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1
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, 2003

[ ] 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]

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 $20,505,314 as of August 29, 2003 based upon the closing sale
price of $20.30 on the American Stock Exchange on August 29, 2003.

The number of shares of common stock outstanding as of August 29, 2003 was
1,010,114.

1




PART I

Item 1. Business.

General

Espey Mfg. & Electronics Corp. (the "Company") 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, (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 year ended June 30, 2003 (referred to herein as "2003"), the
Company's total sales were $19,773,411. Sales to two domestic customers and one
foreign customer accounted for 25%, 19% and 12% and 26%, 21%, and 14%, of total
sales in 2003 and 2002, respectively. Sales to two domestic customers accounted
for 40% and 20% respectively, of total sales in 2001.

Export sales in 2003, 2002 and 2001 were approximately $ 7,100,000, $6,600,000,
and $8,700,000, respectively. The Company has a foreign sales corporation.

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.

Sales Backlog

At August 29, 2003, the Company's backlog was approximately $23.1 million. The
total backlog at June 30, 2003 was approximately $21.4 million as compared to
approximately $24.6 million at June 30, 2002. The Company's backlog is discussed
in greater detail in Management's Discussion and Analysis of Financial Condition
and Results of Operations, contained in Item 7 below.

It is presently anticipated that a minimum of $19 million of orders comprising
the June 30, 2003 backlog will be filled during the fiscal year ending June 30,
2004. The minimum of $19 million does not include any shipments, which may be
made against orders subsequently received during the fiscal year ending June 30,
2004. The estimate of the June 30, 2003 backlog to be shipped in fiscal 2004 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, United States and foreign governments and major foreign
electronic equipment companies. In certain countries the Company has external
sales representatives to help solicit and coordinate foreign contracts. The
Company is also on the eligible list of contractors of many agencies of the
Department of Defense and generally is automatically solicited by such agencies
for procurement needs falling within the major classes of products produced by
the Company. In addition, the Company directly solicits bids from both the
Department of Defense and other United States Government agencies for prime
contracts.

2




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

Research and Development

The Company's expenditures for research and development were approximately
$100,000, $335,000, and $249,000 in 2003, 2002 and 2001, respectively. Some of
the Company's engineers and technicians spend varying degrees of time on either
development of new products or improvement of existing products.

Employees

The number of persons employed by the Company as of August 29, 2003 was 192.
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% pay increase in fiscal
2004 through 2007 and no increase for 2008. Relations with the Union are
considered good. Union membership at August 29, 2003 was 79 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 2003, and
the Company believes will not in fiscal year 2004 have a material effect upon
the capital expenditures, earnings, or competitive position of the Company.

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

PART II

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

3




Price Range of Common Stock

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

2003 High Low
First Quarter 20.50 18.48
Second Quarter 19.75 18.65
Third Quarter 20.75 17.55
Fourth Quarter 18.49 17.70

2002 High Low
First Quarter 18.98 17.40
Second Quarter 20.99 18.45
Third Quarter 20.49 19.50
Fourth Quarter 20.14 19.90


Holders

The approximate number of holders of record of the common stock was 146 on
August 29, 2003 according to records of the Company's transfer agent. Included
in this number are shares held in "nominee" or "street" name and, therefore, the
number of beneficial owners of the common stock is believed to be substantially
in excess of the foregoing number.

Dividends

The Company paid a cash dividend on the common stock of $.35, $.30, and $.20 per
share for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. The
Board of Directors has authorized the payment of a fiscal 2004 first quarter
dividend of $.125 payable September 30, 2003. The board also declared a special
dividend of .50 per share payable on September 30, 2003.

4




Item 6. Selected Financial Data.




ESPEY MFG. & ELECTRONICS CORP.
Five Years Ended June 30, 2002
----------------------------------------------------------------------
Selected Income Statement Data 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ -----------

Net Sales........................ $ 19,773,411 $ 18,405,213 $ 17,251,640 $ 14,719,818 $ 13,629,692
Operating Income................. 1,146,386 549,139 1,169,271 733,617 690,839
Other income .................... 139,880 179,615 305,833 459,326 441,762
------------ ------------ ------------ ------------ ------------
Net income............. 964,700 545,754 1,033,069 782,943 730,601

Income per common share:
basic and diluted.............. $ .94 $ .53 $ 1.00 $ .75 $ .66
============ ============ ============ ============ ============

Selected Balance Sheet Data

Current Assets................... 26,528,434 25,008,710 23,736,991 22,540,316 22,091,114
Current Liabilities ............. 1,841,989 1,278,520 1,063,497 1,329,171 1,274,126
Working Capital.................. 24,686,445 23,730,190 22,673,494 21,211,145 20,816,988
Total Assets .................... 29,795,497 28,332,962 27,228,881 26,118,037 25,394,712

Stockholders' equity ............ 27,953,508 27,054,442 26,165,384 24,788,866 24,120,586

Cash dividends declared and
paid per common share.......... $ .35 $ .30 $ .20 $ .20 $ .20
============ ============ ============ ============ ============



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

Results of Operations

Net Sales for fiscal years ended June 30, 2003, 2002 and 2001, were $19,773,411,
$18,405,213 and $17,251,640, respectively. The 7.4% increase in net sales in
2003 as compared to 2002, is the result of increased shipments of small
transformers, certain power supplies, and shipments made on build to print
orders. The Company continues to realize the benefits of increased business with
existing customers as well as establishing new customer relationships. These
relationships have provided for the continued increase in sales that has
occurred over the last five years. The sales backlog at June 30, 2003 was
approximately $21.4 million. The backlog includes significant orders for land
and shipboard high voltage radar power supply/transmitters, industrial power
supplies, and contracts to manufacture certain customer products in accordance
with pre-engineered requirements. The increase in net sales in 2002 as compared
to 2001 was the result of an increased sales order backlog. Significant
shipments in 2002 included high voltage radar power supply/transmitter
components and industrial power supplies.

Net income for fiscal 2003, was $964,700 or $.94 per share compared to $545,754
or $.53 per share for fiscal 2002. The increase in net income per share was due
to decreased expenditures made on engineering development contracts, higher
sales and favorable product mix. The decrease in engineering development
expenditures occurred naturally as the related programs moved from the
engineering design phase into the production phase of the associated contracts.
The increase in earnings was partially offset by an increase in selling, general
and administrative expenses. Net income for fiscal 2002, was $545,754 or $.53
per share compared to net income of $1,033,069 or $1.00 per share for fiscal
2001. The net income decrease in 2002 was due to increased expenditures made on
engineering development contracts. These contracts are for the development of
new technologies which, if successful, should significantly enhance the
Company's power supply product offerings and operating income in the future.

For fiscal years ended June 30, 2003, 2002 and 2001 gross profits were
$3,097,861, $2,300,994 and $3,061,730, respectively. The increase in gross
profit between 2003 and 2002 was predominately due to an increase in net sales
and favorable product mix. The decrease in gross profit between 2002 and 2001
was due to increased expenditures made on engineering development contracts as
discussed above.

Selling, general and administrative expenses were $ 1,951,475 for the fiscal
year ended June 30, 2003, an increase of $199,620, or 11.4% as compared to the
prior year.

