Note 12 — Stock Compensation Plans:

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.

During fiscal 2012 and fiscal 2011, 9 and 20 stock options, respectively, each with a term of ten years from the date of grant were awarded. The stock option awards granted in fiscal 2012 and fiscal 2011 vest 33 ¹/3% per year over a three-year term. However, an individual’s outstanding stock options immediately vest in full upon retirement eligibility. The Company has elected to use the straight-line method to recognize compensation costs related to such awards.

In fiscal 2012 and fiscal 2011, 32 and 24 shares, respectively, of restricted stock were awarded. Restricted shares of 16 and 15 granted to officers in fiscal 2012 and fiscal 2011, 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. Restricted shares of 7 granted in fiscal 2012 vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date. The restricted shares granted to directors in fiscal 2012 and fiscal 2011 vest 100% on the anniversary of the grant date. Notwithstanding the preceding vesting schedules, an employee’s outstanding restricted shares immediately vest in full when the employee becomes eligible for retirement, which is the date on which an employee reaches age 62 and has been employed on a full-time basis for ten or more years. The Company recognizes compensation cost over the period the shares vest.

During fiscal 2012, fiscal 2011, and fiscal 2010, the Company recognized $556, $431, and $436, respectively, of stock-based compensation cost related to stock option and restricted stock awards, and $198, $148 and $151, respectively, of related tax benefits.

The weighted average fair value of options granted during fiscal 2012, fiscal 2011 and fiscal 2010 was $9.51, $8.12 and $8.57, respectively, using the Black-Scholes option-pricing model with the following weighted average assumptions:

The expected life represents an estimate of the weighted average period of time that options are expected to remain outstanding given consideration to vesting schedules and the Company’s historical exercise patterns. Expected volatility is estimated based on the historical closing prices of the Company’s common stock over the expected life of the options. The risk free interest rate is estimated based on the U.S. Federal Reserve’s historical data for the maturity of nominal treasury instruments that corresponds to the expected term of the option. Expected dividend yield is based on historical trends.

The Company received cash proceeds from the exercise of stock options of $386, $236 and $63 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively. In fiscal 2012, fiscal 2011 and fiscal 2010, the Company recognized a $244, $115 and $40, respectively, increase in capital in excess of par value for the income tax benefit realized upon exercise of stock options and vesting of restricted shares in excess of the tax benefit amount recognized pertaining to the fair value of stock awards treated as compensation expense.

The following table summarizes information about the Company’s stock option awards during fiscal 2012, fiscal 2011 and fiscal 2010:

The following table summarizes information about stock options outstanding at March 31, 2012:

The Company calculated intrinsic value (the amount by which the stock price exceeds the exercise price of the option) as of March 31, 2012. The Company’s closing stock price was $21.89 as of March 31, 2012. The total intrinsic value of the stock options exercised during fiscal 2012, fiscal 2011 and fiscal 2010 was $776, $419 and $123, respectively. As of March 31, 2012, there was $769 of total unrecognized stock-based compensation expense related to non-vested stock options and restricted stock. The Company expects to recognize this expense over a weighted average period of 1.86 years.

The outstanding options expire between October 2012 and May 2021. Options, stock awards and performance awards available for future grants were 514 at March 31, 2012.

The following table summarizes information about the Company’s restricted stock awards during fiscal 2012, fiscal 2011 and fiscal 2010:

The Company has a Long-Term Incentive Plan which provides for awards of share equivalent units for outside directors based upon the Company’s performance. Each unit is equivalent to one share of the Company’s common stock. Share equivalent units are credited to each outside director’s account for each of the first five full fiscal years of the director’s service when consolidated net income is at least 100% of the approved budgeted net income for the year. The share equivalent units are payable in cash or stock upon retirement. Compensation cost for share equivalent units is recorded based on the higher of the quoted market price of the Company’s stock at the end of the period up to $3.20 per unit or the stock price at date of grant. The cost of share equivalent units earned and charged to pre-tax income under this Plan was $20 in fiscal 2012, $30 in fiscal 2011 and $30 in fiscal 2010. At March 31, 2012 and 2011, there were 42 and 60 share equivalent units, respectively, in the Plan and the related liability recorded was $295 and $333 at March 31, 2012 and 2011, respectively. The expense (income) to mark to market the share equivalent units was $(2), $6 and $7 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively. On March 12, 2009, the Compensation Committee of the Company’s Board of Directors suspended the Long-Term Incentive Plan for Directors first elected after such date.

On July 29, 2010, the Company’s stockholders approved the Graham Corporation 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% 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 200,000 shares of common stock may be purchased under the ESPP. In fiscal 2012 and fiscal 2011, 19 and 13 shares, respectively, were issued from treasury stock to the ESPP for the offering periods in each of the fiscal years. During fiscal 2012 and fiscal 2011, the Company recognized stock-based compensation cost of $55 and $47, respectively, related to the ESPP and $19 and $16, respectively, of related tax benefits. The Company recognized a $3 and $5 increase in capital in excess of par value for the income tax benefit realized from disqualifying dispositions in excess of the tax benefit amount recognized pertaining to the compensation expense recorded in fiscal 2012 and fiscal 2011, respectively.