FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For Quarterly Period Ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.


(Mark one)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
		SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period EndedJune 30, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ~~____________~~ to ~~____________~~

Commission File Number1-8462

GRAHAM CORPORATION ~~(Exact~~

(Exact name of registrant as specified in its charter) DELAWARE 16-1194720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020 (Address of Principal Executive Offices) (Zip Code) Registrant's


DELAWARE		16-1194720

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

20 FLORENCE AVENUE, BATAVIA, NEW YORK		14020

(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including Area Code - 585-343-2216 ~~(Former~~

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ~~__X__~~þ NO ~~_____~~o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

Yes ~~__ __~~o No ~~__X__~~þ

As of ~~February 1,~~July 22, 2005, there were outstanding ~~1,668,667~~1,747,932 shares of common stock, par value $.10 per share.2

Item 1.

GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	June 30,			March 31,
	2005			2005
Assets
Current assets:
Cash and cash equivalents	$	1,421		$	724
Investments		5,472			1,993
Trade accounts receivable, net of allowances ($39 and $28 at June 30 and March 31, 2005, respectively)		6,439			10,026
Unbilled revenue		2,901			3,620
Inventories, net		4,423			4,823
Domestic and foreign income taxes receivable		47			45
Deferred income tax asset		696			719
Prepaid expenses and other current assets		348			139

Total current assets		21,747			22,089
Property, plant and equipment, net		7,568			7,649
Deferred income tax asset		3,399			3,747
Other assets		44			44

Total assets	$	32,758		$	33,529


liabilities and Stockholders’ Equity
Current liabilities:
Short-term debt		—			1,872
Current portion of long-term debt		49			48
Accounts payable		3,759			3,374
Accrued compensation		2,932			2,802
Accrued expenses and other liabilities		1,435			1,494
Customer deposits		876			1,295

Total current liabilities		9,051			10,885

Long-term debt		63			44
Accrued compensation		229			213
Other long-term liabilities		316			364
Accrued pension liability		3,217			3,141
Accrued postretirement benefits		2,274			2,304

Total liabilities		15,150			16,951


Stockholders’ equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares Issued, 1,840,055 and 1,796,740 shares at June 30 and March 31, 2005, respectively		184			180
Capital in excess of par value		5,958			5,553
Retained earnings		14,699			14,082
Accumulated other comprehensive loss
Minimum pension liability adjustment		(1,698	)		(1,698	)
Cumulative foreign currency translation adjustment		(1	)		—


Less:		19,142			18,117
Treasury stock (99,123 shares at June 30 and March 31, 2005)		(1,385	)		(1,385	)
Notes receivable from officers and directors		(149	)		(154	)

Total stockholders’ equity		17,608			16,578

Total liabilities and stockholders’ equity	$	32,758		$	33,529

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands except per share data)


	Three Months Ended
	June 30,
	2005			2004
Operating activities:
Income (loss) from continuing operations	$	703		$	(749	)

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		195			195
Discount accretion on investments		(20	)		(10	)
Gain on disposal of property, plant and equipment		(3	)		—
Deferred income taxes		371			(436	)
(Increase) decrease in operating assets:
Accounts receivable		3,587			2,483
Unbilled revenue		719			—
Inventories		400			(49	)
Domestic and foreign income taxes receivable/payable		(1	)		(3	)
Prepaid expenses and other current and non-current assets		(212	)		(189	)
Increase (decrease) in operating liabilities:
Accounts payable		385			(811	)
Accrued compensation, accrued expenses and other current and non-current liabilities		21			(258	)
Customer deposits		(419	)		229
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits		62			(126	)

Total adjustments		5,085			1,025

Net cash provided by continuing operations		5,788			276
Net cash provided by discontinued operations		—			33

Net cash provided by operating activities		5,788			309


Investing activities:
Purchase of property, plant and equipment		(81	)		(27	)
Collection of notes receivable from officers and directors		4			8
Purchase of investments		(5,459	)		(2,692	)
Redemption of investments at maturity		2,000			3,503

Net cash (used) provided by investing activities of continuing operations		(3,536	)		792
Net cash used by investing activities of discontinued operations		—			(38	)

Net cash (used) provided by investing activities		(3,536	)		754


Financing activities:
Decrease in short-term debt, net		(1,872	)		—
Principal repayments on long-term debt		(8	)		(10	)
Issuance of common stock		410			—
Dividends paid		(84	)		(83	)

Net cash used by financing activities of continuing operations		(1,554	)		(93	)
Net cash used by financing activities of discontinued operations		—			(327	)

Net cash used by financing activities		(1,554	)		(420	)

Effect of exchange rate on cash		(1	)		—

Net increase in cash and equivalents		697			643
Cash and cash equivalents at beginning of period		724			467

Cash and cash equivalents at end of period	$	1,421		$	1,110

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2005

(Dollar amounts in thousands except per share data)

NOTE 1 – BASIS OF PRESENTATION

The financial statements have been prepared in accordance with the ~~Company's usual~~Company’s accounting policies, are based in part on estimates and reflect all normal and recurring adjustments which are, in the opinion of management, necessary to a fair presentation of the results of the interim periods. The March 31, ~~2004~~2005 Condensed Consolidated Balance Sheet was derived from the ~~Company's~~Company’s audited Consolidated Balance Sheet ~~for the year ended~~as of March 31, ~~2004. This part also includes management's discussion and analysis of the Company's financial condition as of December 31, 2004 and its~~2005.

The results of operations for the three months ended June 30, 2005 and ~~nine month~~cash flows for the three months ended June 30, 2005 are not necessarily indicative of the results to be expected for other interim periods ~~ended December~~or for the year ending March 31, ~~2004.~~ ~~4 GRAHAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)~~

~~5 GRAHAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (concluded) (Unaudited)~~

~~See Notes to Consolidated Financial Statements.~~ ~~6 GRAHAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited)~~

~~See Notes to Consolidated Financial Statements.~~ ~~7 GRAHAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)~~

~~8 GRAHAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded) (Unaudited)~~

~~See Notes to Consolidated Financial Statements.~~ ~~9 GRAHAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004~~ 2006.

NOTE ~~1 -~~2 – CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION

During the second quarter of fiscal year 2005, the Company changed its method of recognizing revenue for certain contracts from the completed contract to the percentage-of-completion method. Formerly, only contracts with a planned manufacturing process in excess of three months and with revenue of at least $1,000 and 500 pounds sterling, in the ~~USA~~U.S. and UKU.K. operating segments, respectively, were accounted for under the ~~percentage- of-completion~~percentage-of-completion method. ~~Now~~With the change, all contracts with a planned manufacturing process of four weeks or more (which approximates 575 direct labor hours) and without a dollar threshold are accounted for using the percentage-of-completion method. The Company believes this is a preferable accounting method for these contracts because it measures revenue, costs of products sold and related income on construction type contracts based on progress on the contracts, thus providing a better measure of the earnings process on a more timely basis. The Company extended its scope of contracts accounted for using the percentage-of-completion method at ~~this~~that time because management ~~believes~~believed that the effects on the financial statements of applying the completed contract method on these contracts could begin to vary materially from the effects of applying the percentage-of-completion method. The majority of the ~~Company's~~Company’s contracts have a planned manufacturing process of less than four weeks, and are accounted for using the completed contract method. ~~Prior period~~The financial results for the three months ended June 30, 2004 have been restated to reflect this

change. The impact of the change on net sales, cost of products sold, ~~provision~~benefit for income taxes, loss from continuing operations, net loss, loss from continuing operations per share and net ~~income~~loss per share for the prior ~~periods~~period presented is as follows:


	Three Months Ended
	June 30, 2004
	Amounts Reported Using
	Percentage of			Completed Contract
	Completion Method			Method			Difference
Net sales	$	8,281		$	7,761		$	520
Cost of products sold	$	7,500		$	7,124		$	376
Benefit for income taxes	$	(436	)	$	(458	)	$	22
Loss from continuing operations	$	(749	)	$	(870	)	$	121
Net loss	$	(977	)	$	(1,098	)	$	121
Loss from continuing operations per share
Basic	$	(.45	)	$	(.52	)	$	.07
Diluted	$	(.45	)	$	(.52	)	$	.07
Net loss per share
Basic	$	(.58	)	$	(.66	)	$	.08
Diluted	$	(.58	)	$	(.66	)	$	.08

NOTE 3 — INVENTORIES

Inventories are stated at the lower of cost or market, using the average cost method. For contracts accounted for on the completed contract method, progress payments received are netted against inventory to the extent the payment is less than the inventory balance relating to the applicable contract. Progress payments that are in excess of the corresponding inventory balance are presented as customer deposits in the Condensed Consolidated Balance Sheets. Unbilled revenue in the Condensed Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method. For contracts accounted for on the percentage-of–completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract. Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the ~~nine months ended December 31, 2004~~excess is presented as ~~follows:~~

~~11 The effect of~~customer deposits in the ~~change on retained earnings is as follows:~~

~~NOTE 2 - INVENTORIES~~Condensed Consolidated Balance Sheets.