5



This increase is mainly attributable to an increase in insurance premiums and
increased selling expenses. Selling, general and administrative expenses were
$1,751,855 for the year ended June 30, 2002, a decrease of $140,604, or 7.4% as
compared to the prior year. The decrease is primarily related to an overall
decrease in travel, freight and labor costs caused by a decrease of
approximately five full-time equivalent employees.

Total other income in fiscal 2003, as compared to 2002 declined as expected, as
the Company sold its higher interest bearing preferred securities, and interest
rates continued to decline. Total other income in fiscal 2002, as compared to
2001 declined as expected as interest rates were also lower in fiscal 2002.

Business Outlook

The Company continues to increase net sales while also maintaining a sizable
sales backlog. The sales backlog of $23.1 million as of August 29, 2003 gives
the Company a solid base to grow from. In addition to the backlog, the Company
currently has outstanding quotations in excess of $33 million for both repeat
and new programs. The Company has received major contracts for pre-engineered
hardware. The Company also expects to receive substantial orders for spare parts
on the various types of transmitters which are already in the field, a number of
contracts for further development and manufacture of numerous power supplies,
transformers and additional contracts for pre-engineered hardware.

The outstanding quotations encompass various new and previously manufactured
power supplies, transformers, and subassemblies. There can be no assurance that
the Company will acquire any or all of the proposed orders described above since
such a forward-looking statement is subject to future events, market conditions,
political stability of foreign governments, and allocations of the United States
defense budget.

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 uncommitted 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, 2003, 2002 and 2001 was
$24,686,445, $23,730,190 and $22,673,494, respectively. During 2003, 2002 and
2001 the Company repurchased 15,918, 0, and 4,170 shares, respectively, of its
common stock from the Company's Employee Retirement Plan and Trust ("ESOP") and
in other public transactions, for a total purchase price of $311,468, $0 and
$70,890, respectively. Under existing authorizations from the Company's Board of
Directors, as of August 29, 2003, management is authorized to purchase an
additional $814,895 of Company stock.

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

2003 2002
----------- -----------

Net cash provided by operating activities............ $ 1,936,468 $ 3,656,911
Net cash provided by investing activities............ 523,370 576,916
Net cash used in financing activities ............... 656,317 241,601


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 provided by investing
activities decreased in fiscal 2003 due to slightly higher additions of plant
equipment. The increase in cash used in financing activities is due primarily to
the increase in the amount of treasury stock purchased during 2003 as compared
to 2002.

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.

6




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 2003 and 2002, the Company expended approximately $438,000
and $394,000, respectively, for plant improvements and new equipment. The
Company has budgeted approximately $350,000 for new equipment and plant
improvements in fiscal 2004. Management presently anticipates that the funds
required will be available from current operations.

Critical Accounting Policies and Estimates

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

A significant portion of our business is comprised of development and production
contracts which are accounted for under the provisions of the American Institute
of Certified Public Accountants (AICPA) Statement of Position No. 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Generally revenue 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.

Contract accounting requires judgment relative to estimating costs and making
assumptions related to technical issues and delivery schedule. Contract costs
include material, subcontract costs, labor and an allocation of indirect 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 in the
estimation of cost at completion. When a change in contract 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 and was effective as of July 1, 1988. The
ESOP used the proceeds of a loan from the Company to purchase 316,224 shares of
the Company's common stock for approximately $8,400,000 and the Company
contributed approximately $400,000 to the ESOP, which was used by the ESOP to
purchase an additional 15,000 shares of the Company's common stock.

Each year the Company makes contributions to the ESOP, which are used to make
loan interest and principal payments. With each loan and interest payment, a
portion of the common stock is allocated to participating employees. As of June
30, 2003, there were 230,562 shares allocated to participants. Dividends
attributable to allocated shares were likewise allocated to the participants'
accounts, whereas the dividends on unallocated shares were used in part of the
loan repayment, thus reducing the Company's required contribution.

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

7





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

It should be noted that in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal,"
"expect," and similar expressions may identify forward-looking statements. These
forward-looking statements represent the Company's current expectations or
beliefs concerning future events. The matters covered by these statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking statements,
including the Company's dependence on timely development, introduction and
customer acceptance of new products, the impact of competition and price
erosion, as well as supply and manufacturing constraints and other risks and
uncertainties. The foregoing list should not be construed as exhaustive, and the
Company disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.




Item 8. Financial Statements

Report of Independent Auditors

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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) present fairly, in all material respects, the
financial position of Espey Mfg. & Electronics Corp. and Subsidiary at June 30,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period 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 audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


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

8








Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 2003 and 2002
- -------------------------------------------------------------------------------------------------------------------
2003 2002
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents......................................... $ 10,996,483 $ 9,192,962
Investment securities............................................. - 368,000
------------- -------------
Cash and cash equivalents
and investment securities....................... 10,996,483 9,560,962
------------- -------------
Trade accounts receivable, net................................... 3,470,895 2,409,706
Other receivables .......................................... 11,638 13,413
------------- -------------
Total receivables............................... 3,482,533 2,423,119
------------- -------------

Inventories:
Raw materials and supplies............................... 1,570,028 1,424,278
Work in Process.......................................... 3,020,081 4,298,988
Costs related to contracts in process,
net of progress payments of $3,314,816
in 2003 and $2,194,269 in 2002........................... 7,246,158 7,017,529
------------- -------------
Total inventories............................... 11,836,267 12,740,795
------------- -------------
Deferred income taxes............................................. 88,643 85,773
Prepaid expenses and other current assets......................... 124,508 198,061
------------- -------------
Total current assets..................................... 26,528,434 25,008,710
------------- -------------
Property plant and equipment, at cost...................................... 11,608,679 11,175,248
Less accumulated depreciation.............................................. (8,341,616) (7,850,996)
------------- -------------
Net property, plant and equipment................................. 3,267,063 3,324,252
------------- -------------
Total Assets............................................. $ 29,795,497 $ 28,332,962
============= =============


9






LIABILITIES AND STOCKHOLDERS'EQUITY


Current Liabilities:
Accounts payable ................................................ $ 647,597 $ 497,454
Accrued expenses:
Salaries, wages and commissions.......................... 88,287 86,881
Vacation ................................................ 465,815 398,898
Employee insurance costs................................. 7,038 6,887
Other.................................................... 42,361 41,410
Payroll and other taxes withheld and accrued...................... 38,425 37,943
Income taxes payable.............................................. 350,232 88,966
Deferred income taxes............................................. 202,234 120,081
------------- ------------
Total current liabilities....................... 1,841,989 1,278,520
------------- ------------
Stockholders' equity
Common stock, par value $.33-1/3 per share Authorized 10,000,000
shares; Issued 1,514,937 shares in 2003 and 2002, outstanding
1,019,643
and 1,034,561 shares in 2003 and 2002........................ 504,979 504,979
Capital in excess of par value.................................... 10,459,278 10,465,878
Accumulated other comprehensive loss.............................. - (29,079)
Retained Earnings ...................................... 25,458,400 24,848,858
------------- ------------
36,422,657 35,790,636
Less common stock subscribed...................................... (558,662) (1,117,325)
Cost of 495,294 and 480,376 shares of
common stock in treasury in 2003
and 2002, respectively....................................... (7,910,487) (7,618,869)
------------- ------------
Total stockholders' equity...................... 27,953,508 27,054,442
------------- ------------
Total liabilities and
stockholders' equity............................ $ 29,795,497 $ 28,332,962
============= ============


