Edgar Filing: ESPEY MFG & ELECTRONICS CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10 - K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended June 30, 2009
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
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Commission file number 1-4383
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ESPEY MFG. & ELECTRONICS CORP.
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(Exact name of registrant as specified in its charter)

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

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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Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- --------------------------------------------
Common Stock $.33-1/3 par value NYSE - Amex
Common Stock Purchase Rights NYSE - Amex

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

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
[ ] Yes |X| No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes |X| No
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company:
[ ] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer |X| Smaller reporting company
Indicate by check mark whether the registrant is a shell company. [ ] Yes
|X| No
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $26,659,835 based upon the closing sale price of $18.16 on
the NYSE - Amex on December 31, 2008.
At September 8, 2009, there were 2,314,803 shares outstanding of the
registrant's Common stock, $.33-1/3 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to the
2009 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-K as indicated herein.

Forward-Looking Statements

This Annual Report on Form 10-K 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. 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 and
does not have a product line. 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 artillery.

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, 2009 and 2008, the Company's total sales were
$27,241,635 and $25,701,739, respectively. Sales to two customers accounted for
33% and 30% of total sales in 2009. Sales to two customers accounted for 31% and
25% of total sales in 2008.

Export sales in 2009 and 2008 were approximately $4,691,000 and $5,538,000,
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, 2009, the Company's backlog was approximately $38.3 million. The
total backlog at June 30, 2009 was approximately $39.1 million compared to
approximately $44.8 million at June 30, 2008. 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 $29.6 million of orders comprising
the June 30, 2009 backlog will be filled during the fiscal year ending June 30,
2010. The minimum of $29.6 million does not include any shipments, which may be
made against orders subsequently received during the fiscal year ending June 30,
2010. The estimate of the June 30, 2009 backlog to be shipped in fiscal 2010 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, 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 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. In addition, the Company directly
solicits bids from the United States Department of Defense for prime contracts.

There is competition in all classes of products manufactured by the Company 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 the United States.
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
$40,678 and $53,586 in fiscal 2009 and 2008, 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 168 employees as of September 8, 2009. 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, 2009 was 70 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
2009, and the Company believes will not in fiscal year 2010, 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. Property

The Company's entire operation, including manufacturing and engineering
facilities, is 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 and Issuer Purchases of Equity Securities

Price Range of Common Stock

The table below shows the range of high and low prices for the Company's common
stock on the NYSE - Amex (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:

2009 High Low
First Quarter 22.00 18.10
Second Quarter 21.10 16.91
Third Quarter 19.85 13.05
Fourth Quarter 17.00 14.30

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

Holders

The approximate number of holders of record of the common stock was 109 on
September 8, 2009 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 $2.40 and $2.25 per share for
the fiscal years ended June 30, 2009 and 2008, respectively, which included a
special dividend of $1.50 per share during each of such fiscal years. The Board
of Directors has authorized the payment of a fiscal 2010 first quarter dividend
of $.225 payable September 25, 2009 to shareholders of record on September 4,
2009.

During fiscal 2009, 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, 8,800 shares were sold at prices that ranged
from $11.25 a share to $17.80 a share. The securities were sold for cash.
Proceeds are used for general working capital purposes.

The Company did not make any open market purchases of equity securities in the
fiscal 2009 fourth quarter.

The following table sets forth information as of June 30, 2009 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))
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(a) (b) (c)
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Equity compensation
plans approved by
security holders 140,400 $17.43 338,500
Equity compensation
plans not approved
by security holders
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Total 140,400 338,500
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Item 7. 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 2010, and management expects revenues to increase in
fiscal year 2010 over fiscal year 2009. During fiscal 2009 new orders received
by the Company were approximately $21.6 million. The order backlog of
approximately $39.1 million at June 30, 2009 gives the Company a solid base of
future sales. It is presently anticipated that a minimum of $29.6 million of
orders comprising the June 30, 2009 backlog will be filled during the fiscal
year ending June 30, 2010. The minimum of $29.6 million does not include any
shipments, which may be made against orders subsequently received during the
fiscal year ending June 30, 2010. 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 $66.6 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 2009 and 2008 represented 63% and 56%,
respectively, 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 opportunities with current and new customers
with an objective of lowering the overall concentration of sales, mitigating
excessive reliance upon a single major product of a particular program and
minimizing the impact of loss of a single significant customer. We anticipate
significant new orders against the three programs discussed below in the Results
of Operations, which, if realized, will diversify our customer base.

