UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the fiscal year ended June 30, 1999

[ ]  Transition  Report  Pursuant  to Section  13 or 15(d) of the  Securities
     Exchange Act of 1934

               For the transition period from ________________ to

                           Commission File No. 1-4383

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

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

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

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

                                            Name of Each Exchange
            Title of Each Class              on Which Registered
            -------------------              -------------------
     Common Stock $.33-1/3 par value        American Stock Exchange
     Common Stock Purchase Rights           American Stock Exchange

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

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  was  $11,712,576.75  as of September 15, 1999 based upon the closing
sale price of $14.75 on the American Stock Exchange on September 15, 1999.

The number of shares of common stock  outstanding  as of September  15, 1999 was
1,048,631.
<PAGE>
                                     PART I

Item 1.        Business.

General

Espey Mfg. & Electronics  Corp. (the "Company") has been and intends to continue
to be engaged  principally in the development,  design,  production and sales of
specialized  electronic 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. In other cases, the Company is responsible for both
the  overall  design  and  manufacture  of the  product.  The  Company  does not
generally  manufacture  standardized  components.  The  Company  operates  a one
segment business and was incorporated in 1928.

The electronic  power supplies and components  manufactured  by the Company find
application  principally  in (i) aircraft,  (ii) shipboard and land based radar,
(iii) locomotives,  (iv) short, medium range and global  communication  systems,
(v)navigation  systems for aircraft,  (vi) nuclear  submarine  control  systems,
(vii)  missile  guidance  and  control  systems and (viii)  land-based  military
vehicles.

The Company's iron-core  components include (i) transformers of the audio, power
and pulse types, (ii) magnetic amplifiers and (iii) audio filters.

The electronic  system  components  manufactured  by the Company include antenna
systems and high power radar  transmitters.  These system components utilize the
Company's  own  electronic  power  supplies,  transformers  and other  iron-core
components and mechanical assemblies.

In the fiscal  year ended June 30,  1999  (referred  to herein as  "1999"),  the
Company's total sales were $13,629,692.  Sales to two domestic customers and one
foreign customer  accounted for 37.6%, 25.4% and 11.2%,  respectively,  of total
sales in 1999. Sales to three domestic customers accounted for 47.9%, 14.7%, and
12.5%,  respectively,  of total sales in 1998.  Sales to two domestic  customers
accounted for 19.9% and 61.4%, respectively, of total sales in 1997.

Export sales in 1999 were  approximately  $2,500,000 and were not significant in
1998 or 1997. During 1999, the Company established a foreign sales corporation.

Raw Materials

The Company has never experienced any significant delay or shortage with respect
to the purchase of raw materials and components  used in the  manufacture of its
products,  and  has at  least  two  potential  sources  of  supply  for  all raw
materials.

Sales Backlog

At September 1, 1999, the Company's backlog was approximately  $25,500,000 which
is the  highest it has been since 1992.  The total  backlog at June 30, 1999 was
approximately  $16,961,000 as compared to  approximately  $12,168,000 as of June

                                       2
<PAGE>
30, 1998. The Company's  backlog is discussed in greater detail in  Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations,
contained in Item 7, below.

It is presently  anticipated that a minimum of $13,000,000 of orders  comprising
the June 30, 1999 backlog will be filled  during the fiscal year ending June 30,
2000.  This is in addition to any  shipments  which may be made  against  orders
subsequently  received during the fiscal year ending June 30, 2000. The estimate
of the June 1999  backlog  to be  shipped  in fiscal  2000 is  subject to future
events which may cause the amount of the backlog actually shipped to change.


Marketing and Competition

The  Company  markets  its  products  primarily  through  its own  direct  sales
organization.  Business is solicited from Fortune 500  companies,  United States
and foreign  governments and major foreign electronic  equipment  companies.  In
certain countries the Company has external sales representatives to help solicit
and coordinate  foreign  contracts.  The Company is also on the eligible list of
contractors  of many  agencies of the  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 both the  Department  of Defense and other  United
States Government agencies for prime contracts.

There is  competition  in all classes of products  manufactured  by the Company,
from divisions of the largest  electronic  companies in the country,  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
government appropriations and program allocations, the competition for available
military business, and termination of orders for convenience.

The Company's business is not considered to be of a seasonal nature.

Research and Development

The  Company's  expenditures  for research and  development  were  approximately
$291,000,  $244,000 and $223,000 in 1999, 1998 and 1997,  respectively.  Some of
the Company's  engineers and technicians spend varying degrees of time on either
development of new products or improvement of existing products.

Employees

The number of persons employed by the Company as of September 14, 1999 was 202.



                                       3
<PAGE>
Government Regulations

Compliance  with federal,  state and local  provisions that have been enacted or
adopted  to  regulate  the  discharge  of  materials  into the  environment,  or
otherwise relating to the protection of the environment, did not in
1999, and the Company believes will not in fiscal 2000 or any succeeding  fiscal
year,  have a  material  effect  upon  the  capital  expenditures,  earnings  or
competitive position of the Company.



Item 2.        Properties.

The Company's principal  manufacturing and all of its engineering facilities are
at its plant in Saratoga Springs, New York, which the Company owns.

The Saratoga  Springs  plant  consists of various  closely  adjoining  one-story
buildings.   The  plant  has  a  sprinkler   system   throughout   and  contains
approximately  151,000  square feet of floor space,  of which 90,000 is used for
manufacturing,  24,000 for  engineering,  33,000 for shipping  and  climatically
secured  storage,  and 4,000 for  offices.  The  offices,  engineering  and some
manufacturing  areas are  air-conditioned.  In addition  to assembly  and wiring
operations,  the plant includes  facilities  for  varnishing,  potting,  plating
impregnation and spray painting  operations.  The  manufacturing  operation also
includes a complete  machine  shop,  with  welding and sheet  metal  fabrication
facilities  adequate for substantially all of the Company's current  operations.
Besides normal test equipment,  the Company  maintains a  sophisticated  on-site
environmental  test  facility.  In  addition  to  meeting  all of the  Company's
in-house  needs,  the plating,  machine shop and  environmental  facilities  are
available to other companies on a contract basis.

The Company owns an additional  manufacturing facility in a three-story building
of approximately  4,000 square feet in  Gloversville,  New York. The facility is
used primarily for subcomponent wiring and assembly.

The  Company  maintains  a sales  office in Great  Neck,  New York.  This space,
comprising approximately 750 square feet, is leased from a non-affiliated person
for a term expiring on September 9, 2001.

Item 3.        Legal Proceedings.

               None

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

               None

                           PART II

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


                                       4
<PAGE>
Price Range of Common Stock

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




<TABLE>
<CAPTION>

      1999                  High              Low
<S>                        <C>               <C>
First Quarter              14 5/8            12 3/4
Second Quarter             13 3/8            12 3/8
Third Quarter              14 1/8            11 3/4
Fourth Quarter             12 3/4            11 1/4

<CAPTION>

     1998                    High              Low
<S>                        <C>               <C>

First Quarter              17 3/8            16 3/8
Second Quarter             18 1/8            16 3/4
Third Quarter              17                15
Fourth Quarter             15 3/8            13 3/4
</TABLE>


Holders

The  approximate  number of  holders  of record of the  common  stock was 178 on
September  13,  1999  according  to records  of the  Company's  transfer  agent.
Included  in this  number are shares held in  "nominee"  or  "street"  name and,
therefore, the number of beneficial owners of the common stock is believed to be
substantially in excess of the foregoing number.

Dividends

The Company  paid a cash  dividend on the common stock of $.20 per share for the
fiscal year ended June 30, 1999 and $.70 per share in its fiscal year ended June
30,  1998.  The Board of  Directors  has  authorized  the  payment  of an annual
dividend of $.20 per share in fiscal 2000.  This dividend will be paid quarterly
at $.05 per share at the end of each of the four quarters in fiscal 2000.



                                       5
<PAGE>
Item 6.        Selected Financial Data.
<TABLE>
<CAPTION>
                                            ESPEY MFG. & ELECTRONICS CORP.
                                            Five Years Ended June 30, 1999



                                                                     Year Ended June 30,
                                     ---------------------------------------------------------------------------------
Selected Income Statement Data            1999             1998              1997             1996             1995
                                     ------------     ------------      ------------     ------------     ------------
<S>                                  <C>              <C>               <C>              <C>              <C>
Net sales ......................     $ 13,629,692     $ 10,793,572      $ 15,166,075     $ 16,800,200     $ 14,574,097
Operating income (loss) ........          690,839       (1,750,663)          342,177          209,226           24,064
Other income, net ..............          441,762          595,691           525,046          575,006          726,073
                                     ------------     ------------      ------------     ------------     ------------

       Net income (loss) .......          730,601         (739,602)          563,128          522,737          491,767

Income (loss) per common share:      $        .66     $       (.67)     $        .51     $        .41     $        .37
                                     ============     ============      ============     ============     ============

Selected Balance Sheet Data

Current assets .................       22,091,114       21,309,658        21,819,899       21,499,805       25,243,909
Current liabilities ............        1,274,126          883,980           599,180          623,908          983,401
Working capital ................       20,816,988       20,425,678        21,220,719       20,875,897       24,260,508
Total assets ...................       25,394,712       24,574,108        25,199,951       24,950,043       28,839,718
Long-term liabilities (deferred
     income taxes) .............             --               --                --               --             30,697
                                     ------------     ------------      ------------     ------------     ------------

Stockholders' equity ...........       24,120,586       23,690,128        24,600,771       24,326,135       27,825,620
                                     ------------     ------------      ------------     ------------     ------------

Cash dividends declared and paid
     per common share ..........     $        .20     $        .70      $        .70     $        .70     $        .60
                                     ============     ============      ============     ============     ============
</TABLE>
Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations.

