##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  FORM 10-K
  ANNUAL REPORT
 PURSUANT TO SECTION 13 OR
    15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    March 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission file number
    1-8462
  GRAHAM CORPORATION
 (Exact name of registrant as
    specified in its charter)
  DELAWARE

16-1194720(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)20 Florence Avenue, Batavia,
    New York

14020(Address of Principal Executive
    Offices)

(Zip Code)   Registrants telephone number, including area code
    585-343-2216
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of each class

Name of exchange on which
    registeredCommon Stock (Par Value
    $.10)

American Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
   Title of ClassCommon Stock Purchase Rights   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      Documents
    Incorporated By Reference




---



##### 



Table of
    Contents
    GRAHAM CORPORATION
    Annual Report on
    Form 10-K
    Year Ended March 31, 2006
  
  PagePART
    IItem 1





Business


1Item 1A





Risk
    Factors


4Item 1B





Unresolved Staff
    Comments


9Item 2





Properties


9Item 3





Legal
    Proceedings


9Item 4





Submission of
    Matters to a Vote of Security Holders


9PART
    IIItem 5





Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


9Item 6





Selected Financial
    Data


11Item 7





Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


12Item 7A





Quantitative and
    Qualitative Disclosures About Market Risk


20Item 8





Financial
    Statements and Supplementary Data


22Item 9





Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


49Item 9A





Controls and
    Procedures


49Item 9B





Other
    Information


49PART
    IIIItem 10





Directors and
    Executive Officers


49Item 11





Executive
    Compensation


49Item 12





Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


50Item 13





Certain
    Relationships and Related Transactions


50Item 14





Principal
    Accounting Fees and Services


50PART IVItem 15





Exhibits, Financial
    Statement Schedules and Reports on
    Form 8-K


50EX-10.3   EMPLOYMENT AGREEMENTEX-10.6  AMENDMENT NO 1 TO EMPLOYMENT AGREEMENTEX-23.1  CONSENTEX-31.1  CERT.CEOEX-31.2  CERT. CFOEX-32  CERT. CEO AND CFO    Note:
    Portions of the registrants definitive proxy statement, to
    be issued in connection with the registrants 2006 Annual
    Meeting of Stockholders to be held on July 27, 2006, have
    been incorporated by reference into Part III,
    Items 10, 11, 12, 13 and 14 of this Annual Report on
    Form 10-K.




---



##### Table of Contents



PART I    Item 1.
    Business.  ®
    
    petroleum refineries;
    chemical plants;
    power generation facilities, such as fossil fuel, nuclear,
    cogeneration and geothermal power plants;
    pharmaceutical plants;
    plastics plants;
    fertilizer plants;
    breweries;
    titanium plants;
    liquefied natural gas production facilities;
    soap manufacturing plants;
    air conditioning systems;
    food processing plants; and
    other process industries.    Form 10-K
  Our
    Fiscal 2006 Highlights
    
    Sales for the year were up 34% compared with fiscal 2005.
    Backlog increased 48% compared with fiscal 2005.
    Income from continuing operations and income per diluted share
    for fiscal 2006 were $3,586 and $0.96, respectively, compared
    with $296 and $0.09, respectively, for fiscal 2005. 1




---



##### Table of Contents




    Gross profit margins and operating margins from continuing
    operations were 29% and 11%, respectively, compared with 18% and
    0%, respectively, for fiscal 2005.
    Effective October 3, 2005 we split our stock 2 for 1 to
    achieve greater trading liquidity.
    In November 2005, the sale of 198,246 shares of common
    stock, which we previously held as treasury shares, was
    completed resulting in net proceeds to us of approximately
    $3.4 million.
    In January 2006, the position of Vice President of Asia
    Operations was established for the purpose of developing and
    implementing marketing, manufacturing and engineering strategic
    growth opportunities in Asia. In May 2006, we completed the
    formation of a wholly-owned Chinese subsidiary located in
    Suzhou, which currently is a sales, engineering and project
    management operation, and committed to a $2,100 capital
    investment over the next two years.    
    Global consumption of crude oil is estimated to expand
    significantly over the next 15 years.
    It is generally believed that there is a shortage of global oil
    refining capacity.
    There is a significant differential in raw material prices for
    higher quality sweet and lower quality
    sour crude oil. To lower production costs, many
    refineries are upgrading facilities in order to be able to
    process sour crude oil, which requires an upgrade of vacuum and
    heat transfer equipment.
    Known supplies of sweet crude oil are being depleted. Sour crude
    sources are identified and believed to be plentiful.
    New environmental regulations in numerous countries requiring
    lower sulfur emissions are requiring refineries to upgrade their
    facilities.
    The expansion of the middle class in Asia is driving increasing
    demand for power and petrochemical products.
    The high cost of natural gas in North America and Europe is
    leading to the construction of new petrochemical plants in the
    Middle East, where natural gas is plentiful and inexpensive.
    The global economy is continuing to expand.
    There is an increased need in certain regions for geothermal
    electrical power plants to meet increased electricity demand.  Our
    Customers and Markets
       2




---



##### Table of Contents



Form 10-K.
  Our
    Strengths
    
    We have strong brand recognition. Over the past 70 years,
    we believe that we have built a reputation for top quality,
    reliable products and high standards of customer service. As a
    result, the Graham name is well known by both our existing
    customers, and many of our potential customers. We believe that
    recognition of the Graham brand allows us to capitalize on
    market opportunities in both existing and potential markets.
    We engineer and manufacture high quality products and systems
    that address the particular needs of our customers. With over
    70 years of engineering expertise, we believe that we are
    well respected for our knowledge in vacuum and heat transfer
    technologies. We maintain strict quality control and
    manufacturing standards in order to manufacture products of the
    highest quality.
    We have a global presence. Our products are used worldwide, and
    we have sales representatives located in over 40 major cities.
    We believe that we have a solid reputation and strong
    relationships with our existing customer base, as well as with
    our key suppliers.  Our
    Strategy
    
    Continue to invest in engineering resources and technology in
    order to advance our market penetration with our vacuum and heat
    transfer technologies.
    Invest resources to meet the growing demand for our products in
    the oil refining, petrochemical processing and power generating
    industries, especially in emerging markets. Specifically,
    establish sales, engineering and manufacturing capabilities in
    Asia where estimates of demand for oil and oil by-products will
    exceed the rest of the world.
    Expand our margin potential by implementing and expanding upon
    our operational efficiencies through the introduction of lean
    manufacturing processes and other cost efficiencies.
    Enhance our engineering and manufacturing capacities, especially
    in connection with the design of our products, in order to be
    able to more quickly respond to existing and future customer
    demands.
    Accelerate our bids on available contracts by implementing
    front-end bid automation and design processes.
    Expand our global sales presence in order to both further
    penetrate our existing markets and reach additional markets.
    Capitalize on the strength of the Graham brand in order to both
    win more business in our traditional markets and penetrate other
    markets.
    Examine acquisition and organic growth opportunities to expand
    and complement our core business, including opportunities to
    extend our existing product lines and opportunities to move into
    complementary product lines. 3