Major classifications of inventories are as follows:


	June 30,		March 31,
	2005		2005
Raw materials and supplies	$	1,801	$	2,098
Work in process		1,797		1,421
Finished products		1,343		1,566

		4,941		5,085
Less — progress payments		518		262

	$	4,423	$	4,823

NOTE ~~3 -~~4 – STOCK-BASED COMPENSATION:

The Company accounts for stock-based compensation in accordance with ~~SFAS~~Statement of Financial Accounting Standards (SFAS) No. 123, ~~"Accounting~~“Accounting for Stock-Based ~~Compensation"~~Compensation”. As permitted by SFAS No. 123, the Company continues to measure compensation for such plans using the intrinsic value based method of accounting, prescribed by Accounting Principles Board (APB), Opinion No. 25, ~~"Accounting~~“Accounting for Stock Issued to ~~Employees"~~Employees”. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the ~~Company's~~Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for share equivalent units is recorded based on the higher of the quoted market price of the ~~Company's~~Company’s stock at the end of the ~~period.~~period up to $16 per unit or the stock price at the date of grant in accordance with the terms of the Long-Term Incentive Plan.

Under the intrinsic value method, no compensation expense has been recognized for the ~~Company's~~Company’s stock option plans. ~~Had compensation cost~~Since no options were granted and all options are fully vested, net income (loss) as reported and on a pro forma basis for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans in accordance with the fair value methodology prescribed under SFAS No. 123, the Company's net loss and net loss per share would have been the pro forma amounts indicated below:

13 For purposes of the disclosure above, the fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for grants in fiscal yearsthree months ended June 30, 2005 and ~~2004:~~

2004 are the same.

NOTE ~~4 -~~5 — INCOME (LOSS) PER SHARE:

Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Common shares outstanding include share equivalent units, which are contingently issuable shares. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted income (loss) per share is presented below:

~~There are 219,955~~


	Three Months Ended
	June 30,
	2005		2004
Basic income (loss) per share
Numerator:
Income (loss) from continuing operations	$	703	$	(749	)

Denominator:
Weighted common shares outstanding		1,720,161		1,658,327
Share equivalent units (“SEUs”)		13,113		16,437

Weighted average common shares and SEUs		1,733,274		1,674,764

Basic income (loss) per share from continuing operations	$	.41	$	(.45	)


Diluted income (loss) per share

Numerator:
Income (loss) from continuing operations	$	703	$	(749	)


Denominator:
Weighted average shares and SEUs outstanding		1,733,274		1,674,764
Stock options outstanding		62,806		—
Contingently issuable SEUs		24		—

Weighted average common and potential common shares outstanding		1,796,104		1,674,764


Diluted income (loss) per share from continuing operations	$	.39	$	(.45	)

Certain options to purchase shares of common stock, which totaled 23,850 and 191,295 at ~~various exercise prices that~~June 30, 2005 and 2004, respectively, were ~~excluded from~~not included in the above computation of diluted ~~loss~~income (loss) per share ~~for the three and nine month periods ended December 31, 2004 and 2003~~ as the effect would be ~~antidilutive due~~anti-dilutive.

A reconciliation of the numerators and denominators of basic and diluted income (loss) per share on a pro forma post-split basis (Note 13) is presented below:


	Three Months Ended
	June 30,
	2005		2004
Basic income (loss) per share

Numerator:
Income (loss) from continuing operations	$	703	$	(749	)


Denominator:
Weighted common shares outstanding		3,440,322		3,316,654
Share equivalent units (“SEUs”)		26,226		32,874

Weighted average common shares and SEUs		3,466,548		3,349,528


Basic income (loss) per share from continuing operations	$	.20	$	(.22	)


Diluted income (loss) per share

Numerator:
Income (loss) from continuing operations	$	703	$	(749	)


Denominator:
Weighted average shares and SEUs outstanding		3,466,548		3,349,528
Stock options outstanding		125,612		—
Contingently issuable SEUs		48		—

Weighted average common and potential common shares outstanding		3,592,208		3,349,528


Diluted income (loss) per share from continuing operations	$	.20	$	(.22	)

Certain options to purchase shares of common stock, which totaled 47,700 and 382,590 at June 30, 2005 and 2004, respectively, were not included in the ~~net losses for~~above computation of diluted income (loss) per share as the ~~periods.~~ effect would be anti-dilutive.

NOTE ~~5 -~~6 – PRODUCT WARRANTY LIABILITY

The reconciliation of the changes in the product warranty liability is as follows:


	Three Months Ended
	June 30,
	2005			2004
Balance at beginning of period.	$	255		$	242
Expense for product warranties		126			62
Product warranty claims paid		(82	)		(38	)

Balance at end of period	$	299		$	266

NOTE ~~6 -~~7 — CASH FLOW STATEMENT

Interest paid from continuing operations was ~~$84~~$11 and ~~$95~~$5 for the ~~nine~~three months ended ~~December 31,~~June 30, 2005 and 2004, ~~and 2003,~~ respectively. In addition, income taxes refunded from continuing operations were ~~$886~~$5 and ~~$193~~$10 for the ~~nine~~three months ended ~~December 31,~~June 30, 2005 and 2004, respectively.

Non-cash activities during the three months ended June 30, 2005 and ~~2003, respectively.~~ ~~15 Dividends~~2004 included dividends of ~~$249~~$86 and ~~$243~~$83, respectively, which were recorded ~~for the respective nine month periods ended December 31, 2004 and 2003, of which $83 and $0 were~~but not ~~paid during the respective periods.~~paid. In addition, ~~during~~in the ~~nine months ended December 31, 2003,~~first quarter of fiscal year 2005, capital expenditures totaling ~~$11~~$27 were financed through the issuance of capital leases.

NOTE ~~7 -~~8 — COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) was $143 and $(536) for the three months ended December 31, 2004 and 2003, respectively. Other comprehensive income for the three months ended December 31, 2004 and 2003 included foreign currency translation adjustments of $164 and $213, respectively. Total comprehensive loss for the nine months ended December 31, 2004 and 2003 was $501 and $899, respectively. Other comprehensive income for the nine months ended December 31, 2004 and 2003 included foreign currency translation adjustments of $114 and $346, respectively. as follows:


	Three Months Ended
	June 30,
	2005			2004

Net income (loss)	$	703		$	(977	)

Other comprehensive income:
Foreign currency translation adjustment		(1	)		(34	)


Total comprehensive income (loss)	$	702		$	(1,011	)

NOTE ~~8 -~~9 – EMPLOYEE BENEFIT PLANS

The components of pension cost are as follows:


	Three Months Ended
	June 30,
	2005			2004

Service cost	$	108		$	118
Interest cost		218			244
Expected return on assets		(189	)		(226	)
Amortization of:
Transition asset					(4	)
Unrecognized prior service cost		1			1
Actuarial loss		75			76

Net pension cost	$	213		$	209

The Company made contributions of ~~$201 and $773~~$144 to ~~the~~its defined benefit pension plan in the ~~three and nine months ended December 31, 2004, respectively.~~first quarter of fiscal year 2006. The Company ~~does not expect to make any~~expects its contributions to the plan for the balance of fiscal year ~~2005 due~~2006 to a decrease in the minimum contribution requirement as a result of the combination of the amortization bases as permitted by the Internal Revenue Service Code Section 412(b)(4) and the replacement of the 30-year Treasury bond interest rate with a four-year weighted average long-term corporate bond interest rate. 16be approximately $431.

