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 December 31, 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 February 12, 2007
              -----                          --------------------------------
Common stock, $.33-1/3 par value                     2,319,796 shares


Transitional Small Business Disclosure Format YES [ ] NO [X]

<page>

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

PART I     FINANCIAL INFORMATION                                                          PAGE

                                                                                      <c>
           Item 1    Financial Statements:

                        Balance Sheet (Unaudited) -December 31, 2006                        1

                        Statements of Income (Unaudited) -
                        Three and Six Months Ended December 31, 2006 and 2005               2

                        Statements of Cash Flows (Unaudited)-
                        Six Months Ended December 31, 2006 and 2005                         3

                        Notes to Financial Statements (Unaudited)                           4

           Item 2    Management's Discussion and Analysis or Plan of Operation              8

           Item 3    Controls and Procedures                                                11

PART II    OTHER INFORMATION                                                                13

           Item 1    Legal Proceedings                                                      13

           Item 2    Unregistered Sales of Equity Securities and Use of Proceeds            13

           Item 3    Defaults on Senior Securities                                          13

           Item 4    Submission of Matters to a Vote of Security Holders                    13

           Item 5    Other Information                                                      14

           Item 6    Exhibits                                                               14

                     SIGNATURES                                                             15
</table>
<page>

                          PART I: FINANCIAL INFORMATION

                         ESPEY MFG. & ELECTRONICS CORP.
                            Balance Sheet (Unaudited)
                                December 31, 2006
<table>
<caption>
                                                                            December 31,
                                                                                2006
                                                                            ------------

                                                                            <c>
ASSETS:

          Cash and cash equivalents                                         $  8,117,693
          Short term investments                                               4,224,000
          Trade accounts receivable, net                                       3,012,793
          Other receivables                                                        3,473

          Inventories:
                  Raw materials and supplies                                   1,849,482
                  Work-in-process                                              2,245,619
                  Costs relating to contracts in process, net of advance
                    payments of  $309,285 at December 31, 2006                 8,479,403
                                                                            ------------
                               Total inventories                              12,574,504

          Deferred income taxes                                                  170,961
          Prepaid expenses and other current assets                              588,897
                                                                            ------------
                               Total current assets                           28,692,321
                                                                            ------------
          Property, plant and equipment, net                                   2,835,926
                                                                            ------------

                               Total assets                                 $ 31,528,247
                                                                            ============

LIABILITIES AND STOCKHOLDERS' EQUITY:

          Accounts payable                                                  $    789,391
          Accrued expenses:
                  Salaries, wages and commissions                                140,997
                  Vacation                                                       497,450
                  ESOP payable                                                   147,342
                  Other                                                           55,105
          Payroll and other taxes withheld and accrued                            27,067
          Income taxes payable                                                    42,501
                                                                            ------------
                               Total current liabilities                       1,699,853
                                                                            ------------
          Deferred income taxes                                                  196,383
                                                                            ------------
                               Total liabilities                               1,896,236
                                                                            ------------

          Common stock, par value $.33-1/3 per share
              Authorized 10,000,000 shares;  issued 3,029,874  shares
              on December 31, 2006.  Outstanding 2,313,489 (includes
              261,667 Unearned ESOP Shares) on December 31, 2006               1,009,958
          Capital in excess of par value                                      12,659,396
          Retained earnings                                                   26,144,992

          Less: Unearned ESOP Shares                                          (3,961,079)
                Cost of 716,385 Treasury shares on December 31, 2006          (6,221,256)
                                                                            ------------
                               Total stockholders' equity                     29,632,011
                                                                            ------------

                               Total liabilities and stockholders' equity   $ 31,528,247
                                                                            ============
</table>

See accompanying notes to the financial statements.