---



##### Table of Contents



Competition
    Intellectual
    Property
    Availability
    of Raw Materials
    Working
    Capital Practices
    Environmental
    Matters
    Seasonality
    Research
    Activities
    Item 1A.
    Risk
    Factors  Our business and operations are subject to numerous risks,
    many of which are described below and elsewhere in this Annual
    Report on
    Form 10-K.
    If any of the events described below occur, our business and
    results of operations could be harmed.
  Risks
    related to our business
  The
    industries in which we operate are cyclical, and downturns in
    such industries may adversely affect our operating
    results.
   4




---



##### Table of Contents



Our
    international sales operations are subject to uncertainties that
    could harm our business.
    
    it may be difficult to enforce agreements and collect
    receivables through some foreign legal systems;
    foreign customers may have longer payment cycles than customers
    in the United States;
    tax rates in some foreign countries may exceed those of the
    United States and foreign earnings may be subject to withholding
    requirements or the imposition of tariffs, exchange controls or
    other restrictions;
    general economic and political conditions in the countries where
    we sell our products may have an adverse effect on our sales in
    those countries or not be favorable to our growth strategy;
    foreign governments may adopt regulations or take other actions
    that could directly or indirectly harm our business and growth
    strategy; and
    it may be difficult to enforce intellectual property rights in
    some foreign countries.    If we
    fail to introduce enhancements to our existing products or to
    keep abreast of technological changes in our markets, our
    business and results of operations could be adversely
    effected.
    The
    loss of any of our senior executive officers or our inability to
    hire additional qualified management personnel could harm our
    business.
     5




---



##### Table of Contents



Our
    business is highly competitive. If we are unable to successfully
    implement our business strategy, we risk losing market share to
    current and future competitors.
    If we
    are unable to make necessary capital investments, our business
    may be harmed.
    If
    third parties infringe our intellectual property or if we were
    to infringe the intellectual property of third parties, we may
    expend significant resources enforcing or defending our rights
    or suffer competitive injury.
      A
    decrease in supply or increase in cost of the materials used in
    our products could harm our profitability.
    We
    face potential liability from asbestos exposure and similar
    claims.
   6




---



##### Table of Contents



Risks
    related to operating a subsidiary in China
  The
    operations of our Chinese subsidiary may be adversely affected
    by Chinas evolving economic, political and social
    conditions.
    It may
    be difficult for our Chinese subsidiary to make dividend or
    other payments to us, which could adversely effect our results
    of operations.
    Intellectual
    property rights are difficult to enforce in China.
    Uncertainties
    with respect to the Chinese legal system may adversely affect
    the operations of our Chinese subsidiary.
    Risks
    related to the ownership of our common stock
  Provisions
    contained in our certificate of incorporation, bylaws and our
    stockholder rights plan could impair or delay stockholders
    ability to change our management and could discourage takeover
    transactions that our stockholders might consider to be in their
    best interests.
   7




---



##### Table of Contents




    We could issue shares of preferred stock with terms adverse
    to our common stock.  Under our certificate of
    incorporation, our board of directors is authorized to issue
    shares of preferred stock and to determine the rights,
    preferences and privileges of such shares without obtaining any
    further approval from the holders of our common stock. Up to
    440,000 of such undesignated shares of preferred stock are
    presently eligible for issuance. We could issue shares of
    preferred stock with voting and conversion rights that adversely
    affect the voting power of the holders of our common stock, or
    that have the effect of delaying or preventing a change in
    control of our company.
    We maintain a stockholder rights, or poison pill,
    plan.  Our stockholder rights plan has the effect
    of discouraging any person or group that wishes to acquire 15%
    or more of our common stock from doing so without obtaining our
    agreement because such acquisition would cause such person or
    group to suffer substantial dilution. Such plan may have the
    effect of discouraging a change in control transaction that our
    stockholders would otherwise consider to be in their best
    interests.
    Only a minority of our directors may be elected in a given
    year.  Our bylaws provide for a classified board
    of directors, with only approximately one-third of our board
    elected each year. This provision makes it more difficult to
    effect a change of control because at least two annual
    stockholder meetings are necessary to replace a majority of our
    directors.
    Our bylaws contain advance notice
    requirements.  Our bylaws also provide that any
    stockholder who wishes to bring business before an annual
    meeting of our stockholders or to nominate candidates for
    election as directors at an annual meeting of our stockholders
    must deliver advance notice of their proposals to us before the
    meeting. Such advance notice provisions may have the effect of
    making it more difficult to introduce business at stockholder
    meetings or nominate candidates for election as director.
    Our certificate of incorporation requires supermajority
    voting to approve a change of control
    transaction.  Seventy-five percent of our
    outstanding shares entitled to vote are required to approve any
    merger, consolidation, sale of all or substantially all of our
    assets and similar transactions if the other party to such
    transaction owns 5% or more of our shares entitled to vote. In
    addition, a majority of the shares entitled to vote not owned by
    such 5% or greater stockholder are also required to approve any
    such transaction.
    Amendments to our certificate of incorporation require
    supermajority voting.  Our certificate of
    incorporation contains provisions that make its amendment
    require the affirmative vote of both 75% of our outstanding
    shares entitled to vote and a majority of the shares entitled to
    vote not owned by any person who may hold 50% or more of our
    shares unless the proposed amendment was previously recommended
    to our stockholders by an affirmative vote of 75% of our board.
    This provision makes it more difficult to implement a change to
    our certificate of incorporation that stockholders might
    otherwise consider to be in their best interests without
    approval of our board.
    Amendments to our bylaws require supermajority
    voting.  Although our board of directors is
    permitted to amend our bylaws at any time, our stockholders may
    only amend our bylaws upon the affirmative vote of both 75% of
    our outstanding shares entitled to vote and a majority of the
    shares entitled to vote not owned by any person who owns 50% or
    more of our shares. This provision makes it more difficult for
    our stockholders to implement a change they may consider to be
    in their best interests without approval of our board.  Our
    stock price may be volatile because of factors beyond our
    control.
    
    variations in our revenue and operating results from quarter to
    quarter;
    developments or downturns in the industries in which we do
    business;
    our ability to obtain
    and/or
    maintain securities analyst coverage; 8




---



##### Table of Contents




    changes in securities analysts recommendations or
    estimates of our financial performance;
    changes in market valuations of companies similar to ours;
    announcements by our competitors of significant contracts, new
    offerings, acquisitions, commercial relationships, joint
    ventures or capital commitments; and
    general economic conditions.    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties          Item 3.
    Legal
    Proceedings  Form 10-K
  Item 4.
    Submission
    of Matters to a Vote of Security Holders  Form 10-K.
 PART II  Item 5.
    Market
    Information   9




---



##### Table of Contents



two-for-one
  High


LowFiscal year 2006First quarter

$
13.75


$
8.28Second quarter


20.71



12.63Third quarter


24.85



13.20Fourth quarter


26.00



17.60Fiscal year 2005First quarter

$
5.98


$
5.35Second quarter


6.00



5.48Third quarter


7.40



5.70Fourth quarter


8.90



6.39         Form 10-K.
 10




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  Graham
    Corporation  Six Year Summary of Selected
    Financial Data2006