The components of the postretirement benefit income are as follows:


	Three Months Ended
	June 30,
	2005			2004

Service cost	$	—		$	—
Interest cost		19			18
Amortization of prior service cost		(43	)		(41	)
Amortization of actuarial loss		4			6

Net postretirement benefit income	$	(20	)	$	(17	)

The Company paid benefits of ~~$3 and $31~~$10 related to its postretirement benefit plan in the ~~three and nine months ended December 31, 2004, respectively.~~first quarter of fiscal year 2006. The Company expects to pay benefits of approximately ~~$125~~$143 for the balance of fiscal year ~~2005.~~ 2006.

NOTE ~~9 - OTHER INCOME AND EXPENSE In November 2004,~~10 – Discontinued Operations

On March 15, 2005, the ~~Company entered into an Agreement and General Release in connection with the retirement~~Company’s Board of Directors approved a plan to dispose of its ~~former President~~U.K. operations by making available for sale the Company’s wholly-owned subsidiary, Graham Vacuum and ~~CEO. In accordance with~~Heat Transfer Limited (“GVHT”) and all its subsidiaries, including GVHT’s operating subsidiary Graham Precision Pumps Limited (“GPPL”) in Congleton, Cheshire, U.K. and to offer them for sale. On March 24, 2005, the ~~agreement,~~principal creditor of the ~~Company will retain~~U.K. companies, National Westminster Bank, exercised its right to

appoint a receiver for GVHT and GPPL to sell the ~~former officer as an independent consultant for the period January 1, 2005 to November 8, 2008 and provide certain medical, dental and insurance benefits during the consulting period.~~U.K. companies. The ~~agreement also contains~~appointment of a ~~non-compete provision. The agreement has been accounted for as an individual deferred compensation arrangement, and, therefore, an expense of $648 was recognized and is included~~receiver resulted in the ~~caption "Other Expense"~~liquidation of the assets of the U.K. companies, which was completed in May 2005. GPPL manufactured liquid ring vacuum pumps and complete vacuum pump systems used in the ~~Consolidated Statement~~chemical, petrochemical, petroleum refining and power industries. The results of ~~Operations and Retained Earnings~~operations for the three and nine month periods ended December 31, 2004. The current and long-term portions of the related liability at December 31, 2004 were $243 and $319, respectively, and are included in the captions "Accrued Expenses and Other Liabilities" and "Other Long-Term Liabilities" in the Consolidated Balance Sheet at December 31, 2004. In September 2004, the Company settled a contract dispute with a customer regarding cancellation charges. This settlement agreement was executed prior to the end of the quarter, and the unpaid settlement amount due of $183 was received on October 13, 2004. As a result of the settlement, other income of $1,592 was recorded. 17 On February 4, 2003, the Company irrevocably terminated postretirement health care benefits for current U.S. employees. Benefits payable to retirees of record on April 1, 2003 remained unchanged. As a result of the plan change, a curtailment gain of $522 was recognized. This gain is included in the caption "Other Income" in the Consolidated Statement of Operations and Retained Earnings for the nine months ended December 31, 2003. NOTE 10 - SEGMENT INFORMATION The Company's business consists of two operating segments based upon geographic area. The United States segment designs and manufactures heat transfer and vacuum equipment andJune 30, 2004 have been restated to reflect the ~~operating segment located in the United Kingdom manufactures vacuum equipment. Operating segment information is presented below:~~

~~The segment net loss above is reconciled to the consolidated totals~~U.K. operations as ~~follows:~~

18 a discontinued operation.

NOTE 11 - RELATED PARTY TRANSACTION On April 1, 2003, the Company acquired 30,800 shares of common stock previously issued under the Long-Term Stock Ownership Plan from two former officers. This transaction was accounted for as a purchase. The shares were redeemed at the original issue price of $7.25, as compared to a market price at the time of the closing of $7.55. This transaction resulted in a $224,000 increase to treasury stock, a $204,000 reduction in notes receivable from officers and directors and cash payments to former officers. The cash payments of $20 approximate amounts previously paid on the notes. (See Note 9 for additional disclosure of related party transactions). NOTE 12 -– CONTINGENCIES

The Company has been named as a defendant in certain lawsuits wherein the respective plaintiffs allege personal injury from exposure to asbestos contained in products made by the Company. The Company is a co-defendant with numerous other defendants in these ~~suits. The Company has retained litigation counsel~~suits and intends to vigorously defend itself against these claims. The claims are similar to previous asbestos suits naming the Company as defendant, which either were dismissed when it was shown that the Company had not supplied products to the ~~plaintiffs'~~plaintiffs’ places of work or were settled for minimal amounts below the expected defense costs. ~~The~~Neither the outcome of these claims nor the potential for liability is ~~not~~ determinable. In December 2004, the Company received a request for payment from the Metal Goods & Manufacturers Trust Fund for $30 relating to a workers' compensation assessment asserted against members in the Trust Fund during the period 1993 through 2001. The Company

At June 30, 2005, management was ~~a member~~unaware of ~~the Trust Fund~~any additional litigation matters. However, from ~~April 1994 until May 1995. The Company is disputing this claim and has provided for this contingent liability at December 31, 2004. From~~ time to time, the Company is subject to legal proceedings and potential claims arising from contractual agreements in the ordinary course of business. The Company believes there are no such matters pending against it that could have, individually or in the aggregate, a material adverse effect on its business or financial ~~statements.~~ 19 condition.

NOTE ~~13 -~~12 – ACCOUNTING AND REPORTING CHANGES

In November 2004, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued ~~Statement of Financial Accounting Standards ("SFAS")~~SFAS No. 151, ~~"Inventory~~“Inventory Costs."” This Statement amends Accounting Research Bulletin No. 43, Chapter 4, ~~"Inventory Pricing"~~“Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of ~~"abnormal"~~“abnormal”. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during the Company’s fiscal year 2007. The Company believes the adoption of this Statement will result in the acceleration of recognizing indirect manufacturing expenses during times of below normal utilization of plant capacity. ~~In December 2004,~~Management has not determined the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions" and SFAS No. 153, "Exchanges of Nonmonetary Assets". Both Statements are effective for fiscal years beginning after June 15, 2005. The Company does not believe either of these Statements will have a material effectimpact on the ~~Company's consolidated financial position, results~~Consolidated Financial Statements of ~~operations or cash flows.~~adopting this Statement.

The FASB also issued in December 2004, SFAS No. 123R, ~~"Share-Based Payment"~~“Share-Based Payment”. This Statement ~~revises~~requires all share-based payments to employees, including grants of employee stock options, to be recognized in the ~~standards established~~financial statements based on their fair values for the accounting of transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are basedfiscal years beginning after June 15, 2005. In addition, SFAS No. 123(R) will cause unrecognized expense (based on the fair values determined for the pro forma footnote disclosure, adjusted for estimated forfeitures) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include the ~~entity's equity instruments~~modified prospective or ~~that~~the modified retrospective adoption methods. Under the modified retrospective method, prior periods may be ~~settled by the issuance of those equity instruments. This Statement is effective~~restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first interim reporting period that begins after December 15, 2005 and applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Thequarter of adoption of ~~this Statement will have~~SFAS No. 123(R), while the modified retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated. The Company is evaluating the requirements of SFAS No. 123(R), but cannot yet estimate the effect of adopting SFAS No. 123(R) as it has not yet selected the method of adoption or an ~~effect on the Company's consolidated results~~option-pricing model and has not yet finalized estimates of ~~operations.~~its expected forfeitures. For additional information, see Note 4, “Stock-Based Compensation”, of the Notes to Condensed Consolidated Financial Statements.

