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, 2005

[_]   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)245-4400

                                                       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 the 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] Yes [_] No

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).
      [_] Yes [X] No

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  was  $21,116,511  based upon the closing sale price of $30.80 on the
American Stock Exchange on June 30, 2005.

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

              Class                           Outstanding at September 23, 2005
             -------                          --------------------------------
Common stock, $.33-1/3 par value                        1,151,212 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrants  definitive  proxy  statement  relating to the 2005
Annual  Meeting of  Shareholders,  to be filed with the  Securities and Exchange
Commission,  are  incorporated  by reference in Part III, Items 10 through 14 on
Form 10-K as indicated herein.


1
<PAGE>

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "scheduled,"
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended. These statements are not guarantees of future
performance and involve certain risks and uncertainties that are difficult to
predict. Therefore, actual future results and trends may differ materially from
what is forecast in forward-looking statements due to a variety of factors,
including, without limitation:
      o     Changing  priorities  in  the  U.S.   government's   defense  budget
            (including changes in priorities in response to terrorist threats or
            to improve homeland security);
      o     Termination  of government  contracts  due to unilateral  government
            action;
      o     Differences in anticipated and actual program performance, including
            the ability to perform under long-term  fixed-price contracts within
            estimated  costs,  and  performance  issues with key  suppliers  and
            subcontractors;
      o     Potential for changing prices for energy and raw materials.

All  forward-looking  statements speak only as of the date of this report or, in
the case of any document  incorporated by reference,  the date of that document.
All subsequent written and oral forward-looking  statements  attributable to the
Company or any  person  acting on the  Company's  behalf  are  qualified  by the
cautionary  statements  in this  section.  The Company  does not  undertake  any
obligation  to update or  publicly  release  any  revisions  to  forward-looking
statements to reflect events, circumstances or changes in expectations after the
date of this report.

                                     PART I

Item 1.     Business.

General

Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs,  New
York, is engaged principally in the development,  design, production and sale of
specialized  electronic power supplies, a wide variety of transformers and other
types of iron-core components,  and electronic system components. In some cases,
the  Company   manufactures  such  products  in  accordance  with  pre-developed
mechanical and electrical  requirements  ("build to print"). In other cases, the
Company  is  responsible  for both the  overall  design and  manufacture  of the
product. The Company does not generally manufacture standardized components. The
Company operates a one-segment business and was incorporated in 1928.

The electronic  power supplies and components  manufactured  by the Company find
application principally in (i) shipboard and land based radar, (ii) locomotives,
(iii)  aircraft,   (iv)  short  and  medium  range  communication  systems,  (v)
navigation systems and (vi) land based military 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 years ended June 30, 2005 and 2004, the Company's total sales were
$18,828,700  and  $22,507,199,  respectively.  Sales to two  domestic  customers
accounted  for 32%  and 14% of  total  sales  in  2005.  Sales  to two  domestic
customers and one foreign  customer  accounted for 22%, 16% and 18% and 25%, 19%
and 12% of total sales in 2004 and 2003, respectively.

Export sales in 2005, 2004 and 2003 were  approximately  $4,946,000,  $9,800,000
and $7,100,000, respectively.

Sources of Raw Materials

The Company has never experienced any significant delay or shortage with respect
to the purchase of raw materials and components  used in the  manufacture of its
products, and has at least two potential sources of supply for a majority of its
raw materials.  However,  certain  components used in our products are available
from only a limited number of sources,  and other  components are only available
from a single source.  Despite the risk associated with limited or single source
suppliers, the benefits of higher quality goods and timely delivery minimize and
often limit any  potential  risk and can  eliminate  problems with part failures
during production.


2
<PAGE>

Sales Backlog

At September 21, 2005, the Company's  backlog was  approximately  $45.1 million.
The total backlog at June 30, 2005 was  approximately  $31.8 million as compared
to  approximately  $15.4 million at June 30, 2004.  The Company's  total backlog
represents  the estimated  remaining  sales value of work to be performed  under
firm  contracts.  The Company's  backlog and risks  associated  with  government
contracts is discussed in greater detail in Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in Item 7 below.

It is presently anticipated that a minimum of $18.9 million of orders comprising
the June 30, 2005 backlog will be filled  during the fiscal year ending June 30,
2006. The minimum of $18.9 million does not include any shipments,  which may be
made against orders subsequently received during the fiscal year ending June 30,
2006.  The estimate of the June 30, 2005 backlog to be shipped in fiscal 2006 is
subject to future  events,  which may cause the amount of the  backlog  actually
shipped to differ from such estimate.

Marketing and Competition

The  Company  markets  its  products  primarily  through  its own  direct  sales
organization.  Business is solicited  from large  industrial  manufacturers  and
defense companies,  the government of the United States 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 United  States  Department  of Defense and  generally  is
automatically  solicited by such agencies for  procurement  needs falling within
the major classes of products produced by the Company.

There is  competition  in all classes of products  manufactured  by the Company,
including from divisions of the largest  electronic  companies,  as well as many
small companies. The Company's sales do not represent a significant share of the
industry's  market  for any class of its  products.  The  principal  methods  of
competition  for electronic  products of both a military and  industrial  nature
include, among other factors, price, product performance,  the experience of the
particular company and history of its dealings in such products. The Company, as
well as other  companies  engaged in supplying  equipment  for military  use, is
subject to various risks, including, without limitation,  dependence on U.S. and
foreign government  appropriations and program allocations,  the competition for
available   military  business,   and  government   termination  of  orders  for
convenience.

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

Research and Development

The  Company's  expenditures  for research and  development  were  approximately
$187,000,  $150,000 and $100,000, in 2005, 2004 and 2003, 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 Company had 171 employees as of September 1, 2005.  Some of these  employees
are  represented by the  International  Brotherhood of Electrical  Workers Local
#1799. The current collective bargaining agreement expires on June 30, 2008. The
contract  includes a 3.75% annual pay increase in the fiscal period 2005 through
2007, and no increase for 2008.  Relations  with the Union are considered  good.
Union membership at September 1, 2005 was 72 people.

Government Regulations

Compliance  with federal,  state and local  provisions that have been enacted or
adopted  to  regulate  the  discharge  of  materials  into the  environment,  or
otherwise relating to the protection of the environment, did not in fiscal 2005,
and the Company  believes will not in fiscal year 2006,  have a material  effect
upon the  capital  expenditures,  net  income,  or  competitive  position of the
Company.

The Company's  U.S.  government  contract and  subcontract  orders are funded by
government  budgets,  which operate on an  October-to-September  fiscal year. In
February  of each year,  the  President  of the United  States  presents  to the
Congress a proposed  budget for the upcoming  fiscal year.  This budget includes
recommended  appropriations for every federal agency and is the result of months
of policy and program  reviews  throughout the executive  branch.  From February
through September of each year, the appropriations and authorization  committees
of Congress  review the President's  budget  proposals and establish the funding


3
<PAGE>

levels  for  the  upcoming  fiscal  year  in  appropriations  and  authorization
legislation. Once these levels are enacted into law, the Executive Office of the
President administers the funds to the agencies.

There are two primary risks associated with this process. First, the process may
be delayed or disrupted  because of congressional  schedules,  negotiations over
funding levels for programs or unforeseen  world events,  which could,  in turn,
alter the  funding for a program or  contract.  Second,  funding for  multi-year
contracts can be changed by future appropriations, which could affect the timing
of funds, schedules and program content.

Also,  our  international  sales  are  denominated  in United  States  currency.
Consequently, changes in exchange rates that strengthen the United States dollar
could increase the price in local  currencies of our products in foreign markets
and make our products relatively more expensive than competitor's products.

U.S. Government Defense Contracts and Subcontracts
Generally,  U.S.  government  contracts  are  subject  to  procurement  laws and
regulations.  Some  of the  Company's  contracts  are  governed  by the  Federal
Acquisition Regulation (FAR), which lays out uniform policies and procedures for
acquiring  goods  and  services  by the  U.S.  government,  and  agency-specific
acquisition  regulations that implement or supplement the FAR. For example,  the
Department of Defense implements the FAR through the Defense Federal Acquisition
Regulation (DFAR).

The FAR also contains  guidelines and  regulations for managing a contract after
award, including conditions under which contracts may be terminated, in whole or
in part,  at the  government's  convenience  or for  default.  If a contract  is
terminated for the  convenience of the  government,  a contractor is entitled to
receive  payments for its  allowable  costs and, in general,  the  proportionate
share of fees or earnings  for the work done.  If a contract is  terminated  for
default, the government generally pays for only the work it has accepted.  These
regulations  also subject the company to financial  audits and other  reviews by
the  government  of its costs,  performance,  accounting  and  general  business
practices  relating  to its  contracts,  which may result in  adjustment  of the
company's contract-related costs and fees.