2005


2004


2003


2002


2001(Dollar amounts in thousands,
    except per share data)Operations:Net Sales

$
55,208


$
41,333


$
37,508


$
44,511


$
41,085


$
40,664Gross Profit


15,959



7,540



5,890



7,297



7,272



8,213Gross Profit Percentage


29
%


18
%


16
%


16
%


18
%


20
%Income (Loss) From Continuing
    Operations


3,586



296



(832
)


148



1,738



122Dividends


367



334



327



254







Common Stock:Basic Earnings (Loss) From
    Continuing Operations Per Share


.98



.09



(.25
)


.04



.53



.04Diluted Earnings (Loss) From
    Continuing Operations Per Share


.98



.09



(.25
)


.04



.52



.04Quarterly Dividend Declared Per
    Share


.025



.025



.025



.025







Market Price Range of Common Stock


26.00-8.28



8.90-5.35



5.85-3.53



5.50-3.42



7.40-3.63



6.47-3.53Financial Data at
    March 31:Working Capital


16,779



11,204



11,652



12,822



13,812



11,162Capital Expenditures


1,048



224



249



799



607



1,025Depreciation


775



768



793



797



773



754Total Assets


40,556



33,529



35,740



38,323



43,704



36,608Long-Term Debt


30



44



93



127



150



682Stockholders Equity


27,107



16,578



18,102



18,836



19,636



17,137  11




---



##### Table of Contents



Item 7.
    Managements
    Discussion And Analysis Of Financial Condition And Results Of
    Operations  (Dollar
    amounts in thousands, except per share data)
  Overview
          Highlights
    
    Sales for the year were up 34% compared with fiscal 2005.
    Backlog increased 48% compared with fiscal 2005.
    Income from continuing operations and income per diluted share
    for fiscal 2006 were $3,586 and $0.96, respectively, compared
    with $296 and $0.09, respectively, for fiscal 2005.
    Gross profit margins and operating margins from continuing
    operations were 29% and 11%, respectively, compared with 18% and
    0%, respectively, for fiscal 2005.
    Effective October 3, 2005 we split our stock 2 for 1 to
    achieve greater trading liquidity.
    In November 2005, the sale of 198,246 shares of common
    stock, which we previously held as treasury shares, was
    completed resulting in net proceeds to us of approximately
    $3.4 million.
    In January 2006, the position of Vice President of Asia
    Operations was established for the purpose of developing and
    implementing marketing, manufacturing and engineering strategic
    growth opportunities in Asia. In May 2006, we completed the
    formation of a wholly-owned Chinese subsidiary located in
    Suzhou, which currently is a sales, engineering and project
    management operation, and committed to a $2,100 capital
    investment over the next two years.    
    Global consumption of crude oil is estimated to expand
    significantly over the next 15 years.
    It is generally believed that there is a shortage of global oil
    refining capacity.
    There is a significant differential in raw material prices for
    higher quality sweet and lower quality
    sour crude oil. To lower production costs, many
    refineries are upgrading facilities in order to be able to
    process sour crude oil, which requires an upgrade of vacuum and
    heat transfer equipment. 12




---



##### Table of Contents




    Known supplies of sweet crude oil are being depleted. Sour crude
    sources are identified and believed to be plentiful.
    New environmental regulations in numerous countries requiring
    lower sulfur emissions are requiring refineries to upgrade their
    facilities.
    The expansion of the middle class in Asia is driving increasing
    demand for power and petrochemical products.
    The high cost of natural gas in North America and Europe is
    leading to the construction of new petrochemical plants in the
    Middle East, where natural gas is plentiful and inexpensive.
    The global economy is continuing to expand.
    There is an increased need in certain regions for geothermal
    electrical power plants to meet increased electricity demand.  Forward-Looking
    Statements
    Form 10-K.
  
    the current and future economic environments affecting us and
    the markets we serve;
    sources of revenue and anticipated revenue, including the
    contribution from the growth of new products, services and
    markets;
    plans for future products and services and for enhancements to
    existing products and services;
    estimates regarding our liquidity and capital requirements;
    our ability to attract or retain customers; and
    the outcome of any existing or future litigation.
    Forward-looking statements are usually accompanied by words such
    as anticipate, believe,
    estimate, may, intend,
    expect and similar expressions. Actual results could
    differ materially from historical results or those implied by
    the 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
    forward-looking statements contained in this report, whether as
    a result of new information, future events or otherwise.  Critical
    Accounting Policies, Estimates and Judgments
  Form 10-K,
    Revenue Recognition. percentage-of-completion
 13




---



##### Table of Contents



percentage-of-completion
  percentage-of-completion percentage-of-completion
  Pension and Postretirement Benefits.
    Income Taxes.
  Results
    of Operations
  Form 10-K.
    Fiscal Year Ended
    March 31,2006


2005


2004Net sales

$
55,208


$
41,333


$
37,508Income (loss) from continuing
    operations

$
3,586


$
296


$
(832
)Diluted income (loss) per share
    from continuing operations

$
0.96


$
0.09


$
(0.25
)Identifiable assets

$
40,556


$
33,529


$
35,740  14




---



##### Table of Contents



Fiscal
    2006 Compared with Fiscal 2005
               15




---



##### Table of Contents



Fiscal
    2005 Compared with Fiscal 2004
                      Stockholders
    Equity
  FY 2006


FY 2005


FY 2004$
27,107


$
16,578


$
18,102   Fiscal
    2006 Compared with Fiscal 2005
   16




---



##### Table of Contents



Fiscal
    2005 Compared with Fiscal 2004
    Liquidity
    and Capital Resources
  March 31,2006


2005Working capital

$
16,779


$
11,204Working capital ratio(1)


2.6



2.0Long-term debt

$
30


$
44Long-term debt/capitalization(2)


0.1
%


0.3
%Long-term
    liabilities/capitalization(3)


10
%


37
%     (1)
    
    Working capital ratio equals Current Assets divided by Current
    Liabilities.(2)
    
    Long-term Debt/capitalization equals Long-term Debt divided by
    Stockholders Equity plus Long-term Debt.(3)
    
    Long-term Liabilities/capitalization equals Total Long-term
    Liabilities minus Current Liabilities divided by
    Stockholders Equity plus Long-term Debt.    Less Than


1-3


3-5Total


1 Year


Years


Years


ThereafterShort-term debt

$



$



$



$



$
Capital Lease Obligations(1)


83



51



32







Operating Leases(1)


132



39



45



48



Pension and Postretirement
    Benefits(2)


2,139



2,139











Other Long-Term Liabilities
    Reflected on the Balance Sheet Under GAAP


191







131



60



Total

$
2,545


$
2,229


$
208


$
108


$
     (1)
    
    For additional information, see Note 6 to the consolidated
    Financial Statements.(2)
    
    Amounts represent anticipated contributions to the defined
    benefit pension plan and postretirement medical benefit plan for
    our fiscal year ending March 31, 2007. The Company expects
    to be required to make cash contributions beyond one year.  Fiscal
    2006 Compared with Fiscal 2005
   17