Results of Operations

Net Sales for fiscal years ended June 30, 1999, 1998,and 1997, were
$13,629,692,  $10,793,572  and  $15,166,075,  respectively.  The 26% increase in
sales over 1998 is a result of the Company  beginning to realize the benefits of
intensified  marketing  efforts in an attempt to increase business with existing
customers as well as establishing new customer relationships. These efforts have
provided for the  continued  increase in the backlog that has occurred  over the
last  several  quarters.  At  September  1,  1999,  the  Company's  backlog  was
approximately  $25,500,000,  which is the  highest it has been since  1992.  The
backlog at June 30, 1999 was approximately  $16,961,000, a 39% increase over the
June 30, 1998 backlog.  The increase in sales orders resulted from the increased
demand  from  foreign  customers,  and for  spare  parts  and  commercial  power
supplies.

                                        6
<PAGE>
The decrease in Net Sales in 1998 as compared to 1997 was  primarily a result of
the  relatively  low June  30,  1997  backlog.  The  backlog  was low due to the
consolidation  and  relocation  of the  facilities  and  personnel of one of the
Company's major customers, and the attendant delay in its issuance of new orders
and establishment of new programs.

Net income for fiscal  1999,  was  $730,601 or $.66 per share  compared to a net
loss of $739,602 or ($.67) per share for fiscal  1998.  The net income  increase
was due to increased Net Sales, favorable product mix and an overall decrease in
selling, general and administrative expenses.

For  fiscal  years  ended  June  30,  1999,  1998 and 1997  gross  profits  were
$2,537,676, $685,953 and $2,150,639,  respectively. The increase in gross profit
in 1999 was  predominately  due to increased  efficiency  in  manufacturing  and
engineering workforce and favorable product mix. The decrease in gross profit in
1998, as compared to 1997, is largely  attributable to the 29% decrease in sales
during 1998 and the fact that in an effort to expand and diversify product lines
the Company accepted certain contracts with negative profit margins.

Selling,  general and administrative expenses were $1,846,837 for the year ended
June 30, 1999,  a decrease of  $110,279,  or 5.6% as compared to the prior year.
The reduction is primarily related to a decrease in professional fees,  officers
salaries and employment  related expenses.  Selling,  general and administrative
expenses  increased  approximately 8% in the 1998 fiscal year as compared to the
1997 fiscal year. No one factor accounted for this increase.

Other income  declined,  as expected,  as the company  continued to increase the
backlog  and  improve  overall  net  sales,  more  cash was  being  utilized  in
operations for inventory and higher accounts  receivable  balances during fiscal
1999.  This trend left the company with less cash to invest in interest  bearing
securities.  Also,  interest rates declined  slightly in fiscal 1999 from fiscal
1998.


Business Outlook

The Company  continues to increase Net Sales while also  increasing the existing
backlog.  During the first  nine  weeks of fiscal  2000,  the  Company  received
approximately  $13,000,000 in new orders.  The backlog of over $25 million as of
September 1, 1999, gives the Company a solid base to grow from over the next few
years.  In  addition  to the  backlog,  the Company  currently  has  outstanding
quotations  well in excess of $60 million for both repeat and new programs.  The
Company has  received  major  contracts  for power  supplies  which  should find
extensive use  throughout the world.  The Company has also received  substantial
orders for spare parts on the various types of transmitters which are already in
the field, and a number of contracts for further  development and manufacture of
numerous  transformers.  The outstanding  quotations  encompass  various new and
previously  manufactured  power  supplies,   transformers,   and  subassemblies.
Management presently  anticipates that the Company will realize both an increase
in revenues  and income in 2000,  however,  there can be no  assurance  that the
Company  will acquire any or all of the proposed  orders  described  above since
such a forward-looking statement is subject to future events, market conditions,
political stability of foreign governments, and allocations of the United States
defense budget.


                                       7
<PAGE>
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 and does
not currently anticipate that it will borrow any funds during fiscal year 2000.

The  Company's  working  capital  as  of  June  30,  1999,  1998  and  1997  was
$20,816,988,  $20,425,678,and $21,220,719, respectively. During 1999 the Company
repurchased  47,562  shares of its common stock from the  Company's  ESOP and in
other private and public  transactions,  for a total purchase price of $604,226.
The Company did not  repurchase any of its common stock during fiscal year 1998.
The Company  repurchased  7,426 shares of common stock from the  Company's  ESOP
during 1997 for a total  purchase  price of  $116,032.  In the first  quarter of
fiscal year 2000, the Company repurchased 15,027 shares of common stock from the
Company's  ESOP at a purchase price of $193,222.  Under existing  authorizations
from the Company's Board of Directors,  as of September 7, 1999,  57,473 company
shares could be repurchased by the Company,  at a price not to exceed $13.50 per
share.

The table below  presents  the summary of cash flow  information  for the fiscal
year indicated:
<TABLE>
<CAPTION>
                                                           1999             1998
                                                           ----             ----
<S>                                                    <C>              <C>
Net cash used in operating activities ............     $ 2,947,631      $ 1,787,614
Net cash (provided by)used in investing activities      (3,541,565)       6,966,376
Net cash used in financing activities ............         821,338          777,854

</TABLE>

Net cash used in 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.  The increase in cash (provided by) used in investing activities is due
to the  maturities of the  Company's  investment  securities  with no offsetting
purchase of new  investments as the Company needed the funds to support  current
operations.  The  increase in cash used in  financing  activities  is due to the
increased amount of treasury stock purchased during 1999 as explained above.

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

Management  believes  that the  Company's  reserve  for bad  debts of  $3,000 is
adequate  given the  customers  with whom the Company  deals.  The amount of bad
debts over the years has been minimal.

During fiscal year 1999, and 1998, the Company expended  approximately  $508,000
and  $300,000,  respectively,  for plant  improvements  and new  equipment.  The
Company  plans to expend  approximately  $590,000  for new  equipment  and plant
improvements in fiscal 2000.  Management  presently  anticipates  that the funds
required will be available from current operations.


                                       8
<PAGE>
Management Restructuring

At the end of the fiscal 1998, the Company  implemented a management  succession
plan. The plan was effectuated  through  agreements with five executive officers
of the Company: Joseph Canterino (former President and Chief Executive Officer),
Barry Pinsley (former Vice  President-Investor  Relations and Human  Resources),
Seymour Saslow (Senior Vice President), Herbert Potoker (Treasurer and Principal
Financial  Officer)  and  Reita  Wojtowecz  (Secretary).  Under the terms of the
agreements,  the executives  agreed to resign from their  positions as executive
officers  and  are  being   compensated  in  accordance  with  their  respective
agreements. The implementation of this plan resulted in the Company recording in
fiscal 1998 a $479,500  pre-tax  charge for payments due under the contracts and
costs related to the implementation of the plan. The costs of the plan are being
paid with cash flows from the Company's operating  activities.  At June 30, 1999
approximately $306,000 remains to be paid under these agreements.


Other Matters

An Employee  Retirement Plan and Trust ("ESOP") was established for the eligible
non-union  employees of the Company and was  effective  as of July 1, 1988.  The
ESOP used the proceeds of a loan from the Company to purchase  316,224 shares of
the  Company's  common  stock  for  approximately  $8,400,000,  and the  Company
contributed  approximately  $400,000 to the ESOP,  which was used by the ESOP to
purchase an additional 15,000 shares of the Company's common stock.

Each year the  Company  makes  contributions  to the ESOP which are used to make
loan interest and principal  payments.  With each loan and interest  payment,  a
portion of the common stock will be allocated to participating  employees. As of
June 30, 1999, there were 167,632 shares  allocated to  participants.  Dividends
attributable to allocated  shares were likewise  allocated to the  participants'
accounts,  whereas the dividends on unallocated  shares were used as part of the
loan repayment, thus reducing the Company's required contribution.

The loan from the Company to the ESOP is  repayable  in annual  installments  of
$1,039,605,  including interest through June 30, 2004.  Interest is payable at a
rate of 9% per annum.  The  Company's  receivable  from the ESOP is  recorded as
common stock subscribed in the accompanying balance sheets.


Year 2000 Issues

The Company's Year 2000 team has the responsibility of identifying and resolving
significant  Year  2000  issues  in a timely  manner.  In  addition,  management
continues to monitor the status of the Company's Year 2000 remediation.

The process has included an assessment of issues and  development of remediation
plans,  where  necessary,  as they relate to internally used software,  computer
hardware  and  use  of  computer  applications  in the  Company's  manufacturing
processes  and  products.  In addition,  the Company is engaged in assessing the
Year 2000 issue with significant suppliers. The Company continues to communicate
with its  significant  suppliers and large  customers to determine the extent to
which the Company is  vulnerable  to those third  parties'  failure to remediate
their own Year 2000 issues.  To date no significant  issues have been identified
as  to  internally  used  software,   computer  hardware  and  use  of  computer
applications in the Company's manufacturing processes and products. In addition,
no  issues  have  been  identified  regarding  significant  suppliers  and large
customers.

                                       9
<PAGE>
The Company is utilizing both internal and external  resources to reprogram,  or
replace and test,  the software it currently  uses for Year 2000  modifications.
The  Company  has   substantially   completed  its  Year  2000   assessment  and
remediation.  The total project  costs to date,  related to the  assessment  and
remediation of its Year 2000 issues are less than $25,000.

With  regard to its  internal  Year 2000  compliance  program,  the  Company has
completed  approximately  99%  of  its  review  and,  when  necessary,  100%  of
remediation.  With regard to its Year 2000  compliance  program  addressing  the
status of the  Company's  suppliers  and  customers,  the Company has  completed
approximately 98% of its review. No problems have been identified.

