GRAHAM CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the fiscal year ended March 31, 2003.

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

For 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including Area Code -- 585-343-2216

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Title of Class

Common Stock Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 2002 and May 15, 2003 was $11,107,528 and
$12,030,528 respectively.

As of May 15, 2003, there were outstanding 1,648,249 shares of common
stock, $.10 par value. As of May 15, 2003, there were outstanding 1,648,249
common stock purchase rights.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Notice of Meeting and Proxy Statement for the 2003 Annual Meeting of
Stockholders is incorporated by reference into Part III of this filing.

An Exhibit Index is located at page 41 of this filing under the sequential
numbering system prescribed by Rule 0-3(b) of the Act.

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PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Graham Corporation (the "Company" or the "Registrant") is a Delaware
company incorporated in 1983. It is the successor to Graham Manufacturing Co.,
Inc., which was incorporated in 1936. The Company's business consists of two
segments, one operated by the Company in the United States and one operated by
its indirectly wholly-owned subsidiary in the United Kingdom.

UNITED STATES OPERATIONS

During the Fiscal Year ended March 31, 2003 ("FY 2002-2003") the Company's
U.S. operations consisted of its engineering and manufacturing business in
Batavia, NY.

The Company is a well-recognized supplier of steam jet ejector vacuum
systems, surface condensers for steam turbines, liquid ring vacuum pumps and
compressors, dry pumps and various types of heat exchangers such as Heliflow and
plate and frame exchangers. It possesses expertise in combining these various
products into packaged systems for sale to its customers in a variety of
industrial markets, including oil refining, chemical, petrochemical, power, pulp
and paper, other process applications, and shipbuilding.

FY 2002-2003 U.S. sales were $44.0 million, an increase of 7% from the
previous fiscal year.

New orders in FY 2002-2003 were $35.2 million, down 29% from the previous
fiscal year. Year-end backlog stood at $24.5 million, compared to $33.1 million
on March 31, 2002 and $24.8 million on March 31, 2001.

The Company recognized as other income in the Fourth Quarter $1.8 million
in cancellation fees in consequence of the termination of certain large
condenser contracts for the electric power market. The Company continues to view
a need for additional power generating capacity in the United States as offering
potential for significant sales to the power-generating market in the years
ahead.

Over the past year, activity in the power generating market remained
depressed, due principally to uncertainties over geopolitical situations,
residual fallout from the Enron collapse and speculation about the actual
electricity supply/demand imbalance. The Company will continue to pursue this
market, although it will continue to do so at a reduced pace, pending
indications of improvement in the market. The Company continues to see
significant activity in the cogeneration market, where Graham is a major
supplier of condensers.

The Company sees the chemical market as entering a recovery. Petrochemical
demand is expected to grow 4.5% per year through 2010, requiring additional
capacity. Several contracts for new world-scale ethylene plants have been
awarded to engineering and construction companies, something not seen in the
last two to three years.

Activity in the refining sector remained robust and Graham again obtained
several large crude oil vacuum distillation orders for domestic and foreign
destinations. The Company remains in the forefront of this technology, backed by
many years of experience and by its continuous research and development effort.
The refinery market is expected to remain active, with the implementation of the
Clean Air Act requiring low sulfur fuels. Small turbine exhaust condensers and
ejector systems often are required for these upgrades, with larger vacuum
systems replaced when the vacuum tower is optimized. The Company has furnished
equipment for upgrades of oil sands and heavy oil production facilities in
Canada and Latin America, respectively. Further such expansions in Canada in the
near term are considered likely if oil prices remain stable at a favorable
level. Current oil prices continue to drive offshore exploration and production,
presenting opportunities for Graham's UK subsidiary in the supply of specialized
vacuum equipment.

For smaller products such as liquid ring vacuum pumps, small standard
ejectors, Heliflows(R), and plate heat exchangers, which are susceptible to
domestic economic conditions, the downturn in market conditions was noticeable
during the past Fiscal Year. The economy is showing signs of recovery and the
Company is executing strategies to increase its market share.

The Company's U.S. export sales represented 29.5% of U.S. sales in FY
2002-2003, compared to 24.3% of U.S. sales in the previous year. Export sales
reflected a prolonged recession in Asia and Latin America. However, the Asian
markets for the Company's products have demonstrated early signs of recovery.
Now that oil prices
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appear to have stabilized and significant mergers in the oil industry have been
completed, the consensus in the industry is that opportunities in the refinery
markets are expected to increase.

The Company had 281 employees in the United States as of March 31, 2003.

UNITED KINGDOM OPERATIONS

During FY 2002-2003, the Company's U.K. operations were undertaken by its
indirectly wholly-owned subsidiary, Graham Precision Pumps Limited (GPPL) in
Congleton, Cheshire, England. GPPL is wholly-owned by Graham Vacuum & Heat
Transfer Limited, which in turn is wholly-owned by the Company. Graham Vacuum
and Heat Transfer Limited has no employees.