Item 2.     Properties

The  Company's  manufacturing  and  engineering  facilities  are at its plant in
Saratoga Springs, New York.

The  Saratoga  Springs  plant,  which the  Company  owns,  consists  of  various
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.

Item 3.     Legal Proceedings.

            None


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

            None


4
<PAGE>

                                     PART II

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

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 (ticker symbol "ESP"), the principal market
for  trading in the common  stock,  for each  quarterly  period for the last two
fiscal years ended June 30:

                    2005                  High          Low
                    First Quarter         26.09        22.35
                    Second Quarter        28.90        25.60
                    Third Quarter         27.40        25.65
                    Fourth Quarter        31.75        24.75

                    2004                  High          Low
                    First Quarter         23.00        17.60
                    Second Quarter        27.35        22.99
                    Third Quarter         26.00        24.60
                    Fourth Quarter        27.14        21.00

Holders

The  approximate  number of  holders  of record of the  common  stock was 135 on
September  21,  2005  according  to records  of the  Company's  transfer  agent.
Included  in this  number are shares held in  "nominee"  or  "street"  name and,
therefore, the number of beneficial owners of the common stock is believed to be
substantially in excess of the foregoing number.

Dividends

The Company paid cash  dividends on the common stock of $.60,  $1.50,  and $.35,
per share for the fiscal years ended June 30, 2005, 2004 and 2003, respectively.
The Board of Directors has authorized the payment of a fiscal 2006 first quarter
dividend of $.15 payable September 30, 2005.

During  fiscal 2005 the Company sold common  stock to certain  employees as they
exercised  existing  stock options  granted under a shareholder  approved  plan.
During the year,  2,400  shares  were sold at prices  that  ranged from $17.95 a
share to $19.85 a share.  The  securities  were sold for cash and the sales were
made  without  registration  under  the  Securities  Act in  reliance  upon  the
exemption from registration afforded under Section 4(2) of the Securities Act of
1933. Proceeds were used for general working capital purposes.

There were no purchases of equity securities in the fiscal 2005 fourth quarter.

Item 6.     Selected Financial Data.

<TABLE>
<CAPTION>
                                                   ESPEY MFG. & ELECTRONICS CORP.
                                                   Five Years Ended June 30, 2005
                                 -------------------------------------------------------------------
Selected Income Statement Data       2005          2004          2003          2002          2001
                                 -----------   -----------   -----------   -----------   -----------
<S>                              <C>           <C>           <C>           <C>           <C>
Net Sales ....................   $18,828,700   $22,507,199   $19,773,411   $18,405,213   $17,251,640
Operating Income .............     1,107,331     1,178,723     1,146,386       549,139     1,169,271
Other income .................       244,524       121,894       139,880       179,615       305,833
                                 -----------   -----------   -----------   -----------   -----------
         Net income ..........       978,920       960,826       964,700       545,754     1,033,069

Income per common share:
  Basic ......................   $       .97   $       .95   $       .94   $       .53   $      1.00
   Diluted ...................   $       .96   $       .94   $       .94   $       .53   $      1.00
                                 ===========   ===========   ===========   ===========   ===========

Selected Balance Sheet Data

Current Assets ...............    26,711,464    26,030,744    26,528,434    25,008,710    23,736,991
Current Liabilities ..........     1,340,952       965,038     1,639,755     1,158,439     1,063,497
Working Capital ..............    25,370,512    25,065,706    24,888,679    23,850,271    22,673,494
Total Assets .................    29,696,301    29,131,260    29,795,497    28,332,962    27,228,881

Stockholders' equity .........    28,057,292    27,841,906    27,953,508    27,054,442    26,165,384

Cash dividends declared and
  paid per common share ......   $       .60   $      1.50   $       .35   $       .30   $       .20
                                 ===========   ===========   ===========   ===========   ===========
</TABLE>

5
<PAGE>

Item 7.     Management's  Discussion  and  Analysis of Financial  Condition  and
            Results of Operations

Business Outlook

The total  backlog for the Company was  approximately  $31.8 million at June 30,
2005, up $16.4 million over June 30, 2004. The backlog  represents the estimated
remaining sales value of work to be performed  under firm contracts.  The funded
portion of this backlog at June 30, 2005 is  approximately  $23.1 million.  This
includes items that have been  authorized and  appropriated  by Congress  and/or
funded by the customer.  The unfunded backlog is approximately  $8.7 million and
represents  firm   multi-year   orders  for  which  funding  has  not  yet  been
appropriated  by Congress.  While there is no guarantee  that future budgets and
appropriations will provide funding for a given program, management has included
in unfunded  backlog only those  programs that it believes are likely to receive
funding. The unfunded backlog at June 30, 2004 was zero.

During fiscal year 2005, while net sales  decreased,  new orders received by the
Company were approximately $35 million. The sales backlog of approximately $31.8
million  at June 30,  2005 gives the  Company a solid base of future  sales and,
therefore, management expects a significant increase in sales during fiscal 2006
as compared to fiscal 2005.  In addition to the backlog,  the Company  currently
has  outstanding  quotations  representing  in  excess  of  $29  million  in the
aggregate for both repeat and new programs.  Many potential orders are currently
being discussed and negotiated with our customers.

The outstanding  quotations  encompass  various new and previously  manufactured
power  supplies,  transformers,  and  subassemblies.  However,  there  can be no
assurance  that the Company  will acquire any or all of the  anticipated  orders
described  above,  many of which are subject to allocations of the United States
defense  spending  and factors  affecting  the  defense  industry  and  military
procurement generally.

Results of Operations

Net Sales for fiscal years ended June 30, 2005, 2004 and 2003, were $18,828,700,
$22,507,199, and $19,773,411,  respectively.  The 16.3% decrease in net sales in
2005 as compared to 2004,  was a result of the previously  disclosed  decline in
the Company's  backlog  during fiscal 2004.  Specifically,  the Company  shipped
fewer  transmitter  components  in fiscal 2005,  as compared to 2004.  The 13.8%
increase in net sales in 2004 as  compared  to 2003 was the result of  increased
transmitter  component  shipments on two of the  Company's  products.  In fiscal
2005,  the Company  realized the benefits of increased  business  with  existing
customers  and  continued to establish  new customer  relationships.  New orders
received in fiscal 2005 were approximately $35 million compared to approximately
$16.6 in fiscal 2004.  The sales backlog at June 30, 2005,  as discussed  above,
includes  significant  orders for military and industrial  power  supplies,  and
contracts  to  manufacture   certain   customer   products  in  accordance  with
pre-engineered requirements.

The primary  factor in  determining  gross profit and net income is product mix.
The gross  profits on mature  products and build to print  contracts  are higher
than  with  respect  to  the  products,  which  are  still  in  the  engineering
development stage or in the early stages of production.  In any given accounting
period the mix of product  shipments  between higher margin mature  programs and
less mature programs including loss contracts, has a significant impact on gross
profit and net income.

For  fiscal  years  ended  June  30,  2005,  2004 and 2003  gross  profits  were
$3,381,357,  $3,714,865,  and  $3,097,861,   respectively.  Gross  profit  as  a
percentage of sales was 18.0%,  16.5%,  and 15.7%,  for fiscal 2005,  2004,  and
2003, respectively. The improved gross profit percentage in fiscal 2005, relates
to favorable product mix, and lower ESOP  contribution  expense offset partially
by decreased sales. ESOP contribution expense included in cost of sales was zero
for the fiscal year ended June 30, 2005,  and $421,716 for the fiscal year ended
June 30, 2004, (see note 11 to the financial statements).  The increase in gross
profit percentage between 2004 and 2003 was predominately due to increased sales
on higher margin build to print transmitter components.  Management continues to
evaluate the Company's workforce to ensure that production and overall execution
of the  backlog  orders  and  additional  anticipated  orders  are  successfully
performed.  Employment at June 30, 2005 was 169 people compared to 181 people at
June 30,2004 and 192 people at June 30, 2003.

Selling,  general and  administrative  expenses were $2,274,026,  for the fiscal
year ended June 30, 2005,  a decrease of  $262,116,  or 10.3% as compared to the
prior year.  This decrease is primarily due to decreased  professional  fees and
ESOP contribution  expense.  Selling,  general and administrative  expenses were
$2,536,142  for the year ended June 30, 2004, an increase of $584,667,  or 30.0%
as compared to the prior year. This increase was primarily due to an increase in
professional fees, insurance costs and administrative  salaries. The increase in
professional fees was attributable,  in part, to legal fees incurred relating to
the review conducted following the Company's Annual Meeting in November 2003 and
the  implementation  of  corporate  governance   modifications,   including  the
amendment of the corporate by-laws.


