~~FORM 10-Q~~

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)


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

		~~SECURITIES EXCHANGE ACT OF 1934.~~

For the ~~Quarterly Period EndedJune~~quarterly period ended September 30, 2005

OR


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

		For the transition period from ____________ to ____________

~~For the transition period from~~to

Commission File Number1-8462

GRAHAM CORPORATION

(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)~~principal executive offices)		(Zip Code)

585-343-2216

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

area code)

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

YESþ NOo

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

Yeso Noþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of ~~July 22,~~November 1, 2005, there were outstanding ~~1,747,932~~3,599,764 shares of common stock, par value $.10 per share.

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

(Dollar amounts in thousands, except per share data)


	September 30,			March 31,
	2005			2005
	(Unaudited)
Assets

Current assets:
Cash and cash equivalents	$	743		$	724
Investments		8,451			1,993
Trade accounts receivable, net of allowances ($30 and $28 at September 30 and March 31, 2005, respectively)		6,297			10,026
Unbilled revenue		4,215			3,620
Inventories, net		4,178			4,823
Domestic and foreign income taxes receivable		72			45
Deferred income tax asset		1,031			719
Prepaid expenses and other current assets		335			139

Total current assets		25,322			22,089
Property, plant and equipment, net		7,779			7,649
Deferred income tax asset		2,333			3,747
Other assets		73			44

Total assets	$	35,507		$	33,529


Liabilities and Stockholders’ Equity

Current liabilities:
Short-term debt	$	—		$	1,872
Current portion of long-term debt		49			48
Accounts payable		2,361			3,374
Accrued compensation		3,310			2,802
Accrued expenses and other liabilities		1,240			1,494
Customer deposits		3,609			1,295

Total current liabilities		10,569			10,885

Long-term debt		51			44
Accrued compensation		245			213
Other long-term liabilities		283			364
Accrued pension liability		2,370			3,141
Accrued postretirement benefits		2,246			2,304

Total liabilities		15,764			16,951


Stockholders’ equity:
Preferred stock, $1 par value —
Authorized, 500,000 shares
Common stock, $.10 par value —
Authorized, 6,000,000 shares
Issued, 3,798,010 and 3,593,480 shares at September 30 and March 31, 2005, respectively		190			180
Capital in excess of par value		6,783			5,553
Retained earnings		15,958			14,082
Accumulated other comprehensive loss
Minimum pension liability adjustment		(1,698	)		(1,698	)
Cumulative foreign currency translation adjustment		(1	)		—
Treasury stock (198,246 shares at September 30 and March 31, 2005)		(1,385	)		(1,385	)
Notes receivable from officers and directors		(104	)		(154	)


Total stockholders’ equity		19,743			16,578

Total liabilities and stockholders’ equity	$	35,507		$	33,529

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)

(Dollar amounts in thousands, except per share data)


	Three Months Ended
	June 30,						Three Months Ended						Six Months Ended
	2005			2004			September 30,						September 30,
							2005			2004			2005			2004
Net sales	$	11,749		$	8,281		$	14,044		$	9,071		$	25,793		$	17,352

Cost and expenses:
Cost, expenses and other income:
Cost of products sold		8,411			7,500			9,415			8,118			17,826			15,618
Selling, general and administrative		2,253			1,961			2,547			1,926			4,800			3,887
Other income								—			(1,592	)		—			(1,592	)
Interest expense		5			5			4			5			9			10

Total costs and expenses		10,669			9,466
Total costs, expenses and other income								11,966			8,457			22,635			17,923

Income (loss) from continuing operations before income taxes		1,080			(1,185	)		2,078			614			3,158			(571	)
Provision (benefit) for income taxes		377			(436	)		728			222			1,105			(214	)

Income (loss) from continuing operations		703			(749	)		1,350			392			2,053			(357	)
Loss from discontinued operations (net of income tax benefit of $101)		—			(228	)
Loss from discontinued operations (net of income tax benefit of $11 and $112 for the three and six-month periods ended September 30, 2004, respectively)								—			(9	)		—			(237	)

Net income (loss)		703			(977	)		1,350			383			2,053			(594	)
Retained earnings at beginning of period		14,082			17,322			14,699			16,262			14,082			17,322
Dividends		(86	)		(83	)		(91	)		(83	)		(177	)		(166	)

Retained earnings at end of period	$	14,699		$	16,262		$	15,958		$	16,562		$	15,958		$	16,562


Per Share Data:
Basic:
Income (loss) from continuing operations	$	.41		$	(.45	)	$	.38		$	.12		$	.58		$	(.11	)

Loss from discontinued operations	$	—		$	(.14	)	$	—		$	—		$	—		$	(.07	)

Net income (loss)	$	.41		$	(.58	)	$	.38		$	.11		$	.58		$	(.18	)


Diluted:
Income (loss) from continuing operations	$	.39		$	(.45	)	$	.36		$	.12		$	.56		$	(.11	)

Loss from discontinued operations	$	—		$	(.14	)	$	—		$	—		$	—		$	(.07	)

Net income (loss)	$	.39		$	(.58	)	$	.36		$	.11		$	.56		$	(.18	)


Per Share Data – Pro Forma Post-Split Basis
(Note 13):
Basic:
Income (loss) from continuing operations	$	.20		$	(.22	)

Loss from discontinued operations	$	—		$	(.07	)

Net income (loss)	$	.20		$	(.29	)


Diluted:
Income (loss) from continuing operations	$	.20		$	(.22	)

Loss from discontinued operations	$	—		$	(.07	)

Net income (loss)	$	.20		$	(.29	)

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						September 30,
	2005			2004			2005			2004
Operating activities:
Income (loss) from continuing operations	$	703		$	(749	)	$	2,053		$	(357	)