The Company has  determined  that  contingencies  related to the Year 2000 issue
will not have a  material  adverse  effect.  Accordingly,  the  Company  has not
established a contingency plan and does not anticipate creating such a plan.

Due to the general uncertainty  inherent in the Year 2000 problem,  resulting in
part from the  uncertainty of the Year 2000  readiness of third-party  suppliers
and  customers,  the Company,  despite its efforts as described in this section,
can give no assurance as to whether the  consequences of Year 2000 failures will
have a material  impact on the  Company's  results of  operations,  liquidity or
financial condition.


Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995

It should be noted that certain  statements in this Management's  Discussion and
Analysis of Financial  Condition and Results of Operations are  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are made  pursuant  to the safe  harbor  provisions  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,  as well as supply and  manufacturing  constraints  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 8.        Financial Statements and Supplementary Data.


                                       10
<PAGE>
Report of Independent Accountants




To the Board of Directors and Stockholders of
Espey Mfg. & Electronics Corp. and Subsidiary:


In our opinion,  the 1999 consolidated  financial statements listed in the index
appearing  under  Item  14(a)(1)  on page 23  present  fairly,  in all  material
respects,  the  financial  position  of Espey Mfg.  and  Electronics  Corp.  and
Subsidiary at June 30, 1999, and the results of their  operations and their cash
flows for the year ended June 30, 1999 in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based  on our  audit.  We  conducted  our  audit of these
statements in accordance  with  generally  accepted  auditing  standards,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for the opinion expressed above.



/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Albany, New York
August 24, 1999

                                       11


<PAGE>

Report of Independent Accountants

June 30, 1998 and 1997


The Board of Directors and Stockholders
Espey Mfg. & Electronics Corp.:


We have audited the accompanying balance sheet of Espey Mfg. & Electronics Corp.
as of June  30,  1998,  and the  related  statements  of  earnings,  changes  in
stockholders'  equity and cash flows for the years ended June 30, 1998 and 1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Espey Mfg. & Electronics Corp.
as of June 30, 1998,  and the results of its  operations  and its cash flows for
the years ended June 30, 1998 and 1997, in conformity  with  generally  accepted
accounting principles.



/s/KPMG LLP
-----------
KPMG LLP
Albany, New York
August 26, 1998


                                       12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 1999 and 1998

                                   ASSETS                                             1999                  1998
Current assets:
<S>                                                                             <C>               <C>
   Cash and cash equivalents                                                    $  2,364,335      $  2,591,739
   Investment securities                                                           3,674,169         7,235,749
   Trade accounts receivable, net of $3,000 allowance in 1999 and 1998             4,440,177         1,866,336
   Income tax refund receivable                                                         --             270,408
   Other receivables                                                                  10,941            18,642
                                                                                ------------      ------------
        Net receivables                                                            4,451,118         2,155,386
                                                                                ------------      ------------

   Inventories:
      Raw materials and supplies                                                     546,007           558,951
      Work in process                                                              2,639,330         2,905,269
      Costs relating to contracts in process                                       7,856,607         5,324,491
                                                                                ------------      ------------
        Net inventories                                                           11,041,944         8,788,711
                                                                                ------------      ------------

   Deferred income taxes                                                             327,497           348,514
   Prepaid expenses and other current assets                                         232,051           189,559
                                                                                ------------      ------------
        Total current assets                                                      22,091,114        21,309,658
                                                                                ------------      ------------

Deferred income taxes                                                                 42,367            80,793

Property, plant and equipment, at cost                                            12,851,825        12,344,139
Less accumulated depreciation                                                     (9,590,594)       (9,160,482)
                                                                                ------------      ------------
        Net property, plant and equipment                                          3,261,231         3,183,657
                                                                                ------------      ------------

        Total assets                                                            $ 25,394,712      $ 24,574,108
                                                                                ============      ============

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                             $    285,281      $    207,886
   Accrued salaries, wages and commissions                                           498,695           563,058
   Accrued employee insurance costs                                                   58,539            37,472
   Accrued vacation                                                                  211,162            20,000
   Accrued other                                                                      41,251            12,204
   Payroll and other taxes withheld and accrued                                      116,211            43,360
   Income taxes payable                                                               62,987              --
                                                                                ------------      ------------
        Total current liabilities                                                  1,274,126           883,980
                                                                                ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                             <C>               <C>
Stockholders' equity:
   Common stock, par value $.33-1/3 per share                                        504,979           504,979
      Authorized 2,250,000 shares; issued 1,514,937 shares in 1999 and 1998
      Outstanding 1,063,658 and 1,111,220 in 1999 and 1998, respectively
   Capital in excess of par value                                                 10,496,287        10,496,287
   Accumulated other comprehensive income                                            (38,175)            7,260
   Retained earnings                                                              23,193,297        22,671,840
                                                                                ------------      ------------
                                                                                  34,156,388        33,680,366

Less:
   Common stock subscribed                                                        (2,793,312)       (3,351,974)
   Cost of 451,279 and 403,717 shares of common stock in treasury
      in 1999 and 1998                                                            (7,242,490)       (6,638,264)
                                                                                ------------      ------------
        Total stockholders' equity                                                24,120,586        23,690,128
                                                                                ------------      ------------

        Total liabilities and stockholders' equity                              $ 25,394,712      $ 24,574,108
                                                                                ============      ============

</TABLE>

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

                                       13
<PAGE>
<TABLE>
<CAPTION>
Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Income
Years Ended June 30, 1999, 1998 and 1997

                                                                   1999             1998             1997
<S>                                                           <C>              <C>               <C>
Net sales                                                     $ 13,629,692     $ 10,793,572      $ 15,166,075
Cost of sales                                                   11,092,016       10,107,619        13,015,436
                                                              ------------     ------------      ------------

      Gross profit                                               2,537,676          685,953         2,150,639

Selling, general and administrative expenses                     1,846,837        1,957,116         1,808,462
Other costs                                                           --            479,500              --
                                                              ------------     ------------      ------------

      Operating income (loss)                                      690,839       (1,750,663)          342,177
                                                              ------------     ------------      ------------

Other income:
   Interest and dividend income                                    425,330          553,540           514,822
   Other                                                            16,432           42,151            10,224
                                                              ------------     ------------      ------------

      Total other income                                           441,762          595,691           525,046
                                                              ------------     ------------      ------------

Income (loss) before income taxes                                1,132,601       (1,154,972)          867,223

Provision (benefit) for income taxes                               402,000         (415,370)          304,095
                                                              ------------     ------------      ------------

      Net income (loss)                                       $    730,601     $   (739,602)     $    563,128
                                                              ============     ============      ============

Income per common share;
   Net income (loss) per common share - basic and diluted     $        .66     $      (0.67)     $       0.51
                                                              ============     ============      ============

   Weighted average outstanding shares                           1,100,065        1,111,220         1,112,074
                                                              ============     ============      ============

</TABLE>
The accompanying notes are an integral part of the financial statements.



                                       14
<PAGE>
<TABLE>
<CAPTION>
Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1999, 1998 and 1997

                                                                                                      Accumulated
                                                                                    Capital in           Other
                                                                     Common        Excess of Par     Comprehensive        Retained
                                                                     Stock             Value         Income (Loss)        Earnings
                                                                 ------------      ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>               <C>
Balance at June 30, 1996                                         $    504,979      $ 10,496,287      $       --        $ 24,316,400
                                                                 ------------      ------------      ------------      ------------
Comprehensive income
     Net income, 1997                                                                                                       563,128
Comprehensive income (loss)
Dividends paid on common stock, $.70 per share                                                                             (777,855)
Tax effect of dividends on unallocated ESOP shares                                                                           46,732
Purchase of treasury stock (7,426 shares)
Reduction of common stock subscribed
                                                                 ------------      ------------      ------------      ------------
Balance at June 30, 1997                                              504,979        10,496,287              --          24,148,405
                                                                 ------------      ------------      ------------      ------------

Comprehensive loss:
     Net loss                                                                                                              (739,602)
     Other comprehensive income, net of tax of $3,740                   7,260             7,260
Comprehensive loss                                                   (732,342)
Dividends paid on common stock, $.70 per share                       (777,854)         (777,854)
Tax effect of dividends on unallocated ESOP shares (Note 8)            40,891            40,891
Reduction of common stock subscribed                                  558,662           558,662
                                                                 ------------      ------------      ------------      ------------
Balance at June 30, 1998                                              504,979        10,496,287             7,260        22,671,840
                                                                 ------------      ------------      ------------      ------------
Comprehensive income (loss):
     Net income, 1999                                                                                                       730,601
     Other comprehensive loss, net of tax benefit of $25,557                                              (45,435)
Comprehensive income
Dividends paid on common stock $.20 per share                                                                              (217,112)
Tax effect of dividends on unallocated ESOP shares                                                                            7,968
Purchase of treasury stock (47,562 shares)
Reduction of common stock subscribed
                                                                 ------------      ------------      ------------      ------------
Balance at June 30, 1999                                         $    504,979      $ 10,496,287      $    (38,175)     $ 23,193,297
                                                                 ============      ============      ============      ============

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                          Treasury Stock                 Total
                                                                 Common Stock     -----------------------------      Stockholders'
                                                                  Subscribed         Shares            Amount            Equity
                                                                ------------      ------------     ------------      ------------
<S>                                                             <C>               <C>              <C>               <C>
Balance at June 30, 1996                                        $ (4,469,299)          396,291     $ (6,522,232)     $ 24,326,135
                                                                ------------      ------------     ------------      ------------
Comprehensive income
     Net income, 1997                                                                                                     563,128
                                                                                                                     ------------
Comprehensive income (loss)                                                                                               563,128
Dividends paid on common stock, $.70 per share                                                                           (777,855)
Tax effect of dividends on unallocated ESOP shares                                                                         46,732
Purchase of treasury stock (7,426 shares)                                                7,426         (116,032)         (116,032)
Reduction of common stock subscribed                                 558,663                                              558,663
                                                                ------------      ------------     ------------      ------------
Balance at June 30, 1997                                          (3,910,636)          403,717       (6,638,264)       24,600,771
                                                                ------------      ------------     ------------      ------------

