UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549







FORM10-Q





S      QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March
31, 2010


OR




£      TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________ to _________





Commission
File Number I-4383








ESPEY MFG. & ELECTRONICS
CORP.


(Exact
name of registrant as specified in its 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)





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








Indicate
by check mark whether the registrant (1) has filed all reports required to be
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.     S
Yes     £
No





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


SSmaller reportingcompany





Indicate
by check mark whether the registrant is a shell company.£
Yes     S
No








At May
12, 2010, there were 2,319,876 shares outstanding of the registrant's Common
stock, $.33-1/3 par value.





ESPEY
MFG. & ELECTRONICS CORP.


Quarterly
Report on Form 10-Q


I N D E
X





PART
      I
            FINANCIAL
      INFORMATION
            PAGEItem
      1
            Financial
      Statements:Balance
      Sheets - March 31, 2010 (Unaudited) and June 30, 2009
            1Statements
      of Income (Unaudited) -Three and Nine Months Ended March 31, 2010 and
      2009
            3Statements
      of Cash Flows (Unaudited)-Nine Months Ended March 31, 2010 and
      2009
            4Notes
      to Financial Statements (Unaudited)
            5Item
      2
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            8Item
      3
            Quantitative
      and Qualitative Disclosures About Market Risk
            11Item
      4T
            Controls
      and Procedures
            11PART
      II
            OTHER
      INFORMATION
            12Item
      1
            Legal
      Proceedings
            12Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            12Item
      3
            Defaults
      Upon Senior Securities
            12Item
      4
            Submission
      of Matters to a Vote of Security Holders
            12Item
      5
            Other
      Information
            12Item
      6
            Exhibits
            12SIGNATURES
            
            
            13











PART
I:  FINANCIAL INFORMATION





ESPEY
MFG. & ELECTRONICS CORP.


Balance
Sheets


March 31,
2010 (Unaudited) and June 30, 2009











2010
            
            
            2009March 31,
            
            
            June 30,ASSETS:Cash
      and cash equivalents
            
            $
            1,362,948
            
            
            $
            2,775,319Short
      term investments
            
            
            7,771,004
            
            
            
            6,349,874Trade
      accounts receivable, net
            
            
            4,332,561
            
            
            
            5,133,792Income
      tax receivable
            
            
            175,844
            
            
            
            --Other
      receivables
            
            
            10
            
            
            
            297ESOP
      receivable due to dividends on unallocated shares
            
            
            98,571
            
            
            
            71,053Inventories:Raw
      materials
            
            
            1,330,200
            
            
            
            1,394,441Work-in-process
            
            
            1,744,608
            
            
            
            1,107,880Costs
      relating to contracts in process, net of advancepayments
      of $143,748 at March 31, 2010 and$60,079
      at June 30, 2009
            
            
            9,470,199
            
            
            
            10,526,884Total
      inventories
            
            
            12,545,007
            
            
            
            13,029,205Deferred
      income taxes
            
            
            220,673
            
            
            
            224,835Prepaid
      expenses and other current assets
            
            
            192,072
            
            
            
            233,072Total
      current assets
            
            
            26,698,690
            
            
            
            27,817,447Property,
      plant and equipment, net
            
            
            2,780,044
            
            
            
            2,738,222Loan
      receivable
            
            
            20,679
            
            
            
            38,673Total
      assets
            
            $
            29,499,413
            
            
            $
            30,594,342See
      accompanying notes to the financial statements.
            
            
            
            
            
            (Continued)








1








ESPEY
MFG. & ELECTRONICS CORP.


Balance
Sheets


March 31,
2010 (Unaudited) and June 30, 2009





2010
            
            
            2009March 31,
            
            
            June 30,LIABILITIES
      AND STOCKHOLDERS' EQUITY:Accounts
      payable
            
            $
            1,395,174
            
            
            $
            999,521Accrued
      expenses:Salaries,
      wages and commissions
            
            
            157,454
            
            
            
            219,533Vacation
            
            
            545,400
            
            
            
            520,072Other
            
            
            40,177
            
            
            
            42,863Payroll
      and other taxes withheld and accrued
            
            
            45,240
            
            
            
            42,075Income
      taxes payable
            
            
            --
            
            
            
            266,891Total
      current liabilities
            
            
            2,183,445
            
            
            