---



##### Table of Contents



Orders
    and Backlog
     18




---



##### Table of Contents



Contingencies
      New
    Accounting Pronouncements
         19




---



##### Table of Contents



Off
    Balance Sheet Arrangements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    
    foreign currency exchange rates;
    equity price risk (related to our Long-Term Incentive Plan for
    Directors); and
    gross margin risk.    Foreign
    Currency
        Equity
    Price Risk
   20




---



##### Table of Contents



Year EndedMarch 31,2006


200550% increase


(65
)


(65
)50% decrease


32



175% increase


(65
)


(65
)75% decrease


71



24     Year Ended
    March 31,2007


2008


2009


2010


201150% increase


(65
)


(65
)


(65
)


(65
)


(65
)50% decrease


48



65



77



88



9075% increase


(65
)


(65
)


(65
)


(65
)


(65
)75% decrease


95



120



138



155



158   Gross
    Margin Risk
   21




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    FINANCIAL STATEMENTS
  Graham Corporation

PageConsolidated Financial
    Statements:Consolidated
    Statements of Operations for the fiscal years ended
    March 31, 2006, 2005 and 2004


23Consolidated
    Balance Sheets as of March 31, 2006 and 2005


24Consolidated
    Statements of Cash Flows for the fiscal years ended
    March 31, 2006, 2005 and 2004


25Consolidated
    Statements of Changes in Stockholders Equity for the
    fiscal years ended March 31, 2006, 2005 and 2004


26Notes to
    Consolidated Financial Statements


27Report of
    Independent Registered Public Accounting Firm


48  22




---



##### Table of Contents



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended
    March 31,2006


2005


2004(Dollar amounts in thousands,except per share data)Net sales

$
55,208


$
41,333


$
37,508Cost of products sold


39,249



33,793



31,618Gross profit


15,959



7,540



5,890Expenses and other income:Selling, general and administrative


9,818



7,691



7,805Interest expense


17



33



46Other expense


371



1,049



Other income






(1,592
)


(522
)Total expenses and other income


10,206



7,181



7,329Income (loss) from continuing
    operations before income taxes


5,753



359



(1,439
)Provision (benefit) for income
    taxes


2,167



63



(607
)Income (loss) from continuing
    operations


3,586



296



(832
)Loss from discontinued operations
    (net of income tax benefit of $1,420 and $167 in 2005 and 2004,
    respectively)






(3,202
)


(329
)Net income (loss)

$
3,586


$
(2,906
)

$
(1,161
)Per Share DataBasic:Income (loss) from continuing
    operations

$
.98


$
.09


$
(.25
)Loss from discontinued operations






(.95
)


(.10
)Net income (loss)

$
.98


$
(.86
)

$
(.35
)Diluted:Income (loss) from continuing
    operations

$
.96


$
.09


$
(.25
)Loss from discontinued operations






(.93
)


(.10
)Net income (loss)

$
.96


$
(.85
)

$
(.35
)Average common shares outstanding:Basic


3,653,656



3,363,980



3,293,402Diluted


3,734,591



3,433,396



3,293,402Dividends declared per share

$
.10


$
.10


$
.10    23




---



##### Table of Contents



CONSOLIDATED
    BALANCE SHEETS  March 31,2006


2005(Dollar amounts in
    thousands)AssetsCurrent assets:Cash and cash equivalents

$
570


$
724Investments


10,418



1,993Trade accounts receivable, net of
    allowances ($28 in 2006 and 2005)


5,978



10,026Unbilled revenue


4,978



3,620Inventories


5,115



4,823Domestic and foreign income taxes
    receivable


114



45Deferred income tax asset


19



719Prepaid expenses and other current
    assets


203



139Total current assets


27,395



22,089Property, plant and equipment, net


7,954



7,649Deferred income tax asset


2,107



3,747Prepaid pension asset


3,076Other assets


24



44Total assets

$
40,556


$
33,529Liabilities and
    Stockholders EquityCurrent liabilities:Short-term debt

$



$
1,872Current portion of long-term debt


45



48Accounts payable


4,135



3,374Accrued compensation


3,310



2,802Accrued expenses and other
    liabilities


1,573



1,494Customer deposits


1,553



1,295Total current liabilities


10,616



10,885Long-term debt


30



44Accrued compensation


276



213Other long-term liabilities


191



364Accrued pension liability


232



3,141Accrued postretirement benefits


2,104



2,304Total liabilities


13,449



16,951Stockholders equity:Preferred stock, $1 par
    value Authorized, 500,000 sharesCommon stock, $.10 par
    value Authorized, 6,000,000 sharesIssued, 3,832,390 and
    3,593,480 shares in 2006 and 2005, respectively


383



180Capital in excess of par value


9,517



5,553Retained earnings


17,301



14,082Accumulated other comprehensive
    lossMinimum pension liability
    adjustment






(1,698
)Cumulative foreign currency
    translation adjustment


(1
)


Treasury stock
    (198,246 shares in 2005)






(1,385
)Notes receivable from officers and
    directors


(93
)


(154
)Total stockholders equity


27,107



16,578Total liabilities and
    stockholders equity

$
40,556


$
33,529    24




---



##### Table of Contents



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended
    March 31,2006


2005


2004(Dollar amounts in
    thousands)Operating activities:Income (Loss) from continuing
    operations

$
3,586


$
296


$
(832
)Adjustments to reconcile income
    (loss) from continuing operations to net cash provided (used) by
    operating activities of continuing operations:Non cash other expense (income)


247



(846
)


(522
)Depreciation and amortization


793



780



793Discount accretion on investments


(265
)


(38
)


(49
)(Gain) loss on disposal or sale of
    property, plant and equipment


(6
)


4



Deferred income taxes


2,150



58



277(Increase) decrease in operating
    assets:Accounts receivable


4,048



(3,249
)


(1,405
)Unbilled revenue


(1,358
)


(3,620
)


Inventories


(292
)


(193
)


3,252Domestic income taxes
    receivable/payable


(70
)


888



(610
)Prepaid expenses and other current
    and non-current assets


(104
)


(57
)


47Prepaid pension asset


(3,076
)






Increase (decrease) in operating
    liabilities:Accounts payable


761



1,266



(1,557
)Accrued compensation, accrued
    expenses and other current and non-current liabilities


825



(242
)


(1,048
)Customer deposits


258



728



(4
)Long-term portion of accrued
    compensation, accrued pension liability and accrued
    postretirement benefits


(964
)


(169
)


393Total adjustments


2,947



(4,690
)


(433
)Net cash provided (used) by
    continuing operations


6,533



(4,394
)


(1,265
)Net cash provided (used) by
    discontinued operations






(85
)


221Net cash provided (used) by
    operating activities


6,533



(4,479
)


(1,044
)Investing activities:Purchase of property, plant and
    equipment


(1,048
)


(224
)


(249
)Proceeds from sale of property,
    plant and equipment


8







1Purchase of investments


(33,160
)


(8,462
)


(13,209
)Redemption of investments at
    maturity


25,000



11,803



14,408Net cash (used) provided by
    investing activities of continuing operations


(9,200
)


3,117



951Net cash used by investing
    activities of discontinued operations






(75
)


(34
)Net cash (used) provided by
    investing activities


(9,200
)


