or greater than one year) that this Agreement is in effect, unless either the Company, or theExecutive, respectively, elects not to extend the Term further by giving written notice to theother party, in which case the Term shall end on the first anniversary of the date on which suchwritten notice is given; provided, however, that in any event, the Term shall end on the last dayof the month in which the Executive attains the age of 65.     (c) Notwithstanding anything herein contained to the contrary, (i) this Agreement may beterminated during the Term as provided for herein and (ii) nothing in this Agreement shall mandateor prohibit a continuation of the Executive’s employment following the expiration of the Term uponsuch terms and conditions as the Company and the Executive may mutually agree upon.     4. Base Compensation. As the base compensation for all services to be rendered by theExecutive to the Company, the Company agrees to pay to the Executive, and the Executive shallaccepts, a salary at a rate of $152,500 per annum, payable in arrears in equal monthly installmentsof $12,708.33 each, subject to such deductions and withholdings as may be required by law.Periodically, the President and the Board will review the salary of the Executive, taking intoconsideration such factors as the Executive’s performance and such other matters as it deemsrelevant and, in its discretion alone, may increase the salary of the Executive to such rate as theBoard deems proper; provided that the Company shall in no event be required to grant any suchincrease.     5. Incentive Compensation.          (a) *Bonus*. The Executive shall be eligible to receive bonuses and awards under the Company’sbonus plans or arrangements as may be in effect from time to time, including the Company’s AnnualExecutive Cash Bonus Program, as may be from time to time determined by the Board or a committeethereof. Any bonuses and awards made to the Executive under the Company’s bonus plans orarrangements for the fiscal year ending March 31, 2008 shall be pro rated based on the date ofthis Agreement.          (b) *Long-Term Incentive Compensation*. The Executive shall be eligible to participate in anylong-term incentive compensation plan generally made available to similarly situated executiveofficers of the Company in accordance with and subject to the terms of such plans, including theCompany’s Annual Stock-Based Incentive Award Plan for Senior Executives, as may from time to timebe determined by the Board of a committee thereof. Any long-term incentive awards made under theCompany’s Annual Stock-Based Incentive Award Plan for Senior Executives for the fiscal year endingMarch 31, 2008 shall be pro rated based on the date of this Agreement.          (c) *Other Compensation*. The Company may, upon recommendation of the Board or a committeethereof, award to the Executive such other bonuses and compensation as it deems appropriate andreasonable.     6. Benefits. During the term of this Agreement, the Company shall provide thefollowing benefits to the Executive:
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          (a) *Medical*. The Company will provide the Executive health coverage for himself and hisfamily in accordance with the Company’s health and medical insurance plans, as the same may be ineffect from time to time. The Executive shall be responsible for paying the employee portion ofthe premiums for such health and medical insurance plans.          (b) *Vacation*. The Executive shall be entitled to eight days of paid vacation during theperiod commencing on the date hereof and ending on December 31, 2007, which vacation if not usedprior to December 31, 2007 will be forfeited by the Executive. Thereafter, Executive shall beentitled to vacation in accordance with the Company’s general vacation policies and practices asmay be in effect from time to time. For such purposes, Executive shall be considered to be afifteen-year employee of the Company.          (c) *General Benefits*. The Executive shall be entitled to participate in all employee benefitplans and arrangements of the Company that may be in effect from time to time and as may from timeto time be made available to the other similarly situated executive officers of the Company,subject to and on a basis consistent with the terms, conditions and overall administration of suchplans and arrangements.          (d) *No Limitation of Company’s Rights*. Nothing in this Section 6 shall be construed to limitor restrict the complete discretion of the Company to amend, modify or terminate any employeebenefit plan or plans of the Company where such action generally affects plan participants oremployees, including the Executive.          (e) *Defined Benefit Pension Plan Prior Service Credit*. For purposes of participation in theCompany’s Defined Benefit Pension Plan, Executive’s prior years of service on behalf of theCompany will be maintained (but no credit shall be provided under such Plan for time the Executivewas not in the employ of the Company).          (f) *Insurance*. The Company shall provide Executive with $2,500 per annum for the purpose ofExecutive procuring a term insurance policy that names such person(s) of Executive’s choosing asbeneficiary(ies).     7. Travel and Relocation Expenses.          (a) *Travel Expenses*. The Company shall pay or reimburse the Executive for all reasonable andnecessary traveling and other expenses incurred or paid by the Executive in connection with theperformance of his duties under this Agreement upon presentation of expense statements or vouchersand such other supporting information as the Company may from time to time reasonably request.However, the amount available for such traveling and other expenses may be fixed in advance by theCompany.          (b) *Relocation Expenses*. The Company shall pay for Executive’s relocation expenses incurredin connection with his move from Dover, New Hampshire to Western New York in accordance with thepolicies and procedures set forth in the Company’s “Policy on Relocation (New Employees)” ineffect on the date of this Agreement. Such travel expenses shall include a housing allowance of$2,000 per month while the Executive’s house remains for sale in Dover, New Hampshire, whichhousing allowance shall be paid to Executive until the earlier of such time the sale of such houseis closed or December 31, 2007.