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

10







Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Income
Years Ended June 30, 2003, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ -------------

Net sales................................................. $19,773,411 $18,405,213 $17,251,640
Cost of sales............................................ 16,675,550 16,104,219 14,189,910
----------- ----------- -----------
Gross profit............................ 3,097,861 2,300,994 3,061,730

Selling, general and
administrative expenses.............................. 1,951,475 1,751,855 1,892,459
----------- ----------- -----------
Operating income........................ 1,146,386 549,139 1,169,271

Other income
Interest and dividend income............ 140,000 199,050 271,935
Other income/loss....................... (120) (19,435) 33,898
----------- ----------- -----------

Total other income...................... 139,880 179,615 305,833
----------- ----------- -----------
Income before income taxes.............. 1,286,266 728,754 1,475,104

Provision for income taxes ............................... 321,566 183,000 442,035
----------- ----------- -----------
Net income.............................. $ 964,700 $ 545,754 $ 1,033,069
============ ============ ===========
Income per common share;
Net income per common share -
basic and diluted ...................... $ .94 $ .53 $ 1.00
============ ============ ===========
Weighted average outstanding shares:
Basic................................... 1,025,200 1,030,556 1,031,403
============ ============ ===========
Diluted................................. 1,027,686 1,034,904 1,033,989
============ ============ ===========



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

11







Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 2003, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Capital in Comprehen-
Common Excess of sive income Retained
Stock par Value (Loss) Earnings
----------- ----------- ----------- -----------

Balance as of June 30, 2000 504,979 $10,496,287 $(107,221) $23,775,433
----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2001 1,033,069
Other comprehensive income,
net of tax benefit of $30,660 56,941

Comprehensive income

Dividends paid on common stock
$.20 per share (206,309)

Tax effect of dividends on
unallocated ESOP shares 5,043

Purchase of treasury stock

Reduction of common stock subscribed
----------- ----------- ----------- -----------
Balance as of June 30, 2001 504,979 10,496,287 (50,281) 24,607,239
----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2002 545,754
Other comprehensive income,
net of tax benefit of $9,940 21,202

Comprehensive income

Stock option exercises (30,409)

Dividends paid on common stock
$.30 per share (309,176)

Tax effect of dividends on
unallocated ESOP shares 5,041

Purchase of treasury stock

Reduction of common stock subscribed
----------- ----------- ----------- -----------
Balance as of June 30, 2002 504,979 10,465,878 (29,079) 24,848,858
----------- ----------- ----------- -----------
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

Stock option exercises (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

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



12







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


Balance as of June 30, 2000 (2,234,650) 481,306 $(7,645,962) $24,788,866
----------- ----------- ------------ -----------

Comprehensive income:
Net income, 2001 1,033,069
Other comprehensive loss,
net of tax benefit of $30,660 56,941
-----------
Comprehensive income 1,090,009

Dividends paid on common stock
$.20 per share (206,309)

Tax effect of dividends on
unallocated ESOP shares 5,043

Purchase of treasury stock 4,170 (70,890) (70,890)

Reduction of common stock subscribed 558,663 558,663
----------- ----------- ------------ -----------
Balance as of June 30, 2001 (1,675,987) 485,476 (7,716,853) 26,165,384
----------- ----------- ------------ -----------
Comprehensive income:
Net income, 2002 545,754
Other comprehensive income,
net of tax benefit of $9,940 21,202
-----------
Comprehensive income 566,956

Stock option exercises (5,100) 97,984 67,575

Dividends paid on common stock
$.30 per share (309,176)

Tax effect of dividends on
unallocated ESOP shares 5,041

Reduction of common stock subscribed 558,662 558,662

----------- ----------- ----------- -----------
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 option exercises (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
=========== =========== ============ ===========




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

13





Espey Mfg. & Electronics Corp. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended June 30, 2003, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------- ----------- -----------
Cash flows from operating activities:

Net income........................................... $ 964,700 $ 545,754 $ 1,033,069

Adjustments to reconcile net income to net cash provided by
(used in) operating activities:

Tax effect of dividends on
unallocated ESOP shares..................... 2,941 5,043 5,043

Depreciation ................................. 495,670 513,470 604,988

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

Gain (loss) on disposal of assets.............. -- 35,782 (4,272)

Deferred income tax expense.................... 57,359 112,097 188,709

Change in assets and liabilities

(Increase) decrease in trade account
receivables, and other receivables, net.. (1,059,414) 145,370 1,582,974

Decrease (increase)in inventories, net.... 904,528 2,191,882 (106,225)

Decrease (increase) in prepaid
expenses and other current assets....... 73,553 (46,181) 93,621

Increase (decrease) in
accounts payable........................ 150,143 162,682 (206,864)

Increase (decrease) in accrued
salaries, wages and commissions......... 1,406 (37,200) (120,784)

Increase (decrease) in accrued
employee insurance costs................ 150 (54,911) (3,396)

Increase in other accrued expenses........ 951 3,699 16,602

Increase in vacation accrual.............. 66,916 53,352 65,053

Increase (decrease) in payroll and
other taxes withheld and accrued........ 482 (1,454) (12,402)

Increase (decrease) in income
taxes payable........................... 261,266 27,526 (62,635)
------------- ----------- -----------
Net cash provided by
operating activities............ $ 1,936,468 $ 3,656,911 $ 3,073,481
------------ ----------- -----------


14









Cash flows from investing activities


Proceeds from maturity of investment
securities......................................... 403,188 399,869 --

Additions to property, plant and equipment........... (438,481) (393,865) (536,748)

Proceeds on sale of assets........................... -- 12,250 15,350

Reduction of common stock subscribed................. 558,663 558,662 558,662
------------- ----------- -----------
Net cash provided by
investing activities............. 523,370 576,916 37,264
------------- ----------- -----------
Cash flows from financing activities

Dividends on common stock............................ (358,099) (309,176) (206,309)

Purchase of treasury stock.......................... (311,468) -- (70,891)

Proceeds from exercise of stock options.............. 13,250 67,575 --
------------- ----------- -----------
Net cash used in
financing activities............. (656,317) (241,601) (277,200)
------------- ----------- -----------
Increase in cash and cash equivalents..................... 1,803,521 3,992,226 2,833,545

Cash and cash equivalents, beginning of the year.......... 9,192,962 5,200,736 2,367,191
------------- ----------- -----------
Cash and cash equivalents, end of the year................ $ 10,996,483 $ 9,192,962 $ 5,200,736
============= =========== ===========
Supplemental disclosures of cash flow information:
Income taxes paid.................................... $ -- $ 62,238 $ 295,000
============= ============ ===========



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

15




Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

1. Nature of operations

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

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 evident. The costs attributed to units
delivered under contracts are based on the estimated average cost of all
units expected to be produced. Certain contracts are expected to extend
beyond twelve months.

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

A significant portion of our business is comprised of development and
production contracts which are accounted for under the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." Generally revenue 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.