In March 2005, the FASB issued Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143”. FIN No. 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations”, and provides further guidance as to when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective for the Company for the year ending March 31, 2006. The Company is currently evaluating the impact this Interpretation will have on the Company’s financial position, results of operation and cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. In addition, the Statement requires

restatement of previously issued financial statements when reporting the correction of an error. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

NOTE 13 – SUBSEQUENT EVENTS

In July 2005, the Company entered into a new revolving credit facility agreement that provides a line of credit of up to $13,000, including a letter of credit limit of $8,000, through October 31, 2008. The agreement allows the Company to borrow at prime minus a variable percentage or LIBOR plus a variable percentage based upon the ratio of total liabilities to tangible net worth. The Company has the option of choosing an interest rate based on the prime rate or the LIBOR rate. The agreement allows the Company at any time to convert balances outstanding not less than $2,000 and up to $9,000 with a two-year term loan. This conversion feature is available though October 31, 2008.

On July 28, 2005, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common shares. The two-for-one stock split will be effected as a stock dividend, and stockholders will receive one additional share of common stock for every share of common stock held on the record date of September 1, 2005. The Company expects that the new common shares will be distributed on or about October 3, 2005. Fractional shares will be paid in cash based upon the closing price of the Company’s common stock on September 1, 2005. Pro forma income (loss) per share amounts are disclosed in the Statement of Operations and Retained Earnings and Note 5 to the Condensed Consolidated Financial ~~Statements. Certain reclassifications have been made~~Statements to ~~prior financial information to conform~~give effect to the ~~current period presentation.~~ 20 two-for-one split.

Item 2.

GRAHAM CORPORATION AND SUBSIDIARIES ~~MANAGEMENT'S~~
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ~~(MD&A) December 31, 2004~~
June 30, 2005

(Dollar amounts in thousands except per share data)

OVERVIEW

Graham Corporation ~~consists~~(“Graham”, the “Corporation” or the “Company”) is located in Batavia, New York. Formerly, the Company had an operating subsidiary located in the United Kingdom that manufactured vacuum equipment. In March 2005, Graham’s Board of ~~two operating segments~~Directors approved a plan to dispose of the U.K. operations, which resulted in the disposition of the U.K. operations in May 2005. As a result of the disposition, the U.K. operations are presented as ~~determined by geographic areas (USA: Graham Corporation, UK: Graham Vacuum~~a discontinued operation in the Consolidated Statements Of Operations and ~~Heat Transfer Limited~~Retained Earnings and ~~its wholly-owned subsidiary, Graham Precision Pumps Limited). Graham's~~Consolidated Statements Of Cash Flows for the three months ended June 30, 2004.

Graham’s current fiscal financial reporting year ~~commences~~commenced April 1, 2005 and ~~ends~~will end March ~~31. In the quarter ended September 30, 2004, the~~31, 2006.

Graham Corporation ~~modified its method~~is a global designer, manufacturer and supplier of ~~recognizing revenue for certain contracts from the completed contract to the percentage-of-completion method. Prior period financial results have been restated to reflect this change.~~ejectors, pumps, condensers and heat exchangers. The impact of the restatement on FYE 2004 information discussed in this MD&A is disclosed as parenthetical information within the relevant discussion sections. The restatement did not change previously reported UK financial information. The impact of the change on net sales, cost of products sold, provision for income taxes and net incomeprinciple markets for the ~~prior periods presented and the nine months ended December 31, 2004 is~~Company’s equipment, which may be sold either as ~~follows:~~

~~The effect of the change on retained earnings is as follows:~~ 22

Graham Corporation designs and builds vacuum and heat transfer equipment for the process industries throughout the world. The Company is a leader in vacuum technology in the principal markets it serves. The principal markets for our equipmentcomponents or complete units, are the ~~chemical,~~ petrochemical, ~~petroleum refining~~oil refinery and electric power ~~generating~~generation industries, including cogeneration and geothermal plants. ~~Other markets served include~~Graham equipment can also be found in diverse applications, such as metal refining, pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, food processing, ~~drug manufacturing,~~drugs, heating, ventilating and air conditioning. ~~Ejectors, liquid ring~~

Because Graham’s products are capital goods, industrial downturns can have a major impact on sales. The current level of inquiries for Graham’s products gives the Company reason to believe that it has entered an up cycle for capital spending, which it believes should continue to positively impact its business for the immediate future. Global growth and ~~dry vacuum pumps, condensers, heat exchangers~~expansion in oil refineries, petrochemical plants and ~~other products we sell, sold either as components or as complete systems,~~power generation are used by our customers to produce synthetic fibers, chemicals, petroleum products (including gasoline), electric power, processed food (including canned, frozen and dairy products), pharmaceutical products, paper, steel, fertilizers and numerous other products used everyday by people throughout the world. driving current demand for Graham products.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document, including in this ~~MD&A,~~Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical facts, constitute ~~"Forward- Looking Statements"~~“Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, in general, predict, forecast, indicate or imply future results, performance or achievements and generally

use words ~~so indicative. The Company wishes~~such as “anticipates,” “expects,” “believes,” “estimates,” “intends,” and similar expressions to ~~caution the reader that numerous~~identify such statements. Numerous important factors which involve risks and uncertainties, including but not limited to ~~economic, competitive, governmental~~the Company’s strategy to build its global sales representative channel, the effectiveness of automation in its operations, the ability to improve its cost competitiveness, customer preferences and ~~technological factors affecting~~changes in market conditions in the ~~Company's operations, markets, products, services and prices,~~industries in which the Company operates, and other factors discussed in the ~~Company's~~Company’s filings with the Securities and Exchange Commission, in the future, could affect the ~~Company's~~Company’s actual results and could cause its actual consolidated results to23 differ materially from those expressed in any forward-looking statement made by ~~or on behalf of,~~ the Company.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

The discussion and analysis of ~~our~~the Company’s financial condition and results of operations are based upon ~~our~~the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of ~~America ("GAAP").~~America.

Critical accounting policies are defined as those that ~~are reflective of~~reflect significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management has discussed each of these critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Revenue Recognition - – The Corporation recognizes revenue on all contracts with a planned manufacturing process in excess of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion method. The percentage-of-completion method is determined by relating actual labor incurred ~~to-date~~ to ~~management's~~a specific date to management’s estimate of total labor to be incurred on each contract. Contracts in progress are reviewed monthly, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated costs at completion. Losses on contracts are recognized immediately when known.

Revenue on other contracts (less than four weeks in duration, which approximates less than 575 direct labor hours) not accounted for using the percentage-of-completion method is ~~accounted for on~~recognized utilizing the completed contract ~~method because the~~method. The majority of the ~~Company's~~Company’s contracts have a planned manufacturing process of less than four weeks and the results reported under this method do not vary materially from the use of the percentage-of-completion method. The Company recognizes revenue and all related costs on the completed contract method upon substantial completion or shipment of products to the customer. Substantial completion is consistently defined as at least 95% complete with regard to direct labor hours. Customer acceptance is generally required throughout the construction process and the Company has no further material obligations under the contract after the revenue is recognized.

Pension and Postretirement Benefits - – The ~~Company's~~Company’s defined benefit pension and other postretirement benefit costs and obligations are dependent on actuarial assumptions used in calculating such amounts. These assumptions ~~which~~ are reviewed annually by the Company and include the discount rate, long-term expected rate of return on plan assets, salary growth, healthcare cost trend rate and other economic and demographic factors. The Company bases the discount rate assumption for its plans on the AA-rated corporate long-term bond yield rate. The long-term expected rate of return on plan assets is based on the ~~plan's~~plan’s asset allocation, historical returns and ~~management's~~management’s expectation as to future returns that are expected to be realized over the estimated remaining life of the plan liabilities that will be funded with the plan assets. The salary growth assumptions are determined based on the ~~Company's~~Company’s long-term actual experience and24 future and near-term outlook. The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook, and an assessment of the likely long-term trends.