            2,090,955Deferred
      income taxes
            
            
            77,512
            
            
            
            99,253Total
      liabilities
            
            
            2,260,957
            
            
            
            2,190,208Common
      stock, par value $.33-1/3 per share.Authorized
      10,000,000 shares; issued 3,029,874 shareson
      March 31, 2010 and June 30, 2009.  Outstanding2,319,876
      and 2,314,803 (includes 184,791 and 201,666Unearned
      ESOP Shares on March 31, 2010 andJune
      30, 2009, respectively)
            
            
            1,009,958
            
            
            
            1,009,958Capital
      in excess of par value
            
            
            14,061,851
            
            
            
            13,755,808Retained
      earnings
            
            
            22,230,274
            
            
            
            23,485,67537,302,083
            
            
            
            38,251,441Less:      Unearned
      ESOP shares
            
            
            (2,914,077
            )
            
            
            (2,914,077
            )Treasury
      shares, cost of 709,998 shares on March31,
      2010 and 715,071 shares on June 30, 2009
            
            
            (7,149,550
            )
            
            
            (6,933,230
            )Total
      stockholders’ equity
            
            
            27,238,456
            
            
            
            28,404,134Total
      liabilities and stockholders' equity
            
            $
            29,499,413
            
            
            $
            30,594,342











See
accompanying notes to the financial statements.





2


ESPEY
MFG. & ELECTRONICS CORP.


Statements
of Income (Unaudited)


Three and
Nine Months Ended March 31, 2010 and 2009








Three
      Months
            
            
            Nine
      Months2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      sales
            
            $
            6,955,827
            
            
            $
            6,709,880
            
            
            $
            19,697,098
            
            
            $
            18,957,576Cost
      of sales
            
            
            5,117,045
            
            
            
            4,977,068
            
            
            
            14,338,021
            
            
            
            15,447,559Gross
      profit
            
            
            1,838,782
            
            
            
            1,732,812
            
            
            
            5,359,077
            
            
            
            3,510,017Selling,
      general andadministrative
      expenses
            
            
            753,414
            
            
            
            658,115
            
            
            
            2,302,549
            
            
            
            2,125,927Operating
      income
            
            
            1,085,368
            
            
            
            1,074,697
            
            
            
            3,056,528
            
            
            
            1,384,090Other
      income (expense)Interest
      and dividend income
            
            
            15,890
            
            
            
            72,982
            
            
            
            84,554
            
            
            
            268,866Other
            
            
            9,314
            
            
            
            (2,278
            )
            
            
            27,399
            
            
            
            13,63525,204
            
            
            
            70,704
            
            
            
            111,953
            
            
            
            282,501Income
      before income taxes
            
            
            1,110,572
            
            
            
            1,145,401
            
            
            
            3,168,481
            
            
            
            1,666,591Provision
      for income taxes
            
            
            301,849
            
            
            
            364,129
            
            
            
            852,824
            
            
            
            529,436Net
      income
            
            $
            808,723
            
            
            $
            781,272
            
            
            $
            2,315,657
            
            
            $
            1,137,155Net
      income per share:Basic
            
            $
            .38
            
            
            $
            .37
            
            
            $
            1.09
            
            
            $
            .54Diluted
            
            $
            .38
            
            
            $
            .37
            
            
            $
            1.08
            
            
            $
            .54Weighted
      average number ofshares
      outstanding:Basic
            
            
            2,127,135
            
            
            
            2,113,772
            
            
            
            2,127,514
            
            
            
            2,107,735Diluted
            
            
            2,138,898
            
            
            
            2,115,696
            
            
            
            2,135,836
            
            
            
            2,114,732Dividends
      per share:
            
            $
            .2250
            
            
            $
            .2250
            
            
            $
            1.6750
            
            
            $
            2.1750





See
accompanying notes to the financial statements.














3


ESPEY
MFG. & ELECTRONICS CORP.