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     8. Termination. This Agreement shall terminate prior to the Term expiration date,hereinabove set forth, in the event that the Executive shall die or the Board shall reasonablydetermine that the Executive has become disabled, or if the Executive’s employment shall beterminated for cause or without cause, as hereinafter provided.          (a) *Disability*. The Board may determine that the Executive has become disabled, for purposesof this Agreement, in the event that the Executive shall fail, because of illness or incapacity,to render for three successive months, or for shorter periods aggregating three months or more inany period of twelve months, services of the character contemplated by this Agreement; andthereupon this Agreement and all rights of the Executive hereunder shall be deemed to have beenterminated as of the end of the calendar month in which such determination is made.          (b) *For Cause*. The Board may dismiss the Executive for cause in the event that it determinesthat there has been willful misconduct by the Executive in connection with the performance of hisduties hereunder, or any other conduct on the part of the Executive which has been materiallyinjurious to the Company; and thereupon this Agreement shall terminate effective upon the deliveryto the Executive of 30-day written notice that the Board has made such determination. Forpurposes of this Agreement, “cause” shall be determined only by a good faith finding thereof bythe Board, which shall afford the Executive the opportunity to appear before it prior tofinalizing any such determination. If the Executive in good faith contests a termination forcause, the Company will pay all reasonable legal fees and other expenses incurred by theExecutive, as the Executive is billed for such costs, within ten days of periodic submission tothe Company of statements of charges of attorneys and statements of other expenses incurred by theExecutive in connection with such challenge. The Executive will reimburse the Company for allsuch costs if it should be determined by a court of final adjudication that the Executive did notact in good faith in bringing such challenge.          (c) *Without Cause*. The Executive may resign without cause at any time upon 30 days’ writtennotice to the Company, in which event the Company’s obligation to compensate him ceases on theeffective date of his termination except as to amounts due to him under Section 8(c)(i). TheCompany may dismiss the Executive without cause at any time upon 30-days’ written notice to theExecutive. In the event the Company dismisses the Executive other than for cause, or if theExecutive resigns because of a material breach of this Agreement by the Company (which Executivemay do only if such breach remains materially uncured after the Executive has provided 30 days’prior written notice to the Board), the Company shall provide to the Executive:               (i) payment of the compensation due to him through the effective date of the termination ofthe Executive’s employment, within ten business days following such effective date of thetermination of the Executive’s employment;               (ii) continuation of the Executive’s salary for twelve months following the effective date ofthe termination of the Executive’s employment at the higher of the rate specified in Section 4 orthe Executive’s then-current annualized salary, which salary continuation shall be paid monthly inaccordance with the Company’s regular payroll practices; and               (iii) payment of any Accrued Bonus (as defined below), to be paid as soon as administrativelypracticable after the six-month anniversary of the effective date of the
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termination of the Executive’s employment. Accrued Bonus shall mean any amount of bonus withrespect to any year prior to the year in which dismissal without cause occurs (“Prior Bonus Year”)calculable by applying the formula prescribed by the Company’s incentive compensation plan as itexisted on December 31 of such Prior Bonus Year and employing in the application of such formulathe goals, ratios and weighting percentages and other variable figures which the Bonus Plan callsfor the Company’s Board or any committee thereof to determine annually (“Bonus Plan Variables”)which the Company’s Board of Directors or any committee thereof adopted for purposes of the BonusPlan prior to December 31 of such Prior Bonus Year. Notwithstanding any other provision of thisSection, no Accrued Bonus shall be payable pursuant to this Section 8(c) for any Prior Bonus Yearwith respect to which a bonus amount was paid to and accepted by the Executive.          (d) In the event that the provisions of this Section 8(c) are triggered, the Executive shallresign from all offices and directorships of the Company and of all subsidiaries and affiliates ofthe Company, upon payment to the Executive of the amount referred to in Section 8(c)(i).          (e) *Release of Claims*. The Company’s obligation to provide the payments under this Section 8is conditioned upon the Executive’s execution of an enforceable release of all claims (and uponthe expiration of all applicable rescission periods contained in such release) and his compliancewith all provisions of this Agreement. If the Executive chooses not to execute such a release (orrescinds such release) or fails to comply with these provisions, then the Company’s obligation tocompensate him ceases on the effective date of his termination except as to amount due to himunder Section 8(c)(i).          (f) *Return of Confidential Documentation*. Upon termination of his employment for any reasonwhatsoever, the Executive shall return to the Company all working papers, computer equipment,notebooks, strategic plans and other confidential documents and information, in any formwhatsoever.     9. Change in Control. In the event a person begins a tender or exchange offer,circulates a proxy to stockholders, or takes other steps seeking to effect a Change in Control (asdefined below), the Executive agrees that he will not voluntarily leave the employ of the Company,and will render the services contemplated under this Agreement, until such person has eitherabandoned or terminated his or its efforts to effect a Change in Control or until three monthsafter a Change in Control has occurred. For the purposes of this Agreement, the term “Change inControl” shall mean:          (a) any “person” within the meaning of Section 14(d) of the Securities Exchange Act of 1934,as amended (the “Exchange Act”), other than the Company, a subsidiary, or any employee benefitplan(s) sponsored by the Company or any subsidiary, is or has become the “beneficial owner,” asdefined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 25 percent or more of thecombined voting power of the outstanding securities of the Company ordinarily having the right tovote at the election of directors;          (b) individuals who constitute the Board on the effective date of this Agreement (the“Incumbent Board”) have ceased for any reason to constitute at least a majority thereof (or amajority of the Board as then constituted), provided that any person becoming a directorsubsequent to the effective date of this Agreement whose election, or nomination for election bythe Company’s stockholders, was approved by a vote of at least three-quarters of the directors
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comprising the Incumbent Board (either by a specific vote or by approval of the proxystatement of the Company in which such person is named as a nominee for director without objectionto such nomination) shall be, for purposes of this Plan, considered as though such person were amember of the Incumbent Board;          (c) the closing of a reorganization, merger or consolidation of the Company, other than onewith respect to which all or substantially all of those persons who were the beneficial owners,immediately prior to such reorganization, merger or consolidation, of outstanding securities ofthe Company ordinarily having the right to vote in the election of directors own, immediatelyafter such transaction, more than three-quarters of the outstanding securities of the resultingcorporation ordinarily having the right to vote in the election of directors;          (d) the closing of a sale or other disposition of all or substantially all of the assets ofthe Company, other than to a subsidiary; or          (e) the complete liquidation and dissolution of the Company.     10. Covenants of Executive. The Executive acknowledges that: (i) the business of theCompany and its affiliates, as currently conducted and as conducted from time to time throughoutthe term of this Agreement (collectively, the “Business”), is conducted by and is proposed to beconducted by the Company on a world-wide basis (the “Company’s Market”); (ii) the Business involvesproviding design, engineering and manufacture of certain vacuum and heat transfer equipment,including but not limited to steam condensers, steam jet ejectors, shell and tube heat exchangers,plate and frame heat exchangers, Heliflow heat exchangers, liquid ring vacuum pumps and rotarypiston pumps; (iii) the Company has developed trade secrets and confidential information concerningthe Business; and (iv) the agreements and covenants contained in this Section 10 are essential toprotect the Business. In order to induce the Company to enter into this Employment Agreement, theExecutive covenants and agrees that:          (a) *Agreement Not To Compete*. For a period of 18 months after the termination of Executive’semployment with the Company for any reason (such period of time hereinafter referred