UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                                   FORM 10-QSB

            [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 2006

      [ ] TRANSISTION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

             For the transition period from __________ to __________

                          Commission File Number I-4383

                         ESPEY MFG. & ELECTRONICS CORP.

               (Exact name of registrant as specified in charter)

                  NEW YORK                         14-1387171

         (State of Incorporation)    (I.R.S. Employer's Identification No.)

              233 Ballston Avenue, Saratoga Springs, New York 12866

                    (Address of principal executive offices)

           Issuer's telephone number, including area code 518-584-4100
                                                          ------------

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

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

              Class                             Outstanding at November 8, 2006
              -----                             -------------------------------
Common stock, $.33-1/3 par value                       2,314,596 shares

Transitional Small Business Disclosure Format YES [ ] NO [ ]

<PAGE>
<TABLE>
<CAPTION>

                              ESPEY MFG. & ELECTRONICS CORP.
                             Quarterly Report on Form 10-QSB
                                        I N D E X

PART I    FINANCIAL INFORMATION                                                       PAGE
<S>       <C>                                                                          <C>

          Item 1      Financial Statements:

                          Balance Sheet (Unaudited)  - September 30, 2006               1

                          Statements of Income (Unaudited) -
                          Three Months Ended September 30, 2006 and 2005                2

                          Statements of Cash Flows (Unaudited)-
                          Three Months Ended September 30, 2006 and 2005                3

                          Notes to Financial Statements (Unaudited)                     4

          Item 2      Management's Discussion and Analysis of
                      Financial Condition and Results of Operations                     8

          Item 3      Controls and Procedures                                          11

PART II   OTHER INFORMATION                                                            12

          Item 1      Legal Proceedings                                                12

          Item 2      Unregistered Sales of Equity Securities and Use of Proceeds      12

          Item 3      Defaults on Senior Securities                                    12

          Item 4      Submission of Matters to a Vote of Security Holders              12

          Item 5      Other Information                                                12

          Item 6      Exhibits                                                         13

          SIGNATURES                                                                   13

</TABLE>

<PAGE>

                          PART I: FINANCIAL INFORMATION

                         ESPEY MFG. & ELECTRONICS CORP.
                            Balance Sheet (Unaudited)
                               September 30, 2006

<TABLE>
<CAPTION>
<S>                                                                            <C>

ASSETS:

          Cash and cash equivalents                                         $  8,064,351
          Short term investments                                               4,224,000
          Trade accounts receivable, net                                       3,256,196
          Other receivables                                                        5,227

          Inventories:
                  Raw materials and supplies                                   1,831,508
                  Work-in-process                                              2,201,007
                  Costs relating to contracts in process, net of advance
                    payments of  $477,142 at September 30, 2006                8,507,544
                                                                            ------------
                               Total inventories                              12,540,059

          Deferred income taxes                                                  168,038
          Prepaid expenses and other current assets                              740,008
                                                                            ------------
                               Total current assets                           28,997,879
                                                                            ------------
          Property, plant and equipment, net                                   2,867,764
                                                                            ------------

                               Total assets                                 $ 31,865,643
                                                                            ============

LIABILITIES AND STOCKHOLDERS' EQUITY:

          Accounts payable                                                  $  1,287,651
          Accrued expenses:
                  Salaries, wages and commissions                                168,723
                  Vacation                                                       515,634
                  ESOP payable                                                    71,608
                  Other                                                           46,849
          Payroll and other taxes withheld and accrued                            45,048
          Income taxes payable                                                   134,059
                                                                            ------------
                               Total current liabilities                       2,269,572
                                                                            ------------
          Deferred income taxes                                                  211,518
                                                                            ------------
                               Total liabilities                               2,481,090
                                                                            ------------

          Common stock, par value $.33-1/3 per share
              Authorized 10,000,000 shares; issued 3,029,874 shares
              on September 30, 2006. Outstanding 2,312,596 (includes
               267,917 Unearned ESOP Shares) on September 30, 2006             1,009,958
          Capital in excess of par value                                      12,590,207
          Retained earnings                                                   25,930,546

          Less:   Unearned ESOP Shares                                        (3,961,079)
                  Cost of 717,278 Treasury shares on September 30, 2006       (6,185,079)
                                                                            ------------
                               Total stockholders' equity                     29,384,553
                                                                            ------------

                               Total liabilities and stockholders' equity   $ 31,865,643
                                                                            ============
</TABLE>

See accompanying notes to the financial statements.