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations:
Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities of continuing operations:
Non cash other income											(1,592	)
Depreciation and amortization		195			195			394			390
Discount accretion on investments		(20	)		(10	)		(75	)		(19	)
Gain on disposal of property, plant and equipment		(3	)		—
Gain (loss)on disposal of property, plant and equipment								(3	)		1
Deferred income taxes		371			(436	)		1,102			(214	)
(Increase) decrease in operating assets:
Accounts receivable		3,587			2,483			3,729			2,198
Unbilled revenue		719			—			(595	)		—
Inventories		400			(49	)		645			(1,227	)
Domestic and foreign income taxes receivable/payable		(1	)		(3	)		(27	)		(10	)
Prepaid expenses and other current and non-current assets		(212	)		(189	)		(235	)		(154	)
Increase (decrease) in operating liabilities:
Accounts payable		385			(811	)		(1,014	)		(108	)
Accrued compensation, accrued expenses and other current and non-current liabilities		21			(258	)		168			(322	)
Customer deposits		(419	)		229			2,314			(78	)
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits		62			(126	)		(798	)		(269	)

Total adjustments		5,085			1,025			5,605			(1,404	)

Net cash provided by continuing operations		5,788			276
Net cash provided by discontinued operations		—			33
Net cash provided (used) by continuing operations								7,658			(1,761	)
Net cash used by discontinued operations								—			(324	)

Net cash provided by operating activities		5,788			309
Net cash provided (used) by operating activities								7,658			(2,085	)


Investing activities:
Purchase of property, plant and equipment		(81	)		(27	)		(480	)		(40	)
Collection of notes receivable from officers and directors		4			8
Proceeds from sale of property, plant and equipment								1			—
Purchase of investments		(5,459	)		(2,692	)		(13,883	)		(4,585	)
Redemption of investments at maturity		2,000			3,503			7,500			6,802

Net cash (used) provided by investing activities of continuing operations		(3,536	)		792			(6,862	)		2,177
Net cash used by investing activities of discontinued operations		—			(38	)		—			(51	)

Net cash (used) provided by investing activities		(3,536	)		754			(6,862	)		2,126


Financing activities:
Decrease in short-term debt, net		(1,872	)		—			(1,872	)		200
Principal repayments on long-term debt		(8	)		(10	)		(24	)		(21	)
Issuance of common stock		410			—			1,240			57
Collection of notes receivable from officers and directors								50			15
Dividends paid		(84	)		(83	)		(171	)		(166	)

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) provided by financing activities of continuing operations								(777	)		85
Net cash provided by financing activities of discontinued operations								—			18

Net cash used by financing activities		(1,554	)		(420	)
Net cash (used) provided by financing activities								(777	)		103

Effect of exchange rate on cash		(1	)		—			—			—

Net increase in cash and equivalents		697			643			19			144
Cash and cash equivalents at beginning of period		724			467			724			467

Cash and cash equivalents at end of period	$	1,421		$	1,110		$	743		$	611

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

~~(Dollar amounts in thousands except per share data)~~

NOTE 1 –— BASIS OF PRESENTATION

~~The~~Graham Corporation’s (the “Company’s”) condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the ~~Company’s~~instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements do not include all information and notes required by generally accepted 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.principles for complete financial statements. The March 31, 2005 Condensed Consolidated Balance Sheet was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2005. For additional information, please refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended March 31, 2005. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

The Company’s results of operations for the three and six months ended ~~June~~September 30, 2005 and cash flows for the ~~three~~six months ended ~~June~~September 30, 2005 are not necessarily indicative of the results to be expected for other interim periods or for the year ending March 31, 2006.

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 was effected as a stock dividend, and stockholders received one additional share of common stock for every share of common stock held on the record date of September 1, 2005. The new common shares were distributed on October 3, 2005. All share and per share amounts disclosed in the Condensed Consolidated Balance Sheets, the Condensed Consolidated Statements of Operations and Retained Earnings, and the reconciliation in Note 6 have been adjusted to reflect the two-for-one stock split.

All dollar amounts are presented in thousands, except per share data.

NOTE 2 ~~– CHANGE IN ACCOUNTING FOR~~— REVENUE RECOGNITION

~~During the second quarter of fiscal year 2005, the~~The Company ~~changed its method of recognizing~~recognizes revenue ~~for certain contracts from the completed contract to the percentage-of-completion method. Formerly, only~~on all 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 U.S. and U.K. operating segments, respectively, were accounted for under the percentage-of-completion method. 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~~percentage-of-completion method is determined by relating actual labor incurred to a ~~preferable~~specific date to management’s estimate of the total labor to be incurred on each contract. Contracts in progress are reviewed monthly, and sales and earnings are adjusted in current accounting ~~method for these contracts because it measures revenue, costs of products sold and related income on construction type contracts~~periods based on ~~progress~~revisions in the contract value and estimated costs at completion. Losses on ~~the~~ contracts ~~thus providing a better measure of the earnings process~~are recognized immediately when known.

Revenue on ~~a more timely basis. The Company extended its scope of~~ contracts not accounted for using the percentage-of-completion method ~~at that time because management believed that the effects on the financial statements of applying~~is recognized utilizing 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 contracts have a planned manufacturing process of less than four weeks and ~~are accounted for using~~the results reported under this method do not vary materially from the percentage-of-completion method. The Company recognizes revenue and all related costs on the completed contract ~~method. The financial results for~~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 we have no further material obligations under the contract after the revenue is recognized.