6
<PAGE>

Other  income  for fiscal  2005  increased  as  compared  to fiscal  2004 due to
increased  interest  income on the Company's  cash  equivalents  and  short-term
investments  due to higher  interest  rates.  The Company  does not believe that
there is significant risk associated with its investment  policy,  since at June
30, 2005 all of the investments are primarily  represented by short-term  liquid
investments including  certificates of deposit and money market accounts.  Total
other income in fiscal 2004, as compared to 2003 decreased due to lower dividend
and interest income.

The  effective  income tax rate was 27.6% in 2005,  26.1% in 2004,  and 25.0% in
2003.  The  effective tax rate is less than the statutory tax rate mainly due to
the foreign exportation benefit the Company receives on its international sales.

Net income for fiscal 2005,  was $978,920 or $.97 and $.96 per share,  basic and
diluted,  respectively,  compared to $960,826 or $.95 and $.94 per share,  basic
and diluted, respectively, for fiscal 2004. The increase in net income per share
was due to improved  gross profit as a  percentage  of sales and the decrease in
selling, general and administrative  expenses,  offset partially by the decrease
in sales.  Net income for fiscal 2004,  was $960,826 or $.95 and $.94 per share,
basic and diluted, respectively,  compared to net income of $964,700 or $.94 per
share,  both basic and diluted,  for fiscal  2003.  The change in net income per
share was due to increased  sales and improved gross profit offset  primarily by
one loss contract and higher selling, general and administrative expenses.

Liquidity and Capital Resources

The Company's  working  capital is an appropriate  indicator of the liquidity of
its  business,  and  during the past  three  fiscal  years,  the  Company,  when
possible,  has  funded all of its  operations  with cash  flows  resulting  from
operating  activities and when necessary from its existing cash and investments.
The  Company  did not borrow  any funds  during  the last  three  fiscal  years.
Management has available a $3,000,000 line of credit to help fund further growth
or working capital needs, if necessary, but does not anticipate the need for any
borrowed funds in the foreseeable future.

The  Company's  working  capital  as  of  June  30,  2005,  2004  and  2003  was
$25,370,512,  $25,065,706, and $24,888,679,  respectively. During 2005, 2004 and
2003 the Company repurchased 8,724, 13,625, and 15,918 shares, respectively,  of
its common stock from the Company's Employee  Retirement Plan and Trust ("ESOP")
and in other open market  transactions,  for a total purchase price of $215,366,
$272,329,  and $311,468,  respectively.  Under existing  authorizations from the
Company's Board of Directors,  as of June 30, 2005,  management is authorized to
purchase an additional $1 million of Company stock.

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

                                                          2005            2004
                                                       ----------     ----------
Net cash provided by operating activities ........     $  710,049     $3,874,800
Net cash used by investing activities ............      2,441,362        910,855
Net cash used in financing activities ............        776,152      1,649,456

Net cash provided by operating  activities  fluctuates between periods primarily
as a result of  differences  in net  income,  the  timing of the  collection  of
accounts receivable, purchases of inventory, receipt of progress payments, level
of sales and payments of accounts payable. Net cash used by investing activities
increased  in fiscal 2005 due to the  purchase of  short-term  investments.  The
decrease in cash used in financing  activities is due primarily to a decrease in
the amount of dividends paid in fiscal 2005, as compared to fiscal 2004,  when a
special dividend of $.50 per share was paid.

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

Management  believes  that the  Company's  reserve  for bad  debts of  $3,000 is
adequate given the customers with whom the Company does business.  Historically,
bad debt expense has been minimal.

During fiscal year 2005 and 2004,  the Company  expended  $425,362 and $413,517,
respectively, for plant improvements and new equipment. The Company has budgeted
approximately  $500,000 for new equipment and plant improvements in fiscal 2006.
Management presently  anticipates that the funds required will be available from
current operations.

The Company has entered into standby letters of credit agreements with financial
institutions  primarily  relating  to the  guarantee  of future  performance  on
certain


7
<PAGE>

contracts.  Contingent  liabilities  on  outstanding  standby  letters of credit
agreements  aggregated  $39,300 at June 30, 2005. The Company does not expect to
fund any of the amounts under the standby letters of credit.

Critical Accounting Policies and Estimates

Our  significant  accounting  policies are  described in Note 2 to the financial
statements.  We believe our most critical  accounting  policies  include revenue
recognition and cost estimation on our contracts.

Revenue Recognition and Estimates

A significant portion of our business is comprised of development and production
contracts. Generally revenues on long-term fixed-price contracts are recorded on
a  percentage  of  completion  basis using units of delivery as the  measurement
basis for progress toward completion.

Percentage  of  completion  accounting  requires  judgment  relative to expected
sales,  estimating costs and making assumptions  related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an  allocation  of overhead  costs.  The  estimation  of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation  processes  and  judgments  described  above,  it  is  possible  that
materially  different  amounts of contract  costs could be recorded if different
assumptions were used, based on changes in  circumstances,  in the estimation of
cost at  completion.  When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.

Other Matters

An Employee  Retirement Plan and Trust ("ESOP") was established for the eligible
non-union employees of the Company,  effective as of July 1, 1988. The ESOP used
the proceeds of a loan from the Company made on June 5, 1989 to purchase 316,224
shares of the  Company's  common  stock  for  approximately  $8,400,000  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.

Each year the Company made  contributions  to the ESOP,  which were used to make
loan interest and principal  payments.  With each loan and interest  payment,  a
portion of the common stock is allocated to participating  employees. As of June
30,  2005,  there were  230,120  shares  allocated  to  participants.  Dividends
attributable to allocated  shares were likewise  allocated to the  participants'
accounts,  whereas the dividends on unallocated shares were used toward the loan
repayment, thus reducing the Company's required contribution.

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

Effective  June 30,  2004 the loan from the Company to the ESOP was paid in full
and all shares have been allocated to participant's  accounts.

On July 15, 2005,  pursuant to a Stock Purchase Agreement dated as of such date,
the Company sold  150,000  shares of its common  stock,  par value $0.33 1/3 per
share, to the Espey Mfg. & Electronics Corp. Employee Stock Ownership Plan Trust
(the "ESOP"). The ESOP paid $28.90 per share, for an aggregate purchase price of
$4,335,000.  The  determination  of the  purchase  price was based on a fairness
opinion  obtained by an independent  valuation  firm. The ESOP borrowed from the
Corporation  an amount equal to the purchase  price.  The loan will be repaid in
fifteen (15) equal annual  installments of principal and the unpaid balance will
bear interest at a fixed rate of 6.25% per annum,  the "prime rate" as quoted in
The Wall Street Journal on the date of closing.

The Board of Directors of the Company  approved a purchase price per share equal
to a 5% discount on the average  trading price of the Company's  common stock on
the American Stock Exchange on the date before closing,  but in no event greater
than the fair  market  value as  determined  by an  independent  valuation  firm
retained by the ESOP. The average trading price of the Company's common stock on
the American Stock Exchange on July 14, 2005 was $30.72.

In making the sale, the Company relied on the exemption from registration  under
Section 4(2) of the Securities Act of 1933, as amended,  because the shares sold
were offered only to the ESOP.

After giving  effect to the  transaction  the ESOP owned  380,120  shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.


8
<PAGE>

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

The Company is a small  business  issuer as defined under  Security and Exchange
Commission  rule 12b-2 and therefore,  in accordance  with paragraph (e) of Item
305 of Regulation S-K, is not required to provide the information for this item.


Item 8.     Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

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

We have  audited the  accompanying  balance  sheets of Espey Mfg. &  Electronics
Corp.  as of June 30,  2005 and 2004,  and the  related  statements  of  income,
changes in stockholders'  equity, and cash flows for the years then ended. 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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements.  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,  2005 and 2004,  and the results of its  operations  and its cash
flows for the years then  ended,  in  conformity  with U.S.  generally  accepted
accounting principles.


/s/KPMG LLP
-----------------
KPMG LLP
Albany, New York
August 12, 2005



            Report of Independent Registered Public Accounting Firm

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

In our opinion,  the 2003  financial  statements  listed in the index  appearing
under Item 15 (a) (1) present fairly, in all material  respects,  the results of
operations  and cash flows of Espey Mfg. & Electronics  Corp.  (the Company) for
the year ended June 30, 2003, in conformity with accounting principles generally
accepted in the United States of America.  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 the  standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  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 our opinion.