                                       1
<PAGE>

                         ESPEY MFG. & ELECTRONICS CORP.
                        Statements of Income (Unaudited)
                 Three Months Ended September 30, 2006 and 2005


                                                        Three Months
                                                     2006          2005
                                                 -------------------------

Net sales                                        $ 6,071,906   $ 4,560,574
Cost of sales                                      4,674,598     3,680,284
                                                 -----------   -----------
       Gross profit                                1,397,308       880,290

Selling, general and
   administrative expenses                           726,980       669,719
                                                 -----------   -----------

       Operating income                              670,328       210,571
                                                 -----------   -----------

Other income (expense)

       Interest and dividend income                  145,511        98,934
       Other                                           3,625        (2,823)
                                                 -----------   -----------
                                                     149,136        96,111
                                                 -----------   -----------

Income before income taxes                           819,464       306,682

Provision for income taxes                           276,414        88,938
                                                 -----------   -----------

                  Net income                     $   543,050   $   217,744
                                                 ===========   ===========

Net income per share:

       Basic                                     $      0.27   $       .11
       Diluted                                   $      0.26   $       .11
                                                 -----------   -----------

Weighted average number of shares outstanding:

           Basic                                   2,034,014     2,017,164
           Diluted                                 2,060,338     2,054,942
                                                 -----------   -----------

Dividends per share:                             $    0.1300   $     .0750
                                                 ===========   ===========


As  described  in note 7, a stock  split in the form of a stock  dividend of one
share of  common  stock  for each  share of  common  stock  issued,  was paid on
December 30, 2005 (all per share and share amounts have been adjusted to reflect
this dividend).


See accompanying notes to the financial statements.

                                       2
<PAGE>

                         ESPEY MFG. & ELECTRONICS CORP.
                      Statements of Cash Flows (Unaudited)
                 Three Months Ended September 30, 2006 and 2005
<TABLE>
<CAPTION>
                                                                               September 30,
                                                                            2006           2005
                                                                        -----------    -----------
<S>                                                                         <C>            <C>
Cash Flows From Operating Activities:
       Net income                                                       $   543,050    $   217,744

       Adjustments to reconcile net income to net
       cash provided by operating activities:
       Tax effect on stock options                                           24,569             --
       Stock option compensation                                             39,189             --
       Depreciation                                                         121,128        128,874
       ESOP compensation expense                                            107,250        106,401
       Loss on disposal of assets                                             3,493          8,077
       Deferred income tax                                                  (18,204)       (17,500)
       Changes in assets and liabilities:
           Decrease in trade receivable, net                                957,032         73,779
           Decrease (Increase) in other receivables                           1,657         (6,282)
           Increase in inventories                                         (135,680)      (499,276)
           Increase in prepaid expenses and other current assets           (185,881)      (300,951)
           Increase in accounts payable                                     672,065        462,692
           Increase in accrued salaries, wages and commissions               40,716         29,805
           Decrease in other accrued expenses                                (4,551)        (5,680)
           Decrease in vacation accrual                                     (29,789)       (55,527)
           Increase in payroll and other taxes withheld and accrued           4,451          8,289
           Decrease in income taxes payable                                (520,159)      (133,907)
           Decrease in ESOP payable                                         (35,642)       (22,500)
                                                                        -----------    -----------
                  Net cash provided by (used in) operating activities     1,584,694         (5,962)
                                                                        -----------    -----------

Cash Flows From Investing Activities:
       Unearned ESOP Shares                                                      --     (4,335,000)
       Additions to property, plant and equipment                          (109,933)       (50,426)
       Purchase of short term investments                                  (864,000)    (1,920,000)
       Maturity of short term investments                                   576,000      1,632,000
                                                                        -----------    -----------
                  Net cash used in investing activities                    (397,933)    (4,673,426)
                                                                        -----------    -----------