NOTE 3 — INVESTMENTS

Investments consist primarily of fixed-income debt securities with original maturities of greater than three months ~~ended June 30, 2004 have been restated~~and less than one year. All investments are classified as held-to-maturity as the Company has the intent and ability to ~~reflect this~~

~~change.~~hold the securities to maturity. The ~~impact of~~investments are stated at amortized cost which approximates fair value. All the change on net sales, cost of products sold, benefit for income taxes, loss from continuing operations, net loss, loss from continuing operations per share and net loss per share for the prior 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
investments mature within one year.

NOTE 34 — 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 excess is presented as customer deposits in the Condensed Consolidated Balance Sheets.

Major classifications of inventories are as follows:


	June 30,		March 31,		September 30,		March 31,
	2005		2005		2005		2005
Raw materials and supplies	$	1,801	$	2,098	$	1,714	$	2,098
Work in process		1,797		1,421		1,641		1,421
Finished products		1,343		1,566		1,213		1,566

		4,941		5,085		4,568		5,085
Less — progress payments		518		262		390		262

	$	4,423	$	4,823	$	4,178	$	4,823

NOTE ~~4 –~~5 — STOCK-BASED COMPENSATION:

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards ~~(SFAS)~~(“SFAS”) No. 123, “Accounting for Stock-Based ~~Compensation”.~~Compensation.” As permitted by SFAS No. 123, the Company continues to measure compensation for ~~such~~stock-based compensation plans using the intrinsic value based method of accounting, prescribed by Accounting Principles Board ~~(APB)~~(“APB”), Opinion No. 25, “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 common 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 in accordance with the terms of the Company’s Long-Term Incentive Plan based on the higher of the quoted market price of the Company’s common stock at the end of the period up to ~~$16~~$8 per unit or the stock price at the date of ~~grant in accordance with the terms of the Long-Term Incentive Plan.~~grant.

Under the intrinsic value method, no compensation expense has been recognized for the Company’s stock option ~~plans.~~plans for the three and six months ended September 30, 2005 and 2004. Since no options were granted during the six months ended September 30, 2005 and all previously granted options are fully vested, net income (loss) as reported and on a pro forma basis for the three and six months ended ~~June~~September 30, 2005 and 2004 are the same.

NOTE 56 — 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:~~

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 June 30, 2005 and 2004, respectively, were not included in the above computation of diluted income (loss) per share as the effect would be 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)~~from continuing operations 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 )

109


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Basic income (loss) per share from continuing operations

Numerator:
Income (loss) from continuing operations	$	1,350	$	392	$	2,053	$	(357	)


Denominator:
Weighted common shares outstanding		3,558,373		3,324,864		3,499,670		3,320,782
Share equivalent units (“SEUs”)		26,422		33,470		26,325		33,174

Weighted average common shares and SEUs		3,584,795		3,358,334		3,525,995		3,353,956


Basic income (loss) per share from continuing operations	$	.38	$	.12	$	.58	$	(.11	)


Diluted income (loss) per share from continuing operations

Numerator:
Income (loss) from continuing operations	$	1,350	$	392	$	2,053	$	(357	)


Denominator:
Weighted average shares and SEUs outstanding		3,584,795		3,358,334		3,525,995		3,353,956
Stock options outstanding		136,396		44,776		131,004		—
Contingently issuable SEUs		70		280		59		—

Weighted average common and potential common shares outstanding		3,721,261		3,403,390		3,657,058		3,353,956


Diluted income (loss) per share from continuing operations	$	.36	$	.12	$	.56	$	(.11	)

Certain options to purchase shares of common stock, which totaled ~~47,700 and 382,590 at June~~142,700 for the three-month period ended September 30, ~~2005 and~~ 2004, ~~respectively,~~ were not included in the above computation of diluted income ~~(loss)~~ per share as the effect would be ~~anti-dilutive.~~anti-dilutive due to the options’ exercise price being greater than the average market price of the common shares for the three months ended September 30, 2004.

All options to purchase shares of common stock at various exercise prices were excluded from the computation of diluted loss per share for the six-month period ended September 30, 2004 as the effect would be anti-dilutive due to the net loss for the period.

NOTE ~~6 –~~7 — PRODUCT WARRANTY LIABILITY

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


	Three Months Ended						Three Months Ended						Six Months Ended
	June 30,						September 30,						September 30,
	2005			2004			2005			2004			2005			2004
Balance at beginning of period.	$	255		$	242
Expense for product warranties		126			62
Balance at beginning of period							$	299		$	266		$	255		$	242
Expense (income) for product warranties								31			(6	)		157			56
Product warranty claims paid		(82	)		(38	)		(25	)		(35	)		(107	)		(73	)

Balance at end of period	$	299		$	266		$	305		$	225		$	305		$	225

The income of $(6) for product warranties in the three months ended September 30, 2004 resulted from the reversal of provisions made that were no longer required due to lower claims experience.

NOTE 78 — CASH FLOW STATEMENT

Interest paid from continuing operations was ~~$11~~$16 and $5$10 for the ~~three~~six months ended ~~June~~September 30, 2005 and 2004, respectively. In addition, income taxes ~~refunded~~paid (refunded) from continuing operations were $5$11 and ~~$10~~$(10) for the ~~three~~six months ended ~~June~~September 30, 2005 and 2004, respectively.

Non-cash activities during the ~~three~~six months ended ~~June~~September 30, 2005 and 2004 included dividends of ~~$86~~$91 and $83, respectively, which were recorded but not paid. In addition, in the ~~first quarter of fiscal year~~six months ended September 30, 2005, capital expenditures totaling ~~$27~~$33 were financed through ~~the issuance of~~ capital leases.