Contract accounting requires judgment relative to estimating costs and
making assumptions related to technical issues and delivery schedule.
Contract costs include material, subcontract costs, labor and an allocation
of indirect 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 in the estimation of cost at completion.
When a change in contract 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.

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. In addition, SFAS No. 109 requires
that the tax benefit of tax-deductible dividends

16



Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

2. Summary of Significant Accounting Policies, Continued

on unallocated ESOP shares be recorded as a direct addition to retained
earnings rather than as a reduction of income tax expense.

Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of
deposit, and money market accounts.

Investment Securities
The Company accounts for its investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."

Investment securities at June 30, 2002 consist of corporate equity
securities. The Company classifies corporate equity securities as
available-for-sale.

Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of stockholders' equity until realized. Realized
gains and losses for securities classified as available-for-sale are
included in income and are determined using the specific identification
method. Interest income is recognized when earned.

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.

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

Comprehensive Income
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 effect 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.

17





Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

2. Summary of Significant Accounting Policies, Continued

Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Standard addresses the recognition, measurement and reporting costs that
are associated with exit or disposal activities. SFAS No.146 is effective
for exit or disposal activities that are initiated after December 31, 2002.
The adoption of SFAS No. 146 did not have a material effect on the
financial statements

In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
This interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
adoption did not have a material impact on the financial statements.

In April 2003, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
149 is generally effective for derivative instruments, including derivative
instruments embedded in certain contracts, entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003.
The Company does not expect the adoption of SFAS No. 149 to have a material
impact on its financial statements.

In May 2003, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 will not have a material impact on the financial statements.

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.

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.

18





Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

3. Investment Securities

Investment securities at June 30, 2002 consist of corporate equity
securities, which are classified as available-for-sale securities, and
recorded at market value. The cost, gross unrealized holding losses and
fair value of available-for-sale securities at June 30, 2002 are as
follows:



Gross Unrealized
Year Type Cost Holding Loss Fair Value
----- ----- ----- --------------- ----------


2002 Corporate Equities $ 419,005 $ 51,005 $ 368,000




The change in unrealized holding loss on available for sale investment
securities net of tax was $ 20,460 in 2002. During 2003 the Company sold
its only corporate equity security for $403,188. During 2002 the Company
sold an equity security with a cost basis of $400,000 for $399,128 in net
proceeds.

4. Contracts in Process

Contracts in process at June 30, 2003 and 2002 are as follows:



2003 2002
------------- ------------


Gross contract value $ 21,370,490 $ 24,644,653

Costs related to contracts in process,
net of progress payments of $3,314,816
in 2003 and $2,194,269 in 2002 $ 7,246,158 $ 7,017,529




Included in costs relating to contracts in process at June 30, 2003 and
2002 are costs of $1,460,338 and $1,999,616, respectively, relative to
contracts that may not be completed within the ensuing year. Under the
unit-of-delivery method, the related sale and cost of sales will not be
reflected in the statement of income until the units under contract are
shipped.

5. Property, Plant and Equipment

A summary of the original cost of property, plant and equipment at June 30,
2003 and 2002 is as follows:



2003 2002
------------- ------------


Land $ 45,000 $ 45,000
Building and improvements 3,981,689 3,813,343
Machinery and equipment 7,273,596 7,011,192
Furniture, fixtures and office equipment 308,394 305,713
------------- ------------
$ 11,608,679 $ 11,175,248
============= ============



Estimated useful lives of depreciable assets are as follows:

Buildings and improvements 10 - 25 years
Machinery and equipment 3 - 10 years
Furniture, fixtures and office equipment 10 years

19



Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

6. Line of credit

At June 30, 2003, 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.

7. Research and Development Costs

Research and development costs charged to cost of sales during the years
ended June 30, 2003, 2002 and 2001 were approximately $100,000, $335,000,
and $249,000, respectively.

8. Pension Expense

Under terms of a negotiated union contract, the Company is obligated to
make contributions to a union-sponsored defined benefit pension plan
covering eligible employees. Such contributions are based upon hours worked
at a specified rate and amounted to $93,066 in 2003, $83,778 in 2002, and
$92,662 in 2001.

9. Provision for Income Taxes

A summary of the components of the provision for income taxes for the years
ended June 30, 2003, 2002 and 2001 is as follows:




2003 2002 2001
--------- --------- ---------

Current tax expense (benefit)-federal $ 252,961 $ 49,653 $ 257,400
Current tax expense - state 11,246 1,383 17,000
Deferred tax expense (benefit) 57,359 131,964 167,635
--------- --------- ---------
$ 321,566 $ 183,000 $ 442,035
========= ========= =========


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

The combined U.S. federal and state effective income tax rates of 25%, 25%,
and 30.0%, for 2003, 2002 and 2001 respectively, differed from the
statutory U.S. federal income tax rate for the following reasons:




2003 2002 2001
------ ----- -----

U.S. federal statutory income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in rate
resulting from:
Dividends received deduction (1.0) (1.0) (0.8)
State franchise tax, net of federal
income tax benefit 1.0 1.1 1.4
Foreign sales corporation benefit (5.0) (7.3) (4.7)
Other (4.0) (1.7) .1
------- ----- -----
Effective tax rate 25.0% 25.1% 30.0%
======= ===== =====



For the years ended June 30, 2003 and 2002 deferred income tax expense of
$59,182 and $131,964, respectively, result from the changes in temporary
differences for each year. The tax effects of temporary differences that
give rise to deferred tax assets and deferred tax liabilities as of June
30, 2003 and 2002 are presented as follows:

20





Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

9. Provision for Income Taxes, Continued

2003 2002
-------- --------

Deferred tax assets:
Unrealized loss on available-for-sale
investment securities..................................... $ -- $ 20,102
Common stock subscribed - due to difference
in interest recognition................................... 142,159 255,983
Non-deductible accruals........................................ 105,443 92,354
Other.......................................................... 16,875 18,353
-------- --------
Total deferred tax assets ....................... 264,477 386,792
-------- --------
Deferred tax liabilities:
Property, plant and equipment - principally due
to differences in depreciation methods.................... 344,393 376,064
Inventory - effect on uniform capitalization................... 33,675 45,036
-------- --------
Total deferred tax liabilities................... 378,068 421,100
-------- --------
Net deferred tax (liability)/asset................................. $(113,591) $ (34,308)
======== ==========



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

10. Significant Customers

A significant portion of the Company's business is the production of
military and industrial electronic equipment for use by the U.S. and
foreign governments and certain industrial customers. Sales to two domestic
customers and one foreign customer accounted for 25%, 19%, and 12%,
respectively, of total sales in 2003. Sales to two domestic customers and
one foreign customer accounted for 26%, 21%, and 14%, respectively, of
total sales in 2002. Sales to two domestic customers accounted for 40% and
20% respectively, of total sales in 2001.

Export sales aggregated approximately $ 7,100,000, $ 6,600,000, and
$8,700,000, for the years ended June 30, 2003, 2002 and 2001, respectively.