Statements
of Cash Flows (Unaudited)


Nine
Months Ended March 31, 2010 and 2009





March
      31,2010
              
              
              2009Cash
      Flows From Operating Activities:Net
      income
              
              $
              2,315,657
              
              
              $
              1,137,155Adjustments
      to reconcile net income to netcash
      provided by operating activities:Excess
      tax benefits from share-based compensation
              
              
              3,138
              
              
              
              30,245Stock-based
      compensation
              
              
              76,408
              
              
              
              85,111Depreciation
              
              
              342,405
              
              
              
              369,379ESOP
      compensation expense
              
              
              310,273
              
              
              
              326,263Loss
      (gain) on disposal of assets
              
              
              1,802
              
              
              
              (996
              )Deferred
      income tax
              
              
              (17,579
              )
              
              
              (25,046
              )Changes
      in assets and liabilities:Decrease
      (increase) in trade receivables, net
              
              
              801,231
              
              
              
              (1,134,521
              )(Increase)
      decrease in income taxes receivable
              
              
              (175,844
              )
              
              
              133,363Decrease
      in other receivables
              
              
              287
              
              
              
              4,249Increase
      in ESOP receivable due to dividends on unallocated shares
              
              
              (27,518
              )
              
              
              (163,112
              )Decrease
      (increase) in inventories
              
              
              484,198
              
              
              
              (2,530,106
              )Decrease
      in prepaid expenses and other current assets
              
              
              41,000
              
              
              
              97,179Increase
      in accounts payable
              
              
              395,653
              
              
              
              1,459,344(Decrease)
      increase in accrued salaries, wages and commissions
              
              
              (62,079
              )
              
              
              51,243Increase
      (decrease) in vacation accrual
              
              
              25,328
              
              
              
              (40,212
              )Decrease
      in ESOP payable
              
              
              (310,273
              )
              
              
              (326,263
              )(Decrease)
      increase in other accrued expenses
              
              
              (2,686
              )
              
              
              2,036Decrease
      in payroll & other taxes withheld and accrued
              
              
              3,165
              
              
              
              490Decrease
      in income taxes payable
              
              
              (270,029
              )
              
              
              (30,245
              )Net
      cash provided by (used in) operating activities
              
              
              3,934,537
              
              
              
              (554,444
              )Cash
      Flows From Investing Activities:Additions
      to property, plant & equipment
              
              
              (386,029
              )
              
              
              (211,952
              )Proceeds
      from loan receivable
              
              
              17,994
              
              
              
              19,672Purchase
      of short term investments
              
              
              (7,594,731
              )
              
              
              (7,318,000
              )Maturity
      of short term investments
              
              
              6,173,601
              
              
              
              6,788,000Net
      cash used in investing activities
              
              
              (1,789,165
              )
              
              
              (722,280
              )Cash
      Flows From Financing Activities:Sale
      of treasury stock
              
              
              326,752
              
              
              
              --Dividends
      on common stock
              
              
              (3,571,058
              )
              
              
              (4,574,062
              )Purchase
      of treasury stock
              
              
              (452,155
              )
              
              
              (311,545
              )Proceeds
      from exercise of stock options
              
              
              135,580
              
              
              
              132,532Excess
      tax benefits from share-based compensation
              
              
              3,138
              
              
              
              30,245Net
      cash used in financing activities
              
              
              (3,557,743
              )
              
              
              (4,722,830
              )Decrease
      in cash and cash equivalents
              
              
              (1,412,371
              )
              
              
              (5,999,554
              )Cash
      and cash equivalents, beginning of period
              
              
              2,775,319
              
              
              
              6,851,753Cash
      and cash equivalents, end of period
              
              
              1,362,948
              
              
              
              852,199Supplemental
      disclosures of cash flow information:Income
      taxes paid
              
              $
              1,310,000
              
              
              $
              400,000





See
accompanying notes to the financial statements.





4


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.  The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of assets and
liabilities.  On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, inventories, income
taxes, and stock-based compensation.  Management bases its estimates
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.  Actual results may differ
from these estimates under different assumptions or conditions.  These
financial statements should be read in conjunction with the Company's most
recent audited financial statements included in its report on Form 10-K for the
year ended June 30, 2009.





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





The
Company follows Statement of Financial Accounting Standards No. 123(R) (FASB ASC
718) 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 may be settled by the issuance of those equity instruments.  FASB
ASC 718 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.  FASB ASC 718 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
three month period ended March 31, 2010 and 2009, was $25,552 and $26,945,
respectively, before income taxes.  The related total deferred tax
benefit was approximately $2,043 and $2,399 for the three month period ended
March 31, 2010 and 2009, respectively.  Total stock-based compensation
expense recognized in the Statement of Income for the nine month period ended
March 31, 2010 and 2009, was $76,408 and $85,111, respectively, before income
taxes.  The related total deferred tax benefit was approximately
$6,703 and $7,353 for the nine month period ended March 31, 2010 and 2009,
respectively.  FASB ASC 718 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
March 31, 2010, there was approximately $45,580 of unrecognized compensation
cost related to stock option awards that is expected to be recognized as expense
over the next 1.5 years.  The total deferred tax benefit related to
these awards is approximately $4,013.