NOTE 89 — COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) was as follows:


	Three Months Ended
	June 30,						Three Months Ended					Six Months Ended
	2005			2004			September 30,					September 30,
							2005		2004			2005			2004
Net income (loss)	$	703		$	(977	)	$	1,350	$	383		$	2,053		$	(594	)

Other comprehensive income:
Foreign currency translation adjustment		(1	)		(34	)		—		(16	)		(1	)		(50	)


Total comprehensive income (loss)	$	702		$	(1,011	)	$	1,350	$	367		$	2,052		$	(644	)

~~appoint a receiver for GVHT and GPPL to sell the U.K. companies. The appointment of a receiver resulted in the 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~~for use in the chemical, petrochemical, petroleum refining and power industries. The Company’s results of operations for the three and six months ended ~~June~~September 30, 2004 have been restated to reflect the U.K. ~~operations~~companies as a discontinued operation.

NOTE ~~11 –~~12 — OTHER INCOME

In September 2004, the Company settled a contract dispute with a customer regarding cancellation charges. As a result of the settlement, other income of $1,592 was presented in the caption “Other Income” in the Condensed Consolidated Statements of Operations and Retained Earnings for the three and six-month periods ended September 30, 2004.

NOTE 13 — CONTINGENCIES

The Company has been named as a defendant in certain lawsuits ~~wherein the respective plaintiffs allege~~alleging 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~~lawsuits and intends to vigorously defend itself against these claims. The claims are similar to previous asbestos ~~suits~~lawsuits naming the Company as defendant, which lawsuits either were dismissed when it was shown that the Company had

not supplied products to the plaintiffs’ places of work or were settled for minimal amounts below the expected defense costs. Neither the outcome of these ~~claims~~lawsuits nor the potential for liability ~~is determinable.~~can be determined at this time.

At ~~June~~September 30, 2005, management was unaware of any additional litigation matters. However, from time to time in the ordinary course of business, the Company is subject to legal proceedings and potential claims arising from contractual ~~agreements in the ordinary course of business.~~agreements. 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.

NOTE ~~12 –~~14 — ACCOUNTING AND REPORTING CHANGES

In November 2004, the Financial Accounting Standards Board ~~(“FASB”~~(the “FASB”) issued ~~SFAS~~Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory Costs.” ~~This Statement~~SFAS No. 151 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~~SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “abnormal”. contained in such Statement. In addition, ~~this Statement~~SFAS No. 151 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~~SFAS No. 151 will be effective for inventory costs incurred during the Company’s fiscal year ending March 31, 2007. The Company believes the adoption of ~~this Statement will~~SFAS No. 151 may result in the acceleration of recognizing indirect manufacturing expenses during times of below normal utilization of plant capacity. The Company does not anticipate below normal utilization of plant capacity for the immediate future. Management has not yet determined how the adoption of SFAS No. 151 will impact on the Company’s Consolidated Financial ~~Statements of adopting this Statement.~~Statements.

The FASB also issued in December 2004, SFAS No. ~~123R,~~123(R), “Share-Based ~~Payment”. This Statement~~Payment.” SFAS No. 123(R) requires that 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~~Company has decided to use the Black- Scholes fair value model and 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.~~transition method. 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~~continuing to evaluate the requirements of SFAS No. 123(R), ~~but~~and cannot yet estimate the effect the adoption 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~~will have on its ~~expected forfeitures.~~Consolidated Financial Statements. For additional information, see Note 4,3, “Stock-Based Compensation”, ofto 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”.~~143.” FIN No. 47 clarifies the term ~~conditional~~“conditional asset retirement ~~obligation~~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~~FIN No. 47 is effective for the Company for ~~the~~its fiscal year ending March 31, 2006. The Company ~~is currently evaluating~~does not believe that the ~~impact~~adoption of this Interpretation will have a material effect on the Company’s financial position, results of ~~operation~~operations 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 to give effect to the two-for-one split.

Item 2.

GRAHAM CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
~~June~~September 30, 2005

(Dollar amounts in thousands, except per share data)

OVERVIEW

The corporate offices and production facilities of Graham Corporation (“~~Graham”~~we”, ~~the “Corporation”~~“us” or ~~the “Company”~~“our”) isare 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 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 a discontinued operation in the Consolidated Statements Of Operations and Retained Earnings and Consolidated Statements Of Cash Flows for the three months ended June 30, 2004.

~~Graham’s~~Our current fiscal ~~financial reporting~~ year commenced April 1, 2005 and will end March 31, 2006.

~~Graham Corporation is~~We are a ~~global~~ designer, manufacturer and worldwide supplier of ejectors, pumps, condensers and heat exchangers. The ~~principle~~principal markets for ~~the Company’s~~our equipment ~~which may be sold either as components or complete units,~~ are the petrochemical, oil refinery and electric power generation industries, including cogeneration and geothermal plants. ~~Graham~~Our equipment can also be found in diverse applications such as metal refining, pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, food processing, drugs, heating, ventilating and air conditioning.

Because ~~Graham’s~~our products are capital goods, industrial downturns can have a ~~major~~material adverse impact on our sales. The current level of inquiries for ~~Graham’s~~our products gives ~~the Company~~us reason to believe that ~~it has entered an up cycle for~~we continue to be in a period of increased capital spending by our customers, which ~~it believes~~we believe should continue to positively impact ~~its~~our business for the immediate future. Global growth and expansion in oil refineries, petrochemical plants and power generation are driving the current demand for ~~Graham~~our products.