GPPL manufactures liquid ring vacuum pumps, rotary piston pumps, oil sealed
rotary vane pumps, atmospheric air operated ejectors and complete vacuum pump
systems that are factory assembled with self-supporting structure.

Sales for FY 2002-2003 stood at $6,850,000, a decrease of 8% compared with
the previous year. This performance reflects among other factors reduced sales
of pump packages and spare parts.

New orders for GPPL in FY 2002-2003 were $7.2 million, up 18% from the
previous fiscal year. Year end backlog stood at $1.3 million, compared to $1.2
million on March 31, 2002 and $3.4 million on March 31, 2001. The 2001 year-end
backlog included a $1.2 million order, the largest in GPPL's history.

GPPL increased sales of pumps to the offshore oil-drilling market by 50%
over the previous year. The Company anticipates continued opportunity in this
market as long as oil prices remain at current levels, which drive additional
offshore oil exploration. In addition, dry pump sales increased slightly over
the prior year. New European environmental laws are expected to result in
increased opportunities for sales of dry pumps. The company views these areas as
significant opportunities in the face of a generally depressed European economy.

GPPL employed 61 people on March 31, 2003.

CAPITAL EXPENDITURES

The Company's capital expenditures for FY 2002-2003 amounted to $943,000.
Of this amount, $800,000 was for the U.S. business and $143,000 was for the U.K.
business.

(b) FINANCIAL INFORMATION ABOUT SEGMENTS

(1) Segments and (2) Information as to Lines of Business

Graham Corporation operates in only one industry segment which is the
design and manufacture of vacuum and heat transfer equipment. Further
geographical segment information is set forth in Note 14 to the Consolidated
Financial Statements on pages 32-35 of the Annual Report on Form 10-K.

(C) NARRATIVE DESCRIPTION OF BUSINESS

(1) Business Done and Intended to be Done

Principal Products and Markets

The Company designs and manufactures vacuum and heat transfer equipment,
primarily custom built. Its products include steam jet ejector vacuum systems,
surface condensers for steam turbines, liquid ring vacuum pumps and compressors,
dry vacuum pumps and various types of heat exchangers including helical coil
exchangers marketed under the registered name "Heliflow" and plate and frame
exchangers. These products function to produce a vacuum or to condense steam or
otherwise transfer heat, or any combination of these tasks. All of the products
named, other than the pumps, accomplish these results without involving any
moving parts. Graham's products are available in all metals and in many
non-metallic and corrosion resistant materials as well.

This equipment is used in a wide range of industrial process applications:
power generation facilities, including fossil fuel plants and nuclear plants as
well as cogeneration plants and geothermal power plants that

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harness naturally occurring thermal energy; petroleum refineries; chemical
plants; pharmaceutical plants; plastics plants; fertilizer plants; breweries and
titanium plants; liquified natural gas production; soap manufacturing; air
conditioning systems; food processing plants and other process industries. Among
these the principal markets for the Company's products are the chemical,
petrochemical, petroleum refining, and electric power generating industries. The
Company's equipment is sold by a combination of direct company sales engineers
and independent sales representatives located in over 40 major cities in the
United States and abroad.

Status of Publicly Announced New Products or Segments

The Company has no plans for new products or for entry into new industry
segments that would require the investment of a material amount of the Company's
assets or that otherwise is material.

Sources and Availability of Raw Materials

The Company experienced no serious material shortages in FY 2002-2003.

Material Patents, Trademarks

The Company holds no material patents, trademarks, licenses, franchises or
concessions the loss of which would have a materially adverse effect upon the
business of the Company.

Seasonal Variations

No material part of the Company's business is seasonal.

Working Capital Practices

The Company's business does not require it to carry significant amounts of
inventory, or of materials beyond what is needed for work in progress. The
Company does not provide rights to return goods, or payment terms to customers
that would be considered extended in the context of the practices of its
industries.

Principal Customers

The Company's principal customers include the large chemical, petroleum and
power companies, which are end users of the Company's equipment in their
manufacturing and refining processes, as well as large engineering contractors
who build installations for such companies and others.

No material part of the Company's business is dependent upon a single
customer or on a few customers, the loss of any one or more of whom would have a
materially adverse effect on the Company's business. No customer of the Company
or group of related customers regularly accounts for as much as 10% of the
Company's consolidated annual revenue.

Order Backlog

Backlog of unfilled orders at March 31, 2003 was $25,069,000 compared to
$33,871,000 at March 31, 2002 and $27,665,000 at March 31, 2001. The backlog
contains $7,186,000 in orders that will likely not be shipped in the next twelve
months.

Government Contracts

No material portion of the Company's business is subject to renegotiation
of profits or termination of contract or subcontracts at the election of the
government.

Competition

The Company's business is highly competitive and a substantial number of
companies having greater financial resources are engaged in manufacturing
similar products. However, the Company believes it is one of the leading
manufacturers of steam jet ejectors.
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Research Activities

During the fiscal years ended March 31, 2003, 2002, and 2001 the Company
spent approximately $187,000, $248,000 and $250,000, respectively, on research
activities relating to the development of new products or the improvement of
existing products.