To the extent that actual results differ from ~~our~~the Company’s assumptions, the differences are reflected as unrecognized gains and losses and are amortized to earnings over the estimated future service period of the plan participants to the extent such total net recognized gains and losses exceed 10% of the greater of the ~~plan's~~plan’s projected benefit obligation or the market-related value of assets. Significant differences in actual experience or significant changes in future assumptions would affect the ~~Company's~~

Company’s pension and postretirement benefit costs and obligations. Use of Estimates - The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Use of estimates include the recording of revenue, pension obligations, and the underlying assumptions and valuation reserves for uncollectible accounts, inventory obsolescence, deferred taxes, warranty and liquidated damages. Results of Operations - ---------------------

RESULTS OF OPERATIONS

For an understanding of the significant factors that influenced the ~~Company's~~Company’s performance, the following discussion should be read in conjunction with the quarterly condensed consolidated financial statements and the notes to condensed consolidated financial ~~statements.~~

Three Months Ended --------------------------------------- December 31, 2004 December 31, 2003 ----------------- ----------------- ~~USA UK USA UK --- -- --- --~~statements contained in this report.
(Dollar amounts in thousands except per share data)

Three Months Ended
June 30,
2005 2004

Net sales $ 11,749 $ 8,281
Income (loss) from continuing operations $ 703 $ (749 )
Diluted income (loss) per share from continuing operations $ 0.39 $ (0.45 )
Identifiable assets $ 32,758 $ 33,529
Sales $10,783 $ 2,406 $ 8,891 $ 2,358 Net Income (Loss) $ (69) $ 22 $ (701) $ 0 Diluted Income (Loss)Per Share $ (0.04) $ 0.01 $ (0.43) $ 0 Identifiable Assets $31,104 $ 6,046 $31,485 $ 6,176
25

~~Amounts above are inclusive of intercompany amounts. Consolidated sales (net of intercompany sales) for the quarter were $12,937, as compared to $10,224~~ for the quarter ended ~~December 31, 2003.~~June 30, 2005 were $11,749, as compared to $8,281 for the quarter ended June 30, 2004. This represents a 27% increase in consolidated sales. Sales in the USA were up 21% from one year ago. Sales from UK operations were up 2%. The increase in USA sales for the current quarter was due to selling price increases initiated to mitigate rising material costs and greater surface condenser sales. (Due to the restatement, FYE 2004 consolidated and USA sales were increased by $197 for the quarter). Consolidated sales (net of intercompany sales) for the nine months were $33,781, as compared to $31,348 for the nine months ended December 31, 2003. This represents an 8%42% increase in sales. The growth in sales came from increases in both domestic and export business, with export sales to Canada, Asia and the Middle East having the greatest improvement compared with the quarter ended June 30, 2004. Sales, by product, were up due to significantly greater demand for Graham’s condensers and replacement parts. Condenser sales increased about $3,597 or 527%. Capital spending in the ~~USA~~refinery, power and chemical/petrochemical markets is driving this demand. The Company anticipates this trend to be sustained for at least the immediate future. Replacement part sales were up ~~1% from one year ago. Sales from UK operations were up 12%~~$1,510 or about 91%. ~~The FYE 2005 year-to-date (YTD)~~This increase ~~in sales~~ was due substantially to ~~USA increased~~one unusually large replacement order. Partially offsetting these increases were declines in ejector and vacuum pump sales, as compared with the quarter ended June 30, 2004. Vacuum pump sales were down due to the disposal of Graham’s U.K. pump manufacturing operation, which occurred in the ~~current~~fourth quarter of fiscal year 2005. Fewer ejector sales were a matter of timing of shipments. Both pump and ~~increased~~ejector sales ~~YTD in UK operations of offshore oil extraction pumps. (Due~~are expected to rebound as the ~~restatement, FYE 2004 consolidated and USA sales increased $429 for the nine months).~~year continues.

The ~~consolidated~~ gross profit margin for the current quarter was ~~25%~~28%, as compared to ~~15%~~9% for the quarter ended December 31, 2003. By segment, USA operations' gross profit increased from 11% for the third quarter ended December 31, 2003 to 24% for the current quarter. The UK's gross profit margin remained unchanged at 25% for both the quarter ended December 31, 2004 and December 31, 2003.June 30, 2004. The improvement in the ~~USA~~ gross profit margin for the quarter was due to greater sales volume, selling price increases, ~~which generated~~and improved ~~contribution margins across all~~ product ~~lines,~~mix.

Selling, general and ~~fewer sales of lower margin products. (Due to the restatement, FYE 2004 consolidated and USA gross profit percentages increased 1% for the quarter).~~ 26 The consolidated gross profit margin was 17% for both the nine months ended December 31, 2004 and 2003. USA operations' gross profit margin of 15% for the nine months ended December 31, 2004 was unchanged, as compared to the nine months ended December 31, 2003. The UK's gross profit margin decreased to 20% for the nine months ended December 31, 2004 from 22% for the nine months ended December 31, 2003. The reduction in the UK gross profit margin for the nine months was due to the shipment of a few orders taken at very low selling prices. (The restatement did not change gross profit percentages for the nine months ended December 31, 2003). Selling, General and Administrativeadministrative expenses ~~(SG&A)~~ were ~~20%~~19% of sales for the current quarter, as compared to ~~25%~~24% for the quarter ended ~~December 31, 2003~~June 30, 2004. Selling, general and ~~22%~~administrative expenses were down as a percentage of sales due to greater sales.

Actual expenses for the ~~nine months ended December 31, 2004, as compared to 24% for the nine month period ended one year earlier. Percentage variances in SG&A expenses are~~current quarter increased due to ~~changes in~~greater sales ~~levels in both~~activity, Sarbanes-Oxley compliance costs and costs associated with the ~~quarterly and nine-month comparative periods.~~reorganization along business unit lines.

Interest expense was ~~$34~~$5 for ~~the quarter~~both quarters ended ~~December 31, 2004~~June 30, 2005 and $35 for the quarter ended December 31, 2003. For the nine-month periods ended December 31, 2004 and 2003, interest expense was $84 and $93, respectively. Interest expense for the current fiscal year to date decreased in the USA, which resulted in a consolidated decrease of interest expense. Other income for the nine months ended December 31, 2004 was $1,592, as compared to $522 for the nine months ended December 31, 2003. Other income of $1,592 resulted from a settlement of a contract dispute over cancellation charges. The settlement of this matter ended a complaint filed in April 2004 in the United States District Court for the Northern District of California alleging breach of contract by a customer and a counterclaim filed by the customer seeking specific performance of the contract or money damages. Other income of $522 recognized for the nine months ended December 31, 2003 represents a non- recurring curtailment gain resulting from the discontinuation of postretirement medical benefits. Other expense recognized in the current quarter and nine months ended December 31, 2004 of $648 was incurred in conjunction with reaching an Agreement and General Release with its former President and CEO. In accordance with the agreement, the Company will retain the former officer as an independent consultant for the period January 1, 2005 to November 8, 2008 and provide certain medical, dental and insurance benefits during the consulting period. Other expense for the nine months ended December 31, 2003 was zero. 272004.

The effective income tax rate for the quarter was ~~(11)%, as compared to 30% at December 31, 2003. The effective income tax rate for the nine months ended December 31, 2004 was~~ 35%, as compared to ~~29%~~37% at December 31, 2003. The lower effective income tax rate for the nine-month period ended December 31, 2003, as compared to 2004, was attributable to permanent items not available to the Company in FYE 2005. The unusually low effective income tax rateJune 30, 2004. Both quarterly rates approximate statutory rates.