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 2010. 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, 2009 and 2008, were $27,241,635 and
$25,701,739, respectively, a 6% increase. This increase can be attributed to the
contract specific nature of the Company's business and the timing of deliveries
on these contracts. More specifically, shipments of power supplies, spares, and
antennas increased by approximately $2.3 million offset by a decrease of
approximately $.9 million in transformer shipments.

For the fiscal years ended June 30, 2009 and 2008 gross profits were $6,086,726
and $6,862,246, respectively. Gross profit as a percentage of sales was 22.3%
and 26.7%, for fiscal 2009 and 2008, 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
that 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 reduced gross
profit and gross profit percentage in fiscal 2009 as compared to fiscal 2008 was
primarily the result of unexpected losses incurred on three programs with
significant engineering and production time required for design efforts. These
three programs experienced significant cost overruns due to extended product
qualification testing and difficulties moving the products from engineering
design into full production. Currently, one program has completed qualification
testing and has moved into full production. The other two programs are still in
pre-qualification stages and have made significant progress towards completion.
Management is not anticipating any significant future losses on these programs.
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, 2009 was 169 compared to 170 people at June 30,
2008.

Selling, general and administrative expenses were $2,826,676 for the fiscal year
ended June 30, 2009, an increase of $203,363, or 7.8% as compared to the prior
year. This increase relates primarily to an increase in wages and commissions,
travel expenses and consulting fees.

Other income for the fiscal years ended June 30, 2009 and 2008 was $345,010 and
$712,252, respectively, a 51.6% decrease. This decrease is due to a drop in
scrap metal income and interest income on the Company's cash and cash
equivalents and short-term investments. The decrease in interest income is due
to lower interest rates available as well as lower cash and cash equivalent and
short-term investment balances. The Company does not believe that there is
significant risk associated with its investment policy, since at June 30, 2009
all of the investments were primarily represented by short-term liquid
investments including certificates of deposit and money market funds.

The effective income tax rate was 24.2% in fiscal 2009 and 30.9% in fiscal 2008.
The effective tax rate is less than the statutory tax rate mainly due to the
benefit the Company receives on its Qualified Production Activities and the
benefit derived from the ESOP dividends paid on allocated shares. The deduction
for ESOP dividends was substantially larger in 2009 as compared to 2008, due to
the special dividend of $1.50 per share that was paid to ESOP participants in
August 2009.

Net income for fiscal 2009, was $2,733,240 or $1.30 and $1.29 per share, basic
and diluted, respectively, compared to net income of $3,421,869 or $1.65 and
$1.63 per share, basic and diluted, respectively, for fiscal 2008. The decrease
in net income per share was primarily due to loss contracts in three programs
described above resulting in lower gross profits, higher selling, general and
administrative costs and the decrease in interest income.

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, when possible,
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, 2009 and 2008 was $25,726,492 and
$27,448,722, respectively. During 2009 and 2008 the Company repurchased 19,899
and 36,091 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 $311,545 and $769,443 respectively. Under existing
authorizations from the Company's Board of Directors, as of June 30, 2009,
management is authorized to purchase an additional $1,688,454 million of Company
stock.

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

2009 2008
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Net cash provided by operating activities $ 384,936 $ 4,147,247
Net cash provided by (used in) investing activities 731,666 (3,598,961)
Net cash used in financing activities (5,193,036) (4,792,644)

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 provided by investing
activities increased in fiscal 2009 due to the increase in proceeds from the
maturity of short-term investments. The increase in cash used in financing
activities is due primarily to an increase in dividends paid on common stock.
Included in dividends paid are two special dividends of $1.50 per share that
were paid in December 2008 and 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 2009 and fiscal 2008, the Company expended $280,790 and
$517,959, respectively, for plant improvements and new equipment. The Company
has budgeted approximately $350,000 for new equipment and plant improvements in
fiscal 2010. 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 expected sales and contract costs could be
recorded if different assumptions were used, based on changes in circumstances,
in the estimation process. When a change in expected sales value or estimated
cost is determined, changes are reflected in current period earnings.