5








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
supersedes the Company's 2000 Stock Option Plan (the "2000
Plan").  Options covering 400,000 shares are authorized for issuance
under the 2007 Plan, and 60,800 have been granted and are outstanding as of
March 31, 2010.  While no further grants of options may be made under
the 2000 Plan, as of March 31, 2010, 67,400 options remain outstanding, vested
and exercisable from the 2000 Plan.





FASB ASC
718 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
weighted average assumptions that the Company used to calculate the fair value
of each option award for the nine month periods ended March 31, 2010 and 2009
were as follows:





2010
            
            
            2009Dividend
      yield
            
            
            5.3
            %
            
            
            5.3
            %Expected
      stock price volatility
            
            
            31.41
            %
            
            
            31.41
            %Risk-free
      interest rate
            
            
            1.79
            %
            
            
            1.79
            %Expected
      option life (in years)
            
            4.3
      yrs
            
            
            4.3
      yrsWeighted
      average fair value per share of options granted during the
      period
            
            $
            2.767
            
            
            $
            2.767





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 nine months ended
March 31, 2010:





Employee Stock Options
  PlanWeightedNumber
      of
              
              Weighted
              
              AverageShares
              
              Average
              
              RemainingSubject
              
              Exercise
              
              ContractualTo Option
              
              Price
              
              TermBalance
      at July 1, 2009
              
              
              140,400
              
              
              $
              18.29
              
              
              
              7.90Granted
              
              
              2,500
              
              
              $
              17.09
              
              
              
              9.34Exercised
              
              
              (8,100
              )
              
              $
              16.74
              
              
              
              --Forfeited
      or expired
              
              
              (6,600
              )
              
              $
              18.97
              
              
              
              --Balance
      March 31, 2010
              
              
              128,200
              
              
              $
              18.33
              
              
              
              7.27Exercisable
      at March 31, 2010
              
              
              67,400
              
              
              $
              17.48
              
              
              
              6.12


The
intrinsic value of stock options exercised was $23,046 and $21,073, during the
nine months ended March 31, 2010 and 2009, respectively.  The
intrinsic value of stock options outstanding and exercisable as of March 31,
2010 and 2009 was $176,420 and $25,120, respectively.





Note
4.  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 March 31, 2010.  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 pending or threatened against it.





6








Note
5.  Recently Issued Accounting Standards





In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard No. 165, Subsequent Events (FASB ASC
855-10).  FASB ASC 855-10 establishes principles and requirements for
subsequent events.  FASB ASC 855-10 is effective for interim or annual
financial periods ending after June 15, 2009.  Adoption of FASB ASC
855-10 did not have a material effect on the company’s financial
statements.





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard No. 168 (“SFAS 168”), The FASB Accounting
Standards Codification ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162, The Hierarchy
of Generally Accepted Accounting Principles. Under the provisions of SFAS 168,
the Codification will become the source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. The rules and interpretive
releases of the SEC under authority of the federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of SFAS
168, the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative.  The
provisions of SFAS 168 are effective for financial statements issued for interim
and annual periods ended after September 15, 2009.  Adoption of SFAS
168 had no effect on the company's financial statements.





In
September 2009, the FASB issued ASC 605-25 for revenue recognition with
multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective in
fiscal years beginning on or after June 15, 2010, however early adoption is
permitted. The Company is currently assessing the potential impact, if any, of
the guidance on its 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.  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 FASB ASC 718.  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 $110,530 and $97,360 for the three month periods ended March 31,
2010 and 2009, respectively.  ESOP compensation expense was $310,273
and $326,263 for the nine month periods ended March 31, 2010 and 2009,
respectively.    The ESOP shares as of March 31, 2010 and
2009 were as follows:





2010
            
            
            2009Allocated
      Shares
            
            
            431,061
            
            
            
            426,894Committed-to-be-released
      shares
            
            
            16,875
            
            
            
            17,500Unreleased
      shares
            
            
            184,791
            
            
            
            207,500Total
      shares held by the ESOP
            
            
            632,727
            
            
            
            651,894Fair
      value of unreleased shares
            
            $
            3,714,299
            
            
            $
            3,133,250











7











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 vehicle
artillery.