Comprehensive loss:
     Net loss                                                                                                            (739,602)
     Other comprehensive income, net of tax of $3,740                                                                       7,260
                                                                                                                     ------------
Comprehensive loss                                                                                                       (732,342)
Dividends paid on common stock, $.70 per share                                                                           (777,854)
Tax effect of dividends on unallocated ESOP shares (Note 8)                                                                40,891
Reduction of common stock subscribed                                                                                      558,662
                                                                ------------      ------------     ------------      ------------
Balance at June 30, 1998                                          (3,351,974)          403,717       (6,638,264)       23,690,128
                                                                ------------      ------------     ------------      ------------
Comprehensive income (loss):
     Net income, 1999                                                                                                     730,601
     Other comprehensive loss, net of tax benefit of $25,557                                                              (45,435)
                                                                                                                     ------------
Comprehensive income                                                                                                      685,166
Dividends paid on common stock $.20 per share                                                                            (217,112)
Tax effect of dividends on unallocated ESOP shares                                                                          7,968
Purchase of treasury stock (47,562 shares)                                              47,562         (604,226)         (604,226)
Reduction of common stock subscribed                                 558,662                                              558,662
                                                                ------------      ------------     ------------      ------------
Balance at June 30, 1999                                        $ (2,793,312)          451,279     $ (7,242,490)     $ 24,120,586
                                                                ============      ============     ============      ============
</TABLE>
The accompanying notes are an integral part of the financial statements.

                                       15
<PAGE>
<TABLE>
<CAPTION>
Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997


                                                                       1999               1998              1997
<S>                                                                <C>               <C>               <C>
Cash flows from operating activities:
   Net income (loss)                                               $    730,601      $   (739,602)     $    563,128
   Adjustments to reconcile net Income (loss) to net cash
      provided by operating activities:
      Tax effect of dividends on unallocated ESOP shares                  7,968            40,891            46,732
      Depreciation                                                      430,111           422,013           488,617
      Deferred income tax expense (benefit)                              85,000          (220,618)         (202,545)
      Change in assets and liabilities:
        Decrease (increase) in trade accounts receivable             (2,566,142)         (721,148)          410,751
            and other receivables, net
        Decrease (increase) in inventories, net                      (2,253,233)         (586,836)        2,831,471
        Decrease (increase) in income tax refund receivable             270,408          (270,408)             --
        Decrease in prepaid expenses and other current assets           (42,491)            3,294            79,955
        Increase (decrease) in accounts payable                          77,397           (37,917)           87,172
        Increase  (decrease)  in accrued  salaries,  wages and          (64,363)          475,418            (8,711)
            commissions
        Increase (decrease) in accrued employee insurance                21,066            (3,101)          (14,166)
            costs
        Increase (decrease) in other accrued expenses                    29,048             3,210            (8,446)
        Increase in accrued vacation                                    191,161
        Increase (decrease) in payroll and other taxes                   72,851            (4,204)         (109,326)
            withheld and accrued
        Increase (decrease) in income taxes payable                      62,987          (148,606)           28,749
                                                                   ------------      ------------      ------------

           Net cash provided by (used in) operating activities       (2,947,631)       (1,787,614)        4,193,381
                                                                   ------------      ------------      ------------

Cash flows from investing activities:
   Proceeds from maturity of investment securities                   10,000,000              --           7,949,583
   Additions to property, plant and equipment                          (507,684)         (300,289)         (352,848)
   Purchases of investment securities                                (6,509,413)       (7,224,749)       (4,928,388)
   Reduction of common stock subscribed                                 558,662           558,662           558,663
                                                                   ------------      ------------      ------------
         Net cash provided by (used in) investing activities          3,541,565        (6,966,376)        3,227,010
                                                                   ------------      ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>               <C>               <C>
Cash flows from financing activities:
   Dividends on common stock                                           (217,112)         (777,854)         (777,855)
   Purchase of treasury stock                                          (604,226)             --            (116,032)
                                                                   ------------      ------------      ------------

            Net cash used in financing activities                      (821,338)         (777,854)         (893,887)
                                                                   ------------      ------------      ------------

Increase (decrease) in cash and cash equivalents                       (227,404)       (9,531,844)        6,526,504
Cash and cash equivalents, beginning of year                          2,591,739        12,123,583         5,597,079
                                                                   ------------      ------------      ------------

Cash and cash equivalents, end of year                             $  2,364,335      $  2,591,739      $ 12,123,583
                                                                   ============      ============      ============

Supplemental disclosures of cash flow information:
   Income taxes paid                                               $    331,045      $    224,262      $    431,160
                                                                   ============      ============      ============

</TABLE>

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


                                       16
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements


1.     Summary of Significant Accounting Policies

       Nature of Operations

         Espey Mfg. &  Electronics  Corp.  and  Subsidiary  (the  Company)  is a
         manufacturer  of electronic  equipment  used  primarily in military and
         industrial  applications.  The  principal  markets  for  the  Company's
         products are companies that provide electronic support to both military
         and industrial  applications.  During 1999,  the Company  established a
         foreign sales corporation (subsidiary).

       Inventory Valuation and Revenue Recognition

         Raw materials  are valued at the lower of cost or market value,  on the
         first-in, first-out method.

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

         The cost elements of contracts in process  consist of production  costs
         of goods and services  currently  in process and  overhead  relative to
         those  contracts where such costs are  reimbursable  under the terms of
         the  contracts.  General  and  administrative  expenses  are charged to
         operations in the period in which they are incurred.

         Revenue is recognized on contracts in the period in which the units are
         delivered and billed (unit-of-delivery method).

       Depreciation

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

       Income Taxes

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

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


                                       17
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

1.     Summary of Significant Accounting Policies, Continued

       Cash and Cash Equivalents

         Cash and cash  equivalents  consist of cash in banks,  certificates  of
         deposit,  money market accounts,  and U.S. Treasury bills with original
         maturities of three months or less.

       Investment Securities

         The Company  accounts for its  investments in accordance  with SFAS No.
         115,   "Accounting   for  Certain   Investments   in  Debt  and  Equity
         Securities." Investment securities at June 30, 1999 and 1998 consist of
         U.S. Treasury  securities and corporate equity securities.  The Company
         classifies U.S. Treasury  securities and corporate equity securities as
         available-for-sale. Unrealized holding gains and losses, net of related
         tax effect, on available-for-sale securities are excluded from earnings
         and are reported as a separate component of stockholders'  equity until
         realized.  Realized  gains and  losses  for  securities  classified  as
         available-for-sale  are included in earnings and are  determined  using
         the specific  identification method. Interest income is recognized when
         earned.

       Comprehensive Income

         In  1999,  the  Company  adopted  Statement  of  Financial   Accounting
         Standards  (SFAS)  No.  130,  "Reporting  Comprehensive  Income."  This
         statement  establishes rules for the reporting of comprehensive  income
         and its  components.  Comprehensive  income  consists of net income and
         unrealized  gains  (losses)  on  securities  available  for sale and is
         presented in the Statement of Changes in  Stockholders'  Equity.  Prior
         year financial statements have been reclassified to conform to the SFAS
         130  requirements.  Components of other  comprehensive  income  include
         unrealized  gains  (losses) on securities  available for sale and there
         were no  realized  gains  (losses)  included  in net  income  requiring
         reclassification adjustments to other comprehensive income.

       Use of Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions   that  affect  the  reported  amount  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

       Investment Tax Credits

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

       Reclassifications

         Certain 1998 amounts  have been  reclassified  to conform with the 1999
         presentation.

                                       18
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

2.     Marketable Investment Securities

       Marketable  investment  securities  at June  30,  1999,  consist  of U.S.
       Treasury bills and corporate equity  securities,  which are classified as
       available-for-sale  securities,  and recorded at market value.  The cost,
       gross  unrealized  gains,  gross  unrealized  losses  and  fair  value of
       available-for-sale securities by major security type at June 30, 1999 are
       as follows:
<TABLE>
<CAPTION>

                               1999                     Gross         Gross
                                                      Unrealized    Unrealized
                                                       Holding        Holding          Fair
                                          Cost          Gains         Losses           Value

       <S>                             <C>            <C>            <C>            <C>
       U.S. Treasury bills             $2,915,161     $     --       $     --       $2,915,161

       Corporate equity securities        819,005           --           59,997        759,008
                                       ----------     ----------     ----------     ----------

                                       $3,734,166     $     --       $   59,997     $3,674,169
                                       ==========     ==========     ==========     ==========

       <CAPTION>

                               1998                     Gross         Gross
                                                      Unrealized    Unrealized
                                                       Holding        Holding          Fair
                                          Cost          Gains         Losses           Value
       <S>                             <C>            <C>            <C>            <C>
       U.S. Treasury bills             $6,805,744     $     --       $     --       $6,805,744

       Corporate equity securities        419,005         11,000           --          430,005
                                       ----------     ----------     ----------     ----------

                                       $7,224,749     $   11,000     $     --       $7,235,749
                                       ==========     ==========     ==========     ==========
</TABLE>
         The U.S.  Treasury bills classified as  available-for-sale  at June 30,
         1999 mature during 2000.  The change in net  unrealized  gain (loss) on
         available for sale  investment  securities  was ($45,435) and $7,260 in
         1999 and 1998, respectively.