Income for the current ~~quarter resulted~~period from ~~the need to revise the annualized projected effective~~continuing operations and net income tax rate and recognize the year-to-date provision adjustment in a quarter when the income (loss) before income tax amount was minimal. (The restatement did not change the income tax rates for the three or nine months ended December 31, 2003). Net loss for the quarter was ~~$21~~$703 or ~~$0.01~~$0.39 per diluted share. ~~This compares to a~~Loss from continuing operations and the net loss offor the three months ended June 30, 2004 was $749 or ~~$0.46 per diluted share for the quarter ended December 31, 2003. Net losses for the nine- month periods ended December 31, 2004 and 2003 were $615, or $0.37~~$0.45 per diluted share, and ~~$1,245~~$977 or ~~$0.76~~$0.58 per diluted share, respectively. ~~(For~~The loss for discontinued operations for the ~~nine~~three months ended ~~December 31, 2003, the restatement reduced the consolidated and USA net losses by $44~~June 30, 2004 of $228 or ~~$0.02~~$.14 per diluted ~~share. The restatement reduced~~share represents the ~~consolidated and USA net~~operating losses ~~for~~of the ~~quarter ended December 31, 2004 by $38 or $0.02~~U.K. subsidiary that was disposed of in March 2005. There was no loss from discontinued operations in the current quarter.

LIQUIDITY AND CAPITAL RESOURCES

(Dollar amounts in thousands except per ~~diluted share.) Liquidity and Capital Resources - -------------------------------~~

~~(1)As of December 31~~ share data)


	Three Months Ended
	June 30,
	2005			2004

Working Capital	$	12,696		$	9,202
Cash and Investments	$	6,893		$	5,577
Capital Expenditures	$	81		$	27
Long-Term Bank Borrowings	$	—		$	—
Capital Leases	$	112		$	127
Working Capital Ratio		2.4			2.1
Debt/Capitalization		0	%		0.5	%

Working Capital Ratio equals Current Assets divided by Current ~~Liabilities Long-Term~~ Liabilities.
Debt/~~Equity~~Capitalization equals ~~(Current Portion of Long-Term Debt and Long- Term Debt)~~Bank Borrowings divided by ~~Shareholders' Equity Consolidated~~Stockholders Equity.

Net cash ~~flow from operations~~provided by operating activities was ~~negative $2,629~~$5,788 for the ~~nine~~three months ended ~~December 31, 2004~~June 30, 2005, as compared ~~to negative~~with net cash ~~flow~~provided from continuing operations of ~~$2,294~~$276 for the ~~nine~~three months ended ~~December 31, 2003.~~June 30, 2004. The Company believes that this significant increase is an indication of greatly improved business conditions. The increase in ~~negative~~ cash ~~flow~~provided by operations was due to ~~increased inventories. Inventories increased~~net income of $703 for the current quarter, as compared to a loss from continuing operations of $749 for the three months ended June 30, 2004, and reduced working capital. For the quarter ended June 30, 2004, cash generated through reductions in ~~preparation for significant FYE 2005 fourth quarter shipments, for stocking standard products~~trade accounts receivable was used to fund operating losses and ~~due to rising material costs.~~ ~~28 The primary source of liquidity is~~reduce current liabilities, thus resulting in minimal net cash ~~flow~~generated from operations.

Net cash generated from operations in excess of cash held for near term needs was invested in marketable securities. Graham’s investments in marketable securities consist of U.S.

Government instruments with maturity periods of 91 to 120 days, in general. Investments increased $3,479 from March 31, 2005 and $977, as compared to June 30, 2004. Investments decreased $801 from March 31, 2004 to June 30, 2004.

In the first quarter, short-term ~~treasury bills~~debt of $1,872 was paid off. Excluding capital lease obligations of $112, all of the Company’s short-term and ~~secured~~long-term debt was retired as of June 30, 2005.

In June 2005, the Company amended its credit ~~agreements.~~facility to increase its letter of credit capacity from $4,000 to $8,000. In July 2005, the Company entered into a new three-year credit agreement with its bank, which credit facility replaced in its entirety, the Company’s prior facility. Both financing activities were conducted to meet the anticipated increase in orders. The Company’s new credit facility includes a credit capacity of $13,000, which includes a letter of credit limit of $8,000, with interest rates ranging from a maximum rate of prime less 0.25% to prime less 1% or a LIBOR-based rate of LIBOR plus 2% to LIBOR plus 1%. The range in borrowing rates is determined by the ratio of total liabilities to tangible net worth. The Company has the option of choosing an interest rate based on the prime rate or the LIBOR rate.

In addition to the possible need to increase working capital over fiscal year 2005 to finance increased business, other anticipated uses of cash include a capital expenditure program of up to $2,000 and paying quarterly dividends to stockholders. A significant portion of the capital expenditure budget is appropriated for information technology and software expenditures that the Company believes will enhance its engineering and design productivity. Capital expenditures for the first quarter of fiscal year 2006 were $81, as compared to $27 for continuing operations in the quarter ended June 30, 2004. The Company currently has entered into commitments to purchase approximately $1.0 million of capital expenditures. Graham continues to review its financing options with respect to its fiscal year 2006 capital expenditure program and strategic growth objectives.

Graham believes its cash from operations and available debt capacity will be adequate to meet its cash needs to carry out its strategic plans and operations, including planned capital spending, in fiscal year 2006.

Total cash provided from operating activities by discontinued operations in the quarter ended June 30, 2004 was $33. The discontinued operation invested $38 in capital expenditures and disbursed $327 for financing activities to reduce bank debt.

In the current quarter, Graham generated $410 from the issuance of common stock in conjunction with the exercising of stock options. No stock options were exercised in the quarter ended June 30, 2004.

ORDERS AND BACKLOG

Orders ~~and Backlog - ------------------ Consolidated orders~~ for the current quarter were ~~$16,195,~~$20,425, as compared to ~~$9,965~~$13,487 for the quarter ended ~~December 31, 2003,~~June 30, 2004, representing a ~~63%~~51% increase. ~~Prior to intercompany elimination, USA~~Orders represent requests received from customers for the supply of goods and/or services from the Company. The Company believes that customer orders ~~were $13,954,~~can be a significant indicator of its future performance. Management believes the Company’s strong first quarter bookings reflect an increase in overall market activity.

Backlog was $31,145 at June 30, 2005, as compared to ~~$8,301~~$18,776 at June 30, 2004, representing a 66% increase. Backlog represents the total dollar value of orders received for which revenue has not yet been recognized. Orders for surface condensers and ejectors in the current quarter increased 36% and 126%, respectively, over the quarter ended ~~December 31, 2003. Orders in~~June 30, 2004 due largely to the UK were $2,638, as compared to $2,394 one year ago. Consolidated orders for the nine months ended December 31, 2004 were $41,707, up 44%, as compared to $29,052 for the nine months ended December 31, 2003. Prior to intercompany elimination, USA orders for the nine months ended December 31, 2004 were $36,600, as compared to $23,624 for the nine months ended December 31, 2003. UK orders were $5,985 and $7,504 for the nine months ended December 31, 2004 and 2003, respectively. Orders of surface condensers were up $10,013 over the nine months ended December 31, 2003 due to increased demand in major project work in the ~~chemical, energy~~petrochemical and refinery sectors. ~~Improved business conditions are global. As compared to December 31, 2003, for USA products, export~~Export orders ~~are~~were up ~~53%~~67% and domestic orders ~~are~~were up ~~57%.~~28% over the quarter ended June 30, 2004. Export orders for Mexico and the Middle East rose substantially over the quarter ended June 30, 2004. Profit margins on orders in backlog have also improved. Backlog was $24,722 at December 31, 2004, as compared to $15,759 at December 31, 2003, representing a 57% increase. Prior to intercompany eliminations, USA backlog was $22,145 and UK backlog was $3,082 at December 31, 2004. At December 31, 2003, USA and UK backlog amounts were $12,840 and $3,712, respectively. The prior year backlog amounts have been restated to reflect contract cancellations and the restatement of salesimproved due to ~~the change in the revenue recognition accounting method.~~price increases and improved product mix.

All orders in backlog represent orders from traditional markets in the ~~Company's~~Company’s established product lines. ~~Market Risk (Quantitative~~Approximately 36% of the backlog can be attributed to equipment for refinery project work, 38% to petrochemical projects, and ~~Qualitative Disclosures) - ------------------------------------------------------~~18% to equipment sold to the power sector. Refinery project work is on the increase due to the need for more refinery capacity. This need is being driven by the shortages of refinery capacity resulting from rising oil demand from China and India, the need to upgrade existing refineries so that they can make use of lower grade, high sulfur crude, and the need to revamp refineries to meet environmental regulations pertaining to diesel fuel sulfur content requirements. Most refineries today can only process light, sweet (low sulfur) crude, which is in less supply and more expensive than the high sulfur crude variety. Orders from the petrochemical and power markets are mainly for overseas capacity expansion projects. These orders reflect the improved Asian economy. In recent years there has been minimal capital investments by these sectors.