/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Albany, New York
August 1, 2003


9
<PAGE>
<TABLE>
<CAPTION>

Espey Mfg. & Electronics Corp.
Balance Sheets
June 30, 2005 and 2004
---------------------------------------------------------------------------------------------
                                                                     2005            2004
                                                                 ------------    ------------
<S>                                                              <C>             <C>
ASSETS
     Cash and cash equivalents ...............................   $  9,803,507    $ 12,310,972
     Short term investments ..................................      3,072,000       1,056,000
     Trade accounts receivable, net ..........................      2,993,240       2,140,397
     Other receivables .......................................          3,173           1,809

     Inventories:
              Raw materials and supplies .....................      1,768,959       1,543,930
              Work in Process ................................      2,542,303       3,390,133
              Costs related to contracts in process,
                net of progress payments of $97,758
                in 2005 and $905,646 in 2004 .................      6,056,290       5,151,234
                                                                 ------------    ------------
              Total inventories ..............................     10,367,552      10,085,297
                                                                 ------------    ------------
     Deferred income taxes ...................................        135,997          76,876
     Prepaid expenses and other current assets ...............        335,995         359,393
                                                                 ------------    ------------
              Total current assets ...........................     26,711,464      26,030,744
                                                                 ------------    ------------
     Property, plant and equipment, net ......................      2,984,837       3,100,516
                                                                 ------------    ------------
                  Total Assets ...............................   $ 29,696,301    $ 29,131,260
                                                                 ============    ============
LIABILITIES AND STOCKHOLDERS'EQUITY

     Accounts payable ........................................   $    378,771    $    250,675
     Accrued expenses:
              Salaries, wages and commissions ................         62,278          44,519
              Employees' insurance costs .....................             --           7,487
              Vacation .......................................        498,015         451,516
              Other ..........................................         53,783          50,370
     Payroll and other taxes withheld and accrued ............         35,977          26,000
     Income taxes payable ....................................        312,128         134,471
                                                                 ------------    ------------
                  Total current liabilities ..................      1,340,952         965,038
                                                                 ------------    ------------
     Deferred income taxes ...................................        298,057         324,316
                                                                 ------------    ------------
                  Total liabilities ..........................      1,639,009       1,289,354
                                                                 ------------    ------------
     Common stock, par value $.33-1/3 per share
              Authorized 10,000,000 shares; Issued 1,514,937
                shares in 2005 and 2004, outstanding 1,008,294
                and 1,014,618 shares in 2005 and 2004 ........        504,979         504,979
     Capital in excess of par value ..........................     10,412,073      10,411,915
     Retained earnings .......................................     25,284,554      24,911,920
                                                                 ------------    ------------
                                                                   36,201,606      35,828,814

              Cost of 506,643 and 500,319 shares of
                common stock in treasury in 2005
                and 2004, respectively .......................     (8,144,314)     (7,986,908)
                                                                 ------------    ------------
                  Total stockholders' equity .................     28,057,292      27,841,906
                                                                 ------------    ------------
                  Total liabilities and
                  stockholders' equity .......................   $ 29,696,301    $ 29,131,260
                                                                 ============    ============
</TABLE>

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


10

<PAGE>
<TABLE>
<CAPTION>

Espey Mfg. & Electronics Corp.
Statements of Income
Years Ended June 30, 2005, 2004 and 2003
-------------------------------------------------------------------------------------------
                                                     2005           2004           2003
                                                 ------------   ------------   ------------
<S>                                              <C>            <C>            <C>
Net sales ....................................   $ 18,828,700   $ 22,507,199   $ 19,773,411
Cost of sales ................................     15,447,343     18,792,334     16,675,550
                                                 ------------   ------------   ------------
                Gross profit .................      3,381,357      3,714,865      3,097,861

Selling, general and
     administrative expenses .................      2,274,026      2,536,142      1,951,475
                                                 ------------   ------------   ------------
                Operating income .............      1,107,331      1,178,723      1,146,386

Other income (expense)
                Interest and dividend income .        228,159         94,655        140,000
                Other ........................         16,365         27,239           (120)
                                                 ------------   ------------   ------------
                Total other income, net ......        244,524        121,894        139,880
                                                 ------------   ------------   ------------

Income before income taxes ...................      1,351,855      1,300,617      1,286,266

Provision for income taxes ...................        372,935        339,791        321,566
                                                 ------------   ------------   ------------
                Net income ...................   $    978,920   $    960,826   $    964,700
                                                 ============   ============   ============

Net income per share:
     Basic ...................................   $        .97   $        .95   $        .94
     Diluted .................................   $        .96   $        .94   $        .94
                                                 ------------   ------------   ------------

Weighted average number of shares outstanding:
                Basic ........................      1,010,617      1,013,663      1,025,200
                Diluted ......................      1,021,604      1,022,344      1,027,686
                                                 ============   ============   ============
</TABLE>

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


11
<PAGE>
<TABLE>
<CAPTION>

Espey Mfg. & Electronics Corp.
Statements of Changes in Stockholders' Equity
Years Ended June 30, 2005, 2004 and 2003
-------------------------------------------------------------------------------------------------------------------
                                                                                         Accumulated
                                                                                           Other
                                                                            Capital in   Comprehen-
                                                  Common                    Excess of    sive income      Retained
                                                  Shares       Amount       par Value      (Loss)         Earnings
                                               -----------   -----------   -----------   -----------    -----------
<S>                                            <C>         <C>           <C>           <C>            <C>
Balance as of June 30, 2002                      1,034,561   $   504,979   $10,465,878   $  (29,079)    $24,848,858
                                               -----------   -----------   -----------   -----------    -----------
Comprehensive income:
   Net income, 2003                                                                                         964,700
   Other comprehensive income,
     net of tax benefit of $15,599                                                            19,589
   Reclassification adjustment                                                                 9,490

Comprehensive income

Stock options exercised                              1,000                      (6,600)

Dividends paid on common stock
   $.35 per share                                                                                          (358,099)

Tax effect of dividends on
   unallocated ESOP shares                                                                                    2,941

Purchase of treasury stock                         (15,918)

Reduction of common stock subscribed
                                               -----------   -----------   -----------   -----------    -----------
Balance as of June 30, 2003                      1,019,643       504,979    10,459,278            --     25,458,400
                                               -----------   -----------   -----------   -----------    -----------

Net income, 2004                                                                                            960,826

Stock options exercised                              8,600                     (53,122)

Dividends paid on common stock
   $1.50 per share                                                                                       (1,519,913)

Tax effect of stock options exercised                                            5,759

Tax effect of dividends on
   unallocated ESOP shares                                                                                   12,607

Purchase of treasury stock                         (13,625)

Reduction of common stock subscribed
                                               -----------   -----------   -----------   -----------    -----------
Balance as of June 30, 2004                      1,014,618       504,979    10,411,915   $        --     24,911,920
                                               -----------   -----------   -----------   -----------    -----------

Net income, 2005                                                                                            978,920

Stock options exercised                              2,400                     (12,460)

Dividends paid on common stock
   $.60 per share                                                                                          (606,286)

Tax effect of stock options exercised                                           12,618

Purchase of treasury stock                          (8,724)

                                               -----------   -----------   -----------   -----------    -----------
Balance as of June 30, 2005                      1,008,294   $   504,979   $10,412,073   $        --    $25,284,554
                                               ===========   ===========   ===========   ===========    ===========
</TABLE>


12

<PAGE>
<TABLE>
<CAPTION>

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

<S>                                                 <C>                  <C>         <C>              <C>
Balance as of June 30, 2002                           (1,117,325)          480,376     $(7,618,869)     $27,054,442
                                                     -----------       -----------     -----------      -----------

Comprehensive income:
                  Net income, 2003                                                                          964,700
                  Other comprehensive gain,
                    net of tax benefit of $15,599                                                            19,589
                  Reclassification adjustment                                                                 9,490
                                                                                                        -----------
Comprehensive income                                                                                        993,779

Stock options exercised                                                     (1,000)         19,850           13,250

Dividends paid on common stock
   $.35 per share                                                                                          (358,099)

Tax effect of dividends on
   unallocated ESOP shares                                                                                    2,941

Purchase of treasury stock                                                  15,918        (311,468)        (311,468)

Reduction of common stock subscribed                     558,663                                            558,663
                                                     -----------       -----------     -----------      -----------
Balance as of June 30, 2003                             (558,662)          495,294      (7,910,487)      27,953,508
                                                     -----------       -----------     -----------      -----------
Net income, 2004                                                                                            960,826

Stock options exercised                                                     (8,600)        195,908          142,786

Dividends paid on common stock
   $1.50 per share                                                                                       (1,519,913)

Tax effect on stock options exercised                                                                         5,759

Tax effect of dividends on
   unallocated ESOP shares                                                                                   12,607

Purchase of treasury stock                                                  13,625        (272,329)        (272,329)