Environmental Matters

The Company does not anticipate that compliance with federal, state and
local provisions, which have been enacted or adopted regulating the discharge of
material in the environment or otherwise pertaining to the protection of the
environment, will have a material effect upon the capital expenditures, earnings
and competitive position of the Company and its subsidiaries.

(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

The information called for under this Item is set forth in Note 14 to
Consolidated Financial Statements, on pages 32-35 of this Annual Report on Form
10-K.

ITEM 2. PROPERTIES

United States: The Company's corporate headquarters is located at 20
Florence Avenue, Batavia, New York, consisting of a 45,000 square foot building.
The Company's manufacturing facilities are also located in Batavia, consisting
of approximately thirty-three acres and containing about 204,000 square feet in
several connected buildings, including 162,000 square feet in manufacturing
facilities, 48,000 square feet for warehousing and a 6,000 square-foot building
for product research and development.

Additionally the Company leases U.S. sales offices in Los Angeles and
Houston.

United Kingdom: The Company's U.K. subsidiary, Graham Precision Pumps
Limited, owns a 41,000 square-foot manufacturing facility located on 15 acres in
Congleton, Cheshire, England.

Assets of the Company with a book value of $29,980,000 have been pledged to
secure certain domestic long-term borrowings. Short and long-term borrowings of
the Company's United Kingdom subsidiary are secured by assets of the subsidiary,
which have a book value of $673,000.

ITEM 3. LEGAL PROCEEDINGS

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the Company's security holders.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

(a) The information called for under this Item is set forth under Item 8,
"Financial Statements and Supplementary Data," in the Statement of Quarterly
Financial Data appearing on page 35 of this Annual Report on Form 10-K.

(b) On May 15, 2003, there were approximately 400 holders of the Company's
common stock. This figure includes stockholders of record and individual
participants in security position listings who have not objected to the
disclosure of their names; it does not, however, include individual participants
in security position listings who have objected to disclosure of their names. On
May 15, 2003, the closing price of the Company's common stock on the American
Stock Exchange was $7.95 per share.

(c) The Company resumed payment of a regular quarterly dividend on October
1, 2002, paying a dividend of $.05 per share. The same dividend was paid on
January 2, 2003 and April 7, 2003. Restrictions on dividends are described in
Note 5 to the Consolidated Financial Statements included in this Report.

(d) Equity Compensation Plan Information

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ITEM 6. SELECTED FINANCIAL DATA

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(1) The financial data presented for 2003-1998 is for the respective twelve
months ended March 31. The financial data presented for 1997 is for the
three month transition period ended March 31, 1997. The financial data
presented for 1996-1993 is for the respective twelve months ended December
31.

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(2) Per share data has been adjusted to reflect a three-for-two stock split on
July 25, 1996.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Graham Corporation consists of two operating segments as determined by
geographic areas (USA: Graham Corporation, UK: Graham Vacuum and Heat Transfer,
Limited and its wholly-owned subsidiary, Graham Precision Pumps, Ltd.).

Certain statements contained in this document, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical facts, constitute "Forward-Looking
Statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements, in general, predict, forecast, indicate or
imply future results, performance or achievements and generally use words so
indicative. The Company wishes to caution the reader that numerous important
factors which involve risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices, and other factors
discussed in the Company's filings with the Securities and Exchange Commission,
in the future, could affect the Company's actual results and could cause its
actual consolidated results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.

ANALYSIS OF CONSOLIDATED OPERATIONS

RESULTS OF OPERATIONS

For an understanding of the significant factors that influenced the
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements and the notes
to consolidated financial statements presented in this annual report.

Amounts above are inclusive of intercompany amounts.

2003 COMPARED TO 2002

Consolidated sales (net of intercompany sales) were $49,378,000 for the
fiscal year ended (FYE) March 31, 2003. This represents a 4% increase over FYE
2002. Sales from USA operations were greater than the prior year by 7%,
primarily due to (1) additional surface condenser shipments while maintaining
about an equal level of sales in other product categories, and (2) maintaining
domestic market share comparable to last year while increasing export sales
about 30% over FYE 2002. The increased sales were due to specific refining and
electric power generating projects and not a general recovery in domestic or
foreign markets.

Sales from UK operations decreased 8% as compared to FYE 2002. In
particular, significant reductions came in sales of pump packages and spare
parts. The reduction in spare part sales is due to fewer replacements purchased
by traditional customers. This is due to significant buying in recent prior
years. The decline in pump package sales is due to the absence of any unusually
large order this year. Last year Graham Precision Pumps, Ltd. shipped one order
worth about $1,185,000. UK offshore pump sales were up 50% as compared to FYE
2002. This increase is due to the cost of oil. When oil sells for $12-$15 a
barrel, it is economically feasible to drill offshore. In addition, several
offshore oil projects in eastern Russia are developing. The outlook for
continued strength in this market for Graham remains positive. Sales of dry
pumps in FYE 2003 were up slightly from FYE 2002. The Company remains bullish on
future prospects to sell dry pumps. The continued legislation in Europe
tightening environmental requirements will drive this demand.