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





New
orders received in the first nine months of fiscal 2010 were approximately $13.7
million, representing a 3.8% decrease from the amount of new orders received in
the first nine months of fiscal 2009.  These orders are in line with
the Company’s strategy of getting involved in long-term high quantity military
and industrial products and are predominately for follow-on production of mature
products.  The Company's backlog was $33.1 million at March 31, 2010
which includes $21.3 million from three customers compared to $40.0 million at
March 31, 2009 which included $20.9 million from two significant
customers.  The backlog for the Company represents the estimated
remaining sales value of work to be performed under firm contracts.





Based
upon the backlog and the anticipated schedule for the fulfillment of orders,
management expects sales for fiscal 2010 to be higher than fiscal 2009
sales.  In addition to the backlog, the Company currently has
outstanding quotations and potential business representing approximately $52.8
million in the aggregate for both repeat and new programs.





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.





Net sales
to three significant customers represented 64% of the Company's total sales for
the three-month period ended March 31, 2010 while sales to two significant
customers represented 59% of the Company's total sales for the three-month
period ended March 31, 2009, respectively.  Sales to three significant
customers represented 50.9% of the Company's total sales for the nine month
period ended March 31, 2010 while sales to two significant customers represented
65.7% of the Company's total sales for the nine month period ended March 31,
2009, respectively.  Historically, a small number of customers have
accounted for a large percentage of the Company’s total sales in any given
fiscal year.  Even though our business tends to be concentrated in
several customers, the makeup of those customers is constantly
changing.  For several years, management has pursued opportunities
with current and new customers with an overall objective of lowering the
concentration of sales, mitigating excessive reliance upon a single major
product of a particular program and minimizing the impact of the loss of a
single significant customer.  Management continues to evaluate its
business development functions and potential revised courses of
action.


8








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 any 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 March 31, 2010 were $6,955,827 as compared to
$6,709,880 for the same period in 2009, representing an 3.7% increase. Net sales
for the nine months ended March 31, 2010 were $19,697,098 as compared to
$18,957,576 for the same period in 2009, representing a 3.9%
increase.   Generally, the increases and decreases in net
salescan be
attributed to the contract specific nature of the Company's business. The
increase for the three months ended March 31, 2010,was due to anoverall increase in
power supply shipments including engineering design services offset by a
decrease in transmitter component shipments.The increase for the
nine months ended March 31, 2010 was primarily due to an increase in transmitter
component and transformer shipments and an increase in engineering design
services offset by a decrease in power supply shipments.





For the
three months ended March 31, 2010 and 2009 gross profits were $1,838,782 and
$1,732,812, respectively.  Gross profit as a percentage of sales was
26.4% and 25.8%, for the three months ended March 31, 2010 and 2009,
respectively.  For the nine months ended March 31, 2010 and 2009 gross
profits were $5,359,077 and $3,510,017, respectively.  Gross profit as
a percentage of sales was 27.2% and 18.5%, for the nine months ended March 31,
2010 and 2009, respectively.  The primary factor in determining gross
profit and net income is product mix.  The gross profits on mature
products and build to print contracts are higher as compared to products which
are still in the engineering development stage or in the early stages of
production.  In any given accounting period the mix of product
shipments between higher margin mature programs and less mature programs,
including loss contracts, has a significant impact on gross profit and net
income.  The increased gross profit and gross profit percentage in the
three and nine months ended March 2010, was primarily the result of favorable
product mix with only minor cost overruns related to loss
contracts.  For the nine months ended March 31, 2009 the Company had
unexpected losses incurred on programs with significant engineering and
production time required for design efforts.  These programs
experienced significant cost overruns due to extended product qualification
testing and difficulties moving the products from engineering design into full
production.





Selling,
general and administrative expenses were $753,414 for the three months ended
March 31, 2010; an increaseof $95,299, compared to
the three months ended March 31, 2009.  Selling, general and
administrative expenses were $2,302,549 for the nine months ended March 31,
2010; an increase of $176,622 compared to the nine months ended March 31,
2009.  The increase for the three and nine months ended March 31,
2010,relates
primarily to an increase in salary expense, consulting fees, and director
fees.