3,042



917Financing activities:(Decrease) increase in short-term
    debt, net


(1,872
)


1,872



Proceeds from issuance of long-term
    debt


3,070







9,280Principal repayments on long-term
    debt


(3,120
)


(45
)


(9,335
)Issuance of common stock


1,424



390



311Collection of notes receivable from
    officers and directors


61



46



348Dividends paid


(452
)


(333
)


(327
)Acquisition of treasury stock










(20
)Sale of treasury stock


3,403







Net cash provided by financing
    activities of continuing operations


2,514



1,930



257Net cash (used) provided by
    financing activities of discontinued operations






(233
)


114Net cash provided by financing
    activities


2,514



1,697



371Effect of exchange rate on cash


(1
)


(3
)


6Net (decrease) increase in cash and
    cash equivalents


(154
)


257



250Cash and cash equivalents at
    beginning of year


724



467



217Cash and cash equivalents at end of
    year

$
570


$
724


$
467    25




---



##### Table of Contents



CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  Accumulated





NotesCommon Stock


Capital in





Other





ReceivablePar


Excess of


Retained


Comprehensive


Treasury


from Officers


StockholdersShares


Value


Par Value


Earnings


Loss


Stock


and Directors


Equity(Dollar amounts in
    thousands)Balance at April 1, 2003


1,716,572


$
172


$
4,757


$
18,810


$
(2,990
)

$
(1,161
)

$
(752
)

$
18,836Net loss














(1,161
)














(1,161
)Foreign currency translation
    adjustment


















448











448Minimum pension liability
    adjustment, net of income tax of $197


















(366
)










(366
)Total comprehensive loss






























(1,079
)Issuance of shares


40,878



4



307



















311Stock option tax benefit










33



















33Dividends














(327
)














(327
)Acquisition of treasury stock






















(224
)


204



(20
)Collection of notes receivable from
    officers and directors


























348



348Balance at March 31, 2004


1,757,450



176



5,097



17,322



(2,908
)


(1,385
)


(200
)


18,102Net loss














(2,906
)














(2,906
)Foreign currency translation
    adjustment


















92











92Reclassification adjustment for
    losses included in net income


















1,360











1,360Minimum pension liability
    adjustment, net of income tax of $130


















(242
)










(242
)Total comprehensive loss






























(1,696
)Issuance of shares


39,290



4



386



















390Stock option tax benefit










70



















70Dividends














(334
)














(334
)Collection of notes receivable from
    officers and directors


























46



46Balance at March 31, 2005


1,796,740



180



5,553



14,082



(1,698
)


(1,385
)


(154
)


16,578Net income














3,586















3,586Foreign currency translation
    adjustment


















(1
)










(1
)Minimum pension liability
    adjustment, net of income tax of $915


















1,698











1,698Total comprehensive income






























5,283Issuance of shares


136,645



13



1,411



















1,424Stock option tax benefit










725



















725Dividends














(367
)














(367
)Two-for-one
    stock split


1,899,005



190



(190
)


















Sale of treasury stock










2,018











1,385







3,403Collection of notes receivable from
    officers and directors


























61



61Balance at March 31, 2006


3,832,390


$
383


$
9,517


$
17,301


$
(1
)

$



$
(93
)

$
27,107    26




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    for fiscal years ended March 31, 2006, 2005 and
    2004:    Note 1  The
    Company and Its Accounting Policies:
    Principles
    of consolidation and use of estimates in the preparation of
    financial statements
      Translation
    of foreign currencies
    Revenue
    recognition
  Percentage-of-Completion
    Method
  percentage-of-completion percentage-of-completion percentage-of-completion percentage-of-completion
  Completed Contract Method
  percentage-of-completion
 27




---



##### Table of Contents



Shipping
    and handling fees and costs
    Investments
  held-to-maturity,
  Inventories
  percentage-of-completion
    2006


2005Costs incurred since inception on
    contracts in progress

$
8,593


$
8,641Estimated earnings since inception
    on contracts in progress


3,473



1,93812,066



10,579Less billings to date


8,864



8,516Total

$
3,202


$
2,063     2005


2005Unbilled revenue

$
4,978


$
3,620Progress payments reducing
    inventory (Note 3)


(223
)


(262
)Customer deposits


(1,553
)


(1,295
)Total

$
3,202


$
2,063   Property,
    plant and depreciation
   28




---



##### Table of Contents



Product
    warranties
    Research
    and development
    Income
    taxes
    Stock
    split
  two-for-one two-for-one two-for-one
  Stock-based
    compensation
   29




---



##### Table of Contents



Year Ended
    March 31,2006


2005


2004Net income (loss)

As reported

$
3,586


$
(2,906
)

$
(1,161
)Stock-based employee compensation
    cost, net of related tax benefits




(224
)


(118
)


(75
)Pro forma net income (loss)



$
3,362


$
(3,024
)

$
(1,236
)Basic income (loss) per share

As reported

$
.98


$
(.86
)

$
(.35
)Pro forma

$
.92


$
(.90
)

$
(.38
)Diluted income (loss) per share

As reported

$
.96


$
(.85
)

$
(.35
)Pro forma

$
.90


$
(.88
)

$
(.38
)     2006


2005


2004Expected life


5 years



5 years



5 yearsVolatility


46.86
%


42.84
%


47.13
%Risk-free interest rate


4.46
%


3.53
%


3.01
%Dividend yield


.63
%


1.65
%


2.25
%  30




---



##### Table of Contents



Income
    per share data
    Year Ended
    March 31,2006


2005


2004Basic income (loss) per share:Numerator:Income (loss) from continuing
    operations

$
3,586


$
296


$
(832
)Denominator:Weighted common shares outstanding


3,627,283



3,333,874



3,261,092Share equivalent units
    (SEUs) outstanding


26,373



30,106



32,310Weighted average shares and SEUs
    outstanding


3,653,656



3,363,980



3,293,402Basic income (loss) per share from
    continuing operations

$
.98


$
.09


$
(.25
)Diluted income (loss) per share:Numerator:Income (loss) from continuing
    operations

$
3,586


$
296


$
(832
)Denominator:Weighted average shares and SEUs
    outstanding


3,653,656



3,363,980



3,293,402Stock options outstanding


79,412



69,166



Contingently issuable SEUs


1,523



250



Weighted average common and
    potential common shares outstanding


3,734,591



3,433,396



3,293,402Diluted income (loss) per share
    from continuing operations

$
.96


$
.09


$
(.25
)     Cash flow
    statement
       31




---



##### Table of Contents



Accumulated
    other comprehensive income (loss)
    Accounting
    and Reporting Changes
         32




---



##### Table of Contents



Reclassifications
    Note 2  Discontinued
    Operations:
        Note 3  Inventories:
    March 31,2006


2005Raw materials and supplies

$
1,474


$
2,098Work in process


3,087



1,421Finished products


777



1,5665,338



5,085Less  progress
    payments


223



262$
5,115


$
4,823  33




---



##### Table of Contents



Note 4  Property,
    Plant and Equipment:
    March 31,2006


2005Land

$
210


$
210Buildings and improvements


10,307



10,297Machinery and equipment


15,121



14,349Construction in progress


28



25,666



24,856Less  accumulated
    depreciation and amortization


17,712



17,207$
7,954


$
7,649     Note 5  Product
    Warranty Liability:
    Year Ended
    March 31,2006