FYE 2004 is estimated to be another challenging year, as the markets Graham
serves are projected to remain flat for at least the first half of FYE 2004.

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The consolidated gross profit percentage was 19% as compared to 21% for FYE
2002. In the USA, the gross profit percentage was 16% as compared to 18% for the
prior year. This decline was due to the colder winter causing higher comfort
heating charges, greater defined benefit pension costs due to the three year
decline in the stock market and higher product warranty costs.

The gross profit percent in the UK dropped from 38% to 30% this year. This
is attributed to reduced sales volume and fewer sales in offshore spare parts.
Spare part sales generate significant profit margins. It is believed fewer
replacement parts were sold because new pumps were purchased instead. In
addition to sales, the gross profit margin in the UK declined due to greater
production overhead costs caused by temporary staffing needs. As a percent of
sales, production costs were 27% of sales in FYE 2003 as compared to 21% in FYE
2002.

Selling, general and administrative expenses for the current year were down
2% from last year. SG&A expenses represented 21% of FYE 2003 sales as compared
to 22% for FYE 2002. The decrease in costs is due to lower variable compensation
costs.

Interest expense decreased 34% in the current year due to reduced interest
rates and maintaining a low debt level.

The provision for income taxes was 31% as compared to 34% for the year
ended March 31, 2002. The lower effective rate is due to the impact of the extra
territorial income exclusion benefit from foreign shipments.

Consolidated net income for the year was $133,000 or $.08 per diluted
share. The Company concluded the year with both improved operating results and
special transactions. Fourth quarter net income was $1,120,000 or $0.67 per
diluted share. In January, Graham reduced its USA workforce ten percent for an
annualized reduction of $1,480,000 in employee compensation expense and,
accordingly, recognized a before income tax severance expense of $658,000. In
February, the Company received a cancellation notice on one order worth
$2,922,000 for the electric power industry, which resulted in a before income
tax gain of $1,801,000. The combined before income tax effect of special events
on the fourth quarter results was $1,143,000. Net income for FYE 2002 was
$2,305,000 or $1.38 per diluted share.

The Company took several actions in the current year to reduce costs. Many
of the cost saving steps initiated in FYE 2003 are expected to be realized in
the months and years ahead. For example, on February 4, 2003, the Employee
Benefits Committee of the Board of Directors irrevocably terminated
postretirement medical benefits for current employees of USA operations.
(Medical benefits paid to retirees of record as of April 1, 2003 are unchanged).
As of March 31, 2003, the "accrued postretirement benefits" liability remains on
the balance sheet without reduction for the actions taken, however, 72% of the
accrued amount of $3,238,000, or $2,322,000 does not represent an obligation
(amount owed) to anyone. The savings gained through curtailing the Plan will be
recognized for accounting purposes as income over twelve years, starting in the
first quarter of FYE 2004. Other steps taken include: (1) Graham is working
toward expanding its standardized products while maintaining its customized
products and (2) the Company has increased its emphasis on quantifying the costs
of product quality and correcting the issues.

2002 COMPARED TO 2001

Consolidated sales (net of intercompany sales) were $47,396,000 for the
year ended March 31, 2002 as compared to sales of $44,433,000 for the prior
twelve months. Sales from the USA operation increased about 1%. Surface
condenser sales increased about 68% or about $7,000,000 in fiscal year end 2002
due to opportunities in the electric power industry. The power industry includes
sales to merchants, cogeneration and independent production facilities.
Increased sales in condensers were largely offset by reduced shipments in other
product lines. Export shipments, as a percent of total sales, were the lowest
they have been since 1990. The broad decline in demand for Graham's USA products
is believed to be temporary. Principal reasons for fewer projects under
construction by contractors in the three major segments the Company serves
(refinery, chemical and petrochemical) were: (1) limited capital spending due to
poor global economic conditions, (2) the strong US dollar (FYE 2003, now
eliminated), (3) merger and acquisition activity, (4) revamping of financial
infrastructure needs in Asia, and (5) caution resulting from the war on
terrorism.

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Sales from UK operations increased about 38% over FYE March 2001, or about
$2,000,000. Significant sales increases were achieved in the categories of
liquid ring pump packages, offshore pumps, dry pumps and spares. The increased
sales in pump packages resulted from the shipment of one large order valued at
about $1,185,000 to South Africa for the petrochemical industry. Going forward,
targeting larger orders will be a strategic objective. In FYE 2001 Graham
purchased Leybold's dry pump line. Increased dry pump sales in FYE 2002 was due
to further establishing the product line under Graham's offerings. Spare part
sales increased as a result of the market demand for offshore activity and to
the success of the dry pump line.