Reduction of common stock subscribed                     558,662                                            558,662
                                                     -----------       -----------     -----------      -----------
Balance as of June 30, 2004                                   --           500,319      (7,986,908)      27,841,906
                                                     -----------       -----------     -----------      -----------

Net income, 2005                                                                                            978,920

Stock options exercised                                                     (2,400)         57,960           45,500

Dividends paid on common stock
   $.60 per share                                                                                          (606,286)

Tax effect on stock options exercised                                                                        12,618

Purchase of treasury stock                                                   8,724        (215,366)        (215,366)

                                                     -----------       -----------     -----------      -----------
Balance as of June 30, 2005                                   --           506,643     $(8,144,314)     $28,057,292
                                                     ===========       ===========     ===========      ===========
</TABLE>

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


13
<PAGE>
<TABLE>
<CAPTION>

Espey Mfg. & Electronics Corp.
Statements of Cash Flows
Years Ended June 30, 2005, 2004 and 2003
------------------------------------------------------------------------------------------------
                                                           2005          2004            2003
                                                       -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Cash Flows From Operating Activities:
     Net income ....................................   $   978,920    $   960,826    $   964,700

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

     Tax effect of dividends on
       unallocated ESOP shares .....................            --         12,607          2,941

     Tax effect on stock options exercised .........        12,618          5,759             --

     Depreciation ..................................       541,041        557,943        495,670

     Loss on disposal of plant and equipment .......            --         22,121             --

     Loss on sale of investment securities .........            --             --         15,817

     Deferred income tax (benefit) .................       (85,380)       133,849         57,359

     Changes in assets and liabilities:

          (Increase) decrease in trade receivables .      (852,843)     1,330,498     (1,061,189)

          (Increase) decrease in other receivables .        (1,364)         9,829          1,775

          (Increase) decrease in inventories, net ..      (282,255)     1,750,970        904,528

          Decrease (increase) in prepaid
             expenses and other current assets .....        23,398       (234,885)        73,553

          Increase (decrease) in accounts payable ..       128,096       (396,922)       150,143

          Increase (decrease) in accrued
             salaries, wages and commissions .......        17,759        (43,768)         1,406

          (Decrease) increase in accrued
             employee insurance costs ..............        (7,487)           449            150

          Increase (decrease) in vacation accrual ..        46,499        (14,299)        66,916

          Increase in other accrued expenses .......         3,413          8,009            951

          Increase (decrease) in payroll and
             other taxes withheld and accrued ......         9,977        (12,425)           482

          Increase (decrease) in income
             taxes payable .........................       177,657       (215,761)       261,266
                                                       -----------    -----------    -----------
                      Net cash provided by
                         operating activities ......   $   710,049    $ 3,874,800    $ 1,936,468
                                                       -----------    -----------    -----------

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

                                                                                     (Continued)
</TABLE>

14
<PAGE>
<TABLE>
<CAPTION>
<S>                                                        <C>            <C>            <C>

Cash Flows From Investing Activities:

     Proceeds from maturity of investment
       securities ...................................            --             --        403,188

     Additions to property, plant and equipment .....      (425,362)      (413,517)      (438,481)

     Purchase of short term investments .............    (2,688,000)    (1,056,000)            --

     Proceeds from maturity of short term investments       672,000             --             --

     Reduction of common stock subscribed ...........            --        558,662        558,663
                                                        -----------    -----------    -----------
                      Net cash (used) provided by
                         investing activities .......    (2,441,362)      (910,855)       523,370
                                                        -----------    -----------    -----------
Cash Flows From Financing Activities:

     Dividends on common stock ......................      (606,286)    (1,519,913)      (358,099)

     Purchase of treasury stock .....................      (215,366)      (272,329)      (311,468)

     Proceeds from exercise of stock options ........        45,500        142,786         13,250
                                                        -----------    -----------    -----------
                      Net cash used in
                         financing activities .......      (776,152)    (1,649,456)      (656,317)
                                                        -----------    -----------    -----------

(Decrease) increase in cash and cash equivalents ....    (2,507,465)     1,314,489      1,803,521

Cash and cash equivalents, beginning of the year ....    12,310,972     10,996,483      9,192,962
                                                        -----------    -----------    -----------
Cash and cash equivalents, end of the year ..........   $ 9,803,507    $12,310,972    $10,996,483
                                                        ===========    ===========    ===========

Income Taxes Paid ...................................   $   268,040    $   403,337    $        --
                                                        ===========    ===========    ===========
</TABLE>

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


15

<PAGE>

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

Note 1. Nature of operations

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

Note 2. Summary of Significant Accounting Policies

Inventory  Valuation,  Cost Estimation and Revenue Recognition Raw materials are
valued at weighted average cost.

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

Revenue  is  recognized  on  contracts  in the  period  in which  the  units are
delivered and billed  (units-of-delivery  method). A significant  portion of our
business is  comprised  of  development  and  production  contracts.  Generally,
revenues on long-term  fixed-price  contracts  are  recorded on a percentage  of
completion  basis using units of delivery as the measurement  basis for progress
toward completion.

Percentage  of  completion  accounting  requires  judgment  relative to expected
sales,  estimating costs and making assumptions  related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an  allocation  of overhead  costs.  The  estimation  of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation  processes  and  judgments  described  above,  it  is  possible  that
materially  different  amounts of contract  costs could be recorded if different
assumptions were used, based on changes in  circumstances,  in the estimation of
cost at  completion.  When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.

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

Estimated useful lives of depreciable assets are as follows:

          Buildings and improvements                               10 - 20 years
          Machinery and equipment                                   3 - 10 years
          Furniture, fixtures and office equipment                      10 years

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

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


16
<PAGE>

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

Note 2. Summary of Significant Accounting Policies, Continued

Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of deposit, and
money market accounts.  The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.

Short-term  investments include  certificates of deposit with maturities greater
than three months to a year.

Stock-Based Compensation
The intrinsic  value method of accounting is used for  stock-based  compensation
plans.  Under the intrinsic value method,  compensation  cost is measured as the
excess,  if any, of the quoted  market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.

The Company has elected to account for its stock-based  compensation plans under
the intrinsic  value-based method of accounting as permitted by SFAS No. 123 and
as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock  Issued to  Employees",  and related  interpretations  including  FASB
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation  - An  Interpretation  of APB No. 25", in accounting  for its fixed
stock option plans. Under this method, compensation expense would be recorded on
the date of grant  only if the  current  market  price of the  underlying  stock
exceeded  the  exercise  price.  In  December  2003,  the  Financial  Accounting
Standards  Board  ("FASB")  issued  SFAS No.  148,  "Accounting  for Stock Based
Compensation".  SFAS No. 148 provides  alternative  methods of transition  for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation  and amends the disclosure  requirements of SFAS No. 123,
"Accounting for Stock Based Compensation", to require more prominent disclosures
in both annual and interim  financial  statements about the method of accounting
for  stock-based  employee  compensation  and the effect of the  method  used on
reported  results.  The Company adopted the disclosure  requirements of SFAS No.
123 and SFAS No. 148, as required.

The  following  table  illustrates  the  effect on net income and net income per
share if the Company had applied the fair value  recognition  provisions of SFAS
no. 123, to stock-based employee compensation.

                                                    Year Ended June 30,
                                               2005        2004         2003
                                           -------------------------------------
Net income
as reported                                $  978,920   $  960,826   $  964,700

Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related  tax effects                          (31,518)     (31,460)     (36,912)
                                           ----------   ----------   ----------
Pro forma net income                       $  947,402   $  929,366   $  927,788
                                           ==========   ==========   ==========
Net income per share:

   Basic-as reported                       $      .97   $      .95   $      .94
                                           ==========   ==========   ==========
   Basic-pro forma                         $      .94   $      .92   $      .91
                                           ==========   ==========   ==========


   Diluted-as reported                     $      .96   $      .94   $      .94
                                           ==========   ==========   ==========
   Diluted-pro forma                       $      .93   $      .91   $      .91
                                           ==========   ==========   ==========


17

<PAGE>

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

Note 2. Summary of Significant Accounting Policies, Continued

Per Share Amounts
Basic net income per share  excludes  dilution  and is computed by dividing  net
income available to common stockholders by the weighted average number of common
shares  outstanding  for the period.  Diluted net income per share  reflects the
potential  dilution that could occur if  securities or other  contracts to issue
Common Stock were  exercised  or converted  into Common Stock or resulted in the
issuance of Common Stock that then shared in the net income of the Company.

Comprehensive Income
Comprehensive  Income for the years ended June 30, 2005 and 2004 is equal to net
income. For the year ended June 30, 2003,  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.