In May 2005, we disposed of our subsidiary located in the United Kingdom that manufactured vacuum pumps. This disposition was presented as a discontinued operation in the Consolidated Statements of Operations and Retained Earnings and Consolidated Statements of Cash Flows for our fiscal year ended March 31, 2005.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document, including in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical facts, constitute “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 such as “anticipates,” “expects,” “believes,” “estimates,” “intends,” and similar expressions to identify such statements. Numerous important factors which involve risks and uncertainties, including but not limited to 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 changes in market conditions in the industries in which the Company operates,This report and other ~~factors discussed in the Company’s filings~~documents we file with the Securities and Exchange Commission inincludes “forward-looking statements” within the ~~future, could affect~~meaning of Section 27A of the ~~Company’s~~Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from any future results implied by the forward-looking statements. Our forward-looking statements include, but are not limited to, statements about:

	•		the current economic environment affecting us and the markets we serve;

	•		our sources of revenue and anticipated revenue, including the contribution from the growth of new products and markets;

	•		our plans for future products and services and for enhancements of existing products and services;

	•		our estimates regarding our liquidity and capital requirements;

	•		our ability to attract or retain customers;

	•		the outcome of any existing or future litigation; and

	•		our intellectual property.

Forward-looking statements are usually accompanied by words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect” and ~~could cause its~~similar expressions. Our actual ~~consolidated~~ results tocould differ materially from historical results or those ~~expressed in any forward-looking statement made~~implied by the ~~Company.~~forward-looking statements contained in this report. Undue reliance should not be placed on these forward-looking statements. Except as required by law, we undertake no obligation to update or announce any revisions to our forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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

Critical accounting policies are defined as those that 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~~— We recognize 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 a specific date to management’s estimate of the 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 recognized utilizing the completed contract method. The majority of ~~the Company’s~~our 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~~We recognize 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~~we have no further material obligations under the contract after the revenue is recognized.

Pension and Postretirement Benefits ~~– The Company’s~~— Our defined benefit pension and other postretirement benefit costs and obligations are dependent on actuarial assumptions used in calculating such amounts. These assumptions are reviewed annually by ~~the Company~~management 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~~We base the discount rate assumption for ~~its~~our 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 asset allocation, historical returns and 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~~our long-term actual experience and 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 our actual results differ from ~~the Company’s~~our 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 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~~our pension and postretirement benefit costs and obligations.

Income Taxes— We recognize deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using current tax rates. We evaluate the available evidence about future taxable income and other possible sources of realization of deferred income tax assets and record valuation allowances to reduce deferred income tax assets to an amount that represents our best estimates of the amounts of such deferred income tax assets that more likely than not will be realized.

RESULTS OF OPERATIONS

For an understanding of the significant factors that influenced our performance for the ~~Company’s performance,~~three and six-month periods ended September 30, 2005 and 2004, the following discussion should be read in conjunction with ~~the quarterly condensed consolidated financial statements~~our Condensed Consolidated Financial Statements and the ~~notes~~Notes to ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements contained in this report.

Sales for ~~the~~our quarter ended ~~June~~September 30, 2005 were ~~$11,749,~~$14,044, a 55% increase, as compared ~~to $8,281~~with $9,071 for our quarter ended September 30, 2004. Sales for the ~~quarter~~six months ended ~~June~~September 30, 2005 were $25,793, compared with $17,352 for the six months ended September 30, 2004. This represents a ~~42%~~49% increase in sales. The growth in sales for the three and six-month periods ended September 30, 2005 came from increases in both our domestic and export business, with export sales to Canada, Asia and the Middle East having the greatest improvement compared with the ~~quarter~~three and six months ended ~~June~~September 30, 2004. Sales, by product, were up due to significantly greater demand for ~~Graham’s~~our condensers and ~~replacement parts.~~ejectors. Condenser sales for the three and six-month periods increased ~~about $3,597 or 527%~~62% and 182%, respectively, over the three and six-month periods ended September 30, 2004. Ejector sales increased over the same respective periods 231% and 79%. ~~Capital spending~~Increased sales for our condenser products were largely a result of capacity expansion projects in the ~~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~~market. Increased ejector sales were ~~up $1,510 or about 91%. This increase was due substantially to one unusually large replacement order. Partially offsetting these increases were declines in ejector~~primarily a result of oil refinery revamping and ~~vacuum pump sales, as compared with the quarter ended June 30, 2004. Vacuum pump sales were down~~expansion activities. The latter activity is largely due to the ~~disposal~~growing utilization of ~~Graham’s U.K. pump manufacturing operation, which occurred~~“sour” crude oil (as opposed to “sweet” crude oil) as the core raw material for refinery processes and compliance with new regulations related to clean fuels and capacity additions. The need to increase capacity in the ~~fourth quarter~~petrochemical sector is being driven by greater worldwide demand for and consumption of ~~fiscal year 2005. Fewer ejector sales were a matter of timing of shipments. Both pump~~oil and ~~ejector sales are expected to rebound as the year continues.~~natural gas by-products.

~~Actual expenses~~Other income of $1,592 for the ~~current quarter increased due to greater sales activity, Sarbanes-Oxley compliance costs~~three and ~~costs associated with~~six-month periods ended September 30, 2004 resulted from a settlement of a contract dispute over cancellation charges. There was no other income for the ~~reorganization along business unit lines.~~three and six-month periods ended September 30, 2005.

~~Interest~~Our interest expense was $4 for the quarter ended September 30, 2005, compared with $5 for ~~both quarters~~the quarter ended ~~June~~September 30, 2004. For the six months ended September 30, 2005 interest expense was $9, compared with $10 for the six months ended September 30, 2004. We have been able to maintain low levels of debt through this sales expansion period by carefully managing our working capital and ~~2004.~~as a result of our strong cash flow from operations.

~~The~~Our effective income tax rate for the quarter ended September 30, 2005 was 35%, as compared ~~to 37% at June~~with 36% for the quarter ended September 30, 2004. ~~Both quarterly~~For the six-month periods ended September 30, 2005 and 2004 our effective income tax rates ~~approximate~~were 35% and 37%, respectively. Effective tax rates for all periods approximated federal and state statutory rates.