                                       1
<page>

                         ESPEY MFG. & ELECTRONICS CORP.
                        Statements of Income (Unaudited)
              Three and Six Months Ended December 31, 2006 and 2005

<table>
<caption>

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

                                     <c>           <c>            <c>           <c>
Net sales                             $ 6,119,320   $ 5,056,083    $12,191,226   $ 9,616,657
Cost of sales                           4,861,099     4,108,723      9,535,697     7,789,007
                                      -----------   -----------    -----------   -----------
       Gross profit                     1,258,221       947,360      2,655,529     1,827,650

Selling, general and
   administrative expenses                712,743       666,440      1,439,723     1,336,159
                                      -----------   -----------    -----------   -----------

       Operating income                   545,478       280,920      1,215,806       491,491
                                      -----------   -----------    -----------   -----------

Other income (expense)

       Interest and dividend income       149,878       110,976        295,389       209,910
       Other                               30,725        (5,614)        34,350        (8,437)
                                      -----------   -----------    -----------   -----------
                                          180,603       105,362        329,739       201,473
                                      -----------   -----------    -----------   -----------

Income before income taxes                726,081       386,282      1,545,545       692,964

Provision for income taxes                246,170       112,022        522,584       200,960
                                      -----------   -----------    -----------   -----------

                  Net income          $   479,911   $   274,260    $ 1,022,961   $   492,004
                                      ===========   ===========    ===========   ===========

Net income per share:

       Basic                          $       .23   $      0.14    $       .50   $      0.24
       Diluted                        $       .23   $      0.13    $       .49   $      0.24
                                      -----------   -----------    -----------   -----------

Weighted average number of
  shares outstanding:

       Basic                            2,047,803     2,010,791      2,040,909     2,010,779
       Diluted                          2,071,693     2,049,020      2,066,015     2,050,590
                                      -----------   -----------    -----------   -----------

Dividends per share:                  $       .13   $    0.0875    $       .26   $    0.1625
                                      ===========   ===========    ===========   ===========
</table>

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)
                   Six Months Ended December 31, 2006 and 2005
<table>
<caption>
                                                                                      December 31,
                                                                                  2006           2005
                                                                               -----------    -----------

                                                                                  <c>           <c>
Cash Flows From Operating Activities:
       Net income                                                              $ 1,022,961    $   492,004

       Adjustments to reconcile net income to net
       cash provided by operating activities:
       Tax effect on stock options                                                  49,697             --
       Stock option compensation                                                    76,020             --
       Depreciation                                                                243,022        278,391
       ESOP compensation expense                                                   218,625        227,301
       Loss on disposal of assets                                                    4,376         18,660
       Deferred income tax                                                         (36,262)       (35,000)
       Changes in assets and liabilities:
           Decrease (Increase) in trade receivables, net                         1,200,435       (562,778)
           Decrease (Increase) in other receivables                                  3,411         (5,485)
           Increase in inventories                                                (170,125)      (833,746)
           Increase in prepaid expenses and other current assets                   (34,770)       (66,255)
           Increase in accounts payable                                            173,805        464,696
           Increase in accrued salaries, wages and commissions                      12,990         17,024
           Decrease in vacation accrual                                            (47,973)       (56,910)
           Increase in other accrued expenses                                        3,705         14,037
           (Decrease) Increase in payroll & other taxes withheld and accrued       (13,530)         6,114
           Decrease in income taxes payable                                       (611,717)      (234,885)
           Decrease in ESOP payable                                                (71,284)       (48,750)
                                                                               -----------    -----------
                      Net cash provided by (used in) operating activities        2,023,386       (325,582)
                                                                               -----------    -----------

Cash Flows From Investing Activities:
       Unearned ESOP Shares                                                             --     (4,335,000)
       Additions to property, plant & equipment                                   (200,871)      (258,908)
       Proceeds on sale of assets, net                                                  --            500
       Purchase of short term investments                                       (2,400,000)    (3,648,000)
       Maturity of short term investments                                        2,112,000      2,688,000
                                                                               -----------    -----------
                      Net cash used in investing activities                       (488,871)    (5,553,408)
                                                                               -----------    -----------

Cash Flows From Financing Activities:
       Sale of treasury stock                                                           --      4,396,424
       Dividends on common stock                                                  (529,914)      (325,832)
       Purchase of treasury stock                                                 (110,203)      (679,809)
       Proceeds from exercise of stock options                                     150,680        141,805
                                                                               -----------    -----------
                      Net cash (used in) provided by financing activities         (489,437)     3,532,588
                                                                               -----------    -----------

Increase (Decrease) in cash and cash equivalents                                 1,045,078     (2,346,402)
Cash and cash equivalents, beginning of period                                   7,072,615      9,803,507
                                                                               -----------    -----------
Cash and cash equivalents, end of period                                         8,117,693      7,457,105
                                                                               ===========    ===========

Supplemental disclosures of cash flow information:
       Income Taxes Paid                                                       $ 1,121,159    $   470,845
                                                                               ===========    ===========

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.