  3.   Inventories and Cost of Sales

       Included in costs relating to contracts in process at June 30, 1999, 1998
       and 1997 are costs of $298,814,  $310,724,  and  $368,687,  respectively,
       relative to contracts that may not be completed  within the ensuing year.
       Under the  unit-of-delivery  method,  the related  sale and cost of sales
       will not be  reflected  in the  statement of income until the units under
       contract are shipped.
<PAGE>
  4.   Contracts in Process

       Contracts in process at June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                 1999            1998

       <S>                                                                   <C>             <C>
       Gross contract value                                                  $16,961,238     $12,167,932
                                                                             ===========     ===========
       Carrying value of contracts in process included in current assets     $ 7,856,607     $ 5,324,491
                                                                             ===========     ===========
</TABLE>


                                       19
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued


5.     Property, Plant and Equipment

       A summary of the original  cost of property,  plant and equipment at June
       30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
                                                                     1999            1998

<S>                                                              <C>             <C>
  Land                                                           $    50,000     $    50,000
  Buildings and improvements                                       3,952,869       3,863,413
  Machinery and equipment                                          8,477,396       8,078,787
  Furniture, fixtures and office equipment                           371,560         351,939
                                                                 -----------     -----------

                                                                 $12,851,825     $12,344,139
                                                                 ===========     ===========
</TABLE>


Estimated useful lives of depreciable assets are as follows:
<TABLE>
<CAPTION>

<S>                                                                              <C>
  Buildings and improvements                                                     15-20 years
  Machinery and equipment                                                           10 years
  Furniture, fixtures and office equipment                                          10 years

</TABLE>

  6.   Research and Development Costs

       Research and  development  costs charged to  operations  during the years
       ended June 30, 1999, 1998 and 1997 were approximately $291,000, $244,000,
       and $223,000, respectively.


  7.   Pension Expense

       Under terms of a negotiated  union contract,  the Company is obligated to
       make  contributions  to a  union-sponsored  defined  benefit pension plan
       covering  eligible  employees.  Such  contributions  are based upon hours
       worked at a specified  rate and  amounted to $64,829 in 1999,  $54,269 in
       1998, and $66,642 in 1997.
<PAGE>
  8.   Provision (Benefit) for Income Taxes

       A summary of the  components of the provision  (benefit) for income taxes
       for the years ended June 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
                                               1999          1998            1997
<S>                                         <C>            <C>            <C>
Current tax expense (benefit) - federal     $ 313,000      $(195,179)     $ 481,729
Current tax expense - state                     4,000            427         24,911
Deferred tax expense (benefit)                 85,000       (220,618)      (202,545)
                                            ---------      ---------      ---------

                                            $ 402,000      $(415,370)     $ 304,095
                                            =========      =========      =========

</TABLE>


                                       20
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued


  8.   Provision (Benefit) for Income Taxes, Continued

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

       The combined U.S.  federal and state effective income tax rates of 35.5%,
       (36.0)% and 35.1% for 1999,  1998 and 1997,  respectively,  differed from
       the statutory U.S. federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
                                                           1999        1998        1997
<S>                                                         <C>       <C>         <C>
         U.S. federal statutory income tax rate             34%       (34.0)%     34.0%
         Increase (reduction) in rate resulting from:
            Dividends received deduction                    (0.5)        --        (.3)
            State franchise tax, net of federal
                income tax benefit                           2.3       (2.4)       1.9
            Foreign sales corporation benefit               (1.1)        --         --
            Other                                            0.8         .4        (.5)
                                                            ----       ----       ----

         Effective tax rate                                 35.5%     (36.0)%     35.1%
                                                            ====       ====       ====
</TABLE>

       For the years ended June 30, 1999 and 1998 deferred  income tax (expense)
       benefit of $(85,000) and $202,545, respectively,  result from the changes
       in  temporary  differences  for each year.  The tax effects of  temporary
       differences  that give rise to  deferred  tax  assets  and  deferred  tax
       liabilities as of June 30, 1999 and 1998 are presented as follows:
<TABLE>
<CAPTION>

                                                                     1998         1997
<S>                                                                <C>          <C>
Deferred tax assets:
   Inventory - differences in valuation methods                    $161,194     $169,521
   Unrealized loss on available-for-sale investment securities       25,557         --
   Common stock subscribed - due to difference in
      interest recognition                                          449,891      471,882
   Non-deductible accruals                                          154,810      172,524
   Other                                                             13,353       37,626
                                                                   --------     --------

      Total gross deferred tax assets                               804,805      851,553
                                                                   --------     --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>          <C>
Deferred tax liabilities:
   Property, plant and equipment - principally due to
      differences in depreciation methods                           407,524      391,089
   Inventory - effect of uniform capitalization                      27,417       27,417
   Unrealized gain on available-for-sale investment securities         --          3,740
                                                                   --------     --------

      Total gross deferred tax liabilities                          434,941      422,246
                                                                   --------     --------

Net deferred tax asset                                             $369,864     $429,307
                                                                   ========     ========

</TABLE>
                                       21


<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

8.     Provision (Benefit) for Income Taxes, Continued

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


  9.   Common Stock and Income Per Share

       Income per share  information is based on the weighted  average number of
       common shares  outstanding  during the respective  periods.  The weighted
       average number of shares used in the  computation  was 1,100,065 in 1999,
       1,111,220 in 1998, and 1,112,074 in 1997.


10.    Significant Customers

       A  significant  portion of the  Company's  business is the  production of
       military  and  industrial  electronic  equipment  for  use  by  the  U.S.
       Government and its agencies and certain  industrial  customers.  Sales to
       two domestic  customers  and one foreign  customer  accounted  for 37.6%,
       25.4% and  11.2%,  respectively  of total  sales in 1999.  Sales to three
       domestic customers accounted for 47.9%, 14.7% and 12.5%, respectively, of
       total sales in 1998. Sales to two domestic customers accounted for 19.9%,
       and 61.4%, respectively, of total sales in 1997.

       Export sales in 1999 aggregated approximately $2,500,000. Export sales in
       1998 and 1997 were not significant.


 11.   Stock Rights Plan

       During 1989, the Company adopted a Shareholder  Rights Plan which expires
       on December 31, 1999. Under this plan,  common stock purchase rights were
       distributed  as a  dividend  at the rate of one right  for each  share of
       common stock  outstanding  as of or issued  subsequent to April 14, 1989.
       Each right  entitles the holder  thereof to buy one-half  share of common
       stock of the  Company at an  exercise  price of $75 per share  subject to
       adjustment. The rights are exercisable only if a person or group acquires
       beneficial  ownership  of 25% or more of the  Company's  common  stock or
       commences a tender or exchange offer which, if consummated,  would result
       in the offeror,  together with all  affiliates  and  associates  thereof,
       being the beneficial owner of 30% or more of the Company's common stock.


                                       22
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

11.    Stock Rights Plan, Continued

       If a 25% or larger  shareholder  should  engage in  certain  self-dealing
       transactions  or a merger  with the  Company in which the  Company is the
       surviving  corporation  and its shares of common stock are not changed or
       converted  into equity  securities of any other person,  or if any person
       were to  become  the  beneficial  owner  of 30% or more of the  Company's
       common stock,  than each right not owned by such  shareholder  or related
       parties of such  shareholder (all of which will be void) will entitle its
       holder to purchase, at the right's then current exercise price, shares of
       the Company's  common stock having a value of twice the right's  exercise
       price.  In  addition,  if the Company is involved in any other  merger or
       consolidation  with,  or sells 50% or more of its assets or earning power
       to, another  person,  each right will entitle its holder to purchase,  at
       the right's then current  exercise price,  shares of common stock of such
       other person having a value of twice the right's exercise price.

       The  Company  generally  is entitled to redeem the rights at one cent per
       right at any time  until  the  15th day (or 25th day if  extended  by the
       Company's Board of Directors)  following public  announcement  that a 25%
       position has been  acquired or the  commencement  of a tender or exchange
       offer which, if consummated,  would result in the offeror,  together with
       all affiliates and associates thereof,  being the beneficial owner of 30%
       or more of the Company's common stock.


12.    Employee Stock Ownership Plan

       In 1989, the Company  established an Employee Stock Ownership Plan (ESOP)
       for eligible  non-union  employees.  The ESOP used the proceeds of a loan
       from the Company to purchase 316,224 shares of the Company's common stock
       for approximately $8.4 million and the Company contributed  approximately
       $400,000  in 1989 to the ESOP which was used by the ESOP to  purchase  an
       additional  15,000 shares of the Company's common stock.  Since inception
       of the  Plan,  the ESOP  has sold or  distributed  58,532  shares  of the
       Company's common stock to pay benefits to participants.  At June 30, 1999
       and  1998,  the  ESOP  held  a  total  of  272,692  and  291,210  shares,
       respectively, of the Company's common stock, of which 167,632 and 165,139
       shares, respectively, were allocated to participants in the Plan.

       The loan from the Company to the ESOP is repayable in annual installments
       of $1,039,605,  including  interest,  through June 30, 2004.  Interest is
       payable at a rate of 9% per annum. The Company's receivable from the ESOP
       is  recorded  as common  stock  subscribed  in the  accompanying  balance
       sheets.  The Company  recognizes the principal payments of the ESOP debt,
       on a  straight-line  basis  over the term of the  note,  as  compensation
       expense.
<PAGE>

       Each year, the Company makes  contributions to the ESOP which are used to
       make loan payments. With each loan payment, a portion of the common stock
       is allocated to participating  employees.  For the periods ended June 30,
       1999,  1998 and 1997,  20,012 shares were allocated to  participants.  In
       1999, the Company's  required  contribution  of $1,039,605 was reduced by
       $25,214 which  represents  the  dividends  paid on the  unallocated  ESOP
       shares. The resulting payment of $1,014,391  includes $533,449 classified
       as compensation  expense. In 1998, the Company's required contribution of
       $1,039,605 was reduced by $102,959,  which  represents the dividends paid
       on the  unallocated  ESOP  shares.  The  resulting  payment  of  $936,646
       includes  $455,704  classified  as  compensation  expense.  In 1997,  the
       Company's  required  contribution  of $1,039,605 was reduced by $117,667,
       which represents the dividends paid on the unallocated  ESOP shares.  The
       resulting   payment  of  $921,938   includes   $440,996   classified   as
       compensation  expense. All shares purchased by the ESOP are considered to
       be outstanding for the income per share computations.