The consolidated gross profit margin was 21%, down from 22% for the prior
year and down from a recent historical range of about 25-28%. The UK operations
posted a 38% gross profit, up from 31% for the prior year, due to improved
product mix. In FYE 2002 the UK operations significantly increased their sales
in offshore pumps and spares. These pumps require high quality standards and
special fabrication techniques. Accordingly, they bear a higher profit margin.
In the USA the gross profit percent was 18%, down from 20% in FYE March 2001.
The lower gross profit margin was attributed to depressed selling prices
together with greater employment costs in the areas of incentive compensation,
and medical and workers compensation insurances.

Selling, general and administrative expense for the year 2002 was about 22%
of sales as compared to about 21% for the prior year. USA costs approximated FYE
2001 costs. The 1% increase occurred in the UK and related to greater costs for
additional sales personnel and more sales commissions and royalty payments on
higher sales.

Interest expense for the year 2002 decreased 54% from FYE 2001. Bank debt
was about 5% of equity, or $1,050,000, at March 31, 2002 as compared to 27% of
equity, or $4,709,000 as of March 31, 2001.

The provision for income taxes for the year 2002 of $1,172,000 approximated
statutory rates at 34% as compared to a net tax benefit of $221,000 for the FYE
2001.

Consolidated net income for the year was $2,305,000 or $1.38 per diluted
share. In the fourth quarter of FYE March 2002, four orders pertaining to the
merchant power generating industry were cancelled. Net of related expenses, but
before the effect of income taxes, cancellation income of about $3,989,000 was
recorded. Net income for FYE 2001 was $195,000 or $.12 per diluted share.

SHAREHOLDERS' EQUITY

2003 COMPARED TO 2002

Shareholders' Equity decreased $843,000 or 4% in FYE 2003. The Company
recognized a minimum pension liability adjustment net of an income tax benefit,
which reduced equity by $1,090,000. This adjustment will be reversed if and to
the extent the USA defined benefit pension plan investments in stocks and bonds
recover.

2002 COMPARED TO 2001

Shareholders' Equity increased $2,499,000 or nearly 15% for the year 2002
as compared to about 0% for FYE 2001. Ninety-two percent of the increase was due
to earnings. Net book value increased to $11.91 per share at March 31, 2002 from
$10.52 as of March 31, 2001 for a 13% increase in book value per share.

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LIQUIDITY AND CAPITAL RESOURCES

2003 COMPARED TO 2002

Consolidated cash flow from operations was $1,897,000 for the year ended
March 2003 as compared to $4,464,000 for FYE 2002. Cash flow for the current
year was greatly enhanced by collection of the unusually large trade accounts
receivable balance as of March 2002. Receivables were substantially greater than
normal due to fourth quarter FYE 2002 significant customer cancellation fees and
progress billings. Offsetting the change in the accounts receivable balance of
$9,758,000 between March 31, 2002 and 2003 were (1) an increase in inventory,
(2) a special payment to the defined benefit pension plan and (3) fewer customer
deposits. Inventory increased due to the manufacturing stage of USA customer
orders, and UK operations increased inventories (and short-term debt) acquiring
dry pump gear boxes from a supplier who manufactured them under a "make and
hold" program. Customer deposits decreased $4,572,000 this year as compared to
FYE 2002 due to the reduction of large projects currently in the manufacturing
system. To protect the balance sheet and a bank loan covenant, the Company made
an additional $1,600,000 payment to the defined benefit pension fund this year.
A fourth item, which reduced working capital this year, was the recognition of
$702,000 in accruals relating to terminations and retirements.

Capital expenditures are estimated to be $702,000 next year. Depreciation
is estimated to be $980,000.

2002 COMPARED TO 2001

Consolidated cash flow from operations was $4,464,000 for the year 2002 as
compared to negative cash flow of $822,000 for FYE 2001. The increase was due to
net income of $2,305,000 and other changes in working capital items of
$2,650,000. At March 31, 2002 trade account receivables were $17,053,000, up
$9,099,000 from March 31, 2001. This increase significantly related to amounts
due on cancelled and suspended electric power generating business. Subsequent to
March 31, 2002, the accounts receivable were collected.

Capital expenditures for the year ending March 31, 2002 were $688,000 (USA,
$607,000; UK, $81,000). Depreciation expense for FYE 2002 was $956,000.