11. Stock Rights Plan

The Company has a Shareholder Rights Plan which 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 offer
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

Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

11. Stock Rights Plan, Continued

beneficial owner of 15% or more of the Company's common stock, than each
right not owned by such shareholder or related parties of such shareholder
(all of which will be void) will entitle its holder to purchase, at the
right's then current exercise price, shares of the Company's common stock
having a value of twice the right's exercise price. In addition, if the
Company is involved in any other merger or consolidation with, or sells 50%
or more of its assets or earning power to, another person, each right will
entitle its holder to purchase, at the right's then current exercise price,
shares of common stock of such other person having a value of twice the
right's exercise price.

21




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.

12. Employee Stock Ownership Plan

In 1989, the Company established an Employee Stock Ownership Plan (ESOP)
for eligible non-union employees. The ESOP used the proceeds of a loan from
the Company to purchase 316,224 shares of the Company's common stock for
approximately $8.4 million and the Company contributed approximately
$400,000 in 1989 to the ESOP which was used by the ESOP to purchase an
additional 15,000 shares of the Company's common stock. Since inception of
the Plan, the ESOP has sold or distributed 127,125 shares of the Company's
common stock to pay benefits to participants. At June 30, 2003 and 2002,
the ESOP held a total of 251,574 and 262,912 shares, respectively, of the
Company's common stock, of which 230,562 and 220,888 shares, respectively,
were allocated to participants in the Plan.

The loan from the Company to the ESOP is repayable in annual installments
of $1,039,605 including interest, through June 30, 2004. Interest is
payable at a rate of 9% per annum. The Company's receivable from the ESOP
is recorded as common stock subscribed in the accompanying balance sheets.
The Company Espey 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 periods ended June 30,
2003 and 2002, 21,012 shares were allocated to participants. 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.
In 2002, the Company's required contribution of $1,039,605 was reduced by
$18,911, which represents the dividends paid on the unallocated ESOP
shares. The resulting payment of $1,020,694 includes $539,752 classified as
compensation expense. In 2001, the Company's required contribution of
$1,039,605 was reduced by $16,809, which represents the dividends paid on
unallocated ESOP shares. The resulting payment of $1,022,796 includes
$541,853 classified as compensation expense. All shares purchased by the
ESOP are considered to be outstanding for the income per share
computations.

13. Stock Options

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 will be granted to purchase shares of common
stock of the Company. As of June 30, 2002, the Plan was authorized to issue
options to purchase 113,500 shares of the Company's common stock with a
maximum of 15,000 shares in any one year.


Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

13. Stock Options, Continued

Options granted 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.

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

Option Option Price
Shares Per Share
------------------------------------------------------------------
June 30, 1999 0 $0.00
------------------------------------------------------------------
Options granted 11,500 13.25
Options canceled (800) 13.25
Options exercised (6,100) 13.25
------------------------------------------------------------------
June 30, 2000 4,600 $13.25
------------------------------------------------------------------

22



Options granted 13,100 17.95
Options canceled (300) 17.95
Options exercised -- --
------------------------------------------------------------------
June 30, 2001 17,400 $13.25 - 17.95
------------------------------------------------------------------
Options granted 13,000 19.85
Options canceled -- --
Options exercised -- --
------------------------------------------------------------------
June 30, 2002 30,400 $13.25 - 19.85
------------------------------------------------------------------
Options granted 14,800 18.50
Options canceled -- --
Options exercised -- --
------------------------------------------------------------------
June 30, 2003 45,200 $13.25 - 19.85
==================================================================


The table below summarizes information with respect to stock options
outstanding as of June 30, 2003:




Remaining Exercise Price of
Exercise Options Contractual Options Exercisable
Prices Outstanding Life Exercisable Options
---------------------------------------------------------------------------------------------------

$ 13.25 4,600 6 4,600 $ 13.25
$ 17.95 12,800 7 12,800 $ 17.95
$ 19.85 13,000 8 0 --
$ 18.50 14,800 9 0 --
----------------------------------------------------------------------------------
Total 45,200 17,400
==================================================================================



The Company has elected to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for the Plan.
Under APB 25, no compensation expense has been recognized. Had compensation
cost and fair value been determined pursuant to Statement of Financial
Accounting Standards No. 123 (FAS 123) "Accounting for Stock-Based
Compensation," net income would have decreased from $ 964,700 to $927,788,
$545,754 to $509,674, and $1,033,069 to $1,018,526 for the years ended June
30, 2003, 2002 and 2001, respectively. Proforma basic and diluted earnings
per share would have been $.91, $.49, and $.99 respectively. The impact of
FAS 123 on pro forma earnings per share may not be representative of the
effect on income in future years

Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------

13. Stock Options, Continued

because options vest over several years and additional option grants may be
made each year.

The weighted average fair value of options granted under the plans during
fiscal years 2003, 2002, and 2001 was $4.31, $3.93, and $4.67,
respectively. The assumptions used for the Black-Scholes model are as
follows:



2003 2002 2001
------ ------ ------

Risk-free interest rate................................. 3.5% 4.5% 5.0%
Expected term........................................... 5 years 5 years 5 years
Company's expected volatility........................... 20.0% 20.0% 25.0%
Dividend yield.......................................... 2.5% 2.5% 2.5%


14. Financial Instruments/Concentration of Credit Risk

The carrying amounts of financial instruments, including cash and cash
equivalents, investment securities, accounts receivable, accounts payable

23



and accrued expenses, approximated fair value as of June 30, 2003 and 2002
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, investment securities 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 10, 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 Government and certain industrial customers. The
related accounts receivable balance represented by three customers was 57%
and 39% of the Company's total trade accounts receivable balance at June
30, 2003 and 2002, respectively.

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. Government, 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.

15. Related Parties

The Company paid a law firm in which a director of the Company is a
partner, a total of $22,000, $24,000 and $27,000 for legal services during
fiscal years ended June 30, 2003, 2002, and 2001, respectively.

24





Espey Mfg. & Electronics Corp. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

16. Quarterly Financial Information (Unaudited)

First Second Third Fourth
Quarter Quarter Quarter Quarter
2003 ------- ------- ------- -------

Net Sales ......................... $4,491,359 $5,374,456 $5,707,503 $4,200,093
Gross profit (loss)............ 789,221 (75,254) 1,223,106 1,160,788
Net income (loss).............. 306,545 (417,334) 575,586 499,903

Net income (loss)
(per share - basic and
diluted).......................... 0.30 (0.41) 0.56 0.49


2002
Net Sales.......................... $4,585,515 $5,199,517 $4,616,587 $4,003,594
Gross profit .................. 607,585 593,569 700,016 399,824
Net income..................... 203,691 81,999 212,644 47,420

Net income
(per share - basic and
diluted).......................... 0.20 0.08 0.20 0.05


2001
Net Sales.......................... $4,167,234 $4,184,994 $4,615,137 $4,284,274
Gross profit .................. 688,261 889,008 694,761 789,699
Net income..................... 203,420 269,269 205,554 354,826

Net income (per share -
basic and diluted) ............... 0.20 0.26 0.20 0.34




25




PART III

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

None

Item 9A. Controls and Procedures

Within the 90-day period prior to the filing date of this report, an
evaluation was conducted under the supervision of and with the
participation of Espey's management, including the Chief Executive Officer
and the Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and the Principal Financial Officer
have concluded that our disclosure controls and procedures are effective to
ensure that all material information related to the Company and its
consolidated subsidiary is made known to them, particularly during the
period when our periodic reports are being prepared. Subsequent to the date
the Chief Executive Officer and Principal Financial Officer completed their
evaluation, there have been no significant changes in our internal
controls, or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.