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

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

Reclassifications
Certain  reclassifications  may  have  been  made to the  prior  year  financial
statements to conform to the current year presentation.

Recently Issued Accounting Standards
In November  2004,  the FASB issued SFAS No.  151,  "Accounting  for  Unexpected
Production  Defects and Waste." SFAS No. 151 requires  that  "abnormal  freight,
handling costs, and amounts of wasted materials (spoilage)" should be treated as
current-period  costs.  Under this  concept,  if the costs  associated  with the
actual  level of spoilage  or  production  defects  are  greater  than the costs
associated with the range of normal spoilage or defects,  the difference  should
be charged to  current-period  expense.  SFAS No.  151 is  effective  for annual
periods  beginning  after June 15, 2005. In December  2004, the FASB issued SFAS
No. 123R,  "Share Based Payment." SFAS No. 123R requires  companies to recognize
in the income  statement  the  grant-date  fair value of stock options and other
equity-based  compensation issued to employees.  SFAS No. 123R will be effective
for the Company at the  beginning of fiscal  2007.  The adoption of SFAS No. 151
and SFAS No. 123R are not  expected to have a material  impact on the  Company's
results  of  operations  and  financial  condition.  In  March  2005,  the  U.S.
Securities and Exchange  Commission ("SEC") issued Staff Accounting Bulletin No.
107  ("SAB  107"),  which  expresses  views  of  the  SEC  staff  regarding  the
application  of  SFAS  No.  123(R).   Among  other  things,   SAB  107  provides
interpretive  guidance  related to the  interaction  between SFAS No. 123(R) and
certain SEC rules and regulations,  and provides the SEC staff's views regarding
the valuation of share-based payment arrangements for public companies.

In December 2004, the FASB issued Staff Position FAS 109-1 regarding Income from
Domestic Production Activities which was effective  immediately.  Staff Position
FAS 109-1  clarifies  SFAS No. 109's  guidance that applies to the new deduction
for qualified domestic production activities.  The staff position clarifies that
the deduction should be accounted for as a special deduction under SFAS No. 109.
The adoption of Staff  Position FAS 109-1 did not have a material  impact on the
Company's results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
-  Accounting  Principles  Board  Opinion  No. 29,  Accounting  for  Nonmonetary
Transactions".  SFAS No. 153  requires  that  exchanges  should be recorded  and
measured at the fair value of the assets  exchanged,  with  certain  exceptions.
SFAS No. 153 is effective for nonmonetary  exchanges occurring in fiscal periods
beginning  after June 15, 2005.  The adoption of SFAS No. 153 is not expected to
have a significant  impact on the  Company's  results of operations or financial
position.


18
<PAGE>

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

Note 2. Summary of Significant Accounting Policies, Continued

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS
154 requires retrospective application to prior period financial statements of a
voluntary  change in accounting  principle and is effective in the first quarter
of 2006. The company does not expect the adoption of SFAS 154 to have a material
effect on its results of operations, financial condition or cash flows.

Impairment of Long-Lived Assets
Long-lived assets,  including property,  plant, and equipment,  are reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.  Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to  estimated  undiscounted  future cash flows  expected to be  generated by the
asset.  If the carrying  amount of an asset  exceeds its  estimated  future cash
flows,  an  impairment  charge is recognized by the amount by which the carrying
amount of the asset  exceeds the fair value of the asset.  Assets to be disposed
of are  separately  presented in the balance  sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and no longer depreciated.
The assets and  liabilities of a disposed group  classified as held for sale are
presented  separately in the  appropriate  asset and  liability  sections of the
balance sheet.

Concentrations of Risk
The market for our  defense  electronics  products is largely  dependent  on the
availability of new contracts from the United States and foreign  governments to
prime contractors to which we provide components. Any decline in expenditures by
the United  States or  foreign  governments  may have an  adverse  effect on our
financial performance.

Generally,  U.S.  government  contracts  are  subject  to  procurement  laws and
regulations.  Some  of the  Company's  contracts  are  governed  by the  Federal
Acquisition Regulation (FAR), which lays out uniform policies and procedures for
acquiring  goods  and  services  by the  U.S.  government,  and  agency-specific
acquisition  regulations that implement or supplement the FAR. For example,  the
Department of Defense implements the FAR through the Defense Federal Acquisition
Regulation (DFAR).

The FAR also contains  guidelines and  regulations for managing a contract after
award, including conditions under which contracts may be terminated, in whole or
in part,  at the  government's  convenience  or for  default.  If a contract  is
terminated for the  convenience of the  government,  a contractor is entitled to
receive  payments for its  allowable  costs and, in general,  the  proportionate
share of fees or earnings  for the work done.  If a contract is  terminated  for
default, the government generally pays for only the work it has accepted.  These
regulations  also subject the company to financial  audits and other  reviews by
the  government  of its costs,  performance,  accounting  and  general  business
practices  relating  to its  contracts,  which may result in  adjustment  of the
company's contract-related costs and fees.

Note 3. Contracts in Process

Contracts in process at June 30, 2005 and 2004 are as follows:

                                                     2005          2004
                                                 -----------   -----------

      Gross contract value                       $31,757,086   $15,425,540

      Costs related to contracts in process,
      net of progress payments of $97,758
      in 2005 and $905,646 in 2004               $ 6,056,290   $ 5,151,234

Included in costs relating to contracts in process at June 30, 2005 and 2004 are
costs of $1,814,905 and $1,237,135, respectively, relative to contracts that may
not be completed  within the ensuing year. Under the  units-of-delivery  method,
the related  sale and cost of sales will not be  reflected  in the  statement of
income until the units under contract are shipped.


19

<PAGE>

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

Note 4. Property, Plant and Equipment

A summary of the original cost of property, plant and equipment at June 30, 2005
and 2004 is as follows:

                                                     2005            2004
                                                 ------------    ------------
      Land                                       $     45,000    $     45,000
      Building and improvements                     4,065,040       4,040,155
      Machinery and equipment                       7,831,278       7,506,843
      Furniture, fixtures and office equipment        321,732         309,407
                                                 ------------    ------------
                                                   12,263,050      11,901,405
      Accumulated depreciation                     (9,278,213)     (8,800,880)
                                                 ------------    ------------
                                                 $  2,984,837    $  3,100,516
                                                 ============    ============

Depreciation  expense was $541,041,  $557,943,  and  $495,670,  during the years
ended June 30, 2005, 2004, and 2003, respectively.

Note 5. Line of credit

At June 30, 2005, the Company has an uncommitted  and unused Line of Credit with
a financial  institution.  The agreement provides that the Company may borrow up
to $3,000,000.  The line provides for interest at the  borrower's  choice of (I)
prime minus .75% or (II) LIBOR plus 1.80% for periods of 1, 2, or 3 months.  Any
borrowing  under  the  line  of  credit  will  be   collateralized  by  accounts
receivable.

Note 6. Research and Development Costs

Research and  development  costs charged to cost of sales during the years ended
June  30,  2005,  2004 and  2003  were  approximately  $187,000,  $150,000,  and
$100,000, respectively.

Note 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 and expenses are based upon hours worked
at a  specified  rate and  amounted  to  $86,876 in 2005,  $91,265 in 2004,  and
$93,066 in 2003.

The  Company  sponsors  a  401(k)  plan  with  employee  and  employer  matching
contributions.  The employer match is 10% of the employee  contribution  and was
$28,855,   $31,721,   and  $29,030,   for  fiscal  years  2005,  2004  and  2003
respectively.

Note 8. Provision for Income Taxes

A summary of the  components  of the  provision  for income  taxes for the years
ended June 30, 2005, 2004 and 2003 is as follows:

                                              2005          2004         2003
                                        ----------    ----------   ----------
      Current tax expense - federal     $  419,649    $  190,387   $  252,961
      Current tax expense - state           38,666        15,555       11,246
      Deferred tax expense                 (85,380)      133,849       57,359
                                        ----------    ----------   ----------
                                        $  372,935    $  339,791   $  321,566
                                        ==========    ==========   ==========

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.


