NOTE 7 – 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.

There were no stock option awards granted in the three months ended September 30, 2011 and 2010. Stock option awards granted in the six months ended September 30, 2011 and 2010 were 9 and 20, respectively. The stock option awards vest 33 ¹/3% per year over a three-year term. All stock options have a term of ten years from their grant date.

Restricted stock awards granted in the three-month periods ended September 30, 2011 and 2010 were 1 and 0, respectively. Restricted stock awards granted in the six-month periods ended September 30, 2011 and 2010 were 28 and 24, respectively. Performance-vested restricted stock awards granted to officers in fiscal 2012 and fiscal 2011 vest 100% on the third anniversary of the grant date, subject to the satisfaction of the performance metrics established for the applicable three-year period. Time-vested restricted stock awards granted to officers in fiscal 2012 vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date. Time-vested restricted stock awards granted to directors in fiscal 2012 and fiscal 2011 vest 100% on the first anniversary of the grant date.

During the three and six months ended September 30, 2011, the Company recognized stock-based compensation costs related to stock option and restricted stock awards of $173 and $290, respectively. The income tax benefit recognized related to stock-based compensation was $62 and $103 for the three and six months ended September 30, 2011, respectively. During the three and six months ended September 30, 2010, the Company recognized stock-based compensation costs related to stock option and restricted stock awards of $125 and $184, respectively. The income tax benefit recognized related to stock-based compensation was $43 and $63 for the three and six months ended September 30, 2010, respectively.

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 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 and six months ended September 30, 2011, the Company recognized stock-based compensation costs of $12 and $30, respectively, related to the ESPP and $4 and $10, respectively, of related tax benefits.