CONTINGENCIES

outcome of these claims nor the potential for liability is determinable.

At June 30, 2005, management was unaware of any additional litigation matters. However, from time to time, the Company is subject to legal proceedings and potential claims arising from contractual agreements in the ordinary course of business. The Company believes there are no such matters pending against it that could have, individually or in the aggregate, a material adverse effect on its business or financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs.” This Statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “abnormal”. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during the Company’s fiscal year 2007. The Company believes the adoption of this Statement will result in the acceleration of recognizing indirect manufacturing expenses during times of below normal utilization of plant capacity. Management has not determined the impact on the Consolidated Financial Statements of adopting this Statement.

The FASB also issued in December 2004, SFAS No. 123R, “Share-Based Payment”. This Statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values for fiscal years beginning after June 15, 2005. In addition, SFAS No. 123(R) will cause unrecognized expense (based on the fair values determined for the pro forma footnote disclosure, adjusted for estimated forfeitures) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include the modified prospective or the modified retrospective adoption methods. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of SFAS No. 123(R), while the modified retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated. The Company is evaluating the requirements of

SFAS No. 123(R), but cannot yet estimate the effect of adopting SFAS No. 123(R) as it has not yet selected the method of adoption or an option-pricing model and has not yet finalized estimates of its expected forfeitures. For additional information, see Note 4, “Stock-Based Compensation”, of the Notes to Condensed Consolidated Financial Statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections. This Statement is a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. Additionally, the pronouncement gives guidance in the reporting of a correction of an error by restating previously issued financial statements. The impact on previously issued financial statements can only be determined when specific events covered by this pronouncement are applicable. This Statement will be effective in fiscal years beginning after December 15, 2005.

OFF BALANCE SHEET ARRANGEMENTS

The Company did not have any off balance sheet arrangements as of June 30, 2005 and 2004.

SUBSEQUENT EVENTS

On July 28, 2005, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common shares. The two-for-one stock split will be effected as a stock dividend, and stockholders will receive one additional share of common stock for every share of common stock held on the record date of September 1, 2005. The Company expects that the new common shares will be distributed on or about October 3, 2005. Fractional shares will be paid in cash based upon the closing price of the Company’s common stock on September 1, 2005. Pro forma earnings per share amounts are disclosed in the Statement of Operations and Retained Earnings and Note 5 to the Condensed Consolidated Financial Statements.

Item 3. MARKET RISK (QUANTITATIVE AND QUALITATIVE DISCLOSURES)

The principal market risks (i.e., the risk of loss arising from changes in market rates and prices) to which Graham is exposed are: ~~- - foreign currency exchange rates - - equity price risk (related to its Long-Term Incentive Plan for Directors) - -~~

	•		foreign currency exchange rates

	•		equity price risk (related to its Long-Term Incentive Plan for Directors)

	•		material availability and price risk

The assumptions applied in preparing the following quantitative disclosures regarding foreign currency exchange rate and equity price risk are based upon volatility ranges experienced in relevant historical periods, ~~management's~~management’s current knowledge of the business and market place, and ~~management's~~management’s judgment of the probability of future volatility based upon the historical trends and economic conditions of the business.~~29 Graham's~~

FOREIGN CURRENCY

Graham’s international consolidated sales for the past three years approximates ~~43%~~40% of total sales. Operating in world markets involves exposure to movements in currency exchange rates. Currency movements can affect sales in several ways, the foremost being the ability to compete for orders against competition having a relatively weaker currency. Business lost due to ~~this~~competition for orders against competitors having a relatively weaker currency cannot be quantified. Secondly, cash can be adversely impacted by the conversion of sales in foreign currency to U.S. dollars. ~~The substantial portion of Graham's sales is collected in the local currency (USA - dollars; UK - pounds sterling).~~ For both the quarters ended ~~December 31,~~June 30, 2005 and June 30, 2004, ~~and 2003,~~there were no sales in foreign currencies ~~were 2% of sales. For the nine months ended December 31, 2004 and 2003, sales in foreign currencies were 3% and 2% of total sales, respectively.~~from continuing operations. At certain times, the Company may enter into forward foreign currency exchange agreements to hedge its exposure against unfavorable changes in foreign currency values on significant sales contracts negotiated in foreign currencies.

Graham has limited exposure to foreign currency purchases. For the ~~three month~~three-month periods ended ~~December 31,~~June 30, 2005 and June 30, 2004, ~~and 2003,~~ purchases in foreign currencies by continuing operations were 5%1% and 9%5% of cost of goods sold, respectively. For the nine month periods ended December 31, 2004 and 2003, purchases in foreign currencies were 6% and 10% of cost of goods sold, respectively. In FYE 2004 and 2005, USA operations recorded an unusually significant dollar volume of orders utilizing UK subsidiary products in conjunction with USA equipment. At certain times, forward foreign currency exchange contracts may be utilized to limit currency exposure. ~~UK operations experienced a current quarter net income of $22, as compared to a quarterly net income (loss) of $0 for December 31, 2003. For the nine months ended December 31,~~

At June 30, 2005 and 2004, and 2003, foreign operations produced net losses of $329 and $276, respectively. As currency exchange rates change, translations of the income statements of the UK business into US dollars affect year-over-year comparability of operating results. The increase in the foreign currency translation rate to convert pounds sterling to US dollars increased all UK income statement items and order amounts by 12% and all UK balance sheet and backlog amounts by 7% for the nine months ended December 31, 2004 over 2003. The Company does not hedge translation risks because cash flows from UK operations are mostly reinvested in the UK. A 10% change inthere were no forward foreign currency exchange ~~rates would have impacted~~contracts held by the ~~UK reported net loss by approximately $3 and $0 for the three months ended December 31, 2004 and 2003, and $33 and $28 for the nine month periods, respectively.~~Company.

EQUITY PRICE RISK

The Company has a Long-Term Incentive Plan, which provides for awards of share equivalent units (SEUs) for outside directors based upon the ~~Company's~~Company’s stock performance. ~~The outstanding~~ SEUs are ~~recorded~~valued at fair market value, thereby exposing the Company to equity price risk. Upward adjustment to market value is limited to (a) $16 per unit if at the valuation date the fair market value was less

than or equal to $16 per unit or (b) the fair market value at the valuation date if the fair market value on that date was greater than $16 per unit. Gains and losses recognized due to market price changes are included in the ~~Company's~~Company’s results of operations. Based upon the plan provisions and SEUs outstanding at ~~December 31,~~June 30, 2005 and June 30, 2004 and ~~2003 and~~ a ~~$12~~$16 per share price, a 50-75% change in the ~~respective~~ year end market price of the ~~Company's~~Company’s common stock would positively or ~~negatively~~(negatively) impact the ~~Company's operating~~ ~~30 (Continued) results by $79 to $118 for the three and nine months ended December 31, 2004 and $99 to $148 for the three and nine months ended December 31, 2003.~~Company’s income before income taxes as follows:

(Dollar amounts in thousands except per share data)


	Thee months ended
	June 30,
	2005			2004
50% increase	$	(2	)	$	(135	)
50% decrease	$	137		$	135
75% increase	$	(2	)	$	(202	)
75% decrease	$	206		$	202

Assuming required net income ~~of $500 is~~targets are met, certain awards would be provided, and based upon a market price of the ~~Company's~~Company’s stock of ~~$12~~$16 per share, a 50-75% change in the stock price would positively ~~or negatively~~(negatively) impact the ~~Company's operating results by $122 to $183~~Company’s income before income taxes in ~~2006, $136 to $203~~future years as follows:

(Dollar amounts in ~~2007, $146 to $218 in 2008, $156 to $233 in 2009 and $158 to $237 in 2010.~~thousands except per share data)