Item 8. 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, 2009 and 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, 2009. 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, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the two-year period ended
June 30, 2009 in conformity with accounting principles generally accepted in the
United States of America.

/s/Rotenberg & Co. LLP
----------------------
Rochester, New York
September 7, 2009

Espey Mfg. & Electronics Corp.
Balance Sheet
June 30, 2009 and 2008
--------------------------------------------------------------------------------------------------------------
2009 2008
---- ----

ASSETS
Cash and cash equivalents ................................................ $ 2,775,319 $ 6,851,753
Short term investments ................................................... 6,349,874 7,336,000
Trade accounts receivable, net ........................................... 5,133,792 3,646,127
Income tax receivable .................................................... -- 276,087
ESOP receivable due to dividends on unallocated shares ................... 71,053 36,809
Other receivables ........................................................ 297 4,348

Inventories:
Raw materials ................................................... 1,394,441 1,575,116
Work-in-process ................................................. 1,107,880 1,151,332
Costs related to contracts in process, net of progress
payments of $60,079 in 2009 and $959,175 in 2008 .............. 10,526,884 7,461,786
------------ ------------
Total inventories .................................. 13,029,205 10,188,234

Deferred income taxes .................................................... 224,835 169,853
Prepaid expenses and other current assets ................................ 233,072 355,688
------------ ------------
Total current assets ............................... 27,817,447 28,864,899
------------ ------------
Property, plant and equipment, net ....................................... 2,738,222 2,956,590
Loan receivable .......................................................... 38,673 65,003
------------ ------------
Total assets ....................................... $ 30,594,342 $ 31,886,492
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable ......................................................... $ 999,521 $ 600,931
Accrued expenses:
Salaries, wages and commissions ................................. 219,533 184,377
Vacation ........................................................ 520,072 542,441
Other ........................................................... 42,863 46,253
Payroll and other taxes withheld and accrued ............................. 42,075 42,175
Income taxes payable ..................................................... 266,891 --
------------ ------------
Total current liabilities .......................... 2,090,955 1,416,177
------------ ------------
Deferred income taxes .................................................... 99,253 132,578
------------ ------------
Total liabilities .................................. 2,190,208 1,548,755
------------ ------------

Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; Issued 3,029,874 shares in 2009 and
2008. Outstanding 2,314,803 and 2,325,902 in 2009 and 2008,
respectively (includes 201,666 and 225,000 Unearned
ESOP Shares) .................................................. 1,009,958 1,009,958
Capital in excess of par value ........................................... 13,755,808 13,476,609
Retained earnings ........................................................ 23,485,675 25,796,703
------------ ------------
38,251,441 40,283,270

Less: Unearned ESOP shares ............................................ (2,914,077) (3,251,248)
Cost of 715,071 and 703,972 shares of common stock in
treasury in 2009 and 2008, respectively ....................... (6,933,230) (6,694,285)
------------ ------------
Total stockholders' equity ......................... 28,404,134 30,337,737
------------ ------------

Total liabilities and stockholders' equity ......... $ 30,594,342 $ 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, 2009 and 2008
--------------------------------------------------------------------------------

2009 2008
---- ----
Net sales ....................................... $ 27,241,635 $ 25,701,739
Cost of sales ................................... 21,154,909 18,839,493
------------- -------------
Gross profit ........................... 6,086,726 6,862,246

Selling, general and administrative expenses .... 2,826,676 2,623,313
------------- -------------
Operating income ....................... 3,260,050 4,238,933

Other income (expense)
Interest and dividend income ........... 327,260 640,412
Other .................................. 17,750 71,840
------------- -------------
Total other income, net ......... 345,010 712,252
------------- -------------

Income before income taxes ...................... 3,605,060 4,951,185

Provision for income taxes ...................... 871,820 1,529,316
------------- -------------