~~Income for~~For the ~~current period~~three and six-month periods ended September 30, 2005 income from continuing operations was $1,350 and ~~net income for the quarter was $703~~$2,053, respectively, or ~~$0.39~~$0.36 and $0.56 per diluted ~~share. Loss~~share, respectively. Income (loss) from continuing operations ~~and the net loss~~ for the three ~~months~~and six-month periods ended ~~June~~September 30, 2004 was ~~$749~~$392 or ~~$0.45~~$0.12 per diluted share, and ~~$977~~$(357) or ~~$0.58~~$(0.11) per diluted share, respectively. Our net income (loss) for the three and six months ended September 30, 2005 was $1,350 or $.36 per diluted share and $2,053 or $.56 per diluted share, respectively. Our net income (loss) for the three and six months ended September 30, 2004 was $383 or $0.11 per diluted share and $(594) or $(0.18) per diluted share, respectively.

The ~~loss for~~(loss) from discontinued operations for the three ~~months~~and six-month periods ended ~~June~~September 30, 2004 of ~~$228~~ $(9)or ~~$.14~~$0.00 per diluted share and $(237) or $(0.07) per diluted share, respectively, represents the operating losses of ~~the U.K.~~our United Kingdom subsidiary that ~~was~~we disposed of in March 2005. There was no loss from discontinued operations in ~~the~~our current ~~quarter.~~fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

(Dollar amounts in thousands, except per 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 %


	Six Months Ended
	September 30,
	2005			2004
Working capital	$	14,754		$	11,243
Working capital ratio (1)		2.4			2.1
Long-term debt	$	51		$	70
Long-term debt/capitalization (2)		0.3	%		0.4	%
Long-term liabilities/capitalization (3)		26	%		29	%

~~Working Capital Ratio equals Current Assets divided by Current Liabilities.~~
~~Debt/Capitalization equals Bank Borrowings divided by Stockholders Equity.~~


(1)		Working capital ratio equals Current Assets divided by Current Liabilities.

(2)		Long-term Debt/capitalization equals Long-term Debt divided by Stockholders’ Equity.

(3)		Long-term Liabilities/capitalization equals Total Liabilities minus Current Liabilities divided by Stockholders’ Equity.

Net cash provided by operating activities from continuing operations was ~~$5,788~~$7,658 for the ~~three~~six months ended ~~June~~September 30, 2005, as compared with a net cash ~~provided~~used by operating activities from continuing operations of ~~$276~~$1,761 for the ~~three~~six months ended ~~June~~September 30, 2004. The ~~Company believes that this significant increase is an indication of greatly improved business conditions. The increase in~~change from cash used by operations to cash provided by operations was primarily due to net income of ~~$703~~$2,053 for the ~~current quarter, as~~six months ended September 30, 2005, compared towith a net loss from continuing operations of ~~$749~~$357 for the ~~three~~six months ended ~~June~~September 30, 2004, an increase in customer deposits on orders, and reduced ~~working capital. For~~accounts receivable and inventories in the ~~quarter~~six months ended ~~June~~September 30, 2005. The increase in customer deposits is due to increases in major project orders. These orders customarily require advance payments from customers. We have been able to reduce days outstanding in accounts receivable through various initiatives enacted over the past six months. Reduced inventories were a benefit of lean manufacturing practices initiated over the past ten months. Additionally, the loss of $357 for the six months ended September 30, 2004 ~~cash generated through reductions in trade accounts receivable was used to fund operating losses~~included non-cash other income of $1,592.

During the three and ~~reduce current liabilities, thus resulting in minimal~~six-month periods ended September 30, 2005, we invested net ~~cash generated from operations.~~

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

~~Government~~ government instruments with maturity periods of 91 to 120 ~~days, in general.~~days. Investments increased ~~$3,479 from~~$6,458 over March 31, ~~2005 and $977, as compared to June 30, 2004.~~2005. Investments decreased ~~$801~~$2,198 from March 31, 2004 to ~~June~~September 30, 2004.

~~In the first quarter, short-term debt~~ The decrease was due to our sale of ~~$1,872 was paid off. Excluding capital lease obligations of $112, all of the Company’s short-term and long-term debt was retired as of June 30, 2005.~~

In June 2005, the Company amended its credit 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~~marketable securities to finance ~~increased business, other anticipated~~our operating cash deficits.

Anticipated uses of cash for the year ending March 31, 2006, include a capital expenditure program of up to $2,000 and ~~paying~~the continued payment of quarterly dividends to our stockholders. ~~A significant portion of the~~Our capital expenditure budget ~~is appropriated~~includes significant expenditures for information technology and software ~~expenditures that the Company believes~~expenditures. We believe this capital spending will enhance ~~its~~our engineering and design productivity. Capital expenditures for the first ~~quarter~~six months of fiscal ~~year~~ 2006 were ~~$81, as~~$480, compared with $40 for the six months ended September 30, 2004. We currently have entered into capital expenditure commitments of approximately $434. In October 2005, we contributed $2,289 to ~~$27~~our defined benefit pension plan. With this contribution, the total amount contributed to our pension plan for ~~continuing operations~~the current year is $3,576. Making this additional contribution will enable us to take the maximum income tax deduction permitted under full funding limitations, reduce our future pension expenses and, under current funding standard, substantially fund the Plan on an on-going basis.

We generated cash of $1,240 from the issuance of common stock in conjunction with the exercise of stock options during the six months ended September 30, 2005. This compares with $57 generated from the exercise of stock options in the ~~quarter~~six-month period ended ~~June~~September 30, 2004. ~~The Company currently has entered into commitments to purchase approximately $1.0 million of capital expenditures. Graham continues to review its~~Other financing ~~options with respect to its~~activities in the current fiscal year ~~2006 capital expenditure program and strategic growth objectives.~~included the retirement of $1,872 in short-term debt.