Item 10. Directors and Executive Officers of the Registrant

Identification of Directors



Date Present Term Other Positions
Expires and Period and Offices Held
Name Served as Director With Registrant Age
----- ------------------ ---------------- ---


Paul J. Corr Annual Meeting in None 59
December 2005
Director since 1992

William P. Greene Annual Meeting in None 73
December 2004
Director since 1992

Carl Helmetag Annual Meeting in None 55
December 2003
Director since 1999

Barry Pinsley Annual Meeting in Non-Executive 61
December 2005 officer
Director since 1994

Howard Pinsley Annual Meeting in President and Chief 63
December 2003 Executive Officer
Director since 1992

Alvin O. Sabo Annual Meeting in None 60
December 2003
Director since 1999

Seymour Saslow Annual Meeting in None 82
December 2004
Director since 1992

Michael W. Wool Annual Meeting in None 57
December 2005
Director since 1990



26







Identification of Executive Officers

Positions and
Offices Held Period Served As
Name With Company Executive Officer Age
---- ----------------- ----------------- ---


Howard Pinsley President and Served as Vice President- 63
Chief Executive Special Power Supplies
Officer from April 3, 1992
until being elected
as Executive Vice
President on December
6, 1997. Elected to
present office on
December 10, 1998

John J. Pompay, Jr. Vice President- Since December 6, 1996 68
Marketing and Sales

David A. O'Neil Treasurer & Principal Since January 4, 2000. 38
Financial Officer Controller and Assistant
Treasurer from December 11,
1998 to January 3, 2000

Peggy A. Murphy Secretary Since December 11, 1998 45

Garry M. Jones Assistant Treasurer Since August 4, 1988. 63
& Principal Accounting Principal Financial
Officer Officer from August 4, 1988
to September 10, 1993

Timothy A. Polidore Assistant Treasurer Since December 8, 2000 43




The terms of office of Mrs. Peggy A. Murphy, Mr. David A. O'Neil, Mr.
Timothy A. Polidore, and Mr. Garry M. Jones are until the next annual
meeting of the Board of Directors unless successors are sooner appointed by
the Board of Directors. The terms of office of Mr. Howard Pinsley and Mr.
John Pompay are subject to the agreements between them and the Company. See
"Employment Contracts and Termination of Employment."

Family Relationships

Barry Pinsley and Howard Pinsley are cousins.

Business Experience of Directors and Officers

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

William P. Greene, D.B.A. was vice president of operations for the Company
until December 31, 2000 when he retired. Prior to joining the Company's
management team he was Vice President of Finance for ComCierge, LLC, San
Diego, CA since August 1997. Prior to that position, Dr. Greene held the
position of Vice President Operations for Bulk Materials International,
Newtown, CT from 1993 to July 1997. From 1991 to 1993, Dr. Greene was
Associate Professor of Finance and International Business at Pennsylvania
State University Kutztown, PA. From 1985 to 1990, he was Associate Dean of
the School of Business, United States International University, San Diego,
CA. From 1992 to 1995, he was Chairman of the Department of Business,
Skidmore College, Saratoga Springs, NY.

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


Howard Pinsley for more than the past five years has been employed by the
Company on a full-time basis as a Program Director prior to being elected
Vice President-Special Power Supplies on April 3, 1992. On December 6,
1996, Mr. Pinsley was elected to the position of Executive Vice President.
On June 9, 1998 he was elected to the positions of President and Chief
Operating Officer. On December 10, 1998 he became the President and Chief
Executive Officer.

27




Seymour Saslow had been Senior Vice President since December 6, 1996. Prior
to being elected to Senior Vice President, Mr. Saslow served as Vice
President-Engineering since April 3, 1992. Mr. Saslow resigned as an
executive officer effective December 31, 1999.

Michael W. Wool is an attorney engaged in the private practice of law and
as a senior partner since 1982 in the law firm of Langrock, Sperry & Wool
with offices in Burlington and Middlebury, Vermont.

Alvin O. Sabo is an attorney engaged in private practice of law and Senior
Partner of the law firm of Donohue, Sabo, Varley & Armstrong, P.C. in
Albany, NY since 1980. Prior to that position, he was Assistant Attorney
General, State of New York, Department of Law for eleven years.

Carl Helmetag is currently President and CEO of UVEX Inc. in Providence,
RI. From 1996 to 1999, he was President and CEO of Head USA Inc. Prior to
that position, Mr. Helmetag was Executive Vice President, and then
President at Dynastar Inc. from 1978 to 1996. He is an MBA graduate from
the Wharton School of Business, University of Pennsylvania.

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

David A. O'Neil is currently the Treasurer and Principal Financial Officer
of the Company. Mr. O'Neil is a Certified Public Accountant who joined the
Company as Controller and Assistant Treasurer on November 6, 1998. Prior to
joining the Company, Mr. O'Neil was a Senior Manager at the accounting firm
of KPMG LLP.

John J. Pompay, Jr. for more than the past five years has been employed by
the Company on a full-time basis as Vice President-Marketing and Sales
since December 6, 1996.

Timothy A. Polidore is currently the Assistant Treasurer of the Company.
Mr. Polidore joined the Company on May 17, 1999. Prior to joining the
Company he was Accounting Manager for Brinks, Inc.

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

Directorships

Howard Pinsley serves as a director of All American Semiconductor Inc.

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

Legal Proceedings

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











Item 11. Executive Compensation

The following table summarizes the annual compensation for each of the
fiscal years ended June 30, 2003, 2002, and 2001 received by the Company's
Chief Executive Officer and the other highest paid executive officers of
the Company that received over $100,000 in total compensation as of June
30, 2003.

28






SUMMARY COMPENSATION TABLE

Long Term
Compensation
------------
Securities
Name and Fiscal Annual Underlying All Other
Principal Position Year Salary Bonus Options(#) Compensation(1)
- ------------------ ------ ------ ------ ------------ ---------------


Howard Pinsley 2003 $180,404 $12,500 2,000 $ 19,109
President and 2002 $173,120 $25,000 2,000 $ 11,841
Chief Executive Officer 2001 $172,600 $25,000 2,000 $ 9,590

John J. Pompay, Jr. 2003 $160,554 $25,000 800 $ 19,244
Vice President-Sales 2002 $154,340 $25,000 800 $ 12,134
2001 $152,938 $25,000 800 $ 9,737

David A. O'Neil 2003 $105,490 $10,000 800 $ 10,738
Treasurer and Principal 2002 $ 99,950 $12,500 800 $ 9,899
Financial Officer 2001 $ 91,200 $12,500 800 $ 7,703





(1) Represents (a) the cash and market value of the shares allocated for
the respective fiscal years under the Company's ESOP to the extent to
which each named executive officer is vested, and the Company's
matching contribution under the 401K plan.




OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning the grant of stock options
to the named executive officers during the year ended on June 30, 2003.