                                       23
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

 13.   Financial Instruments/Concentration of Credit Risk

       The carrying amounts of financial instruments, including cash, short-term
       investments, investment securities, accounts receivable, accounts payable
       and  accrued  expenses,  approximated  fair value as of June 30, 1999 and
       1998 because of the relatively short maturities of these instruments.

       Financial   instruments   that   potentially   subject   the  Company  to
       concentrations of credit risk consist  principally of cash and short-term
       investments  and  accounts  receivable.  The Company  maintains  cash and
       short-term investments with various financial institutions. At times such
       investments  may be in excess of FDIC insurance  limits.  As disclosed in
       Note 10, a  significant  portion of the  Company's  sales are made to the
       U.S.  Government and its agencies and certain industrial  customers.  The
       related accounts  receivable  balance  represented 93.2% and 76.2% of the
       Company's  total trade accounts  receivable  balance at June 30, 1999 and
       1998, respectively.

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


14.    Commitments

       The Company under an operating  lease  agreement  rents a sales office in
       Great Neck,  New York.  This lease,  which  expires on September 9, 2001,
       requires future minimum lease payments of $14,222 payable as follows:



         Year ending June 30,
            2000                                           12,190
            2001                                            2,032
                                                        ----------

                                                        $  14,222
                                                        ==========

       Rent  expense  for the  years  ended  June  30,  1999,  1998 and 1997 was
       $18,674, $12,398, and $14,156, respectively.

<PAGE>

 15.   Other Costs

       During 1998 the Company  implemented  a management  succession  plan that
       involves  agreements  with five members of management.  These  agreements
       require the Company to pay certain amounts for a period of  approximately
       two years after the employees'  resignations from the Company in exchange
       for the  employees'  agreements  to be  available  to the  Company  on an
       as-needed  basis.  Since  there is no  minimum  service  required  by the
       agreements,  the Company accrued for these payments on the effective date
       of the plan as the  employees  are eligible for the benefit at that date.
       At June 30, 1998, $479,500 was accrued to record the liabilities relating
       to these agreements. At June 30, 1999, approximately $306,000 was left to
       be paid to these individuals.


                                       24
<PAGE>
Espey Mfg. & Electronics Corp. and Subsidiary

Notes to Consolidated Financial Statements, Continued

16. Related Parties

       The  Company  paid a law firm in which a  director  of the  Company  is a
       partner,  a total of $42,000 for legal  services  during each fiscal year
       ended June 30,  1999,  1998 and 1997.  The Company paid a director of the
       Company, a total of approximately  $29,000 for consulting services during
       the fiscal year ended June 30, 1999.

17. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
                                                 First            Second           Third           Fourth
                                                 Quarter          Quarter          Quarter         Quarter
<S>                                             <C>             <C>             <C>              <C>
        1999:
           Net sales                            $ 2,523,984     $ 3,134,377     $ 3,089,547      $ 4,881,784
           Gross profit                             398,705         625,453         451,815        1,061,703
           Net income                                84,042         166,109          99,723          380,727
                                                -----------     -----------     -----------      -----------
        Net income (per share - basic
           and diluted)                                 .08             .15             .09              .34
                                                -----------     -----------     -----------      -----------

        1998:
           Net sales                            $ 2,503,584     $ 3,549,697     $ 2,240,347      $ 2,499,944
           Gross profit                             428,603         401,300        (457,608)         313,658
           Net income (loss)                         45,009          24,955        (507,426)        (302,140)
                                                -----------     -----------     -----------      -----------
        Net income (loss) per share - basic
           and diluted                                 0.04            0.02           (0.46)           (0.27)
                                                -----------     -----------     -----------      -----------

        1997:
           Net sales                            $ 4,586,892     $ 4,066,386     $ 3,805,569      $ 2,707,228
           Gross profit                             698,018         729,221         544,037          179,363
           Net earnings (loss)                      228,719         244,126         127,370          (37,087)
                                                -----------     -----------     -----------      -----------
        Net income (per share - basic
           and diluted)                                 .21             .21             .12             (.03)
                                                -----------     -----------     -----------      -----------
</TABLE>

       Financial  information  for the fourth quarter of 1997 reflects a pre-tax
       write off of  approximately  $385,000  related to inventory for which the
       Company expected to receive orders during the year. In the fourth quarter
       of  1997,  management's  assessment  of this  inventory  resulted  in the
       aforementioned   write-off  as  previously  anticipated  orders  did  not
       materialize.


                                       25
<PAGE>

                          PART III

Item 10.  Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Identification of Directors

                  Date Present Term          Other Positions
                  Expires and Period         and Offices Held
Name              Served as Director         With Registrant                   Age
----              ------------------         ---------------                   ---
<S>                  <C>                      <C>                               <C>
Paul J. Corr         Annual Meeting in        None                               55
                     December 1999
                     Director since
                     April 3, 1992

William P. Greene    Annual Meeting in        Executive Vice                     69
                     December 2001            President of Operations
                     Director since
                     April 3, 1992

Barry Pinsley        Annual Meeting in        None                               57
                     December 1999
                     Director since
                     March 25, 1994

Howard Pinsley       Annual Meeting in        President and Chief                59
                     December 2000            Executive Officer
                     Director since
                     December 11, 1992


Gerald B.H. Solomon  Annual meeting 2001      None                              69
                     Director since
                     March 25, 1999

Seymour Saslow       Annual Meeting in        Senior Vice President             78
                     December 2001
                     Director since
                     December 11, 1992

Michael W. Wool      Annual Meeting in        None                              53
                     December 1999
                     Director since 1990


</TABLE>
                                       26
<PAGE>
<TABLE>
<CAPTION>
Identification of Executive Officers

                     Positions and
                     Offices Held             Period Served As
Name                 With Company             Executive Officer                 Age
----              ------------------         ---------------                   ---
<S>                  <C>                      <C>                               <C>
Howard Pinsley       President and            Served as Vice President-         59
                     Chief Executive          Special Power Supplies
                     Officer                  from April 3, 1992 until
                                              being elected as Executive
                                              Vice President on December
                                              6, 1997.  Elected to present
                                              office on June 9, 1998

William P. Greene    Executive Vice           Since February 1, 1999            69
President of
Operations


Seymour Saslow       Senior Vice President    Served as Vice                    78
                                              President from April 3,
                                              1992 until being elected
                                              to present position on
                                              December 6, 1997

John J. Pompay, Jr.  Vice President-          Since December 6, 1996            64
                     Marketing and Sales

David A. O'Neil      Controller and Asst.     Since December 11, 1998           34
                     Treasurer


Garry M. Jones       Assistant Treasurer      Since August 4, 1988;             59
                     and Principal Accounting Principal Financial
                     Officer                  Officer from August 4,
                                              1988 to September 10,
                                              1993

Peggy A. Murphy      Secretary                Since December 11, 1998           41


</TABLE>
The terms of office of Mr. Howard Pinsley,  Mr. William P. Greene,  Ms. Peggy A.
Murphy,  Mr.  David A.  O'Neil and Mr.  Garry M. Jones are until the next annual
meeting of the Board of Directors unless  successors are sooner appointed by the
Board of Directors. The terms of office of Mr. Saslow and Mr. Pompay are subject
to the  provisions  of  agreements  between each  officer and the  Company.  See
"Executive  Compensation-Employment  Contracts and Termination of Employment and
Change in Control Agreements."


Family Relationships

Barry Pinsley and Howard Pinsley are cousins. Herbert Potoker and Howard Pinsley
are cousins.

                                       27
<PAGE>
Business Experience of Directors and Officers

Paul J.  Corr is a  Certified  Public  Accountant  and has been a  Professor  of
Business at Skidmore College in Saratoga Springs,  New York since 1981. Mr. Corr
currently  holds  the  position  of  Associate  Professor.  Mr.  Corr  is also a
shareholder in the Latham, New York accounting firm of Rutnik, Matt & Corr, P.C.

William P. Greene,  D.B.A.  prior to joining the Company's  management  team was
Vice President of Finance for ComCierge,  LLC, San Diego,  CA since August 1997.
Prior to that position, Dr.Greene held the position of Vice President Operations
for Bulk Materials International., Newtown, CT from 1993 to July 1997. From 1991
to 1993,  Dr.  Greene  was  Associate  Professor  of Finance  and  International
Business at Pennsylvania State University Kutztown,  Kutztown,  PA. From 1985 to
1990,  he  was  Associate  Dean  of  the  School  of  Business,   United  States
International  University,  San Diego, CA. From 1992 to 1995, he was Chairman of
the Department of Business,  Skidmore College,  Saratoga  Springs,  NY. Prior to
that  time,  he  had  been  employed  as  an  officer  with  several   financial
institutions.

Barry  Pinsley is a Certified  Public  Accountant  who for five years acted as a
consultant  to the Company  prior to his  election  as a Vice  President-Special
Projects on March 25, 1994. On December 6, 1997,  Mr. Pinsley was elected to the
position of Vice President-Investor Relations and Human Resources, from which he
resigned on June 9, 1998.  Mr.  Pinsley has been a practicing  Certified  Public
Accountant in Saratoga Springs, New York since 1975.