Cash Flows From Financing Activities:
       Sale of treasury stock                                                    --      4,396,424
       Dividends on common stock                                           (264,449)      (149,903)
       Purchase of treasury stock                                           (31,126)      (417,684)
       Proceeds from exercise of stock options                              100,550         61,170
                                                                        -----------    -----------
                  Net cash (used in) provided by financing activities      (195,025)     3,890,007
                                                                        -----------    -----------

Increase (Decrease) in cash and cash equivalents                            991,736       (789,381)
Cash and cash equivalents, beginning of period                            7,072,615      9,803,507
                                                                        -----------    -----------
Cash and cash equivalents, end of period                                  8,064,351      9,014,126
                                                                        ===========    ===========

Supplemental disclosures of cash flow information:
       Income Taxes Paid                                                $   790,500    $   240,345
                                                                        ===========    ===========
</TABLE>

Non-cash investing and financing activities:
       During the period ended December 31, 2005,  the Company  effected a stock
       split  in the  form of a  stock  dividend  of  1,514,937  common  shares,
       representing one share for each share  outstanding and each share held as
       a treasury share.  This resulted in a transfer from retained  earnings to
       common stock of $504,979.

See accompanying notes to the financial statements.

                                       3
<PAGE>

                         ESPEY MFG. & ELECTRONICS CORP.
                    Notes to Financial Statements (Unaudited)
                    -----------------------------------------

Note 1. Basis of Presentation

In the opinion of management the  accompanying  unaudited  financial  statements
contain  all  adjustments  (consisting  of only  normal  recurring  adjustments)
necessary for a fair  presentation of the results for such periods.  The results
for any  interim  period are not  necessarily  indicative  of the  results to be
expected for the full fiscal year. Certain information and footnote  disclosures
normally  included in financial  statements  prepared in accordance  with United
States generally accepted accounting  principles have been condensed or omitted.
These financial statements should be read in conjunction with the Company's most
recent audited  financial  statements  included in its report on Form 10-KSB for
the year ended June 30, 2006.

Note 2. Net income per Share

Basic net income per share  excludes  dilution  and is computed by dividing  net
income available to common stockholders by the weighted average number of common
shares  outstanding  for the period.  Diluted net income per share  reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised  or converted  into common stock or resulted in the
issuance  of common  stock  that then  shared in the income of the  Company.  As
Unearned ESOP shares are released or committed-to-be-released  the shares become
outstanding for earnings-per-share computations.

Note 3. Stock Based Compensation

Prior to July 1, 2006, the Company  accounted for its  stock-based  compensation
plan under the recognition and measurement  provisions of Accounting  Principles
Board Opinion No. 25,  "Accounting for Stock Issued to Employees"  ("APB Opinion
No. 25") and related  interpretations,  as permitted by the Financial Accounting
Standards Board's ("FASB") Statement of Financial  Accounting Standards ("SFAS")
No. 123,  Accounting for Stock-Based  Compensation,  as amended by SFAS No. 148,
Accounting  for   Stock-Based   Compensation   -  Transition   and   Disclosure.
Accordingly, no stock-based compensation expense was recognized in the Statement
of Income for the three months ended  September 30, 2005, as all options granted
under the  Company's  stock-based  employee  compensation  plans had an exercise
price equal to the market  value of the  underlying  common stock on the date of
grant.  As  permitted  by SFAS No.  123,  stock-based  compensation  expense was
included  as a pro  forma  disclosure  in the Notes to the  Company's  financial
statements for the three months ended September 30, 2005.

Effective  July  1,  2006,  the  Company  adopted  the  fair  value  recognition
provisions  of  SFAS  No.  123(R),   Share-Based  Payment,  using  the  modified
prospective  transition method. Under that transition method,  compensation cost
recognized   during  the  three  months  ended   September   30,  2006  includes
compensation  expense for all stock-based  compensation awards granted prior to,
but not yet  vested  as of July 1,  2006,  based on the  grant-date  fair  value
estimated in accordance  with the provisions of SFAS No. 123.  Results for prior
periods have not been  restated,  as allowed for under the modified  prospective
transition method.

