan. While no further grants of options may be made under the 2000
Plan, as of June 30, 2008, 126,500 options were outstanding of which 58,100 are
vested and exercisable. Options available for future grants at June 30, 2008
total 365,600.

SFAS No. 123(R) requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the Black-Scholes
option valuation model, which incorporates various assumptions including those
for volatility, expected life and interest rates.

The table below outlines the weighted average assumptions that the Company used
to calculate the fair value of each option award for the years ended June 30,
2008 and 2007, respectively:

2008 2007
----------- ----------
Dividend yield 3.0% 3.0%
Expected stock price volatility 27.03% 22.03%
Risk-free interest rate 3.12% 4.63%
Expected option life (in years) 4.0 years 4.0 years
Weighted average fair value per share
of options granted during the period $3.934 $3.284

The Company pays dividends quarterly and anticipates that it will be able to
continue to pay dividends in the foreseeable future. Expected stock price
volatility is based on the historical volatility of the Company's stock. The
risk-free interest rate is based on the implied yield available on U.S. Treasury
issues with an equivalent term approximating the expected life of the options.
The expected option life (in years) represents the estimated period of time
until exercise and is based on actual historical experience.

The following table summarizes stock option activity during the year ended June
30, 2008:

Employee Stock Options Plan
--------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Options Price Term
--------------------------------------
Balance at July 1, 2007 138,800 $15.77 7.14
Granted 34,400 $21.54 9.89
Exercised (45,100) $12.70 --
Forfeited or expired (1,600) $18.05 --
--------------------------------------
Balance at June 30, 2008 126,500 $18.40 8.36
======================================
Exercisable at June 30, 2008 58,100 $16.61 7.28
======================================

The intrinsic value of stock options exercised was $256,533, during the twelve
months ended June 30, 2008. The intrinsic value of stock options outstanding as
of June 30, 2008 was $162,099. The intrinsic value of stock options exercisable
as of June 30, 2008 was $138,299.

Note 12. Financial Instruments/Concentration of Credit Risk

The carrying amounts of financial instruments, including cash and cash
equivalents, short term investments, accounts receivable, accounts payable and
accrued expenses, approximated fair value as of June 30, 2008 and 2007 because
of the relatively short maturities of these instruments.

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 12. Financial Instruments/Concentration of Credit Risk, Continued

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. The Company maintains cash and cash
equivalents with various financial institutions. At times such investments may
be in excess of FDIC insurance limits. As disclosed in note 8, a significant
portion of the Company's business is the production of military and industrial
electronic equipment for use by the U.S. and foreign governments and certain
industrial customers. The related accounts receivable balance of the Company's
total trade accounts receivable balance, represented at June 30, 2008 by three
customers was 56.8%, and 51% by three customers at June 30, 2007.

Although the Company's exposure to credit risk associated with nonpayment of
these balances is affected by the conditions or occurrences within the U.S. and
foreign governments, the Company believes that its trade accounts receivable
credit risk exposure is limited. The Company performs ongoing credit evaluations
of its customer's financial conditions and requires collateral, such as progress
payments, in certain circumstances. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.

Note 13. Related Parties

The administration of the shares of common stock held by the ESOP Trust is
subject to the Second Amended and Restated Plan, effective as of July 1, 2002,
creating the Trust, and a Trust Agreement dated July 15, 2005. The Trustees'
rights with respect to the disposition of shares are governed by the terms of
the Plan and the Trust Agreement. As to shares that have been allocated to the
accounts of participants in the ESOP Trust, the Plan provides that the Trustees
are required to vote such shares in accordance with instructions received from
the participants. As to unallocated shares and allocated shares for which voting
instructions have not been received from participants, the Plan provides that
the Trustees are required to vote such shares in accordance with the direction
of a Committee, appointed by the Board of Directors of the Company under the
terms of the Plan and Trust Agreement. See note 10 for additional information
regarding the ESOP.

Note 14. Commitments and Contingencies

The Company at certain times enters into standby letters of credit agreements
with financial institutions primarily relating to the guarantee of future
performance on certain contracts. Contingent liabilities on outstanding standby
letters of credit agreements aggregated to zero at June 30, 2008.

Note 15. Stockholders' Equity

Reservation of Shares
The Company has reserved common shares for future issuance as follows as of June
30, 2008:

Stock options outstanding 126,500
Stock options available for issuance 365,600
-------
Number of common shares reserved 492,100
=======

The following table sets for the reconciliation of the numerators and
denominators of the basic and diluted per share computations for continuing
operations for the years ended June 30:

Espey Mfg. & Electronics Corp.
Notes to Financial Statements
--------------------------------------------------------------------------------

Note 15. Stockholders' Equity, Continued

2008 2007
---- ----

Numerator:
Net Income $ 3,421,869 $ 2,544,720
=========== ===========

Denominator:
Basic EPS:
Common shares outstanding, beginning of period 2,316,893 2,304,562
Unearned ESOP shares (249,167) (274,167)
Weighted average common shares issued during the period 24,026 15,541
Weighted average common shares purchased during the period (21,114) (6,711)
Weighted average ESOP shares earned during the period 9,096 9,401
Denominator for basic earnings per common shares -
----------- -----------
Weighted average common shares 2,079,734 2,048,626
=========== ===========

Diluted EPS:
Common shares outstanding, beginning of period 2,316,893 2,304,562
Unearned ESOP shares (249,167) (274,167)
Weighted average common shares issued during the period 24,026 15,541
Weighted average common shares purchased during the period (21,114) (6,711)
Weighted average ESOP shares earned during the period 9,096 9,401
Weighted average dilutive effect of issued or forfeited shares 24,102 29,038
Denominator for diluted earnings per common shares -
----------- -----------
Weighted average common shares 2,103,836 2,077,664
=========== ===========

Not included in this computation of earnings per share for the year ended June
30, 2008 were options to purchase 34,400 of the Company's common stock. These
items were excluded because their inclusion would have been anti-dilutive due to
the average strike price exceeding the average market price of those shares.