Net income ........... $ 2,733,240 $ 3,421,869
============= =============

Net income per share:
Basic .................................. $ 1.30 $ 1.65
Diluted ................................ $ 1.29 $ 1.63
------------- -------------

Weighted average number of shares outstanding:
Basic .................................. 2,107,643 2,079,734
Diluted ................................ 2,113,798 2,103,836
============= =============

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, 2009 and 2008
------------------------------------------------------------------------------------------------------------

Outstanding Capital in Unearned
Common Excess of ESOP Retained
Shares Amount Par Value Shares Earnings
----------- ----------- ----------- ----------- -----------

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
----------- ----------- ----------- ----------- -----------

Net income, 2009 2,733,240

Stock options exercised 8,800 59,932

Stock option expense 109,921

Dividends paid on common stock
$2.40 per share (5,044,268)

Tax effect of stock options exercised 30,245

Purchase of treasury stock (19,899)

Reduction of unearned ESOP shares 79,101 337,171
----------- ----------- ----------- ----------- -----------

Balance as of June 30, 2009 2,314,803 $ 1,009,958 $13,755,808 $(2,914,077) $23,485,675
=========== =========== =========== =========== ===========

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

(Continued)

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

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
============ ============ ============

Net income, 2009 2,733,240

Stock options exercised (8,800) 72,600 132,532

Stock option expense 109,921

Dividends paid on common stock
$2.40 per share (5,044,268)

Tax effect of stock options exercised 30,245

Purchase of treasury stock 19,899 (311,545) (311,545)

Reduction of unearned ESOP shares 416,272
------------ ------------ ------------

Balance as of June 30, 2009 715,071 $ (6,933,230) $ 28,404,134
============ ============ ============

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

Espey Mfg. & Electronics Corp.
Statements of Cash Flows
Years Ended June 30, 2009 and 2008
------------------------------------------------------------------------------------------------------------
2009 2008
----------- -----------

Cash Flows From Operating Activities:
Net income ............................................................... $ 2,733,240 $ 3,421,869

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

Excess tax benefits from share-based compensation ........................ 30,245 83,471

Stock-based compensation ................................................. 109,921 143,530

Depreciation ............................................................. 488,461 491,526

ESOP compensation expense ................................................ 416,272 507,805

Loss on disposal of assets ............................................... 10,695 4,353

Deferred income tax benefit .............................................. (88,305) (38,510)

Changes in assets and liabilities:

Increase in trade receivables, net .................................. (1,487,665) (625,646)

Decrease (increase) in income tax receivable ........................ 276,087 (276,087)

Decrease (increase) in other receivables ............................ 4,051 (900)

Increase in ESOP receivable due to dividends on unallocated shares .. (34,244) (36,809)

(Increase) decrease in inventories, net ............................. (2,840,971) 961,093

Decrease in prepaid expenses and other current assets ............... 122,616 192,524

Increase (decrease) in accounts payable ............................. 398,590 (380,020)

Decrease in accrued salaries, wages and commissions ................. 35,156 22,175

(Decrease) increase in other accrued expenses ....................... (3,390) 200

Decrease in vacation accrual ........................................ (22,369) (40,040)

(Decrease) increase in payroll and other taxes withheld and accrued.. (100) 127

Increase (decrease) in income taxes payable ......................... 236,646 (283,414)
----------- -----------

Net cash provided by operating activities ............... $ 384,936 $ 4,147,247
----------- -----------

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

Cash Flows From Investing Activities:

Additions to property, plant and equipment ......................... (280,790) (517,959)

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

Proceeds from return of loan receivable ............................ 26,330 14,998

Purchase of short term investments ................................. (8,087,874) (8,135,000)

Proceeds from maturity of short term investments ................... 9,074,000 5,119,000
------------ ------------

Net cash provided by (used in) investing activities 731,666 (3,598,961)
------------ ------------

Cash Flows From Financing Activities:

Dividends on common stock .......................................... (5,044,268) (4,679,491)

Purchase of treasury stock ......................................... (311,545) (769,443)

Proceeds from exercise of stock options ............................ 132,532 572,819