2005Balance at beginning of year

$
255


$
242Expense for product warranties


301



124Product warranty claims paid


(226
)


(111
)Balance at end of year

$
330


$
255   Note 6  Leases:
      March 31,2006


2005Machinery and equipment

$
196


$
222Less accumulated amortization


125



137$
71


$
85    34




---



##### Table of Contents



Operating


CapitalLeases


Leases2007

$
39


$
512008


23



282009


22



42010


23



2011


25



Total minimum lease payments

$
132


$
83Less  amount
    representing interest






8Present value of net minimum lease
    payments





$
75   Note 7  Debt:
  Short-Term
    Debt Due Banks
    March 31,2006


2005United States revolving credit
    facility

$



$
1,872           Long-Term
    Debt
    March 31,2006


2005Capital lease obligations
    (Note 6)

$
75


$
92Less: current amounts


45



48Total

$
30


$
44    35




---



##### Table of Contents



Note 8  Financial
    Instruments and Derivative Financial Instruments
  Concentrations
    of Credit Risk
    Letters
    of Credit
    Foreign
    Exchange Risk Management:
  and/or
  Fair
    Value of Financial Instruments
    Investments:
  Short-term debt:
  Note 9  Income
    Taxes:
    Year Ended
    March 31,2006


2005


2004United States

$
5,739


$
359


$
(1,439
)United Kingdom


14







$
5,753


$
359


$
(1,439
)  36




---



##### Table of Contents



Year Ended
    March 31,2006


2005


2004Current:Federal

$



$



$
(892
)State


14



5



8United Kingdom


3







17



5



(884
)Deferred:Federal


1,878



36



266State


272



22



112,150



58



277Total provision (benefit) for
    income taxes

$
2,167


$
63


$
(607
)     Year Ended
    March 31,2006


2005


2004Provision (benefit) for income
    taxes at federal rate

$
1,956


$
122


$
(489
)State taxes


281



25



16Charges not deductible for income
    tax purposes


32



43



54Recognition of tax benefit
    generated by extraterritorial income exclusion


(100
)


(94
)


(98
)Cash surrender value of officer
    life insurance policies redeemed










(130
)Tax credits






(20
)Other


(2
)


(13
)


40Provision (benefit) for income
    taxes

$
2,167


$
63


$
(607
)  37




---



##### Table of Contents



March 31,2006


2005Depreciation

$
(885
)

$
(865
)Accrued compensation


354



400Prepaid pension asset


(1,309
)


Accrued pension liability


91



1,219Accrued postretirement benefits


875



961Compensated absences


522



500Inventories


(1,072
)


(304
)Warranty liability


129



100Restructuring reserve


11



55Accrued expenses


206



66Federal and state loss
    carryforwards


2,970



2,070Federal tax credits


121



121New York State investment tax
    credit


133



130Other


(20
)


132,126



4,466Less: Valuation allowance






Total

$
2,126


$
4,466     March 31,2006


2005Current deferred income tax asset

$
19


$
719Long-term deferred income tax asset


2,107



3,747$
2,126


$
4,466     Note 10  Employee
    Benefit Plans:
  Retirement
    Plans
   38




---



##### Table of Contents



Year Ended
    March 31,2006


2005


2004Service cost-benefits earned
    during the period

$
450


$
472


$
474Interest cost on projected benefit
    obligation


988



975



959Expected return on assets


(921
)


(905
)


(783
)Amortization of:Transition asset






(15
)


(44
)Unrecognized prior service cost


4



4



4Actuarial loss


297



304



287Net pension cost

$
818


$
835


$
897     Discount rate


5.93
%


6
%


6.75
%Rate of increase in compensation
    levels


3
%


3
%


3
%Long-term rate of return on plan
    assets


8.5
%


9
%


9
%         Year Ended
    March 31,2006


2005Change in the benefit obligationProjected benefit obligation at
    beginning of year

$
17,607


$
17,333Service cost


382



419Interest cost


988



975Actuarial loss (gain)


364



(641
)Benefit payments


(478
)


(479
)Projected benefit obligation at
    end of year

$
18,863


$
17,607Accumulated benefit obligation at
    end of year

$
15,515


$
14,048  39




---



##### Table of Contents



March 31,2006


2005Discount rate


5.75
%


5.93
%Rate of increase in compensation
    levels


3
%


3
%Change in fair value of plan assetsFair value of plan assets at
    beginning of year

$
10,535


$
9,988Actual return on plan assets


707



254Employer contributions


4,751



772Benefit and administrative expense
    payments


(478
)


(479
)Fair value of plan assets at end
    of year

$
15,515


$
10,535Funded statusFunded status at end of year

$
(3,348
)

$
(7,072
)Unrecognized prior service cost


38



42Unrecognized actuarial loss


6,386



6,173Net asset (liability) recognized

$
3,076


$
(857
)     2007

$
5452008


5562009


5592010


6992011


7702012-2016


4,548Total

$
7,677     March 31,2005Accrued benefit liability

$
(3,513
)Intangible asset


43Deferred income tax asset


915Accumulated other comprehensive
    loss


1,698$
(857
)    40




---



##### Table of Contents



Target


December 31,Allocation


2005


2004Asset CategoryEquity securities


50-70
%


66
%


64
%Debt securities


20-50
%


34
%


33
%Other, including cash


0-10
%






3
%100
%


100
%           Other
    Postretirement Benefits
     41




---



##### Table of Contents



Year Ended
    March 31,2006


2005


2004Service
    cost  benefits earned during the period

$



$



$
13Interest cost on accumulated
    benefit obligation


70



72



100Amortization of prior service
    benefit


(166
)


(166
)


(124
)Amortization of actuarial loss


15



13



10Net postretirement benefit

$
(81
)

$
(81
)

$
(1
)       Year Ended
    March 31,2006


2005Change in the benefit obligationProjected benefit obligation at
    beginning of year

$
1,203


$
1,160Interest cost


70



72Participant contributions


23



25Actuarial loss


42



125Benefit payments


(163
)


(179
)Projected benefit obligation at
    end of year

$
1,175


$
1,203     March 31,2006


2005Discount rate


5.65
%


5.93
%Medical care cost trend rate


6.5
%


7
%   1 2
  Year Ended
    March 31,2006


2005Change in fair value of plan assetsFair value of plan assets at
    beginning of year

$



$
Employer contribution


140



154Participants contributions


23



25Benefit payments


(163
)


(179
)Fair value of plan assets at end
    of year

$



$
Funded statusFunded status at end of year

$
(1,175
)

$
(1,203
)Unrecognized prior service benefit


(1,475
)


(1,641
)Unrecognized actuarial loss


407



380Net liability recognized

$
( 2,243
)

$
(2,464
)  42




---



##### Table of Contents



2007

$
1392008


1352009


1272010


1242011


1112012-2016


558Total

$
1,194       Employee
    Stock Ownership Plan
    Note 11  Stock
    Compensation Plans:
       43