</table>

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 2006 Form 10-KSB.

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 and six months ended  December 31, 2005,  as all options
granted  under  the  Company's  stock-based  employee  compensation  plan 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 and six months ended December 31, 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 and six months  ended  December  31, 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. No new grants have been awarded since July 1, 2006.

Total stock-based compensation expense recognized in the Statement of Income for
the three and six months  ended  December  31,  2006,  was $36,831 and  $76,020,
respectively,  before income taxes.  The related total  deferred tax benefit was
approximately $2,923 and $5,992, for the three and six months ended December 31,
2006,  respectively.  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 December  31,  2006,  there was  approximately  $153,609  of  unrecognized
compensation  cost  related  to  stock  option  awards  that is  expected  to be
recognized as expense over a period of 1.5 years.

The 2000 Stock Option Plan is the Company's only 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

                                       4
<page>

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 to  satisfy  option  grants  are  issued  from  Treasury  stock.  Options
authorized for issuance under the 2000 Stock Option Plan totaled 275,300.  As of
December 31, 2006, of the options authorized for issuance,  124,000 were granted
and are  outstanding,  51,000  of which  are  vested  and  exercisable.  Options
available for future grants at December 31, 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 and six months
ended December 31, 2006:

                                         Three Months Ended     Six Months Ended
                                          December 31, 2006    December 31, 2006
                                          -----------------    -----------------
Dividend yield                                   2.10%                2.36%
Expected stock price volatility                 22.41%               21.72%
Risk-free interest rate                          4.49%                4.35%
Expected option life (in years)                  5.5                  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
and six months  ended  December  31, 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   Six Months Ended
                                               December 31, 2005   December 31, 2005
                                               -----------------   -----------------

                                             <c>                <c>
Net income, as reported                         $       274,260    $       492,004
Deduct: Total stock-based employee
        compensation expense determined
        under fair value based method for all
        awards, net of related income taxes             (20,926)           (25,784)
                                                ---------------    ---------------
Pro forma net income                            $       253,334    $       466,220
                                                ===============    ===============

Income per share:
Basic - as reported                             $           .14    $           .24
Basic - pro forma                               $           .13    $           .23
Diluted - as reported                           $           .13    $           .24
Diluted - pro forma                             $           .12    $           .23

</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 and six months ended December 31, 2005:

                                       5
<page>

                                          Three Months Ended    Six Months Ended
                                           December 31, 2005   December 31, 2005
                                           -----------------   -----------------
Dividend yield                                    2.46%               2.46%
Expected stock price volatility                  23.26%              23.26%
Risk-free interest rate                           4.00%               4.00%
Expected option life (in years)                   5.0                 5.0
Weighted average fair value per share
   of options granted during the period           --                  --

The following table summarizes stock option activity during the six months ended
December 31, 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                                (15,000)      10.05
   Forfeited or expired                      (7,200)      13.39
                                           ------------------------------------
   Balance at December 31, 2006             124,000       14.53           8
                                           ====================================
   Exercisable at December 31, 2006          51,000       10.15         6.5
                                           ====================================

The  intrinsic  value of stock  options  exercised  was $62,170,  during the six
months ended December 31, 2006. The intrinsic value of stock options outstanding
and exercisable as of December 31, 2006 was $436,975.

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 $119,650 at December 31, 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 at this time to predict the outcome of any such
actions. There are no pending claims against the Company.

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 and an
adjustment  to tax  liabilities  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.

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

                                       6
<page>

years. The Company is currently  evaluating the effect of the guidance contained
in SFAS 157 and does not expect the  implementation to have a material effect on
the Company's financial statements.