Total stock-based compensation expense recognized in the Statement of Income for
the three months ended September 30, 2006, was $39,189 before income taxes.  The
related  total  deferred  tax benefit was  approximately  $3,069,  for the three
months ended September 30, 2006.  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  September  30, 2006,  there was  approximately  $190,439 of  unrecognized
compensation  cost  related  to  stock  option  awards  that is  expected  to be
recognized as expense over a period of 1.75 years.

The Company has one employee  stock option plan, the 2000 Stock Option 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

                                       4
<PAGE>

continuous  service and have a ten year contractual  life. Option grants provide
for  accelerated  vesting  if there is a change  in  control.  Shares  issued to
satisfy  option grants are issued from Treasury  stock.  Options  authorized for
issuance under the 2000 Stock Option Plan totaled  275,300.  As of September 30,
2006,  of the options  authorized  for  issuance,  129,200  were granted and are
outstanding,  56,200 of which are vested and exercisable.  Options available for
future grants at September 30, 2006 total 103,800.

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  stock-based  employee  compensation  for the three  months  ended
September 30, 2006:
                                                          Three Months Ended
                                                          September 30, 2006
                                                          ------------------
    Dividend yield                                                2.36%
    Expected stock price volatility                              21.72%
    Risk-free interest rate                                       4.35%
    Expected option life (in years)                                5.4
    Weighted average fair value per share of options
     granted during the period                                      --

The Company  pays  dividends  quarterly  and does plan 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
the safe harbor calculation under SFAS No. 123.

The following table illustrates the effect on net income per share for the three
months  ended  September  30,  2005 as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                 September 30, 2005
                                                                 ------------------
<S>                                                                <C>
Net income, as reported                                            $   217,744

Deduct: Total stock-based employee compensation expense
        determined under fair value based method for all awards,
        net of related income taxes                                     (4,858)
                                                                   -----------
Pro forma net income                                               $   212,886
                                                                   ===========

Income per share:
Basic - as reported                                                $       .11
Basic - pro forma                                                  $       .11
Diluted - as reported                                              $       .11
Diluted - pro forma                                                $       .10
</TABLE>

The table below outlines the weighted average  assumptions as if the Company had
applied the fair value  recognition  provisions  of SFAS No. 123 to  stock-based
employee compensation for the three months ended September 30, 2005:

                                                              Three Months Ended
                                                              September 30, 2005
                                                              ------------------
Dividend yield                                                       3.0%
Expected stock price volatility                                     20.0%
Risk-free interest rate                                              4.0%
Expected option life (in years)                                      5.0
Weighted average fair value per share of options
  granted during the period                                           --


                                       5
<PAGE>

The following  table  summarizes  stock option  activity during the three months
ended September 30, 2006:

                                               Employee Stock Options Plan
                                       -----------------------------------------
                                                                       Weighted
                                        Number of      Weighted         Average
                                         Shares         Average        Remaining
                                         Subject       Exercise      Contractual
                                        To Option        Price           Term
                                       -----------------------------------------
Balance at July 1, 2006                 146,200          $14.02            8
Granted                                      --              --           --
Exercised                                (9,800)         $10.26           --
Forfeited or expired                     (7,200)         $13.39           --
                                       -----------------------------------------
Balance September 30, 2006              129,200          $14.33            8
                                       =========================================
Exercisable at September 30, 2006        56,200          $10.10          6.5
                                       =========================================

The  intrinsic  value of stock options  exercised was $35,272,  during the three
months  ended   September  30,  2006.  The  intrinsic  value  of  stock  options
outstanding and exercisable as of September 30, 2006 was $387,525.

Note 4.  Commitments and Contingencies

The Company has entered 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  $246,625 at September 30, 2006. The Company does
not expect to fund any of the amounts under the standby letters of credit.  As a
government  contractor,  the Company is continually  subject to audit by various
agencies of the U.S. Government to determine compliance with various procurement
laws and regulations.  As a result of such audits and as part of normal business
operations of the Company,  various  claims and charges can be asserted  against
the  Company.  It is not  possible  to  predict  the  outcome  of such  actions.
Currently the Company has no claims or assertions against it.