Potential
Realizable Value
at Assumed
Number of % of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term (1)
Options Employees in Price Expiration ---------------------
Name Granted Fiscal Year ($/SH) Date 5%($) 10%($)
- ---------------- -------- ---------- ------ ------- ------ ------


Howard Pinsley 2,000 13.5% 18.50 2013 60,269 95,968

John J. Pompay Jr. 800 5.4% 18.50 2013 24,107 38,387

David A. O'Neil 800 5.4% 18.50 2013 24,107 38,387



(1) Amounts reflect certain assumed rates of appreciation set forth in the
Commission's executive compensation disclosure rules. Actual gains, if
any, on stock option exercises will depend on future performance of
the Common Stock. No assurance can be made that the amounts reflected
in these columns will be achieved. The values in these columns assume
that the fair market value on the date of grant of each option was
equal to the exercise price thereof.
The following table sets forth information concerning unexercised options held
on June 30, 2003 by the named executive officers:

29







AGGREGATED OPTIONS AT FISCAL YEAR-END AND FISCAL YEAR-END OPTION VALUES


Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year-End (#) Fiscal Year-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------- ------------------------- --------------------------

Howard Pinsley 2,000/4,000 $0/$0

John J. Pompay Jr. 1,400/1,600 $10,680/$0

David A. O'Neil 800/1,600 $0/$0





In accordance with the 2000 Stock Option Plan the above options have exercise
dates that range from March 1, 2002 through and expiring on March 1, 2013.

Insurance

The executive officers and directors of the Company can elect to be covered
under the Company sponsored health plans which do not discriminate in favor of
the officers or directors of the Company and which are available generally to
all employees. In addition, the executive officers are covered under a group
life plan, which does not discriminate, and is available to all employees.

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

Employee Retirement Plan and Trust

Under the Company's ESOP, approved by the Board of Directors on June 2, 1989,
effective July 1, 1988, all non-union employees of the Company, including the
Company's executive and non-executive officers are eligible to participate. The
ESOP is a non-contributory plan which is designed to invest primarily in shares
of common stock of the Company. Certain technical amendments not considered
material were adopted effective as of June 30, 1994 and July 1, 2002.

Of the 230,562 shares of common stock of the Company allocated to participants
of the ESOP as of June 30, 2003, 9,984 shares were allocated to John J. Pompay
Jr., 9,502 shares were allocated to Howard Pinsley, 1,801 shares were allocated
to David A. O'Neil and 3,161 shares were allocated to Barry Pinsley.

30




Compensation of Directors

The Company's standard arrangement compensates each director of the Company an
annual fee in the amount of $12,000 for being a member of the Board of
Directors. Each Director that also serves as a member of the Audit Committee is
compensated an additional annual fee of $5,000. Each director that serves as a
member of the Succession Committee or the Mergers and Acquisition Committee is
compensated an additional $2,500 for each committee. These fees are paid monthly
to the Directors. Executive officers that also serve on the Company's Board of
Directors do not receive director's fees.

Directors are also eligible to receive stock options under the 2000 Stock Option
Plan at the discretion of the stock option committee. The stock option committee
consists of three appointed board members. For the year ended June 30, 2003 the
following options remain granted and unexercised by the Board of Directors in
accordance with this Plan.

Name Number of Options Exercise Price Range
- ---- ----------------- --------------------
Seymour Saslow 1,500 $17.95 - 19.85

Barry Pinsley 2,200 13.25 - 19.85

Michael W. Wool 1,500 17.95 - 19.85

William P. Greene 900 17.95 - 19.85

Paul J. Corr 1,900 13.25 - 19.85

Alvin O. Sabo 1,600 13.25 - 19.85

Carl Helmetag 1,300 13.25 - 19.85

Howard Pinsley 6,000 17.95 - 19.85

The above options have exercise dates ranging from March 1, 2002 and expiring on
March 1, 2013.

Employment Contracts and Termination of Employment

The Company has an employment contract with John J. Pompay Jr. in connection
with his duties as Vice President-Marketing and Sales. The contract was
effective as of January 1, 2003, and expires on December 31, 2003 unless the
parties mutually agree to extend the agreement. The contract provides for a
minimum base annual salary of $156,000 plus commissions at the rate of 3% on all
payments received by the Company against Mr. Pompay's open orders booked up to
and including December 31, 1996, and 1% on all payments received against orders
booked by the Company between January 1, 1997 and December 31, 1998. The
contract further provides that if Mr. Pompay's employment is terminated by the
Company prior to the expiration date, other than for cause, he will continue to
receive his full salary for 27 months and commissions due on his orders when
payment is received. The contract also provides for a restrictive covenant of
non-competition by Mr. Pompay for a period of two years upon termination for
cause or termination of the contract by Mr. Pompay. At the end of the contract
term Mr. Pompay has the option to accept at the time of his voluntary
resignation as an executive officer, an employment contract as a non-executive
officer in which he would receive full compensation for 13 weeks and then for
the next 143 weeks receive $1,000 per week for services rendered.

The Company entered into an agreement with Howard Pinsley, President and CEO
effective July 1, 2002. The contract allows Mr. Pinsley upon his resignation or
termination to become a non-executive officer of the Company for a period of
thirty-six months. In consideration for services to be provided by Mr. Pinsley
for the equivalent of two days a month after his resignation or termination, and
to perform duties as reasonably requested by the Company, he will receive full
benefits plus, $15,000 per month for the first three months, and $4,333 per
month for the next thirty-three consecutive months. This agreement expires on
December 31, 2005.

31




Item 12. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

The following information is furnished as of August 29,2003 (unless otherwise
indicated) with respect to any person (including any "group" as that term is
used in Section 13(d)(3) of the Act) who is known to the Company to be the
beneficial owner of more than five percent of any class of the Company's voting
securities:



Amount and
Nature of
Title Name and Address Beneficial Percent of
Class of Beneficial Owner Ownership Class
- ----- ------------------- --------- -----


Common Stock Dimensional Fund 73,100 - Direct (1) 7.06%
Advisors Inc.
1299 Ocean Avenue
11th Floor
Santa Monica,
CA 90401

" Franklin Advisory 78,900 - Direct (2) 7.60%
Services, LLC
777 Mariners Island Blvd
P.O. Box 7777 San Mateo, CA 94403-7777

" The Adirondack Trust 244,845 - Direct (3) 24.24%
Company, as Trustee of
the Company's Employee
Retirement Plan and Trust
473 Broadway
Saratoga Springs,
NY 12866

" Howard Pinsley 43,634 - Direct 5.02%
233 Ballston Avenue 9,502 - Indirect (4)
Saratoga Springs,
NY 12866


(1) The information as to the number of shares of common stock of the Company
that may be deemed beneficially owned by advisory clients of Dimensional
Fund Advisors Inc. ("Dimensional") is from the Schedule 13G dated December
31, 2002 filed with the Securities and Exchange Commission (the "SEC").
Dimensional, a registered investment advisor, is deemed to have beneficial
ownership of 73,100 shares of Espey Mfg. & Electronics Corp. stock as of
December 31, 2002, all of which shares are held in Dimensional investment
companies, trusts and accounts. Dimensional, in its role as investment
advisor and/or manager, disclaims beneficial ownership of all such shares.
Dimensional, in its role as investment advisor and/or manager, reported
sole voting power with respect to 73,100 shares.