Howard  Pinsley  for more than the past  five  years  has been  employed  by the
Company on a full-time  basis as Program  Director  prior to being  elected Vice
President-Special Power Supplies on April 3, 1992. On December 6, 1996, Mr.
Pinsley was elected to the position of Executive Vice President.  On June 9,1998
he was  elected to the  positions  of  President  and Chief  Operating  Officer.
Subsequently  he was also  elected  Treasurer  and  became  the Chief  Executive
Officer.

Seymour Saslow has been Senior Vice President  since December 6, 1996.  Prior to
being   elected  to  his   present   position,   Mr.   Saslow   served  as  Vice
President-Engineering since April 3, 1992.

Gerald B.H.  Solomon is currently  President and Chief Executive  Officer of the
Solomon Group. The Solomon Group is an  international  consulting firm providing
strategic  advice  and  counsel to  corporations  worldwide.  Prior to  becoming
President of the Solomon Group he retired from the United  States  Congress were
he served as a congressman from New York State for twenty years.

Michael W. Wool has been an  attorney in private  practice  and a partner in the
law firm of  Langrock,  Sperry & Wool in  Burlington,  Vermont for more than the
past five years.

Peggy Murphy has been  Secretary of the Company since December 11, 1998. She has
been employed by the Company as Director of Human Resources since October 1998.

David A.  O'Neil is a  Certified  Public  Accountant  who joined the  Company as
Controller  and Assistant  Treasurer on November 16, 1998.  Prior to joining the
Company Mr. O'Neil was a Senior Manager at the accounting firm of KPMG LLP.

                                       28
<PAGE>
John J. Pompay,  Jr. for more than the past five years has been  employed by the
Company on a full-time  basis as Director of Marketing  and Sales prior to being
elected Vice President-Marketing and Sales on December 6, 1996.

Garry M.  Jones  for more  than the past five  years  has been  employed  by the
Company  on a  full-time  basis as  Senior  Accountant  prior  to being  elected
Assistant  Treasurer and Principal Financial and Accounting Officer on August 4,
1988.


Directorships

None of the directors  holds a directorship in any other company with a class of
securities  registered  pursuant to Section 12 of the Exchange Act or subject to
the  requirements  of Section 15(d) of that Act or any company  registered as an
Investment company under the Investment Company Act of 1940.

Legal Proceedings

None of the directors or executive  officers of the Company were involved during
the past five years in any legal  proceedings  specified  under  Item  401(f) of
Regulation S-K.




                                       29
<PAGE>
Item 11.  Executive Compensation.
Executive Compensation Table

The following table  summarizes the annual  compensation  for each of the fiscal
years  ended June 30,  1999,  1998,  and 1997  received by the  Company's  Chief
Executive Officer and the other highest paid executive
officers of the Company that received over $100,000 in total  compensation as of
June 30, 1999.
<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE



Name and                 Fiscal         Annual                  All Other
Principal Position       Year           Salary       Bonus      Compensation(1)
------------------       ----           ------       -----      ---------------

<S>                      <C>           <C>           <C>          <C>
Howard Pinsley           1999          $127,700      $     0      $11,492
President and            1998          $120,125      $25,000      $15,961
Chief Executive Officer  1997          $109,600      $25,000      $16,455

Seymour Saslow           1999          $124,625      $     0      $10,568
Senior Vice President    1998          $119,625      $25,000      $15,024
                         1997          $117,075      $25,000      $15,353

Herbert Potoker(2)       1999          $ 98,475      $     0      $ 8,612
Former Treasurer and     1998          $113,226      $25,000      $12,314
Principal Financial      1997          $109,855      $25,000      $13,289
Officer


John J. Pompay, Jr.      1999          $189,399      $     0      $ 8,679
Vice President-Sales     1998          $176,297      $     0      $12,314
                         1997          $172,963      $     0      $13,289
</TABLE>

(1)  Represents  (a) the cash and market value of the shares  allocated  for the
     respective  fiscal  years under the  Company's  ESOP to the extent to which
     each named executive officer is vested,  and (b) directors' fees except for
     Mr. Potoker and Mr. Pompay through April 1, 1999.  Effective  April 1, 1999
     employees  of the  Company  that  also  serve on the  Board do not  receive
     director's fees.

(2)  Represents wages as both an executive  officer and  non-executive  officer.
     Mr.  Potoker  resigned as  Treasurer  and  Principal  Financial  Officer on
     December 31, 1998.

<PAGE>
Insurance

The  executive  officers of the Company are covered under group life and medical
and health plans which do not discriminate in favor of the officers or directors
of the Company and which are available generally to all salaried employees.


                                       30
<PAGE>
The Company maintains  insurance  coverage,  as authorized by Section 727 of the
New York  Business  Corporation  Law,  providing  for (a)  reimbursement  of the
Company  for  payments  it makes to  indemnify  officers  and  directors  of the
Company,  and (b) payment on behalf of officers and directors of the Company for
losses, costs and expenses incurred by them in any actions.

Employee Retirement Plan and Trust

Under the  Company's  ESOP,  approved by the Board of Directors on June 2, 1989,
effective  July 1, 1988, all non-union  employees of the Company,  including the
Company's executive and non-executive officers are eligible to participate.  The
ESOP is a non-contributory  plan which is designed to invest primarily in shares
of common stock of the Company.  Reference is made to, and there is incorporated
by reference,  the  description  of the ESOP, its  implementation  and pertinent
documents  attached as exhibits in the  Company's  Form 8-K dated June 16, 1989,
filed with the Commission on June 20, 1989, and to the amendments  thereto filed
as an Exhibit  to the 10-K  Report  for the  fiscal  year  ended June 30,  1991.
Certain  technical  amendments not  considered  material were adopted during the
year effective as of June 30, 1994.

Of the 167,632 shares of common stock of the Company  allocated to  participants
of the ESOP as of June 30, 1999, 6,000 shares were allocated to Herbert Potoker,
6,005 shares were allocated to John J. Pompay,  Jr., 5,869 shares were allocated
to Howard  Pinsley,  5,655  shares were  allocated  to Seymour  Saslow and 2,404
shares were allocated to Barry Pinsley.

Compensation of Directors

The Company's standard  arrangement  compensates each director of the Company an
annual  fee in the  amount  of  $10,000  for  being a  member  of the  Board  of
Directors.  Each Director that also serves as a member of the Audit Committee is
compensated an additional  annual fee of $5,000.  These fees are paid monthly to
the  Directors.  Paul J. Corr and Barry  Pinsley were paid $3,774,  and $28,456,
respectively,  for  additional  services  in  connection  with  their  duties as
directors for the fiscal year ended June 30, 1999.  Executive officers that also
serve on the Company's Board of Directors do not receive director's fees.

Employment Contracts and Termination of Employment and
Change in Control Agreements

The Company has entered into an  employment  contract with John J. Pompay Jr. in
connection with his duties as Vice  President-Marketing  and Sales. The contract
is effective as of January 4, 1999 and  terminates  on December 31, 1999 subject
to a one year option.  The contract provides for a minimum base annual salary of
$117,000  plus  commissions  at the rate of 3% on all  payments  received by the
Company against Mr. Pompay's open orders booked up to and including December 31,
1996,  and 1% on all  payments  received  against  orders  booked by the Company
between  January 1, 1997 and December 31, 1998.  The contract  further  provides
that if Mr.  Pompay's  employment  is  terminated  by the  Company  prior to the
expiration  date,  other than for cause,  he will  continue  to receive his full
salary for six months  after the  termination  date and the Company will pay him
commissions  due on all orders  when  payment is  received.  The  contract  also
provides  for a  restrictive  covenant of  non-competition  by Mr.  Pompay for a
period of two years upon termination for cause or termination of the contract by
Mr. Pompay.


                                       31
<PAGE>
As part of a management succession plan as implemented by the Board of Directors
in June 1998, the Company has entered into  agreements  with the following named
executive officers: Joseph Canterino,  Barry Pinsley, Seymour Saslow and Herbert
Potoker.  The contracts  provide for the  resignation of the above officers from
their  positions  as  executive  officers  and  for  them to be  compensated  in
accordance  with  their  respective  agreements.   The  effective  date  of  the
resignations of Mr. Canterino and Mr. Barry Pinsley as executive
officers was June 9, 1998. The effective date of the  resignation of Mr. Potoker
as an  executive  officer was  December  31,  1998.  The  effective  date of the
resignation of Mr. Saslow as an executive officer is December 31, 1999.
The  compensation to be paid under the agreements is $1,000 per week for Messrs.
Canterino,  Saslow and Potoker and $500 per week for Mr. Pinsley during such two
year period.  In the event of a named executive  officer's death, the Company is
obligated  to  continue  the  payments  as  scheduled  under  the  terms  of the
agreements.

All of the named executive  officers'  contracts contain a restrictive  covenant
regarding  non-competition with the Company during the term of the agreement and
for a period  of five  years  after  the  termination  of the  agreement  and an
agreement regarding the treatment of confidential information.



                                      32
<PAGE>
Item 12.  Security Ownership of Certain Beneficial Owners
          and Management.