Note 16. Quarterly Financial Information (Unaudited)

First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------

2008
Net Sales................ $6,301,786 $6,732,144 $6,479,020 $6,188,789
Gross profit ......... 1,349,110 1,682,585 2,177,431 1,653,120
Net income............ 591,583 797,086 1,199,205 833,995

Net income per share -
Basic.................... .29 .38 .53 .45
Diluted.................. .28 .37 .53 .45

2007
Net Sales................ $6,071,906 $6,119,320 $8,059,695 $7,405,438
Gross profit ......... 1,397,308 1,258,221 1,616,134 1,788,304
Net income............ 543,050 479,911 714,030 807,729

Net income per share -
Basic.................... .27 .23 .35 .39
Diluted.................. .26 .23 .34 .39

Item 8. Changes in and disagreements with accountants on accounting and
financial disclosure

None

Item 8A(T). Controls and Procedures

Disclosure Controls and Procedures

(a) The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Annual Report on Form 10-KSB. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.

(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.

Management's Report on Internal Control Over Financial Reporting

Management of our Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as that term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including
the principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
using the criteria set forth in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation using the criteria set forth in Internal Control-Integrated
Framework, management has concluded that our internal control over financial
reporting was effective as of June 30, 2008.

This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting. Our
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only
management's report in this annual report.

Item 8B. Other information

None

PART III

The information called for by "Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a) of the Registrant", "Item 10.
Executive Compensation", "Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", "Item 12. Certain
Relationships and Related Transactions" and "Item 14. Principal Accountant Fees
and Services", is hereby incorporated by reference to the Company's Proxy
Statement for its Annual Meeting of Shareholders, (scheduled to be held on
November 30, 2007) to be filed with the SEC pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.

Item 13. Exhibits

3.1 Certificate of incorporation and all amendments thereto
(incorporated by reference to Exhibit 3.1 to Espey's Report
on Form 10-K for the year ended June 30, 2004 and Report on
Form 10-Q for the quarter ended December 31, 2004)

3.2 By-laws (incorporated by reference to Exhibit 3.2 to Espey's
Report on Form 10-Q for the quarter ended March 31, 2004)

4.1 Amended and Restated Rights Agreement, dated March 31, 1989,
as amended February 12, 1999 and December 31, 1999, between
Espey Mfg. & Electronics Corp. and Registrar and Transfer
Company (incorporated by reference to Espey's Form 8-K dated
December 20, 1999)

4.2 Description of Capital Stock (incorporated by reference to
Espey's Report on Form 8-K dated October 7, 2005)

10.1 2000 Stock Option Plan (incorporated by reference to Espey's
Definitive Proxy Statement dated December 6, 1999 for the
January 4, 2000 Annual Meeting)

10.2 Executive Officer contract (incorporated by reference to
Espey's Report on Form 10-KSB dated September 5, 2007)

10.3 2007 Stock Option and Restricted Stock Plan (incorporated by
reference to Espey's Proxy Statement dated October 23, 2007
for the November 30, 2007 Annual Meeting)

11.1 Statement re: Computation of Per Share Net income (filed
herewith)

14.1 Code of ethics (incorporated by reference to Espey's website
www.espey.com)
-------------

23.1 Consent of Rotenberg & Co., LLP (filed herewith)

31.1 Certification of the Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

31.2 Certification of the Principal Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)

32.2 Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith)

S I G N A T U R E S

Pursuant to the requirements of Section 13 and 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.

ESPEY MFG. & ELECTRONICS CORP.

/s/Howard Pinsley
------------------------------
Howard Pinsley
President and
Chief Executive Officer

/s/Howard Pinsley President
--------------------------- (Chief Executive Officer)
Howard Pinsley September 8, 2008

/s/David O'Neil Treasurer
--------------------------- (Principal Financial Officer)
David O'Neil September 8, 2008

/s/Katrina Sparano Assistant Treasurer
--------------------------- (Principal Accounting Officer)
Katrina Sparano September 8, 2008

/s/Barry Pinsley Director
--------------------------- September 8, 2008
Barry Pinsley

/s/Seymour Saslow Director
--------------------------- September 8, 2008
Seymour Saslow

/s/Michael W. Wool Director
--------------------------- September 8, 2008
Michael W. Wool

/s/Paul J. Corr Director
--------------------------- September 8, 2008
Paul J. Corr

/s/Alvin O. Sabo Director
--------------------------- September 8, 2008
Alvin O. Sabo

/s/Carl Helmetag Director
--------------------------- September 8, 2008
Carl Helmetag