ORDERS AND BACKLOG

USA new orders for the current year were down 29% or $14,214,000 from last
year. Surface condensers and special ejectors represent 38% of new orders for
the current year as compared to 67% for FYE 2002. Orders in these two categories
decreased in total $19,609,000. For the three years ended March 2002, surface
condensers and special ejectors averaged 54% of the total USA orders. Decreased
new business in condenser products is due to lower demand in the merchant power
plant market resulting from an adequate short term electric power supply.
Decreased orders in special ejector products is due to weakness in the refinery
market, which are attributed to geopolitical concerns in Iraq and Venezuela.
Graham did partially recover from the decline in condenser and special ejector
orders with increased activity in vacuum technology products due to, what may
be, signs of the beginning of a recovery in the petrochemical market. The
Company cannot predict the strength or duration of the recovery. The Company
continues to be optimistic about potential orders from Chinese petrochemical
projects in spite of the SARS anxiety that is currently impacting new order
opportunities. UK new orders (measured in dollars) were up 18% over FYE 2002. An
8% increase (caused by a weakened US dollar) in the currency exchange rate
played a significant roll in the increase. In FYE 2003, the UK operation
introduced a new liquid ring pump design that is more environmentally friendly.
This new product, trade name, Ecoseal, resulted in 4% of the new orders in FYE
2003. The Company believes the growth of this product will continue.

As of March 31, 2003, the consolidated backlog was $25,069,000, down 26%
from FYE 2002. The decrease was due to fewer new orders in FYE 2003. The backlog
contains about $7,186,000 in orders that will likely not be shipped in the next
twelve months. One order, valued at $5,286,000, bears cancellation fees if/when
cancelled.

MARKET RISK (QUANTITATIVE AND QUALITATIVE DISCLOSURES)

The principal market risks (i.e., the risk of loss arising from changes in
market rates and prices) to which Graham is exposed are:

- interest rates

- foreign exchange rates

- equity price risk

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

The Company is exposed to interest rate risk primarily through its
borrowing activities. Management's strategy for managing risks associated with
interest rate fluctuations is to hold interest bearing debt to the absolute
minimum and carefully assess the risks and rewards for incurring long-term debt.
Assuming year ended 2003 and 2002 variable rate debt, a 1% change in interest
rates would impact annual interest expense by $15,200 and $10,500, respectively.

Graham's international consolidated sales exposure for the current year
approximated 37% of annual sales as compared to 33% for the year 2002. Operating
in world markets involves exposure to movements in currency exchange rates.
Currency movements can affect sales in several ways, the foremost being the
ability to competitively compete for orders against competition having a
relatively weaker currency. Business lost due to this cannot be quantified.
Secondly, cash can be adversely impacted by the conversion of sales in foreign
currency to U.S. dollars. The substantial portion of Graham's sales is collected
in the seller's currency. In both 2003 and 2002, sales in foreign currencies
were 1.5% of sales. At certain times, the Company may enter into forward

12

foreign exchange agreements to hedge its exposure against unfavorable changes in
foreign currency values on significant sales contracts negotiated in foreign
currencies.

Graham has limited exposure to foreign currency purchases. In both FYE 2003
and 2002, purchases in foreign currencies were 4% of cost of goods sold. At
certain times, forward foreign exchange contracts may be utilized to limit
currency exposure.

Foreign operations resulted in a current year loss of $96,000 as compared
to income of $505,000 for FYE 2002. As currency exchange rates change,
translations of the income statements of the UK business into US dollars affects
year-over-year comparability of operating results. We do not hedge translation
risks because cash flows from UK operations are mostly reinvested in the UK. A
10% change in foreign exchange rates would have impacted the UK reported net
income by approximately $9,600 for FYE 2003 and $50,500 for the previous year.

The Company has a Long-Term Incentive Plan which provides for awards of
share equivalent units (SEU) for outside directors based upon the Company's
performance. The outstanding SEU's are recorded at fair market value thereby
exposing the Company to equity price risk. Gains and losses recognized due to
market price changes are included in the quarterly results of operations. Based
upon the SEU's outstanding at March 31, 2003 and 2002 and an $8 per share price,
a 50-75% change in the respective year end market price of the Company's common
stock would positively or negatively impact the Company's operating results by
$66,000 to $99,000 for FYE 2003 and $65,000 to $97,000 in FYE 2002. Assuming
required net income is met, and based upon a market price of the Company's stock
of $8 per share, a 50-75% change in the stock price would positively or
negatively impact the Company's operating results by $105,000 to $157,000 in
2004, $123,000 to $185,000 in 2005, $143,000 to $219,000 in 2006, $157,000 to
$235,000 in 2007 and $172,000 to $258,000 in 2008.

OTHER MATTERS

Increases in material and labor costs traditionally have been offset by
cost cutting measures and selling price increases. Obtaining price increases are
largely a factor of supply and demand for Graham's products, whereas inflation
factors can originate from influences outside of the Company's direct global
competition. Graham will continue to monitor the impact of inflation in order to
minimize its effects in future years through sales growth, pricing, product mix
strategies, purchasing advantageously, productivity improvements, and cost
reductions.

The Company's USA operations are governed by federal environmental laws,
principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air
Act, and the Clean Water Act, as well as state counterparts ("Environmental
Laws"). Environmental Laws require that certain parties fund remedial actions
regardless of fault, legality or original disposal or ownership of the site.
Graham is not involved in any environmental remediation projects.

CRITICAL ACCOUNTING POLICIES

The significant accounting policies are disclosed in Note 1 to the
consolidated financial statements. The following discussion addresses the most
critical accounting policies, which are those that are most important to the
portrayal of the financial condition and results, and that require judgment.