to as the“Restricted Period”), neither the Executive nor any entity of which 20 percent or more of thebeneficial ownership is held by the Executive or a person related to the Executive by blood ormarriage (“Controlled Entity”) will, anywhere in the Company’s Market, directly or indirectly own,manage, operate, control, invest or acquire an interest in, or otherwise engage or participate in,whether as a proprietor, partner, stockholder, director, officer, member manager, employee orotherwise any business which competes in the Company’s Market with the Business, without the priorwritten consent of the Company. Notwithstanding any other provisions of this Agreement, theExecutive may make a passive investment in any publicly-traded company or entity in an amount notto exceed five percent of the voting stock of any such company or entity.          (b) *Agreement Not To Interfere in Business Relationships*.               (i) During the Restricted Period, neither the Executive nor any Controlled Entity willdirectly or indirectly solicit, induce or influence any customer, or any other person which has abusiness relationship with the Company or any affiliate, or which had on the date of this
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Agreement such a relationship with the Company or any affiliate, to discontinue or reduce theextent of such relationship with the Company or any affiliate in the Company’s Market.               (ii) During the Restricted Period, neither the Executive nor any Controlled Entity will (1)directly or indirectly recruit, solicit or otherwise induce or influence any stockholder oremployee of the Company or any of its affiliates to discontinue such employment or otherrelationship with the Company or any affiliate, or (2) employ or seek to employ, or cause anybusiness which competes in the Company’s Markets to employ or seek to employ for any reason, anyperson who is then (or was at any time within six months prior to the date the Executive or suchbusiness employs or seeks to employ such person) employed by the Company or any affiliate withoutthe prior written consent of the Company.          (c) *Confidentiality*. During the Restricted Period, neither the Executive nor any ControlledEntity will directly or indirectly disclose to anyone, or use or otherwise exploit for theExecutive’s or any Controlled Entity’s own benefit or for the benefit of anyone other than theCompany, any confidential information, including, without limitation, any confidential “know-how”,trade secrets, customer lists, details of customer contracts, pricing policies, operationalmethods, marketing plans or strategies, product development techniques or plans, businessacquisition plans and new personnel acquisition plans of the Company or any affiliate related tothe Business or any portion or phase of any scientific, engineering or technical information,design, process, procedure, formula, improvement, discovery, invention, machinery or device of theCompany or any affiliate, whether or not in written or tangible form (all of the preceding ishereinafter referred to as “Confidential Information”). The term “Confidential Information” doesnot include, and there shall be no obligation hereunder with respect to, information that becomesgenerally available to the public or the Company’s competitors other than as a result of adisclosure by the Executive or a Controlled Entity or any agent or other representative thereof.Neither the Executive nor any Controlled Entity shall have any obligation hereunder to keepconfidential any Confidential Information to the extent disclosure is required by law, ordetermined in good faith by the Executive to be necessary or appropriate to comply with any legalor regulatory order, regulation or requirement; provided, however, that in the event disclosure isrequired by law, the Executive or the Controlled Entity concerned shall provide the Company withprompt advance written notice of such requirement so that the Company may seek an appropriateprotective order. It is understood that in any new employment, the Executive may use his ordinaryskill and non-confidential knowledge, even though said skill and non-confidential knowledge mayhave been gained at the Company. The Executive’s obligations under this Section 10(c) shall be inaddition to, not in substitution for, any common law fiduciary duties the Executive has to theCompany regarding information acquired during the course of his employment.          (d) *Intellectual Property*. The Executive shall communicate to the Company full informationconcerning all inventions, improvements, discoveries, formulas, processes, systems oforganization, management procedures, software or computer applications (hereinafter, collectively,“Intellectual Property”) made or conceived by him either solely or jointly with others while inthe employ of the Company, whether or not perfected during his period of employment and whichshall be within the existing or contemplated scope of the Company’s business during hisemployment. The Executive will assist the Company and its nominees in every way at the Company’sexpense in obtaining patents for such Intellectual Property as may be patentable in any and allcountries and the Executive will execute all papers the Company may desire and