March 31,
	2007			2008			2009			2010			2011
50% increase	$	(2	)	$	(2	)	$	(2	)	$	(2	)	$	(2	)
50% decrease	$	154		$	171		$	183		$	195		$	197
75% increase	$	(2	)	$	(2	)	$	(2	)	$	(2	)	$	(2	)
75% decrease	$	231		$	256		$	274		$	293		$	296

MATERIAL AVAILABILITY

The risks associated with materials include availability and price increases. Material shortages have affected the ~~Company's~~Company’s ability to meet delivery requirements for certain orders. The Company has identified alternative vendors in such cases and seeks to negotiate escalation provisions in its sales contracts in the event that costs of materials increase. Profit margins on sales would be reduced to the extent rising material costs could not be passed on to ~~Graham's~~Graham’s customers. ~~Contingencies - -------------~~

Item 4. CONTROLS AND PROCEDURES

The Company is a co-defendant with numerous other defendants in matters of litigation alleging personal injury from exposure to asbestos contained in some of the Company's products previously manufactured. To date, it has been the Company's experience that upon investigation the cases have been dismissed or settled for minimal amounts. However, the magnitude of potential damages on unsettled current claims is not determinable. In December 2004, the Company received a request for payment from the Metal Goods & Manufacturers Trust Fund for $30 relating to a workers' compensation assessment asserted against members in the Trust Fund during the period 1993 through 2001. The Company was a member of the Trust Fund from April 1994 until May 1995. The Company is disputing this claim. It is not possible to predict the outcome of this dispute at this time, however, management has provided for this contingent liability at December 31, 2004. From time to time, the Company is subject to legal proceedings and potential claims arising from contractual agreements in the ordinary course of business. The Company believes there are no such matters pending against it that could have, individually or in the aggregate, a material adverse effect on its financial statements. New Accounting Pronouncements - ----------------------------- In November 2004, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing, "to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "abnormal." In addition, this Statement requires that allocation of fixed 31 (Continued) production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred on a prospective basis during fiscal years beginning after June 15, 2005. The pronouncement will have the effect of accelerating the recognition of indirect manufacturing costs in times of below normal manufacturing capacity utilization. In December 2004, the FASB issued SFAS Nos. 152, Accounting for Real Estate Time-Sharing Transactions and 153, Exchanges of Nonmonetary Assets as Amendment of ARB Opinion No. 29. Both statements are effective for fiscal years beginning after June 15, 2005. It is anticipated that neither pronouncement will have a significant, if any, impact on Graham's financial reporting, if any. The FASB also issued in December 2004, SFAS No. 123R, "Share-Based Payment". This Statement revises the standards established for the accounting of transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement is effective as of the beginning of the first interim reporting period that begins after December 15, 2005 and applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The adoption of this Statement will have an effect on the Company's consolidated results of operations. For additional information, see Note 3 to the Condensed Consolidated Financial Statements. Controls and Procedures - ----------------------- The Company'sCompany’s President and Chief Executive Officer and its Vice ~~President-Finance~~President Finance and Administration, Chief Financial Officer each have ~~independently~~ evaluated the ~~Company's~~Company’s disclosure controls and procedures as(as defined in Exchange Act Rules ~~13a-14(c)~~13a-15(e) and ~~15d- 14(c)~~15d-15(e)) as of the end of the period covered by this quarterly report. Based on these reviews, each has determined such

INDEX OF EXHIBITS (2) Plan of acquisition, reorganization, arrangement, liquidation or succession Not applicable. (3)(i) Articles of Incorporation of Graham Corporation (filed as Exhibit 3(b) to the Registrant's annual report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference.) (3)(ii) By-laws of registrant, as amended (filed as Exhibit 3(ii) to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference). (4) Instruments defining the rights of security holders, including indentures (a) Equity securities The instruments defining the rights of the holders of Registrant's equity securities are as follows: Certificate of Incorporation, as amended, of Registrant (filed as Exhibit 3(a) to the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference.) Stockholder Rights Plan of Graham Corporation (filed as Item 5 to Registrant's current report filed on Form 8-K on August 23, 2000 and Registrant's Form 8-A filed on September 15, 2000, and incorporated herein by reference.) (b) Debt securities Not applicable. (10) Material Contracts (10.1) Indemnification Agreements with Named Directors 1989 Stock Option and Appreciation Rights Plan of Graham Corporation (filed on the Registrant's Proxy Statement for its 1990 Annual Meeting of Stockholders and incorporated herein by reference.) 1995 Graham Corporation Incentive Plan to Increase Shareholder Value (filed on the Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders and incorporated herein by reference.) 34 Index to Exhibits (Continued) 2000 Graham Corporation Incentive Plan to Increase Shareholder Value (filed on the Registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders and incorporated herein by reference.) Graham Corporation Outside Directors' Long-Term Incentive Plan (filed as Exhibit 10.3 to the Registrant's annual report on Form 10-K for the fiscal year ended March 31, 1998, and is incorporated herein by reference.) Employment Contracts between Graham Corporation and Named Executive Officers (filed as Exhibit 10.4 to the Registrant's annual report on Form 10-K for the fiscal year ended March 31, 1998 and Exhibit 10.2 to Registrant's current report filed on Form 8-K on December 2, 2004, and are incorporated herein by reference.) Senior Executive Severance Agreements with Named Executive Officers (filed as Exhibit 10.5 to the Registrant's annual report on Form 10-K for the fiscal year ended March 31, 1998, and is incorporated herein by reference.) Long-Term Stock Ownership Plan of Graham Corporation (filed on the Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders and incorporated herein by reference.) Agreement and Release of Claims dated November


3.1		Articles of Incorporation of Graham Corporation (filed as Exhibit 3(b) to the Registrant’s annual report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference.)

3.2		By-laws of registrant, as amended (filed as Exhibit 3(ii) to the Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference).

4.1		Certificate of Incorporation, as amended, of Registrant (filed as Exhibit 3(a) to the Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference.)

4.2		Stockholder Rights Plan of Graham Corporation (filed as Item 5 to Registrant’s current report filed on Form 8-K on August 23, 2000 and Registrant’s Form 8-A filed on September 15, 2000, and incorporated herein by reference.)

4.3		Amended and Restated Credit Facility Agreement (filed as Exhibit 4.1 to Registrant’s current report filed on Form 8-K on July 13, 2005 and is incorporated herein by reference.)

31.1		Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Vice President Finance and Administration, Chief Financial Officer

32.1		Section 1350 Certifications

29 2004 between Alvaro Cadena and Graham Corporation (filed as Exhibit 10.1 to Registrant's current report filed on Form 8-K on December 2, 2004 and is incorporated herein by reference.) Indemnification Agreement with Named Officer (filed as Exhibit 10.1 to Registrant's current report filed on Form 8-K on January 25, 2005 and is incorporated herein by reference.) (11) Statement re-computation of per share earnings Computation of per share earnings is included in Note 4 of the Notes to Financial Information. (14) Code of Ethics The Company's code of ethics is available on the Company's website at www.graham-mfg.com. (15) Letter re-unaudited interim financial information Not applicable. 35 (Continued) (18) Letter re-change in accounting principles Not applicable. (19) Report furnished to security holders None. (22) Published report regarding matters submitted to vote of security holders None. (23) Consents of experts and counsel Not applicable. (24) Power of Attorney Not applicable. (31) Rule 13a-14(a)/15d-14(a) Certifications (32) Section 1350 Certifications (99) Additional exhibits None.


		Page
Part I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosure About Market Risk 23	25

Item 4.	Controls and Procedures	26

Part II.	OTHER INFORMATION

Item 5.	Other Information 27	28

Item 6.	Exhibits	28
EX-31.1 Certification of President and ~~Reports on Form 8-K 27~~ CEO
EX-31.2 Certification of VP of Finance and Admin. CFO
EX-32.1 Section 1350 Certification


	GRAHAM CORPORATION
	/s/ J. Ronald Hansen
	J. Ronald Hansen
	Vice President Finance and Administration, Chief Financial Officer (Principal Accounting Officer)