Note 5.  Recently Issued Accounting Standards

In July 2006,  the FASB issued  Interpretation  No.  ("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 will be  effective  beginning  July 1,  2007.  The
adoption of FIN 48 will not have a material  effect on the  Company's  financial
statements.

Note 6. 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 described in note 7.

                                       6
<PAGE>

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.

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
$107,250  for the  quarter  ended  September  30,  2006.  The ESOP  shares as of
September 30 (after the stock split described in note 7) were as follows:

       Allocated Shares                                           444,202
       Committed-to-be-released shares                              6,250
       Unreleased shares                                          267,917
                                                               ----------

       Total shares held by the ESOP                              718,369
                                                               ==========

       Fair value of unreleased shares at September 30, 2006   $4,554,589
                                                               ==========


Note 7. Stock Split

On December 30, 2005, the Company effected a one-for-one stock split in the form
of a  dividend  of one share of  common  stock  for each  share of common  stock
outstanding. The Company also allocated to treasury an additional share for each
share being held as a treasury  share.  All  references  to the number of common
shares,  shares related to the Company's stock option plan, as well as per share
data in the accompanying financial statements, have been adjusted to reflect the
stock split on a retroactive basis with the exception of the details  describing
the Company's ESOP transaction  which became executed on July 15, 2005 described
in note 6 and "Other Matters".  As a result of the stock split, common stock was
increased and retained earnings was decreased by $504,979.

                                       7
<PAGE>

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Overview

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  products  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.

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 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 United States and
foreign government  appropriations and program allocations,  the competition for
available   military  business,   and  government   termination  of  orders  for
convenience.

Management  is  optimistic  about the future of the Company.  In the first three
months of fiscal 2007, the Company  received  approximately  $3.9 million in new
orders.  These orders  include both follow-on  production  quantities for mature
products,  and engineering  development  orders which will enable the Company to
utilize its engineering  expertise in developing new customer specific products.
Some of these  products,  once  developed,  will be  produced  in the  Company's
manufacturing  facility  and are  expected  to provide  large  production  order
quantities  over  several  years.  These  orders are in line with the  Company's
strategy of being  involved in long-term  high quantity  military and industrial
products.

The sales backlog of approximately $35.6 million at September 30, 2006 gives the
Company a solid  base of future  sales  and,  therefore,  management  expects an
increase in sales for fiscal 2007 as compared to fiscal 2006. In addition to the
backlog, the Company currently has outstanding  quotations and expected business
representing  approximately $31 million in the aggregate for both repeat and new
programs.  Many potential  orders are currently  being  discussed and negotiated
with our 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.

The total backlog for the Company of $35.6  million at September 30, 2006,  down
$9.7 million over September 30, 2005,  represents the estimated  remaining sales
value of work to be performed under firm  contracts.  The funded portion of this
backlog at September  30, 2006 is  approximately  $31.2  million.  This includes
items that have been  authorized and  appropriated  by Congress and/or funded by
the customer.  The unfunded backlog is approximately $4.3 million and represents
firm  multi-year  orders  for which  funding  has not yet been  appropriated  by
Congress.  While there is no guarantee  that future  budgets and  appropriations
will provide  funding for a given  program,  management has included in unfunded
backlog only those programs that it believes are likely to receive funding.  The
unfunded  backlog  at  September  30,  2005 was $8.7  million.  The  backlog  at
September 30, 2006 as discussed

                                       8
<PAGE>

above,  includes  significant orders for military and industrial power supplies,
and  contracts to  manufacture  certain  customer  products in  accordance  with
pre-engineered requirements.

Management,  along with the Board of  Directors,  continues to evaluate the need
and use of the  Company's  working  capital.  Expectations  are that the working
capital  will be required to fund the  increase in orders over the next  several
quarters,  dividend payments, and general operations of the business.  Also, the
Mergers  and  Acquisitions  Committee  of the Board of  Directors  continues  to
evaluate potential strategic options on a periodic basis.