Excess tax benefits from share-based compensation .................. 30,245 83,471
------------ ------------

Net cash used in financing activities ............. (5,193,036) (4,792,644)
------------ ------------

Decrease in cash and cash equivalents ................................... (4,076,434) (4,244,358)

Cash and cash equivalents, beginning of the year ........................ 6,851,753 11,096,111
------------ ------------

Cash and cash equivalents, end of the year .............................. $ 2,775,319 $ 6,851,753
============ ============

Supplemental Schedule of Cash Flow Information:

Income taxes paid .................................................. $ 470,000 $ 1,970,000
============ ============

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 estimable. 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 - 20 years
Furniture and fixtures 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 funds. 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. 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, 2009. 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, 2009 and 2008 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 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 165, Subsequent Events ("SFAS
165"). SFAS 165 establishes principles and requirements for subsequent events.
SFAS 165 is effective for interim or annual financial periods ending after June
15, 2009. As such, the Company is required to adopt this standard in the current
period. Adoption of SFAS 165 did not have a significant effect on the Company's
consolidated financial statements.

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. SFAS 162 did not have
a material effect on the company's financial statements.

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

Note 2. Summary of Significant Accounting Policies, Continued

In March 2008, the FASB issued Statement of Financial Accounting Standard No.
161 ("SFAS 161"), Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. SFAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application encouraged. As such,
the Company was required to adopt these provisions at the beginning of the
fiscal year ended June 30, 2009. The adoption of the provisions of SFAS 161 did
not have a material effect on the Company's financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standard No.
160 ("SFAS 160"), Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. As such, the Company was required to adopt these provisions on January 1,
2009. The adoption of the provisions of SFAS 160 did not have a material effect
on the Company's financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standard No.
141(R) ("SFAS 141(R)"), Business Combinations. SFAS 141(R) establishes
principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
an any noncontrolling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. As such, the
Company was required to adopt these provisions on January 1, 2009. The adoption
of the provisions of SFAS 141(R) did not have a material effect on the Company's
financial statements.

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 did not 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.

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

Note 2. Summary of Significant Accounting Policies, Continued

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.

Note 3. Contracts in Process

Contracts in process at June 30, 2009 and 2008 are as follows:

2009 2008
----------- -----------

Gross contract value $39,116,487 $44,784,584
Costs related to contracts in process, net of progress payments
of $60,079 in fiscal 2009 and $959,175 in fiscal 2008 $10,526,884 $ 7,461,786

Included in costs relating to contracts in process at June 30, 2009 and 2008 are
costs of $974,342 and $1,911,986, 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, 2009
and 2008 is as follows:

2009 2008
------------ ------------
Land $ 45,000 $ 45,000
Building and improvements 4,638,879 4,639,626
Machinery and equipment 6,723,573 6,706,540
Furniture and fixtures 156,884 156,884
------------ ------------
11,564,336 11,548,050
Accumulated depreciation (8,826,114) (8,591,460)
------------ ------------
$ 2,738,222 $ 2,956,590
============ ============

Depreciation expense was $488,461 and $491,526, during the years ended June 30,
2009 and 2008, 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 $95,711 in fiscal 2009 and $87,159 in fiscal
2008.

The Company sponsors a 401(k) plan with employee and employer matching
contributions. The employer match is 10% of the employee contribution and was
$31,647 and $30,125, for fiscal years 2009 and 2008, respectively.

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

Note 7. Provision for Income Taxes

A summary of the components of the provision for income taxes for the years
ended June 30, 2009 and 2008 is as follows:

2009 2008
----------- -----------
Current tax expense - federal $ 953,319 $ 1,561,918
Current tax expense - state 6,806 5,909
Deferred tax (benefit) expense (88,305) (38,511)
----------- -----------
$ 871,820 $ 1,529,316
=========== ===========

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.