---



##### Table of Contents



WeightedOption


Shares


AveragePrice


Under


ExerciseRange


Option


PriceOutstanding at April 1, 2003

$
3.75-10.72



451,946


$
5.94Granted

$
4.40-4.57



65,000


$
4.43Exercised

$
3.75-4.00



(81,756
)

$
3.81Cancelled

$
3.84-10.72



(11,800
)

$
6.79Outstanding at March 31, 2004

$
3.75-10.72



423,390


$
6.09Granted

$
6.25-6.50



78,000


$
6.37Exercised

$
3.75-10.72



(78,580
)

$
4.97Cancelled

$
5.50-10.72



(40,800
)

$
7.75Outstanding at March 31, 2005

$
3.75-10.72



382,010


$
6.20Granted

$
13.90



56,000


$
13.90Exercised

$
3.75-10.72



(238,910
)

$
5.96Outstanding at March 31, 2006

$
3.75-13.90



199,100


$
8.65   Weighted AverageOptions Outstanding


Weighted Average


RemainingExercise Price

at March 31, 2006


Exercise Price


Contractual Life$3.75- 4.57


26,500


$
4.19



5.74 years5.50- 6.50


77,600



6.09



6.608.06-13.90


95,000



11.99



6.42$3.75-13.90


199,100


$
8.65



6.40     Note 12  Shareholder
    Rights Plan:
       44




---



##### Table of Contents



Note 13 
    Other
    Income and Expense:              2006


2005Balance at beginning of year

$
142


$
153Expense for restructuring


19



401Amounts paid for restructuring


(135
)


(412
)Balance at end of year

$
26


$
142     Note 14 
    Related
    Party Transactions:   45




---



##### Table of Contents



Note 15 
    Segment
    Information:      2006


2005


2004Heat transfer equipment

$
24,242


$
15,927


$
12,047Vacuum equipment


21,011



18,104



17,532All other


9,955



7,302



7,929Net sales

$
55,208


$
41,333


$
37,508     2006


2005


2004Net Sales:Africa

$
30


$
403


$
23Asia


8,854



6,154



8,341Australia & New Zealand


295



731



2,222Canada


5,201



3,756



6,068Mexico


2,578



1,007



69Middle East


7,893



1,783



1,064South America


1,965



1,874



1,879United States


27,881



24,995



17,440Western Europe


375



594



253Other


136



36



149Net sales

$
55,208


$
41,333


$
37,508     Note 16 
    Commitments
    and Contingencies:   46




---



##### Table of Contents



Note 17 
    Sale of
    Treasury Stock:    Quarterly
    Financial Data (Unaudited):
    First


Second


Third


Fourth


Total2006

Quarter


Quarter


Quarter


Quarter


YearNet sales

$
11,749


$
14,044


$
13,504


$
15,911


$
55,208Gross profit


3,338



4,629



3,595



4,397



15,959Net income


703



1,350



560



973



3,586Per share:Net income:Basic


.20



.38



.15



.25



.98Diluted


.20



.37



.15



.25



.96Market price range of common stock


13.75-8.28



20.71-12.63



24.85-13.20



26-17.60



26-8.28   First


Second


Third


Fourth


Total2005

Quarter


Quarter


Quarter


Quarter


YearNet sales

$
8,281


$
9,071


$
10,783


$
13,198


$
41,333Gross profit


781



953



2,572



3,234



7,540Income (loss) from continuing
    operations


(749
)


392



(90
)


743



296Loss (income) from discontinued
    operations


(228
)


(9
)


69



(3,034
)


(3,202
)Net (loss) income


(977
)


383



(21
)


(2,291
)


(2,906
)Per share:BasicIncome (loss)from continuing
    operations


(.22
)


.12



(.03
)


.22



.09(Loss) income from discontinued
    operations


(.07
)






.02



(.90
)


(.95
)Net (loss) income


(.29
)


.11



(.01
)


(.68
)


(.86
)Diluted Income (loss) from
    continuing operations


(.22
)


.12



(.03
)


.21



.09Income (loss) from discontinued
    operations


(.07
)






.02



(.87
)


(.93
)Net (loss) income


(.29
)


.11



(.01
)


(.65
)


(.85
)Market price range of common stock


5.98-5.35



6.00-5.48



7.40-5.70



8.90-6.39



8.90-5.35  47




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 48




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Conclusion
    regarding the effectiveness of disclosure controls and
    procedures
  Rules 13a-15(e) 15d-15(e)) Form 10-K.
  Changes
    in internal control over financial reporting
  Form 10-K
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers    Code of Ethics. Form 8-K
  Item 11.
    Executive
    Compensation   49




---



##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Securities
    Authorized for Issuance under Equity Compensation Plans as of
    March 31, 2006
  Equity Compensation Plan
    Information(a)


(b)


(c)Number of SecuritiesRemaining AvailableNumber of Securities to


Weighted Average


for Future IssuanceBe Issued upon Exercise


Exercise Price of


Under Equity Compensationof Outstanding Options,


Outstanding Options,


Plans (Excluding SecuritiesPlan Category

Warrants and Rights


Warrants and Rights


Reflected in Column
    (a))Equity compensation plans approved
    by security holders


199,100


$
8.65



93,300Equity compensation plans not
    approved by security holders










Total


199,100


$
8.65



93,300   Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accounting Fees and Services    Item 15.
    Exhibits,
    Financial Statement Schedules and Reports on
    Form 8-K  Form 10-K Form 10-K
    Form 10-K Form 10-K.
 50




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Form 10-K.
       51




---



##### Table of Contents



GRAHAM
    CORPORATION AND SUBSIDIARIES
  SCHEDULE II  VALUATION
    AND QUALIFYING ACCOUNTS
 (In
    Thousands)
  Balance at


Charged to


Charged to





Balance atBeginning


Costs and


Other





End ofDescription

of Period


Expenses


Accounts


Deductions


PeriodYear ended March 31, 2006Reserves deducted from the asset
    to which they apply:Reserve for doubtful accounts
    receivable

$
28


$
5


$



$
(5
)

$
28Reserves included in the balance
    sheet captionAccrued expensesProduct warranty liability


255



301







(226
)


330Restructuring reserve


142



19







(135
)


26Year ended March 31, 2005Reserves deducted from the asset
    to which they apply:Reserve for doubtful accounts
    receivable

$
75


$
16


$
(32
)(b)

$
(31
)

$
28Reserves included in the balance
    sheet captionAccrued expensesProduct warranty liability


242



124







(111
)


255Restructuring reserve


153



401







(412
)


142Year ended March 31, 2004Reserves deducted from the asset
    to which they apply:Reserve for doubtful accounts
    receivable

$
35


$
35


$
6
(a)

$
(1
)

$
75Reserves included in the balance
    sheet captionAccrued expensesProduct warranty liability


592



89







(439
)


242Restructuring reserve


390



10







(247
)


153       (a)
    
    Represents a bad debt recovery and a foreign currency
    translation adjustment.(b)
    
    Represents a bad debt recovery and a reduction due to the
    liquidation of Graham Vacuum and Heat Transfer Limited. 52