REVENUE RECOGNITION

PERCENTAGE-OF-COMPLETION

The Company recognizes revenue and all related costs on contracts with a
duration in excess of three months and with revenues of $1,000,000 and greater
using the percentage-of-completion method. The percentage-of-completion is
determined by relating actual labor incurred to-date to management's estimate of
total labor to be incurred on each contract. Contracts in progress are reviewed
monthly, and sales and earnings are adjusted in current accounting periods based
on revisions in contract value and estimated costs at completion.

13

COMPLETED CONTRACT

Contracts with values less than $1,000,000 are accounted for on the
completed contract method. The Company recognizes revenue and all related costs
on these contracts upon substantial completion or shipment to the customer.
Substantial completion is consistently defined as at least 95% complete with
regard to direct labor hours. Customer acceptance is generally required
throughout the construction process and the Company has no further obligations
under the contract after the revenue is recognized.

USE OF ESTIMATES

We have made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of contingent assets and
liabilities, and reported amounts of revenue and expenses in preparing our
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from these
estimates.

NEW ACCOUNTING PRONOUNCEMENTS

In FYE March 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" and FASB Interpretation No. 45 ("FIN"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". There were no affects on the Company's
consolidated financial position, results of operations or cash flows resulting
from the adoption of these standards. Additionally, the Company has implemented
all required disclosures of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition Disclosure" and those disclosures required by the
aforementioned standards in the Notes to the Consolidated Financial Statements.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 retains the
basic requirements of SFAS No. 121 regarding when to record an impairment loss
and provides additional guidance on how to measure an impairment loss. SFAS No.
144 excludes goodwill and intangibles not being amortized from its scope. SFAS
No. 144 also supercedes the provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations," pertaining to
discontinued operations.

SFAS No. 146, "Accounting for Costs associated with Exit or Disposal
Activities" addresses the recognition, measurement, and reporting of costs that
are associated with exit and disposal activities and nullifies EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS No. 146, the cost associated with an exit or disposal activity is
recognized in the periods in which it is incurred rather than at the date the
Company commits to the exit plan.

SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
Disclosure" amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition to the SFAS No. 123 fair value method
of accounting for stock-based compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements.

FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" clarifies and
elaborates on the requirement for entities to recognize a liability and provide
disclosures relating to the fair value of the obligation undertaken in a
guarantee. Under FIN 45, the Company will record a liability at the inception of
a transaction representing the fair value of the guarantee and maintain such
liability until it is relieved of the obligation to "stand ready" to perform.
The interpretation does not apply to guarantees such as insurance bonds and bank
standby letters of credit.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Included in Item 7, Management's Discussion and Analysis -- Market Risk.

14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(Financial Statements, Notes to Financial Statements, Quarterly Financial
Data)

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements.
15

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.
16

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements.
17

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

See Notes to Consolidated Financial Statements.
18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS ACCOUNTING POLICIES:

Graham Corporation and its subsidiaries are primarily engaged in the design
and manufacture of vacuum and heat transfer equipment used in the chemical,
petrochemical, petroleum refining, and electric power generating industries and
sell to customers throughout the world. The Company's significant accounting
policies follow.

Principles of consolidation and use of estimates in the preparation of
financial statements

The consolidated financial statements include the accounts of the Company
and its wholly-owned domestic and foreign subsidiaries. All significant
intercompany balances, transactions and profits are eliminated in consolidation.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the related revenues and
expenses during the reporting period. Actual amounts could differ from those
estimated.

Certain amounts in prior periods have been reclassified to conform to the
current presentation.

Translation of foreign currencies

Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at currency exchange rates in effect at year end and revenues and
expenses are translated at average exchange rates in effect for the year. Gains
and losses resulting from foreign currency transactions are included in results
of operations. The Company's sales and purchases in foreign currencies are
minimal, therefore, foreign currency transaction gains and losses are not
significant. Gains and losses resulting from translation of foreign subsidiary
balance sheets are included in a separate component of shareholders' equity.
Translation adjustments are not adjusted for income taxes since they relate to
an investment which is permanent in nature.

Revenue recognition

Percentage-of-Completion

The Company recognizes revenue and all related costs on contracts with a
duration in excess of three months and with revenues of $1,000,000 and greater
using the percentage-of-completion method. The percentage-of-completion is
determined by relating actual labor incurred to-date to management's estimate of
total labor to be incurred on each contract. Contracts in progress are reviewed
monthly, and sales and earnings are adjusted in current accounting periods based
on revisions in contract value and estimated costs at completion.

Completed Contract

All contracts with revenue of less than $1,000,000 are accounted for using
the completed contract method. The Company recognizes revenue and all related
costs on these contracts upon substantial completion or shipment to the
customer. Substantial completion is consistently defined as at least 95%
complete with regard to direct labor hours. Customer acceptance is generally
required throughout the construction process and the Company has no further
obligations under the contract after the revenue is recognized.