Security Ownership of Certain Beneficial Owners

The  following  information  is  furnished  as of  September  14,  1999  (unless
otherwise  indicated) with respect to any person  (including any "group" as that
term is used in Section  13(d)(3)  of the Act) who is known to the Company to be
the  beneficial  owner of more than five  percent of any class of the  Company's
voting securities:
<TABLE>
<CAPTION>
                                             Amount and
                                             Nature of
Title of            Name and Address         Beneficial           Percent of
Class               of Beneficial Owner      Ownership            Class
-----               -------------------      ---------            -----
<S>               <C>                      <C>                    <C>
Common Stock        Barry Pinsley             2,600   -Direct      7.8640%
$.33-1/3 p.v.       P.O. Box 422             79,865   -Indirect(1)
                    Saratoga Springs,
                    NY  12866


   "                Dimensional Fund          74,100  -Direct(2)  7.0664%
                    Advisors Inc.
                    1299 Ocean Avenue
                    11th Floor
                    Santa Monica,
                    CA  90401

   "                Franklin Resources, Inc. 108,000  -Direct(3)  10.2991%
                    777 Mariners Island
                    Blvd., P.O. Box 7777
                    San Mateo,
                    CA 94403-7777

                    The Adirondack Trust     267,565  -Direct(4) 25.5156%
   "                Company, as Trustee of
                    the Company's Employee
                    Retirement Plan and Trust
                    473 Broadway
                    Saratoga Springs,
                    NY  12866

</TABLE>

(1) Does not include  2,000 shares of common  stock of the Company  owned by the
spouse of Barry  Pinsley,  beneficial  ownership of which is  disclaimed  by Mr.
Pinsley. The shares listed as indirectly owned by Barry Pinsley are 2,404 shares
allocated to him as of June 30, 1999 as a participant  in the Company's ESOP and
77,461  shares  owned by the trust  under the will of Ruth  Pinsley of which Mr.
Pinsley is trustee. Mr. Pinsley has the right to direct the manner in which such
shares are to be voted.
<PAGE>

(2) The  information  as to the number of shares of common  stock of the Company
that  may be  deemed  beneficially  owned  by  Dimensional  Fund  Advisors  Inc.
("Dimensional")  is from the Schedule 13G dated February 11, 1999 filed with the
Securities  and  Exchange  Commission  (the  "SEC").  Dimensional,  a registered
investment advisor,  is deemed to have beneficial  ownership of 74,100 shares of
Espey Mfg. &  Electronics  Corp.  stock as of December  31,  1998,  all of which
shares are held in  portfolios  of DFA  Investment  Dimensions  Group,  Inc.,  a
registered open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA Participation
Group Trust,  investment  vehicles for qualified  employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment  manager.  Dimensional
disclaims  beneficial  ownership of all such shares.  Dimensional  reported sole
voting power with respect to 74,100 shares.

                                       33
<PAGE>
(3) The  information  as to the number of shares of common  stock of the Company
that may be deemed beneficially owned by Franklin Resources,  Inc.  ("Franklin")
is from the Schedule 13G, dated January 16,1998 filed with the SEC. The Franklin
statement  indicated that Franklin's  investment advisory  subsidiary,  Franklin
Advisory  Services,  Inc.("Franklin  Advisory") has sole voting and  dispositive
power with respect to all of the shares of common stock shown in the table above
for Franklin.  The Franklin statement  indicates that the common stock set forth
in the table is beneficially owned by one or more open or closed-end  investment
companies  or other  managed  accounts  which are advised by direct and indirect
Franklin  investment  advisory  subsidiaries,  including Franklin Advisory.  The
statement  also  indicated  that it filed the  Schedule 13G on behalf of itself,
Franklin Advisory, and Franklin's principal shareholders, Charles B. Johnson and
Rupert H. Johnson,  Jr.(the "Principal  Shareholders"),  all of which are deemed
beneficial  owners of the shares of common  stock  shown in the above  table for
Franklin.  Franklin,  the Principal  Shareholders and Franklin Advisory disclaim
any economic  interest or beneficial  ownership in any of the common stock shown
in the table for Franklin.

(4) This  information is from the Form 4 dated  September 8, 1999 filed with the
SEC by the Trustee on behalf of the  Company's  ESOP.  The ESOP Trustee has sole
voting  power with  respect to  unallocated  common  shares  owned by the Trust,
105,060  shares as of August 28,  1999,  as directed  by the Plan  Administrator
appointed by the Company's Board of Directors. As to the common shares allocated
to participants,  162,505 shares as of August 28, 1999, the ESOP Trustee has the
power to vote such shares as directed by such Plan  Administrator  to the extent
the participants do not direct the manner in which such shares are to be voted.

                                       34
<PAGE>
Security Ownership of Management

The  following  information  is  furnished  as of  September  14,  1999  (unless
otherwise indicated), as to each class of equity securities of the Company
beneficially  owned by all Directors and Executive Officers and by Directors and
Executive Officers of the Company as a Group:
<TABLE>
<CAPTION>
                                             Amount and
                                             Nature of
Title of            Name of                 Beneficial                Percent of
Class               Beneficial Owner         Ownership                 Class
-----               ----------------         ---------                 -----
<S>                <C>                   <C>                          <C>
Common Stock
$.33-1/3 p.v.       Paul J. Corr           2,500-Direct                 .2384%

   "                William P. Greene        100-Direct                 .0095%

   "                Michael W. Wool          100-Direct                 .0095%

   "                Barry Pinsley          2,600-Direct                7.8641%
                                          79,865-Indirect
                                                (1)(2)(3)

                    Seymour Saslow           351-Direct                 .5727%
                                           5,655-Indirect(2)

   "                John J. Pompay, Jr.    6,006-Indirect(2)            .5727%

   "                Howard Pinsley        42,134-Direct                4.5603%
                                           5,687-Indirect(2)

   "               Garry M. Jones          2,838-Indirect(2)            .2706%

   "               Peggy Murphy            1,662-Indirect(2)            .1585%

   "               Officers and Directors  47,785-Direct              14.2563%
                            as a Group    101,713-Indirect (6)
</TABLE>
-------------
(1)  Excludes  2,000  shares  owned by the spouse of Barry  Pinsley.  Beneficial
ownership of the shares is disclaimed by Mr. Pinsley.
(2) Includes shares allocated to named director or executive  officer as of June
30, 1999 as a participant in the Company's  ESOP. Each such person has the right
to direct  the  manner in which such  shares  allocated  to him or her are to be
voted by the ESOP Trustee.
(3) Includes  77,461 shares owned by a testamentary  trust of Ruth Pinsley,  the
deceased spouse of Sol Pinsley. As trustee of the trust, Barry Pinsley is deemed
the beneficial owner, as defined in Rule 13d-3, of the shares held by the trust.
(4) Includes shares allocated to all directors and executive officers as a group
as of June 30, 1999 who  participate in the Company's ESOP. Each such person has
the right to direct the manner in which such shares  allocated to him or her are
to be voted by the ESOP Trustee.

There are no  arrangements  known to the Company the execution of which may at a
subsequent date result in change of control of the Company.


                                       35
<PAGE>
Item 13.  Certain Relationships and Related Transactions.

As previously  reported,  the Company  established and sold to the ESOP Trust on
June 5,  1989,  331,224  shares of the  Company's  treasury  stock at a price of
$26.50 per share,  which  purchase price was funded by the Company making a cash
contribution  and loan. Each year, the Company makes  contributions  to the ESOP
which are used to make loan interest and principal payments to the Company. With
each such  payment,  a portion of the common stock held by the ESOP is allocated
to  participating  employees.  As of June 30, 1999,  there were  167,632  shares
allocated to participants. The loan from the Company to the ESOP is repayable in
annual installments of $1,039,605,  including  interest,  through June 30, 2004.
Officers of the Company,  including  three (Seymour  Saslow,  Howard Pinsley and
Bill Greene) who are also directors, are eligible to participate in the ESOP and
to have shares and cash allocated to their  accounts and  distributed to them in
accordance with the terms of the ESOP.

The Company paid the law firm of Langrock,  Sperry & Wool,  of which  Michael W.
Wool,  a director  of the  Company,  is a partner,  a total of $42,000 for legal
services during the fiscal year ended June 30, 1999.




                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 (a) 1.   Financial Statements

          Included in Part II, Item 8, of this report:

               Reports of Independent Accountants

               Balance Sheets at June 30, 1999 and 1998

               Statements of Income for the years ended
               June 30, 1999, 1998 and 1997

               Statements of Changes in Stockholders' Equity
               for the years ended June 30, 1999, 1998 and 1997

               Statements of Cash Flows for the years ended
               June 30, 1999, 1998 and 1997

               Notes to Financial Statements


                                      36
<PAGE>
     2.   Financial Statement Schedules

          Schedules are omitted because of the absence of conditions under which
          they are required or because the required  information is given in the
          financial statements or notes thereto.

     3.   Exhibits


          11.1 Statement re: Computation of Per Share Earnings

          27   Financial Data Schedule

(b)  Reports on Form 8-K

          none






                               S I G N A T U R E S


     Pursuant  to the  requirements  of Section  13 and 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              ESPEY MFG. & ELECTRONICS CORP.



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


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report is signed below by the following  persons on behalf of the Registrant and
in the capacities and on the dates indicated.


/s/Howard Pinsley            President
-----------------            (Principal Executive Officer)
Howard Pinsley                September 17, 1999


/s/ David O'Neil             Controller
----------------             (Principal Financial Officer)
David O'Neil                  September 17, 1999




                                       37

<PAGE>
/s/ Garry M. Jones           Assistant Treasurer
------------------           (Principal Accounting Officer)
Garry M. Jones               September 17, 1999


/s/ Barry Pinsley            Director
-----------------            September 17, 1999
Barry Pinsley


/s/ Seymour Saslow           Senior Vice President and Director
------------------           September 17, 1999
Seymour Saslow


/s/ William P. Greene        Vice President of
---------------------        operations and Director
William P. Greene            September 17, 1999


/s/ Michael W. Wool          Director
-------------------          September 17, 1999
Michael W. Wool


/s/ Paul J. Corr             Director
----------------             September 17, 1999
Paul J. Corr


/s/ Gerald B.H. Solomon      Director
-----------------------      September 17, 1999
Gerald B. H. Solomon


                                       38