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assignments thereof to the Company or its nominees and said Intellectual Property shall beand remain the property of the Company and its nominees, if any, whether patented or not orassigned or not.          (e) *Survival of Covenants*. In the event of a termination of this Agreement, the covenantsand agreements contained in this Section 10 shall survive, shall continue thereafter, and shallnot expire unless and except as expressly set forth in this Section.          (f) *Remedies*. The parties to this Agreement agree that (i) if either the Executive or anyControlled Entity breaches any provision of this Section 10, the damage to the Company and itsaffiliates will be substantial, although difficult to ascertain, and money damages will not affordan adequate remedy, and (ii) if either the Executive or any Controlled Entity is in breach of thisAgreement, or threatens a breach of this Agreement, the Company shall be entitled in its own rightand/or on behalf of one or more of its affiliates, in addition to all other rights and remedies asmay be available at law or in equity, to (1) injunctive and other equitable relief to prevent orrestrain a breach of this Agreement and (2) may require the breaching party to pay damages as theresult of any transactions constituting a breach hereof.     11. Indemnification of Executive. In the event the Executive is terminated for anyreason, (a) the Company will hold harmless and indemnify the Executive for all third party claims,actions or other proceedings against the Executive initiated either prior to the termination ofemployment or thereafter which relate to duties performed in good faith by the Executive whileemployed by the Company; and (b) the Company will retain the Executive as named insured under anydirectors’ and officers’ insurance policies it may have, for acts of the Executive during the timehe served as an officer of the Company. Additionally, all reasonable legal and other costsincurred by the Executive to defend himself will be paid by the Company, as the Executive is billedfor such costs, within ten days of periodic submission to the Company of statements of charges ofattorneys and statements of other expenses incurred by the Executive in connection with suchdefense.     12. Effect of Waiver. The waiver by either party of a breach of any provision of thisAgreement shall not operate as or be construed as a waiver of any subsequent breach thereof.     13. Notice. Any and all notices provided for herein shall be in writing and shall bephysically delivered or mailed by registered or certified mail, return receipt requested to theparties at their respective addresses set forth hereinabove. Either party may from time to timedesignate a different address for notices to be sent to such party by giving the other party duenotice of such different address.     14. Validity. If any part of this Agreement shall be found to be invalid orunenforceable, the same shall be deemed to be severable and the remaining portions of thisAgreement shall remain in full force and effect.     15. Modification and Assignment. This Agreement shall not be modified or amendedexcept by an instrument in writing signed by the parties hereto. This Agreement and all of itsterms and conditions shall be binding upon and shall inure to the benefit of the parties hereto andtheir respective heirs, legal representatives, successors and assigns, including but not limited toany corporation or other entity with or into which the Company is merged or consolidated or anyother
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successor of the Company. The Executive agrees that he will not and may not assign, transferor convey, pledge or encumber this Agreement or his right, title or interest therein, or his powerto execute the same or any monies due or to become due hereunder, this Agreement being intended tosecure the personal services of the Executive, and the Company shall not recognize any suchassignment, transfer, conveyance, pledge or encumbrance.     16. Applicable Law. This Agreement and the rights and obligations of the partieshereunder shall be construed and interpreted in accordance with the laws of the State of New York,without giving effect to the conflict of laws provisions thereof. Any action or proceeding broughtby either party against the other arising out of or related to the Agreement shall be brought onlyin a state court of competent jurisdiction located in the County of Monroe, State of New York orthe Federal District Court for the Western District of New York located in Monroe County, New Yorkand the parties hereby consent to the personal jurisdiction and venue of said courts.     