NOTE 6 – STOCK-BASED COMPENSATION:

The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value provides for the issuance of up to 1,375 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, stock awards and performance awards to officers, key employees and outside directors; provided, however, that no more than 250 shares of common stock may be used for awards other than stock options. Stock options may be granted at prices not less than the fair market value at the date of grant and expire no later than ten years after the date of grant.

Stock option awards granted in the three months ended June 30, 2013 and 2012 were 0 and 49, respectively. The stock option awards granted in the first quarter of fiscal 2013 vest 33  ¹/₃ % per year over a three-year term and have a term of ten years from their grant date.

Restricted stock awards granted in the three-month periods ended June 30, 2013 and 2012 were 32 and 26, respectively. Performance vested restricted stock awards of 14 and 18 granted to officers in fiscal 2014 and fiscal 2013, respectively, vest 100% on the third anniversary of the grant date, subject to the satisfaction of the performance metrics for the applicable three-year period. Time vested restricted stock awards of 12 granted to officers and key employees in fiscal 2014 vest 33 ¹ /₃% per year over a three-year period. Time vested restricted stock awards of 6 and 8 granted to directors in fiscal 2014 and fiscal 2013, respectively, vest 100% on the first anniversary of the grant date.

During the three months ended June 30, 2013 and 2012, the Company recognized stock-based compensation costs related to stock option and restricted stock awards of $180 and $156, respectively. The income tax benefit recognized related to stock-based compensation was $63 and $55 for the three months ended June 30, 2013 and 2012, respectively.

The Company has an Employee Stock Purchase Plan (the “ESPP”), which allows eligible employees to purchase shares of the Company’s common stock on the last day of a six-month offering period at a purchase price equal to the lesser of 85 percent of the fair market value of the common stock on either the first day or the last day of the offering period. A total of 200 shares of common stock may be purchased under the ESPP. During the three months ended June 30, 2013 and 2012, the Company recognized stock-based compensation costs of $15 and $15, respectively, related to the ESPP and $5 and $5, respectively, of related tax benefits.