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   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
$111,375 for the quarter ended  December 31, 2006 and $218,625 for the six-month
period ending December 31, 2006. The ESOP shares as of December 31, 2006 were as
follows:

        Allocated Shares                                           436,492
        Committed-to-be-released shares                             12,500
        Unreleased shares                                          261,667
                                                                ----------

        Total shares held by the ESOP                              710,659
                                                                ==========

        Fair value of unreleased shares at December 31, 2006   $ 4,898,406
                                                               ===========

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. 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 or Plan of Operation

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 and foreign  governments  and major foreign
electronic  equipment  companies.  In certain countries the Company has external
sales  representatives  to help solicit and coordinate  foreign  contracts.  The
Company  is also  on the  eligible  list of  contractors  of 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 half of
fiscal  2007,  the Company  received  approximately  $8.2 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 getting
involved in long-term high quantity military and industrial products.

The sales backlog of approximately  $33.7 million at December 31, 2006 gives the
Company a solid base of future  sales and,  therefore,  management  continues to
expect an increase in sales during  fiscal 2007 as compared to fiscal  2006.  In
addition  to the  backlog,  the Company  currently  has  outstanding  quotations
representing  in excess of $31 million in the  aggregate for both repeat and new
programs.   New  orders   received  in  the  first  half  of  fiscal  2007  were
approximately $8.2 million compared to approximately  $20.6 million in the first
half of fiscal 2006.  Many potential  orders are currently  being  discussed and
negotiated  with our customers and management  expects to book several orders in
the second half of the fiscal year.

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 $33.7  million at December 31, 2006,  down
$9.0  million as  compared  to  December  31,  2005,  represents  the  estimated
remaining sales value of work to be performed  under firm contracts.  The funded
portion of this backlog at December  31, 2006 is  approximately  $29.4  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

                                       8
<page>

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 December 31, 2005 was  approximately  $8.6.  The backlog at
December 31, 2006, as discussed 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

We believe 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  December  31,  2006 were  $6,119,320  as
compared  to  $5,056,083  for the  same  period  in 2005,  representing  a 21.0%
increase.  Net sales for the six months ended December 31, 2006 were $12,191,226
as  compared  to  $9,616,657  for the same  period in 2005,  representing  a 27%
increase.  Generally, these increases 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 three
and six months ended December 31, 2006 is largely attributable to an increase in
shipments to two customers for power supplies and transformers.

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  December  31,  2006 and 2005  gross  profits  were
$1,258,221 and $947,360, respectively. Gross profit as a percentage of sales was
20.6%  and  18.7%,  for the  three  months  ended  December  31,  2006 and 2005,
respectively.  For the six months ended December 31, 2006 and 2005 gross profits
were  $2,655,529 and $1,827,650,  respectively.  Gross profit as a percentage of
sales was 21.8% and 19.0%,  for the six months ended December 31, 2006 and 2005,
respectively.  The improved gross profit  percentage in the three and six months
ended  December 31, 2006,  relates to a favorable  mature  product mix and lower
overhead  expenses,  offset  partially  by  stock  option  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  obtained and  executed.  Employment  of full time  equivalents  at
December 31, 2006 was 173.5 compared to 175 people at December 31, 2005.

Selling,  general and administrative expenses were $712,743 for the three months
ended  December  31, 2006,  an increase of $46,303  compared to the three months
ended  December 31, 2005.  Selling,  general and  administrative

                                       9
<page>

expenses were $1,439,723 for the six months ended December 31, 2006, an increase
of $103,564  compared to the six months ended December 31, 2005. The increase is
primarily due to stock option expense and an increase in selling expenses.