20

<PAGE>

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

Note 8. Provision for Income Taxes, Continued

The combined U.S. federal and state effective income tax rates of 27.6%,  26.1%,
and 25.0%,  for 2005,  2004 and 2003  respectively,  differed from the statutory
U.S. federal income tax rate for the following reasons:

                                                    2005       2004       2003
                                                   ------     ------     ------
    U.S. federal statutory income tax rate           34.0%      34.0%      34.0%
    Increase (reduction) in rate resulting from:
             Dividends received deduction              --         --       (1.0)
             State franchise tax, net of federal
                 income tax benefit                   1.9        1.0        1.0
             Foreign exportation benefit             (2.7)      (7.7)      (5.0)
             Adjustment of deferred tax accounts     (5.2)        --         --
             Other                                   (0.4)      (1.2)      (4.0)
                                                   ------     ------     ------
    Effective tax rate                               27.6%      26.1%      25.0%
                                                   ======     ======     ======

For the years ended June 30, 2005 and 2004 deferred income tax (benefit)/expense
of $(85,380)  and $133,849,  respectively,  result from the changes in temporary
differences for each year.  Adjustments were made to the Company's  deferred tax
assets and  liabilities  in fiscal 2005 based on an analysis  completed in 2005.
The tax effects of temporary  differences  that give rise to deferred tax assets
and  deferred  tax  liabilities  as of June 30, 2005 and 2004 are  presented  as
follows:

                                                              2005       2004
                                                            --------   --------
      Deferred tax assets:
          Accrued expenses ..............................   $125,215   $108,485
          Other .........................................     13,964     15,428
                                                            --------   --------
                        Total deferred tax assets .......    139,179    123,913
                                                            --------   --------
      Deferred tax liabilities:
          Property, plant and equipment - principally due
               to differences in depreciation methods ...    298,057    324,316
          Inventory - effect on uniform capitalization ..      3,182     47,037
                                                            --------   --------
                        Total deferred tax liabilities ..    301,239    371,353
                                                            --------   --------
      Net deferred tax liability ........................   $162,060   $247,440
                                                            ========   ========

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

Note 9. Significant Customers

A significant  portion of the Company's  business is the  production of military
and industrial  electronic equipment for use by the U.S. and foreign governments
and certain industrial customers.  Sales to two domestic customers accounted for
32%  and 14% of  total  sales  in  2005,  respectively.  Sales  to two  domestic
customers and one foreign  customer  accounted for 22%, 16% and 18% and 25%, 19%
and 12% of total sales in 2004 and 2003, respectively.

Export sales in 2005, 2004 and 2003 were  approximately  $4,946,000,  $9,800,000
and $7,100,000, respectively.


21

<PAGE>

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

Note 10. Stock Rights Plan

The Company has a  Shareholder  Rights Plan that  expires on December  31, 2009.
Under this plan,  common stock purchase rights were distributed as a dividend at
the rate of one right for each share of common stock outstanding as of or issued
subsequent  to April 14, 1989.  Each right  entitles  the holder  thereof to buy
one-half  share of common  stock of the Company at an exercise  price of $50 per
share  subject to  adjustment.  The rights are  exercisable  only if a person or
group acquires beneficial ownership of 15% or more of the Company's common stock
or commences a tender or exchange offer which, if  consummated,  would result in
the  offeror  individually  or,  together  with all  affiliates  and  associates
thereof,  being  the  beneficial  owner of 15% or more of the  Company's  common
stock.

If  a  15%  or  larger  shareholder   should  engage  in  certain   self-dealing
transactions  or a merger with the Company in which the Company is the surviving
corporation  and its shares of common  stock are not changed or  converted  into
equity  securities  of any other  person,  or if any  person  were to become the
beneficial owner of 15% or more of the Company's  common stock,  then each right
not owned by such  shareholder or related  parties of such  shareholder  (all of
which will be void) will  entitle its holder to  purchase,  at the right's  then
current  exercise price,  shares of the Company's common stock having a value of
twice the right's exercise price. In addition, if the Company is involved in any
other  merger  or  consolidation  with,  or sells  50% or more of its  assets or
earning  power to,  another  person,  each  right  will  entitle  its  holder to
purchase,  at the right's then current exercise price, shares of common stock of
such other person having a value of twice the right's exercise price.

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

Note 11. Employee Stock Ownership Plan

In 1989, the Company established an Employee Stock Ownership Plan (ESOP) with an
effective date of July 1, 1988, for eligible non-union employees.  The ESOP used
the  proceeds of a loan from the Company  made in June 1989 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  145,402
shares of the Company's  common stock to pay benefits to  participants.  At June
30,  2005  and  2004,  the ESOP  held a total of  230,120  and  240,749  shares,
respectively,  of the  Company's  common  stock,  of which  230,120  and 240,749
shares, respectively, were allocated to participants in the Plan.

The loan from the Company to the ESOP was  repayable in annual  installments  of
$1,039,605 including interest,  through June 30, 2004. Interest was payable at a
rate of 9% per annum. The Company  recognizes the principal payments of the ESOP
debt,  on a  straight-line  basis  over the term of the  note,  as  compensation
expense.

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 period ended June 30, 2004, 21,012
shares  were  allocated  to  participants.   In  2004,  the  Company's  required
contribution  of  $1,039,605  was  reduced  by  $31,518,  which  represents  the
dividends paid on unallocated ESOP shares.  The resulting  payment of $1,008,087
includes  $527,144  classified as compensation  expense.  In 2003, the Company's
required contribution of $1,039,605 was reduced by $14,708, which represents the
dividends paid on unallocated ESOP shares.  The resulting  payment of $1,024,897
includes $543,954  classified as compensation  expense.  All shares purchased by
the  ESOP  are  considered  to be  outstanding  for the  net  income  per  share
computations.

Effective  June 30,  2004 the loan from the Company to the ESOP was paid in full
and all shares have been allocated to  participants'  accounts.  See Note 17 for
further information on the ESOP.


22

<PAGE>

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

Note 12. Stock Based Compensation

During fiscal 2000,  the Board of Directors and  shareholders  approved the 2000
Stock Option Plan (the Plan). Under the Plan,  incentive and non-qualified stock
options  may be  granted  to  purchase  shares of common  stock of the  Company.
Options  authorized for issuance under the Plan totaled 150,000.  As of June 30,
2005, the Plan was authorized to grant options to purchase  84,400 shares of the
Company's common stock.

Options  under the Plan have been  granted with  exercise  prices at fair market
value at the grant date and vest over a period of two years. All options must be
exercised  within 10 years  from the date of grant and are  exercisable  anytime
after the two year vesting period.

Information concerning the plans incentive and non-qualified stock options is as
follows:

                                          Option                 Option Price
                                          Shares                   Per Share
      ------------------------------------------------------------------------
      June 30, 2002                       31,400                $13.25 - 19.85
      ------------------------------------------------------------------------
      Options granted                     15,100                      18.50
      Options canceled                        --                       --
      Options exercised                   (1,000)                     13.25
      ------------------------------------------------------------------------
      June 30, 2003                       45,500                 $13.25 - 19.85
      ------------------------------------------------------------------------
      Options granted                         --                       --
      Options canceled                        --                       --
      Options exercised                   (8,500)                $13.25 - 19.85
      ------------------------------------------------------------------------
      June 30, 2004                       37,000                 $13.25 - 19.85
      ------------------------------------------------------------------------
      Options granted                     15,500                     22.50
      Options canceled                    (1,500)                17.95 - 22.50
      Options exercised                   (2,400)                17.95 - 19.85
      ------------------------------------------------------------------------
      June 30, 2005                       48,600                 13.25 - 22.50
      ========================================================================

The table below summarizes information with respect to stock options outstanding
as of June 30, 2005:

                                    Remaining                  Exercise Price of
          Exercise     Options     Contractual     Options        Exercisable
           Prices    Outstanding      Life       Exercisable        Options
      --------------------------------------------------------
          $ 13.25        1,600         5            1,600           $ 13.25
          $ 17.95        7,500         6            7,500           $ 17.95
          $ 19.85       10,400         7           10,400           $ 19.85
          $ 18.50       14,000         8           14,000           $ 18.50
          $ 22.50       15,100         9               --                --
      --------------------------------------------------------
      Total             48,600                     33,500
      ========================================================

The weighted average fair value of options granted under the plans during fiscal
years 2005 and 2003 was $3.89, and $4.31,  respectively.  During fiscal 2004, no
stock  options  were  granted  under  the  plan.  The  assumptions  used for the
Black-Scholes model are as follows:

                                                 2005      2004     2003
                                                ------    ------   ------
      Risk-free interest rate ...............      4.0%       --      3.5%
      Expected term .........................   5 years       --   5 years
      Company's expected volatility .........     20.0%       --     20.0%
      Dividend yield ........................      3.0%       --      2.5%


23

<PAGE>

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

Note 13. Financial Instruments/Concentration of Credit Risk

The  carrying  amounts  of  financial  instruments,   including  cash  and  cash
equivalents, short term investments,  accounts receivable,  accounts payable and
accrued  expenses,  approximated fair value as of June 30, 2005 and 2004 because
of the relatively short maturities of these instruments.