Critical Accounting Policies and Estimates

Management  believes  our most  critical  accounting  policies  include  revenue
recognition and estimates to completion.

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 schedule. 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.

Results of Operations

Net sales for the three  months  ended  September  30, 2006 were  $6,071,906  as
compared  to  $4,560,574  for the  same  period  in 2005,  representing  a 33.1%
increase.  Generally,  this increase can be attributed to the contract  specific
nature of the Company's  business.  The Company  continues to deliver product on
its single  largest  order for power  supplies.  The  increase  in sales for the
quarter is largely attributable to an increase in shipments to two customers for
power supplies and  transformers.  New orders received in the first three months
of fiscal 2007 were approximately  $3.9 million compared to approximately  $18.1
million in the first three months of fiscal 2006. Additional orders are expected
to be  received  in the next  several  months and new orders for fiscal 2007 are
expected to be equivalent to or exceed the value of new orders  received in 2006
of approximately $26.8 million.

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
than  with  respect  to  the  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.

For the three  months  ended  September  30,  2006 and 2005 gross  profits  were
$1,397,308 and 880,290, respectively.  Gross profit as a percentage of sales was
23.0% and  19.3%,  for the  three  months  ended  September  30,  2006 and 2005,
respectively.  The improved  gross profit  percentage  in the three months ended
September 30, 2006, relates to favorable product mix and lower overhead expenses
primarily due to decreased  engineering salary expense.  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
performed. Employment at September 30, 2006 and 2005 was 173 people.

Selling,  general and administrative expenses were $726,980 for the three months
ended  September 30, 2006,  an increase of $57,261  compared to the three months
ended  September 30, 2005.  The increase is primarily due to the  requirement to
record stock option expense in accordance with new accounting  rules (see note 3
to the financial statements).

Other income for three months ended  September 30, 2006 increased as compared to
the three months ended  September 30, 2005, due to increased  interest income on
the Company's cash and cash equivalents and short-term

                                       9
<PAGE>

investments  due to higher  interest  rates.  The Company  does not believe that
there is a significant  risk  associated  with its investment  policy,  since at
September  30,  2006  all  of  the  investments  are  primarily  represented  by
short-term liquid investments including certificates of deposit and money market
accounts.

The  effective  income  tax rate at  September  30,  2006 and 2005 was 33.7% and
29.0%, respectively.  The effective tax rate is less than the statutory tax rate
mainly due to the  foreign  exportation  benefit  the  Company  receives  on its
international  sales,  the  Qualified  Production  Activities  benefit,  and the
benefit derived from the ESOP dividends paid on allocated shares.

Net income for the three months ended  September 30, 2006,  was $543,050 or $.27
and $.26 per share,  basic and  diluted,  respectively,  compared to $217,744 or
$.11 per share, both basic and diluted, for the three months ended September 30,
2005. The increase in net income per share was due to improved gross profit as a
percentage of sales,  offset  partially by the increase in selling,  general and
administrative expenses.

Liquidity and Capital Resources

The Company's  working  capital is an appropriate  indicator of the liquidity of
its  business,  and  during the past  three  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 has available a $3,000,000 line of credit to help fund further growth
or working capital needs, if necessary, but does not anticipate the need for any
borrowed funds in the foreseeable future.

The Company's working capital as of September 30, 2006 was  approximately  $26.7
million.  During the three months ended  September 30, 2006 and 2005 the Company
repurchased 1,766 and 24,284 shares, respectively,  of its common stock from the
Company's  Employee  Retirement  Plan and Trust  ("ESOP"),  for a total purchase
price of $31,126 and $417,685,  respectively. Under existing authorizations from
the  Company's  Board of  Directors,  as of September  30, 2006,  management  is
authorized to purchase an additional $968,874 of Company stock.