(2) The information as the number of shares of common stock of the Company that
may be deemed beneficially owned by Franklin Advisory Services, LLC
("Franklin") is from the Schedule 13G, dated January 30, 2003 filed with
the SEC. The Franklin statement indicated that Franklin's investment
"advisory subsidiaries," have sole voting and dispositive power with
respect to all of the shares of common stock shown in the table above for
Franklin. The Franklin statement indicates that the common stock set forth
in the table is beneficially owned by one or more open or closed-end
investment companies or other managed accounts which are advised by direct
and indirect Franklin investment advisory subsidiaries. The statement also
indicated that it filed the Schedule 13G on behalf of itself and Franklin's
principal shareholders, Charles B. Johnson and Rupert H. Johnson, Jr. (the
"Principal Shareholders"), all of which are deemed beneficial owners of the
shares of common stock shown in the above table for Franklin. Franklin and
the Principal Shareholders disclaim any economic interest or beneficial
ownership in any of the common stock shown in the table for Franklin.

(3) This information is from the Form 4 dated August 22, 2003 filed with the
SEC by the Trustee on behalf of the Company's ESOP. The ESOP Trustee has
sole voting power with respect to unallocated common shares owned by the
Trust, as directed by the ESOP Committee appointed by the Company's Board
of Directors. As to the common shares allocated to participants, 223,833
shares as of August, 22, 2003, the ESOP Trustee has the power to vote such

32



shares as directed by such ESOP Committee to the extent the participants do
not direct the manner in which such shares are to be voted.

(4) This information is from Form 4 dated July 28, 2003. Indirect shares
represent stock being held in the Company ESOP.


Security Ownership

The following information is furnished as of August 29, 2003 (unless otherwise
indicated), as to each class of equity securities of the Company beneficially
owned by all Directors and Executive Officers and by Directors and Executive
Officers of the Company as a Group:




Amount and
Nature of
Title Name of Beneficial Percent of
Class Beneficial Owner Ownership Class
- ----- ------------------- ---------- ----------
Common Stock


$.33-1/3 p.v. Paul J. Corr 3,000 - Direct *

" William P. Greene 100 - Direct *

" Carl Helmetag 2,500 - Direct *
500 - Indirect (3)

" Gary M. Jones 4,533 - Indirect (2) *

" Peggy Murphy 3,210 - Indirect (2) *

" David A. O'Neil 1,600 - Direct *
1,801 - Indirect (2)

" Barry Pinsley 37,130 - Direct 3.89%
3,161 - Indirect (1,2)

" Howard Pinsley 43,634 - Direct 5.13%
9,502 - Indirect (2)

" Timothy A. Polidore 834 - Indirect (2) *

" John J. Pompay, Jr. 9,984 - Indirect (2) *

" Alvin O. Sabo 0 *

" Seymour Saslow 7,559 - Direct *

" Michael W. Wool 100 - Direct *

" Officers and Directors 95,623 - Direct 12.48%
as a Group (13 persons) 33,525 - Indirect (1,2,3)



* Less than one percent

33




(1) Excludes 2,000 shares owned by the spouse of Barry Pinsley. Beneficial
ownership of the shares is disclaimed by Mr. Pinsley

(2) Includes shares allocated to named director or officer as of June 30,
2003 as a participant in the Company's ESOP. Each such person has the
right to direct the manner in which such shares allocated to him or
her are to be voted by the ESOP Trustee.

(3) Includes 500 shares owned by the trust of Molly K. Helmetag. As
trustee of the trust, Mr. Helmetag is deemed beneficial owner, as
defined in rule 13d-3, of the shares held by the trust. Excludes 806
shares owned by the spouse of Mr. Helmetag. Beneficial ownership is
disclaimed by Mr. Helmetag.

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

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 will be granted to purchase shares of common stock of the Company. As of
June 30, 2002, the Plan was authorized to issue options to purchase 113,500
shares of the Company's common stock with a maximum of 15,000 shares in any one
year.

The Stock Option Committee of the Board of Directors administers the 2000 Plan.
The Committee may designate, from time to time, the individuals to whom awards
are made under the 2000 Plan, the amount of any such award and the price and
other terms and conditions of any such award. The Committee has the full and
exclusive power to interpret the 2000 Plan and may, subject to the provisions of
the 2000 Plan, establish the rules for its operation.

Item 13 Certain Relationships and Related Transactions

As previously reported, the Company established and sold to the ESOP Trust on
June 5, 1989, 331,224 shares of the Company's treasury stock at a price of
$26.50 per share, which purchase price was funded by the Company making a cash
contribution and loan. Each year, the Company makes contributions to the ESOP,
which are used to make loan interest and principal payments to the Company. With
each such payment, a portion of the common stock held by the ESOP is allocated
to participating employees. As of June 30, 2003, there were 230,562 shares
allocated to participants. The loan from the Company to the ESOP is repayable in
annual installments of $1,039,605, including interest, through June 30, 2004.
Officers of the Company, (including Howard Pinsley) who is also a director, are
eligible to participate in the ESOP and to have shares and cash allocated to
their accounts and distributed to them in accordance with the terms of the ESOP.

The Company paid the law firm of Langrock, Sperry & Wool, of which Michael W.
Wool, a director of the Company, is a partner, a total of $22,000 for legal
services during the fiscal year ended June 30, 2003.

Item 14 Principal Accountant Fees and Services

The information required by this item is included in "Independent Auditors" in
our Proxy Statement for our 2003 annual meeting of shareholders.

34





PART IV

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

(a) 1. Financial Statements

Included in Part II, Item 8, of this report: Reports of
Independent Auditors

Balance Sheets at June 30, 2003 and 2002

Statements of Income for the years ended June 30,
2003, 2002 and 2001

Statements of Changes in Stockholders' Equity for the
years ended June 30, 2003, 2002 and 2001

Statements of Cash Flows for the years ended June 30,
2003, 2002 and 2001

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

11.1 Statement re: Computation of Per Share Earnings


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

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

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

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

99.1 Press Release dated August 22, 2003

(b) Reports on Form 8-K

None
35





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 August 29, 2003

/s/ David A. O'Neil Treasurer
- -------------------------------------- (Principal Financial Officer)
David A. O'Neil August 29, 2003

/s/ Garry M. Jones Assistant Treasurer
- -------------------------------------- (Principal Accounting Officer)
Garry M. Jones August 29, 2003

/s/ Timothy A. Polidore Assistant Treasurer
- -------------------------------------- (Principal Accounting Officer)
Timothy A. Polidore August 29, 2003

/s/ Barry Pinsley Director
- -------------------------------------- August 29, 2003
Barry Pinsley

/s/ Seymour Saslow Director
- -------------------------------------- August 29, 2003
Seymour Saslow

/s/ William P. Greene Director
- -------------------------------------- August 29, 2003
William P. Greene

/s/ Michael W. Wool Director
- -------------------------------------- August 29, 2003
Michael W. Wool

/s/ Paul J. Corr Director
- -------------------------------------- August 29, 2003
Paul J. Corr

/a/ Alvin O. Sabo Director
- -------------------------------------- August 29, 2003
Alvin O. Sabo

/s/ Carl Helmetag Director
- -------------------------------------- August 29, 2003
Carl Helmetag


36