9








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 March 31, 2010 was 170 compared to 166 people at March 31,
2009.





Other
income for the three and ninemonths ended March 31,
2010 decreased as compared to the three and nine months ended March 31, 2009 due
to decreased interest rates and related interest income on the Company’s cash
and cash equivalents and short-term investments.The Company does not
believe that there is a significant risk associated with its investment policy,
since at March 31, 2010 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 at March 31, 2010 and 2009 was 26.9% and 31.8%,
respectively.  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.





Net
income for the three months ended March 31, 2010, was $808,723 or $.38 per
share, both basic and diluted, compared to $781,272 or $.37 per share, both
basic and diluted, for the three months ended March 31, 2009.  Net
income for the nine months ended March 31, 2010, was $2,315,657 or $1.09 and
$1.08 per share, basic and diluted, respectively, compared to $1,137,155 or $.54
per share, both basic and diluted, for the nine months ended March 31,
2009.  The increase in net income per share was primarily dueto higher gross profit
on sales offset by higher selling, general and administrative expenses and
decreased 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 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.





The
Company's working capital as of March 31, 2010 and 2009 was approximately $24.5
million and $24.1 million, respectively.  During the three months
ended March 31, 2010 and 2009 the Company repurchased 0 and 14,350 shares,
respectively, of its common stock for a total purchase price of $0 and $209,035,
respectively.  Of the total purchases, 0 shares and 10,699 shares,
respectively, were purchased from the Company's Employee Retirement Plan and
Trust ("ESOP") for a purchase price of $0 and $157,222,
respectively.  All remaining shares were purchased on the open
market.  During the nine months ended March 31, 2010 and 2009 the
Company repurchased 23,513 and 19,899 shares, respectively, of its common stock
for a total purchase price of $452,155 and $311,545, respectively.  Of
the total purchases, 23,513 shares and 11,499 shares, respectively, were
purchased from the Company's Employee Retirement Plan and Trust ("ESOP") for a
purchase price of $452,155 and $171,662, respectively.  All remaining
shares were purchased on the open market.  Under existing
authorizations from the Company's Board of Directors, as of March 31, 2010,
management is authorized to purchase an additional $1,236,300 million of Company
stock.





Nine
      Months Ended March 31,2010
            
            
            2009Net
      cash provided by (used in) operating activities
            
            $
            3,934,537
            
            
            $
            (554,444
            )Net
      cash used in investing activities
            
            
            (1,789,165
            )
            
            
            (722,280
            )Net
      cash used in financing activities
            
            
            (3,557,743
            )
            
            
            (4,722,830
            )





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 increasedin the first nine
months of fiscal 2010due to increased
purchases, net of maturities, of short term investments and property plant and
equipment during the period.The decrease in cash
used in financing activities is due primarily to a decrease in the dividends on
common stock.





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.


10








During
the nine months ended March 31, 2010 and 2009, the Company expended
$386,029 and $211,952, respectively, for plant improvements and new
equipment. The Company has budgeted approximately $450,000 for new equipment and
plant improvements in fiscal 2010.  Management anticipates that the
funds required will be available from current operations.





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 March 31, 2010 and March 31,
2009.














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.
Quantitative and Qualitative Disclosures About Market Risk





The
Company is a smaller reporting company as defined under Securities and Exchange
Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting
company issuers under Item 305 of Regulation S-K, quantitative and qualitative
disclosures about market risk, the Company is not required to provide the
information for this item.





Item 4T.
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-Q. 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


PART
II:    Other Information and Signatures





Item
      1.
            Legal
      ProceedingsNoneItem
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds(a)
            None(c)
            Securities
      Repurchased - NoneItem
      3
            Defaults
      Upon Senior SecuritiesNoneItem
      4.
            Submission
      of Matters to a Vote of Security HoldersNoneItem
      5.
            Other
      InformationNoneItem
      6.
            Exhibits31.1
            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 200231.2
            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 200232.1
            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
      200232.2
            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


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/
      Mark St. PierreMark
      St. Pierre, President andChief
      Executive Officer/s/
      David O'NeilDavid
      O'Neil, Treasurer andPrincipal
      Financial Officer





May12, 2010


Date








13