<TABLE>
<CAPTION>

                                                    Three Months Ended September 30,
                                                           2006         2005
                                                      -----------    -----------
<S>                                                   <C>            <C>
Net cash provided by (used in) operating activities   $ 1,584,694    $    (5,962)
Net cash used in investing activities                    (397,933)    (4,673,426)
Net cash (used in) provided by financing activities      (195,025)     3,890,007
</TABLE>

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,  level of sales and  payment  of
accounts payable.  Net cash used in investing  activities decreased in the first
three  months of fiscal 2007 due to the  decrease  in  purchases  of  short-term
investments and the ESOP  transaction  described in note 6 which occurred in the
prior  year.  The  decrease  in cash  provided by  financing  activities  is due
primarily to the decrease in purchases of  short-term  investments  and the ESOP
transaction  described  in note 6 which  occurred  in the  prior  year  and less
purchases of treasury stock during the current quarter.

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

During the three months ended September 30, 2006 and 2005, the Company  expended
$109,933 and $50,426,  respectively,  for plant  improvements and new equipment.
The Company has  budgeted  approximately  $400,000 for new  equipment  and plant
improvements in fiscal 2007.  Management  presently  anticipates  that the funds
required will be available from current operations.

The Company has entered 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  $246,625 at September 30, 2006. The Company does
not expect to fund any of the amounts under the standby letters of credit.

                                       10
<PAGE>

Other Matters

On July 15, 2005,  pursuant to a Stock Purchase Agreement dated as of such date,
the Company sold 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
(the "ESOP"). 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 described in note 7.

The Board of Directors of the Company  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.

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. As
of September  30, 2006,  there were 444,202  shares  (after giving effect to the
one-for-one stock dividend) allocated to participants.


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
                    SECURITIES LITIGATION REFORM ACT OF 1995

This  report  contains  "forward-looking  statements"  within the meaning of the
Private  Securities   Litigation  Reform  Act  of  1995.  The  terms  "believe,"
"anticipate,"  "intend," "goal," "expect," and similar  expressions may identify
forward-looking  statements.  These  forward-looking  statements  represent  the
Company's current  expectations or beliefs concerning future events. The matters
covered by these statements are subject to certain risks and uncertainties  that
could  cause  actual  results to differ  materially  from those set forth in the
forward-looking  statements,   including  the  Company's  dependence  on  timely
development, introduction and customer acceptance of new products, the impact of
competition and price erosion, supply and manufacturing  constraints,  potential
new orders from customers and other risks and uncertainties.  The foregoing list
should not be construed as exhaustive,  and the Company disclaims any obligation
subsequently  to revise any  forward-looking  statements  to  reflect  events or
circumstances  after the date of such statements or to reflect the occurrence of
anticipated or unanticipated  events.  The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.


Item 3. 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  Quarterly  Report on Form 10-QSB.  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.

                                       11
<PAGE>

                    PART II: Other Information and Signatures

Item 1.       Legal Proceedings

              None

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

              (a) None

              (c) Securities Repurchased

<TABLE>
<CAPTION>
                                       Purchases of Equity Securities

                                                           Total Number   Maximum Number
                                                             of Shares    (or Approximate
                                                             Purchased    Dollar Value)
                                                            as Part of      of Shares
                                    Total       Average      Publicly      that May Yet
                                   Number        Price       Announced     Be Purchased
                                  of Shares      Paid         Plan or     Under the Plan
              Period              Purchased    per Share      Program     or Program (1)
              ---------------------------------------------------------------------------
<S>                  <C>          <C>          <C>           <C>             <C>
              August 1 to
              August 31, 2006      1,766        $17.625       1,766           $968,874
</TABLE>

              (1)  Pursuant to a prior Board of Directors  authorization,  as of
              September  30, 2006 the Company can  repurchase  up to $968,874 of
              its common stock pursuant to an ongoing plan.


Item 3        Defaults on Senior Securities

              None

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

              None

Item 5.       Other Information

              None

Item 6.       Exhibits


              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

              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

              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

              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

                                       12
<PAGE>

                               S I G N A T U R E S

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

                                               ESPEY MFG. & ELECTRONICS CORP.


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

                                                  /s/ David O'Neil
                                               -----------------------------
                                               David O'Neil, Treasurer and
                                               Principal Financial Officer

November 14, 2006
-----------------
     Date


                                       13