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

Total cash ~~provided from~~used by operating activities byof the discontinued ~~operations in~~operation for the ~~quarter~~six months ended ~~June~~September 30, 2004 was ~~$33.~~$324. The discontinued operation invested ~~$38~~$51 in capital expenditures and ~~disbursed $327~~generated $18 from financing activities. There were no discontinued operation activities 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.~~fiscal year.

2120

ORDERS AND BACKLOG

Orders for the current quarter were ~~$20,425, as~~$12,833, compared ~~to $13,487~~with $9,084 for the quarter ended ~~June~~September 30, ~~2004, representing~~2004. This represents a ~~51%~~41% increase. Orders for the six months ended September 30, 2005 were $33,258, compared with $22,571 for the six months ended September 30, 2004. This represents a 47% increase. Orders represent ~~requests~~communications received from customers for the supply of our goods ~~and/or services from~~and services. Orders for surface condensers in the ~~Company. The Company believes that customer orders can be a significant indicator of its future performance. Management believes the Company’s strong first~~current quarter ~~bookings reflect an increase in overall market activity.~~

~~Backlog was $31,145 at June~~and six months ended September 30, 2005 asincreased 71% and 48%, respectively, over the three and six-month periods ended September 30, 2004. Orders for ejector sales increased 52% and 99% for the three and six-month periods ended September 30, 2005 compared with the same respective periods one year ago. Increases in orders are due largely to ~~$18,776~~the increased demand for our products coming from major project work in the petrochemical and refinery sectors. Export orders were up 88% and 73% for the respective three and six-month periods ended September 30, 2005 compared with the three and six-month periods ended September 30, 2004. Orders from Canada, Mexico and the Middle East for major project work rose substantially in the three and six-month periods ended September 30, 2005 compared with the three and six-month periods ended September 30, 2004. Domestic orders were up 22% in the current three months and 25% in the six months ended September 30, 2005, compared with the three and six-month periods ended September 30, 2004.

Our backlog was $30,002 at ~~June~~September 30, ~~2004, representing~~2005, compared with $18,894 at September 30, 2004. This represents a ~~66%~~59% increase. Backlog ~~represents~~is defined as 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 June 30, 2004 due largely to the increased demand in major project work in the petrochemical and refinery sectors. Export orders were up 67% and domestic orders were up 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 improved due to price increases and improved product mix.

All orders in backlog represent orders from traditional markets in ~~the Company’s~~our established product ~~lines.~~lines and are scheduled to be shipped in the next twelve months. Approximately ~~36%~~41% of ~~the~~our backlog can be attributed to equipment for refinery project work, ~~38%~~33% to chemical and petrochemical projects, ~~and 18%~~14% to equipment sold to the power ~~sector. Refinery project work is on~~generation sector and 12% to other industrial or commercial applications. The demand coming from the ~~increase due to the need~~refinery sector for ~~more refinery capacity. This need~~our equipment is being driven by the shortages of refinery capacity resulting from ~~rising~~increased usage of oil ~~demand from~~in China and India and recent disruptions to U.S. refining capacity in the wake of hurricanes Katrina and Rita, the need to upgrade existing refineries so that they can ~~make~~ use of lower ~~grade,~~cost, high sulfur “sour” crude, and the need to revamp refineries to meet environmental regulations pertaining to diesel fuel sulfur content requirements. Most refineries ~~today~~presently in operation can only process light, ~~sweet (low~~“sweet” (i.e., low sulfur) crude, which is in less ~~supply~~abundant and more expensive than ~~the~~heavier (i.e. high ~~sulfur crude variety.~~sulfur) “sour” crude. Orders from the petrochemical and power markets are mainly for overseas capacity expansion projects. These orders reflect the improved ~~Asian economy.~~economic conditions in Asia. In ~~recent~~ years prior to 2005, there ~~has been~~were minimal capital investments by these ~~sectors.~~sectors, which we believe has contributed to the present increased demand.

CONTINGENCIES

~~The Company has~~We have been named as a defendant in certain lawsuits ~~wherein the respective plaintiffs allege~~alleging personal injury from exposure to asbestos contained in ~~products made by the Company. The Company is~~our products. We are a co-defendant with numerous other defendants in these ~~suits~~lawsuits and ~~intends~~intend to vigorously defend ~~itself~~ against these claims. The claims are similar to previous asbestos ~~suits naming the Company~~lawsuits which named us as a defendant, which lawsuits either were dismissed when it was shown that ~~the Company~~we had not supplied products to the plaintiffs’ places of work or were settled for minimal amounts below the expected defense costs. Neither the

2221

outcome of these ~~claims~~lawsuits nor the potential for liability ~~is determinable.~~can be determined at this time.

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

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board ~~(“FASB”~~(the “FASB”) issued ~~SFAS~~Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory Costs.” ~~This Statement~~SFAS No. 151 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~~SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “abnormal”. contained in such Statement. In addition, ~~this Statement~~SFAS No. 151 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~~SFAS No. 151 will become effective for inventory costs ~~incurred~~we incur during ~~the Company’s~~our fiscal year ending March 31, 2007. ~~The Company believes the~~We believe that our adoption of ~~this Statement will~~SFAS No. 151 may result in the acceleration of recognizing indirect manufacturing expenses during times of below normal utilization of plant capacity. ~~Management has~~We do not anticipate below normal utilization of plant capacity for the immediate future. We have not yet determined the impact on ~~the~~our Consolidated Financial Statements of adopting ~~this Statement.~~SFAS No. 151.