17. Prior Agreements. This Agreement shall supersede any prior employment agreement,arrangement or understanding between the Company and the Executive, without limitation, and shallbe effective from the date specified hereinabove.     18. Business Combinations. In the event of any sale, merger or any form of businesscombination affecting the Company, including without limitation the purchase of assets or any otherform of business combination, the Company will obtain the express written assumption of thisAgreement by the acquiring or surviving entity from such combination, and failure of the Company toobtain such an assumption will constitute a breach of this Agreement, entitling the Executive toall payments and other benefits to be provided in the event of termination without cause providedin Section 8.     19. Section 409A. This Agreement is intended to comply with Section 409A of the Codeto the extent its provisions are subject to that law. The parties agree that they will negotiatein good faith regarding amendments necessary to bring this Agreement into compliance with the termsof that Section or an exemption therefrom as interpreted by guidance issued by the Internal RevenueService, taking into account any limitations on amendments imposed by Section 409A or InternalRevenue Service guidance. The parties further agree that to the extent the terms of this Agreementfail to qualify for exemption from or satisfy the requirements of Section 409A, this Agreement maybe operated in compliance with Section 409A pending amendment to the extent authorized by theInternal Revenue Service. In such circumstances the Company and the Executive will administer theAgreement in a manner which adheres as closely as possible to the existing terms and intent of theAgreement while complying with Section 409A.     20. Headings. The section headings of this Agreement are for convenience of referenceonly and are not to be considered in the interpretation of the terms and conditions of thisAgreement.     21. Invalidity or Unenforceability. If any term or provision of this Agreement isheld to be invalid or unenforceable, for any reason, such invalidity or unenforceability shall notaffect any other term or provision hereof and this Agreement shall continue in full force andeffect as if such invalid or unenforceable term or provision (to the extent of the invalidity orunenforceability) had not been contained herein. If any court determines that any provision ofSection 10 hereof is unenforceable because of the duration or geographic scope of such provision,such court shall have
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the power to reduce the scope or duration of such provision, as the case may be, and, in itsreduced form, such provision shall then be enforceable.     22. Counterparts. This Agreement may be executed in any number of counterparts, eachof which for all purposes shall be deemed to be an original.[*Remainder of page intentionally left blank*.]
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     IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the day andyear first above written.       **GRAHAM CORPORATION**       By: /s/ James R. Lines       Name: James R. Lines  Title: President and Chief Operating Officer         /s/ Alan E. Smith         Alan E. Smith     STATE OF NEW YORK )     ss:  COUNTY OF MONROE )        On this 1st day of August, 2007, before me personally came James R. Lines, to me known, who,being by me duly sworn did depose and say that the above-named person resides in Lancaster, NY,that said person is the President and the Chief Operating Officer of Graham Corporation, thecorporation described in and which executed the foregoing instrument; and that the above-namedperson signed thereto by order of the Board of Directors of said corporation.         /s/ Carole M. Anderson   Notary Public   [notary stamped]        STATE OF NEW YORK )     ss:  COUNTY OF MONROE )        On the 1st day of August, in the year 2007, before me, the undersigned, a Notary Public in andfor said State, personally appeared Alan E. Smith, personally known to me or proved to me on thebasis of satisfactory evidence to be the individual whose name is subscribed to the withininstrument and acknowledged to me that he executed the same in his capacity, and that by hissignature on the instrument, the individual, or the person upon behalf of which the individualacted, executed the instrument.         /s/ Carole M. Anderson   Notary Public   [notary stamped]   ***[Signature Page to the Employment Agreement of Alan E. Smith]***
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