The combined U.S. federal and state effective income tax rates of 24.2% and
30.9%, for 2009 and 2008 respectively, differed from the statutory U.S. federal
income tax rate for the following reasons:

2009 2008
------ ------

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 0.1
ESOP cost versus Fair Market Value 0.7 1.1
Dividend on allocated ESOP shares (8.9) (1.6)
Qualified Production Activities (1.7) (2.0)
Stock-based compensation .1 (0.7)
Other (.1) --
------ ------
Effective tax rate 24.2% 30.9%
====== ======

For the years ended June 30, 2009 and 2008 deferred income tax benefit of
$(88,305) and $(38,511), 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, 2009 and
2008 are presented as follows:

2009 2008
-------- --------
Deferred tax assets:
Accrued expenses .............................. $124,157 $126,808
ESOP .......................................... 95,319 77,987
Stock-based compensation ...................... 8,996 6,775
Inventory - effect on uniform capitalization .. 83,575 26,699
Other ......................................... 8,108 9,572
-------- --------
Total deferred tax assets ............ 320,155 247,841
-------- --------

Deferred tax liabilities:
Property, plant and equipment - principally due
to differences in depreciation methods ...... 194,573 210,564
-------- --------

Total deferred tax liabilities ....... 194,573 210,564
-------- --------
Net deferred tax asset ............................ $125,582 $ 37,277
======== ========

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.

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

Note 7. Provision for Income Taxes, Continued

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, 2009, the Company has no unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax
positions, if any, in general and administrative expense. As of June 30, 2009,
the Company has not recorded any provision for accrued interest and penalties
related to uncertain tax positions.

By statute, tax years ending June 30, 2009, 2008 and 2007 remain open to
examination by the major taxing jurisdictions to which the Company is subject.

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
33% and 30% of total sales in fiscal 2009. Sales to two domestic customers
accounted for 31% and 25% of total sales in fiscal 2008.

Export sales in fiscal 2009 and fiscal 2008 were approximately $4,691,000 and
$5,538,000, 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.

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

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. 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
$416,272 for the year ended June 30, 2009 and $507,805 for the year ended June
30, 2008. The ESOP shares as of June 30, 2009 and 2008 were as follows:

2009 2008
---------- ----------
Allocated Shares 450,228 442,243
Committed-to-be-released shares -- --
Unreleased shares 201,666 225,000
---------- ----------

Total shares held by the ESOP 651,894 667,243
========== ==========

Fair value of unreleased shares $3,095,573 $4,272,750
========== ==========

Note 11. Stock-based Compensation

The Company follows Statement of Financial Accounting Standards No. 123(R) 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.

Total stock-based compensation expense recognized in the Statement of Income for
the fiscal years ended June 30, 2009 and 2008, was $109,921 and $143,530,
respectively, before income taxes. The related total deferred tax benefit was
approximately $9,683 and $11,239, for the same periods. 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, 2009, there was approximately $116,045 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over the next 1.75 years. The total deferred tax benefit
related to these awards is approximately $11,003.

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, and 61,500 have been granted and are outstanding as of June 30,
2009. While no further grants of options may be made under the 2000 Plan, as of
June 30, 2009, 78,900 options remain outstanding, vested and exercisable from
the 2000 Plan.

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

Note 11. Stock-based Compensation, Continued

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,
2009 and 2008, respectively:

2009 2008
--------- ---------
Dividend yield 5.30% 3.70%
Expected stock price volatility 31.41% 27.03%
Risk-free interest rate 1.79% 3.12%
Expected option life (in years) 4.3 years 4.0 years
Weighted average fair value per share
of options granted during the period $2.767 $3.934

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, 2009:

Employee Stock Options Plan
-----------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Options Price Term
-----------------------------------------
Balance at July 1, 2008 126,500 $18.40 7.36
Granted 31,800 $17.09 9.64
Exercised (8,800) $15.06 --
Forfeited or expired (9,100) $18.81 --
-----------------------------------------
Balance at June 30, 2009 140,400 $18.29 7.90
=========================================
Exercisable at June 30, 2009 78,900 $17.43 6.84
=========================================

The intrinsic value of stock options exercised was $21,073 and $258,783, during
the year ended June 30, 2009 and 2008, respectively. The intrinsic value of
stock options outstanding and exercisable as of June 30, 2009 and 2008 was
$26,220 and $138,299, respectively.