Other  income for three and six months  ended  December  31, 2006  increased  as
compared to the three months ended  December 31, 2005 due to increased  interest
income on the Company's cash and cash equivalents and short-term investments due
to  higher  interest  rates.  The  Company  does  not  believe  that  there is a
significant  risk associated with its investment  policy,  since at December 31,
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 December 31, 2006 and 2005 was 33.8% 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  December 31, 2006,  was $479,911 or $.23
per share,  both basic and  diluted,  compared  to $274,260 or $.14 and $.13 per
share,  basic and diluted,  for the three months  ended  December 31, 2005.  Net
income for the six months ended  December 31, 2006,  was  $1,022,961 or $.50 and
$.49 per share, basic and diluted,  compared to $492,004 or $.24 per share, both
basic and diluted,  for the six months ended  December 31, 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 December 31, 2006 was  approximately  $26.8
million.  During the three months  ended  December 31, 2006 and 2005 the Company
repurchased 4,307 and 14,462 shares, respectively,  of its common stock from the
Company's  Employee  Retirement  Plan and Trust  ("ESOP"),  for a total purchase
price of  $79,077  and  $262,125,  respectively.  During  the six  months  ended
December  31, 2006 and 2005 the  Company  repurchased  6,073 and 38,746  shares,
respectively,  of its common  stock for a total  purchase  price of $110,202 and
$679,809,  respectively.  Under existing authorizations from the Company's Board
of Directors,  as of December 31, 2006,  management is authorized to purchase an
additional $889,798 million of Company stock.

<table>
<caption>
                                                    Six Months Ended December 31,
                                                         2006           2005
                                                      ----------     -----------

                                                   <c>            <c>
Net cash provided by (used in) operating activities   $2,023,386     $  (325,582)
Net cash used in investing activities                   (488,871)     (5,553,408)
Net cash (used in) provided by financing activities     (489,437)      3,532,588

</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
half of fiscal 2007 due to the decrease in purchases of  short-term  investments
and the ESOP transaction  which occurred in the prior year. The decrease in cash
provided by financing  activities  is due  primarily to decrease in purchases of
treasury stock and the ESOP transaction which occurred in the prior year.

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 six months  ended  December 31, 2006 and 2005,  the Company  expended
$200,871 and $258,908,  respectively,  for plant improvements and new equipment.
The Company has  budgeted  approximately  $500,000 for

                                       10
<page>

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 $119,650 at December 31, 2006. The Company does not
expect to fund any of the amounts under the standby letters of credit.


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)
              ------------------------------------------------------------------------------------------

                                    <c>            <c>              <c>                <c>
              December 1 to
              December 31, 2006          4,307          $18.36           4,307              $889,798
</table>

              (1)  Pursuant to a prior Board of Directors  authorization,  as of
              December 31, 2006 the Company can repurchase up to $889,798 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

              (a) The  Company's  Annual  Meeting of  Shareholders  (the "Annual
                  Meeting") was held on November 20, 2006.

              (b) Howard  Pinsley,  Alvin Sabo and Carl Helmetag were re-elected
                  as Class A  directors  each to serve  for a  three-year  term.
                  Continuing as directors after the Annual Meeting were:

                      Class A (term expiring 2009):    Howard Pinsley
                                                       Alvin Sabo
                                                       Carl Helmetag

                      Class B (term expiring 2007):    Barry Pinsley
                                                       Seymour Saslow

                      Class C (term expiring 2008):    Paul J. Corr
                                                       Michael W. Wool

              (c) The following matters were voted upon at the annual meeting:

                  The election of three Class A  directors.  The votes were cast
                  as follows:
<table>
<caption>
                    Nominee:                 Voted For:      Voted Against or Withheld:      Broker Non-Votes:
                    -------                  ---------       -------------------------       ----------------

                 <c>                      <c>                      <c>                           <c>
                    Howard Pinsley           1,844,151                284,027                       0
                    Alvin Sabo               2,075,064                 53,114                       0
                    Carl Helmetag            2,072,944                 55,234                       0
</table>

                                       12
<page>

                  Ratification  of  Rotenberg  &  Company  LLP,  as  independent
                  auditors for the  Corporation  for the fiscal year ending June
                  30, 2007. The votes were cast as follows:

                      Shares in favor               2,111,861
                      Shares against                    1,740
                      Abstentions                      14,576
                      Broker non-votes                      0


Item 5.       Other Information

              None


Item 6.       Exhibits

              (a)   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

                                       13
<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

February 12, 2007
-----------------
      Date


                                       14