~~The FASB also issued in~~In December 2004, the FASB issued SFAS No. ~~123R,~~123(R), “Share-Based Payment”. ~~This Statement~~SFAS No. 123(R) requires that 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~~The adoption of SFAS No. 123(R), requires management to choose among various acceptable options in quantifying the ~~Company must determine~~compensation expense to be recognized for options granted. We have decided to use the ~~appropriate~~Black-Scholes fair value model and 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~~adopt the modified prospective ~~or the modified retrospective adoption methods. Under the modified retrospective~~ method ~~prior periods may be restated either~~for expense recognition of options granted as of the ~~beginning~~adoption date of ~~the year of adoption or for all periods presented.~~April 1, 2006. 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~~. We are continuing to evaluate the requirements of

SFAS No. 123(R)~~, but~~ and cannot yet estimate the effect that our adoption 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 Condensedwill have on our 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~~“conditional asset retirement ~~obligation~~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~~FIN No. 47 is effective for ~~the Company~~us for ~~the~~our current

fiscal year ending March 31, 2006. ~~The Company is currently evaluating~~We do not believe the ~~impact this Interpretation~~adoption of FIN No. 47 will have ~~on the Company’s~~a material adverse financial ~~position, results of operation and cash flows.~~

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.our Consolidated Financial Statements.

OFF BALANCE SHEET ARRANGEMENTS

~~The Company~~We did not have any off balance sheet arrangements as of ~~June~~September 30, 2005 ~~and~~or 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~~we are exposed are:

	•		foreign currency exchange ~~rates~~rates;

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

	•		material ~~availability~~availability; and ~~price risk~~

	•		gross margin risk.

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

FOREIGN CURRENCY

~~Graham’s~~Our international consolidated sales for the past three fiscal years ~~approximates~~were 40% of our total sales. Operating in markets throughout the world ~~markets~~ involves exposure to movements in currency exchange rates. Currency movements can affect our sales in several ways, the foremost being ~~the~~our ability to compete for orders against ~~competition having a~~competitors who base their prices on relatively weaker ~~currency.~~currencies. Business lost due to competition for orders against competitors ~~having~~using 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. For ~~both~~ the ~~quarters~~three and six-month periods ended ~~June~~September 30, 2005 and ~~June~~September 30, 2004, ~~there were~~we had no sales for which we were paid in foreign ~~currencies from continuing operations.~~currencies. At certain times, ~~the Company~~we may enter into forward foreign currency exchange agreements to hedge ~~its~~our exposure against unfavorable changes in foreign currency values on significant sales contracts negotiated in foreign currencies.

~~Graham has~~We have limited exposure to foreign currency purchases. For the three-month periods ended ~~June~~September 30, 2005 and ~~June~~September 30, 2004, our purchases in foreign currencies ~~by continuing operations were~~represented 1% and 5% of our cost of ~~goods~~products sold, respectively. For the six-month period ended September 30, 2005 and 2004, our purchases in foreign currencies represented 1% and 4% of cost of products sold, respectively. At certain times, we may utilize forward foreign currency exchange contracts ~~may be utilized~~ to limit our currency exposure.

At ~~June~~September 30, 2005 and 2004, ~~there were~~we held no forward foreign currency exchange ~~contracts held by the Company.~~contracts.

GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
~~June~~September 30, 2005

PART II — OTHER INFORMATION


~~Item 5.~~		~~Other Information~~

		~~Not applicable.~~

Item 4. Submission of Matters to a Vote of Security Holders

On July 28, 2005, our stockholders voted on the following proposals at our 2005 Annual Meeting of Stockholders:

Proposal 1:

To elect William C. Denninger, H. Russel Lemcke and Cornelius S. Van Rees as directors of the Company, each to serve for a three-year term expiring in 2008 or until his successor is duly elected and qualified:


Nominees	Votes For		Votes Withheld

William C. Denninger		1,623,230		7,637
H. Russel Lemcke		1,623,230		7,637
Cornelius S. Van Rees		1,603,424		27,443

The other directors, whose terms of office continued after the meeting, are Helen H. Berkeley, Jerald D. Bidlack, William C. Johnson and James J. Malvaso.

Proposal 2:

To ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2006.


~~Item 6.~~	~~Exhibits~~

Votes For:	a.	1,630,005
Votes Against:		412
Votes Abstained:		450

Item 6. Exhibits

See index to exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		GRAHAM CORPORATION

		/s/ J. Ronald Hansen

		J. Ronald Hansen

	Vice President Finance and Administration,
		Chief Financial Officer
		(Principal Accounting Officer)

November 2, 2005
Date

~~August 2, 2005~~
~~Date~~

2826

INDEX OF EXHIBITS


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

3.2		By-laws of registrant, as amended (filed as Exhibit 3(ii) to the Registrant’s ~~quarterly report~~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)~~4.1 to the Registrant’s ~~annual report~~Registration Statement on Form ~~10-K for the fiscal year ended December 31, 1989,~~S-2 filed on September 28, 2005, and incorporated herein by ~~reference.)~~reference).

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

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

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

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

32.1		Section 1350 ~~Certifications~~Certifications.

2927


					Page
Part I FINANCIAL INFORMATION	~~FINANCIAL INFORMATION~~

Item 1.	Condensed Consolidated Financial Statements		3	4

Item 2.	~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations		16	15

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

Item 4. Controls and Procedures	~~Controls and Procedures~~	25		26

Part II. OTHER INFORMATION	~~OTHER INFORMATION~~

Item 5.4. Submission of Matters to a Vote of Security Holders	~~Other Information~~	26		28

Item 6. Exhibits	~~Exhibits~~	26		28
EX-31.1 Certification of President and CEO
EX-31.2 Certification of ~~VP of~~Vice President Finance and Admin. ~~CFO~~
EX-32.1 Section 1350 ~~Certification~~Certifications


	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


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


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