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, 2009 and 2008 because
of the relatively short maturities of these instruments.

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, as a percentage
of the Company's total trade accounts receivable balance, was 79% represented by
four customers at June 30, 2009, and 56.8%, by three customers at June 30, 2008.

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

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

Although the Company's exposure to credit risk associated with nonpayment of
these concentrated 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, 2009 and 2008.

Note 15. Stockholders' Equity

Reservation of Shares
The Company has reserved common shares for future issuance as follows as of June
30, 2009:

Stock options outstanding 140,400
Stock options available for issuance 338,500
---------
Number of common shares reserved 478,900
=========

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

2009 2008
----------- -----------

Numerator:
Net Income $ 2,733,240 $ 3,421,869
=========== ===========

Denominator:
Basic EPS:
Common shares outstanding, beginning of period 2,325,902 2,316,893
Unearned ESOP shares (225,000) (249,167)
Weighted average common shares issued during the period 5,934 24,026
Weighted average common shares purchased during the period (7,967) (21,114)
Weighted average ESOP shares earned during the period 8,774 9,096
----------- -----------
Denominator for basic earnings per common shares -
Weighted average common shares 2,107,643 2,079,734
=========== ===========

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

Note 15. Stockholders' Equity, Continued

Diluted EPS:

Common shares outstanding, beginning of period 2,325,902 2,316,893
Unearned ESOP shares (225,000) (249,167)
Weighted average common shares issued during the period 5,934 24,026
Weighted average common shares purchased during the period (7,967) (21,114)
Weighted average ESOP shares earned during the period 8,774 9,096
Weighted average dilutive effect of issued or forfeited shares 6,155 24,102
---------- ----------
Denominator for diluted earnings per common shares -
Weighted average common shares 2,113,798 2,103,836
========== ==========

Not included in this computation of earnings per share for the year ended June
30, 2009 and 2008 were options to purchase 136,000 and 34,400, respectively, of
the Company's common stock. These options 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
2009 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------

Net Sales ........... $ 6,053,519 $ 6,194,177 $ 6,709,880 $ 8,284,059
Gross profit ..... 1,151,275 625,930 1,732,812 2,576,709
Net income ....... 398,296 (42,412) 781,272 1,596,084

Net income per share -
Basic ............... .19 (.02) .37 .76
Diluted ............. .19 (.02) .37 .75

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 1,099,205 933,995

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

Note 17. Subsequent Events

Subsequent events were evaluated through September 7, 2009, the dates these
financial statements were available for issue.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None

Item 9A(T). Controls and Procedures

Evaluation of 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-K. 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, 2009.

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 9B. Other information

None

PART III

The information called for by "Item 10. Directors, Executive Officers, and
Corporate Governance", "Item 11. Executive Compensation", "Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters", "Item 13. Certain Relationships and Related Transactions, and Director
Independence" 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 20, 2009) to be filed
with the SEC pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.

PART IV

Item 15. Exhibits, Financial Statement Schedules Signatures

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 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.2 to Espey's Report on Form 8-K dated February 26,
2009)

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
Exhibit 10.2 to Espey's Report on Form 8-K dated July 27,
2009)

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
Chief Executive Officer

/s/Howard Pinsley Chief Executive Officer
--------------------------- September 8, 2009
Howard Pinsley

/s/David O'Neil Treasurer
--------------------------- (Principal Financial Officer)
David O'Neil September 8, 2009

/s/Katrina Sparano Assistant Treasurer
--------------------------- (Principal Accounting Officer)
Katrina Sparano September 8, 2009

/s/Barry Pinsley Director
--------------------------- September 8, 2009
Barry Pinsley

/s/Seymour Saslow Director
--------------------------- September 8, 2009
Seymour Saslow

/s/Michael W. Wool Director
--------------------------- September 8, 2009
Michael W. Wool

/s/Paul J. Corr Director
--------------------------- September 8, 2009
Paul J. Corr

/s/Alvin O. Sabo Director
--------------------------- September 8, 2009
Alvin O. Sabo

/s/Carl Helmetag Director
--------------------------- September 8, 2009
Carl Helmetag