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist  principally  of cash  and  cash  equivalents,  short-term
investments  and  accounts  receivable.  The  Company  maintains  cash  and cash
equivalents with various financial  institutions.  At times such investments may
be in excess of FDIC  insurance  limits.  As disclosed in Note 9, a  significant
portion of the Company's  business is the  production of military and industrial
electronic  equipment  for use by the U.S. and foreign  governments  and certain
industrial  customers.  The related accounts receivable balance of the Company's
total trade  accounts  receivable  balance  represented  at June 30, 2005 by two
customers was 57% and by three customers at June 30, 2004 was 29%.

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

Note 14. Related Parties

The Company  paid a law firm in which a director of the Company is a partner,  a
total of $72,979,  $11,524,  and $22,000, for legal services during fiscal years
ended June 30, 2005,  2004, and 2003,  respectively.  Included in the payment of
$72,979 for fiscal year ended June 30, 2005,  was $23,750 held in trust and paid
to other service  providers  relating to the ESOP transaction  described in Note
17.

Note 15. Commitments and Contingencies

The Company has entered into standby letters of credit agreements with financial
institutions  primarily  relating  to the  guarantee  of future  performance  on
certain  contracts.  Contingent  liabilities on outstanding  standby  letters of
credit  agreements  aggregated  $39,300 at June 30,  2005.  The Company does not
expect to fund any of the amounts under the standby letters of credit.

Note 16. Quarterly Financial Information (Unaudited)

                                     First      Second      Third       Fourth
                                    Quarter     Quarter     Quarter     Quarter
      2005                          -------     -------     -------     -------
       Net Sales................  $4,730,327  $4,896,741  $4,219,861  $4,981,771
          Gross profit .........     649,142     772,387     650,890   1,308,938
          Net income............      60,585     167,032     111,987     639,316

      Net income per share -
       Basic....................        0.06        0.17        0.11        0.63
       Diluted..................        0.06        0.16        0.11        0.63

      2004
      Net Sales ................  $5,095,317  $5,871,675  $6,116,221  $5,423,986
          Gross profit .........     900,172     727,876     717,562   1,369,255
          Net income............     280,965      61,430      54,008     564,423

      Net income per share -
       Basic....................        0.28        0.06        0.05        0.56
       Diluted..................        0.28        0.06        0.05        0.55


24

<PAGE>

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

Note 17. ESOP Stock Purchase

On July 15, 2005 pursuant to a Stock Purchase  Agreement  dated as of such date,
the Company sold  150,000  shares of its common  stock,  par value $0.33 1/3 per
share, to the the Espey Mfg. & Electronics  Corp.  Employee Stock Ownership Plan
Trust (the "ESOP").  The ESOP paid $28.90 per share,  for an aggregate  purchase
price of  $4,335,000.  The  determination  of the purchase  price was based on a
fairness  opinion  obtained by an independent  valuation firm. The ESOP borrowed
from the  Corporation  an amount equal to the purchase  price.  The loan will be
repaid in fifteen (15) equal  annual  installments  of principal  and the unpaid
balance will bear interest at a fixed rate of 6.25% per annum,  the "prime rate"
as quoted in The Wall Street Journal on the date of closing.

The Board of Directors of the Company  approved a purchase price per share equal
to a 5% discount on the average  trading price of the Company's  common stock on
the American Stock Exchange on the date before closing,  but in no event greater
than the fair  market  value as  determined  by an  independent  valuation  firm
retained by the ESOP. The average trading price of the Company's common stock on
the American Stock Exchange on July 14, 2005 was $30.72.

In making the sale, the Company relied on the exemption from registration  under
Section 4(2) of the Securities Act of 1933, as amended,  because the shares sold
were offered only to the ESOP.

After giving  effect to the  transaction  the ESOP owned  380,120  shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.



25

<PAGE>

Item 9.     Changes in and  disagreements  with  accountants  on accounting  and
            financial disclosure

            None

Item 9A.    Controls and Procedures

(a) The Company's  management,  with the  participation  of the Company's  chief
executive officer and chief financial officer,  carried out an evaluation of the
effectiveness  of our  disclosure  controls and  procedures  (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the  period  covered  by this  Annual  Report  on Form  10-K.  Based  on such
evaluation,  our chief  executive  officer  and  chief  financial  officer  have
concluded that our disclosure  controls and procedures  were effective as of the
end of the period covered by this report.

(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially  affected,  or are
reasonably  likely to materially  affect,  our internal  controls over financial
reporting.

Item 9B.    Other information

            None.

                                    PART III

The information  called for by "Item 10. Directors and Executive Officers of the
Registrant", "Item 11. Executive Compensation",  "Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters", "Item
13. Certain  Relationships  and Related  Transactions"  and "Item 14.  Principal
Accountant  Fees and  Services",  is hereby  incorporated  by  reference  to the
Company's Proxy Statement for its Annual Meeting of Shareholders,  (scheduled to
be held on November 18,  2005) to be filed with the SEC  pursuant to  Regulation
14A under the Securities Exchange Act of 1934, as amended.



26

<PAGE>

PART IV

Item 15.    Exhibits and Financial Statement Schedules

            (a) 1. Financial Statements

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

                        Report of Independent  Registered Public Accounting Firm
                        Auditors 2005 and 2004

                        Report of Independent  Registered Public Accounting Firm
                        Auditors 2003

                        Balance Sheets at June 30, 2005 and 2004

                        Statements  of Income for the years ended June 30, 2005,
                        2004 and 2003

                        Statements  of Changes in  Stockholders'  Equity for the
                        years ended June 30, 2005, 2004 and 2003

                        Statements  of Cash  Flows for the years  ended June 30,
                        2005, 2004 and 2003

                        Notes to Financial Statements

                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

                   3.1   Certificate of incorporation and all amendments thereto
                         (incorporated  by  reference  to Exhibit 3.1 to Espey's
                         Report on Form 10-K for the year  ended  June 30,  2004
                         and Report on Form 10-Q for the quarter ended  December
                         31, 2004)

                   3.2   By-laws  (incorporated  by  reference to Exhibit 3.2 to
                         Espey's Report on Form 10-Q for the quarter ended March
                         31, 2004)

                   4.1   Amended and Restated Rights Agreement,  dated March 31,
                         1989,  as amended  February  12, 1999 and  December 31,
                         1999,  between  Espey  Mfg.  &  Electronics  Corp.  and
                         Registrar  and  Transfer   Company   (incorporated   by
                         reference to Espey's Form 8-K dated December 20, 1999)

                   10.1  2000 Stock  Option Plan  (incorporated  by reference to
                         Espey's  Definitive  Proxy  Statement dated December 6,
                         1999 for the January 4, 2000 annual meeting)

                   11.1  Statement  re:  Computation  of Per  Share  Net  income
                         (filed herewith)

                   14.1  Code of ethics  (incorporated  by  reference to Espey's
                         website www.espey.com)
                                 -------------

                   31.1  Certification  of the Chief Executive  Officer pursuant
                         to Rules  13a-14(a) and 15d-14(a)  under the Securities
                         Exchange  Act of 1934,  as adopted  pursuant to Section
                         302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

                   31.2  Certification  of  the  Principal   Financial   Officer
                         pursuant to Rules  13a-14(a)  and  15d-14(a)  under the
                         Securities Exchange Act of 1934, as adopted pursuant to
                         Section  302 of the  Sarbanes-Oxley  Act of 2002 (filed
                         herewith)

                   32.1  Certification  of the Chief Executive  Officer pursuant
                         to 18 U.S.C.  Section  1350,  as  adopted  pursuant  to
                         Section  906 of the  Sarbanes-Oxley  Act of 2002 (filed
                         herewith)

                   32.2  Certification  of  the  Principal   Financial   Officer
                         pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                         to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
                         herewith)


27

<PAGE>

                               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 Executive Officer



/s/Howard Pinsley                                President
-------------------------                        (Chief Executive Officer)
Howard Pinsley                                   September 27, 2005

/s/David A. O'Neil                               Treasurer
-------------------------                        (Principal Financial Officer)
David A. O'Neil                                  September 27, 2005

/s/Katrina Sparano                               Assistant Treasurer
-------------------------                        (Principal Accounting Officer)
Katrina Sparano                                  September 27, 2005

/s/Barry Pinsley                                 Director
-------------------------                        September 27, 2005
Barry Pinsley

/s/Seymour Saslow                                Director
-------------------------                        September 27, 2005
Seymour Saslow

/s/Michael W. Wool                               Director
-------------------------                        September 27, 2005
Michael W. Wool

/s/Paul J. Corr                                  Director
-------------------------                        September 27, 2005
Paul J. Corr

/s/Alvin O. Sabo                                 Director
-------------------------                        September 27, 2005
Alvin O. Sabo

/s/Carl Helmetag                                 Director
-------------------------                        September 27, 2005
Carl Helmetag


28