---



##### Table of Contents



INDEX TO
    EXHIBITS
  (2)

Plan of acquisition,
    reorganization, arrangement, liquidation or successionNot applicable.(3)

Articles of Incorporation and
    By-Laws3
.1

Certificate of Incorporation, as
    amended, is incorporated herein by reference to Exhibit 4.1
    to the Companys Registration Statement on
    Form S-2
    (SEC File No.
    333-128646)
    filed on September 28, 2005.3
.2

By-laws, as amended, are
    incorporated herein by reference to Exhibit 3(ii) to the
    Companys Quarterly Report on
    Form 10-Q
    for the quarterly period ended June 30, 2004.(4)

Instruments defining the rights of
    security holders, including indentures4
.1

Stockholder Rights Plan is
    incorporated herein by reference to Exhibit 99.3 to the
    Companys
    Form 8-A
    (SEC File No. 000-18703) filed September 15, 2000.(9)

Voting trust agreementNot applicable.(10)

Material Contracts#10
.1

1995 Graham Corporation Incentive
    Plan to Increase Shareholder Value is incorporated herein by
    reference to Appendix A to the Companys Proxy Statement
    for its 1996 Annual Meeting of Stockholders.#10
.2

Employment Agreement between the
    Company and J. Ronald Hansen dated May 13, 1993 is
    incorporated herein by reference to Exhibit 10.4 to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended March 31, 1998.#*10
.3

Employment Agreement between the
    Company and James R. Lines dated December 1, 1993.#10
.4

Graham Corporation Senior
    Executive Severance Agreement between the Company and J. Ronald
    Hansen dated July 28, 1995 is incorporated herein by
    reference to Exhibit 10.5 to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended March 31, 1998.#10
.5

Amendment No. 1, dated
    September 26, 1996, to Employment Agreement between the
    Company and J. Ronald Hansen, dated May 13, 1993, is
    incorporated herein by reference to Exhibit 10.4 to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended March 31, 1998.#*10
.6

Amendment No. 1, dated
    September 26, 1996, to Employment Agreement between the
    Company and James R. Lines, dated December 1, 1993.#10
.7

Employment Agreement between the
    Company and Stephen P. Northrup dated as of September 26,
    1996 is incorporated herein by reference to Exhibit 10.4 to
    the Companys Annual Report on
    Form 10-K
    for the fiscal year ended March 31, 1998.#10
.8

2000 Graham Corporation Incentive
    Plan to Increase Shareholder Value is incorporated herein by
    reference to Appendix A to the Companys Proxy Statement
    for its 2001 Annual Meeting of Stockholders.#10
.9

Long-Term Stock Ownership Plan of
    Graham Corporation is incorporated herein by reference to
    Appendix A to the Companys Proxy Statement for its 2000
    Annual Meeting of Stockholders.#10
.10

Letter Agreement dated
    November 29, 2004 between the Company and William C.
    Johnson is incorporated herein by reference to Exhibit 10.2
    to the Companys Current Report on
    Form 8-K
    dated November 29, 2004.#10
.11

Agreement and Release of Claims
    between Alvaro Cadena and the Company dated November 29,
    2004 is incorporated herein by reference to Exhibit 10.1 to
    the Companys Current Report on
    Form 8-K
    dated November 29, 2004.#10
.12

Form of Director Indemnification
    Agreement is incorporated herein by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q
    for the quarterly period ended December 31, 2004.#10
.13

Indemnification Agreement between
    William C. Johnson and Graham Corporation dated January 19,
    2005 is incorporated herein by reference to Exhibit 10.1 to
    the Companys Current Report on
    Form 8-K
    dated January 19, 2005. 53




---



##### Table of Contents



#10
.14

Graham Corporation Outside
    Directors Long-Term Incentive Plan is incorporated herein
    by reference to Exhibit 10.1 to the Companys Current
    Report on
    Form 8-K
    dated March 3, 2005.10
.15

Amended and Restated Credit
    Facility Agreement between Graham Corporation and Bank of
    America, N.A. dated as of July 12, 2005 (includes form of
    Amended and Restated Revolving Line Note) is incorporated herein
    by reference to Exhibit 4.1 to the Companys Current
    Report on
    Form 8-K
    dated July 12, 2005.10
.16

First Amendment, dated as of
    February 24, 2006, to Credit Facility Agreement between
    Graham Corporation and Bank of America, N.A. dated as of
    July 12, 2005, is incorporated herein by reference to
    Exhibit 4.1 to the Companys Current Report on
    Form 8-K
    dated February 24, 2006.(11)

Statement re computation of per
    share earningsComputation of per share earnings
    is included in Note 1 of the Notes to Consolidated
    Financial Statements.(12)

Statement re computation of ratiosNot applicable.(13)

Annual report to security holders,
    Form 10-Q
    or quarterly report to security holdersNot applicable.(14)

Code of Ethics14
.1

Graham Corporations Code of
    Business Conduct and Ethics is incorporated herein by reference
    to Exhibit 14.1 to the Companys Current Report on
    Form 8-K
    dated March 2, 2006.(16)

Letter re change in certifying
    accountantNot applicable.(18)

Letter re change in accounting
    principlesNot applicable.(21)

Subsidiaries of the registrantNot applicable.(22)

Published report regarding matters
    submitted to vote of security holders.Not applicable.(23)

Consents of Experts and Counsel*23
.1

Consent of Deloitte &
    Touche LLP(24)

Power of AttorneyNot applicable.(31)

Rule 13a-14(a)/15d-14(a)
    Certifications*31
.1

Certification of Principal
    Executive Officer*31
.2

Certification of Principal
    Financial Officer(32)

Section 1350 Certifications*32
.1

Section 1350 Certifications(99)

Additional ExhibitsNot applicable     *
    
    Exhibits filed with this report.#
    
    Management contract or compensatory plan. 54




---



##### Table of Contents



DATE:  June 8, 2006

By: /s/  J.
    Ronald HansenJ.
    Ronald HansenVice President  Finance &
    Administration
    and Chief Financial Officer     Signature/s/  William
    C. JohnsonWilliam
    C. Johnson

President and Chief Executive Officer; Director (Principal Executive Officer)

June 8, 2006/s/  J.
    Ronald HansenJ.
    Ronald Hansen

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

June 8, 2006/s/  Cornelius
    S. Van ReesCornelius
    S. Van Rees

Director

June 8, 2006/s/  Jerald
    D. BidlackJerald
    D. Bidlack

Director; Chairman of the Board

June 8, 2006/s/  Helen
    H. BerkeleyHelen
    H. Berkeley

Director

June 8, 2006/s/  H.
    Russel LemckeH.
    Russel Lemcke

Director

June 8, 2006/s/  William
    C. DenningerWilliam
    C. Denninger

Director

June 8, 2006/s/  James
    J. MalvasoJames
    J. Malvaso

Director

June 8, 2006  55




---



##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      EXHIBITS
  filed with
  FORM 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
  of
  THE SECURITIES EXCHANGE ACT OF
    1934
  FOR THE FISCAL YEAR ENDED
  March 31, 2006
      GRAHAM CORPORATION