Shipping and handling fees and costs

Shipping and handling fees billed to the customer are classified as revenue
and the related costs incurred for shipping and handling are included in cost of
goods sold.

19

Investments

Investments consist primarily of fixed-income debt securities with
maturities of beyond three months. All investments are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. The investments are stated at amortized cost which
approximates fair value. All the investments mature within one year.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method. Progress payments for orders are netted
against inventory to the extent the payment is less than the inventory balance
relating to the applicable contract. Progress payments that are in excess of the
corresponding inventory balance are presented as customer deposits in the
Consolidated Balance Sheets.

Property, plant and depreciation

Property, plant and equipment are stated at cost net of accumulated
depreciation and amortization. Major additions and improvements are capitalized,
while maintenance and repairs are charged to expense as incurred. Depreciation
and amortization are provided based upon the estimated useful lives under the
straight line method. Estimated useful lives range from approximately five to
twenty-five years for office and manufacturing equipment and forty years for
buildings and improvements. Upon sale or retirement of assets, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in the results of operations. Impairment losses are
recognized when the carrying value of an asset exceeds its fair value. The
Company regularly assesses all of its long-lived assets for impairment. No such
impairment losses were required in 2003, 2002 or 2001.

Product warranties

In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
Interpretation elaborates on the existing disclosure requirements for most
guarantees in interim and annual financial statements and changes the accounting
for obligations undertaken in issuing guarantees. The disclosure requirements,
which are applicable to the Company with regard to product warranties, are
effective for financial statements of interim or annual periods ending after
December 15, 2002.

The Company provides a liability for product warranty claims at the time
revenue is recognized. The reserve for product warranties is based upon past
claims experience and ongoing evaluations of any specific probable claims from
customers. A reconciliation of the changes in the product warranty liability is
presented in Note 4 of the Notes to Consolidated Financial Statements.

Income taxes

The Company recognizes deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred income tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates. The Company evaluates the available evidence about future taxable income
and other possible sources of realization of deferred income tax assets and
records a valuation allowance to reduce deferred income tax assets to an amount
that represents the Company's best estimate of the amount of such deferred
income tax assets that more likely than not will be realized.

Stock-based compensation

In 2003, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure". This standard provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Additionally, the standard also requires prominent
disclosures in the Company's

20

financial statements about the method of accounting used for stock-based
employee compensation, and the effect of the method used when reporting
financial results.

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

Under the intrinsic value method, no compensation expense has been
recognized for its stock option plans. Had compensation cost for the Company's
two stock option plans been determined based on the fair value at the grant date
for awards under those plans in accordance with the optional methodology
prescribed under SFAS No. 123, the Company's net income and net income per share
would have been the pro forma amounts indicated below:

The weighted average fair value of the options granted during 2003, 2002,
and 2001 is estimated as $2.88, $5.85, and $5.15, respectively, using the Black
Scholes option pricing model with the following weighted average assumptions:

Per share data

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

21

Options to purchase shares of common stock, which totaled 136,000, 138,350
and 116,500 in 2003, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share as the effect would be anti-dilutive.

Cash flow statement

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

Actual interest paid was $97,000 in 2003, $161,000 in 2002, and $319,000 in
2001. In addition, actual income taxes paid (refunded) were $1,194,000 in 2003,
$(521,000) in 2002, and $(376,000) in 2001.

Non cash activities during 2003, 2002, and 2001 included capital
expenditures totaling $76,000, $112,000 and $93,000, respectively, which were
financed through the issuance of capital leases. In addition, in 2003 a minimum
pension liability adjustment, net of an income tax benefit, was recognized
totaling $1,090,000 and dividends of $82,000 were recorded but not paid.

Accumulated other comprehensive loss

Comprehensive income (loss) is comprised of net income and other
comprehensive income or loss items, which are reflected as a separate component
of equity. For the Company, other comprehensive income or loss items include a
foreign currency translation adjustment and a minimum pension liability
adjustment.

Accounting and Reporting Changes

On April 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." There was no effect on the Company's consolidated financial
position, results of operations or cash flows resulting from the adoption of
SFAS No. 144 during fiscal year 2003.

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This Statement was effective for exit or disposal activities initiated after
December 31, 2002. The Company adopted SFAS No. 146 effective January 1, 2003.
During the fourth quarter of fiscal year 2003, the Company restructured its US
workforce and offered one-time termination

22

benefits to the terminated employees. The liability for these termination
benefits was recognized in accordance with SFAS No. 146 and the related charge
is included in the caption "Other Income" in the 2003 Consolidated Statement of
Operations.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that changes to the fair value based method of
accounting for stock-based employee compensation and changes the disclosure
requirements. This statement was effective for financial statements for fiscal
years ending after December 15, 2002. The Company adopted SFAS No. 148 effective
January 1, 2003. The Company currently has no plans to voluntarily change to the
fair value method, however, the necessary disclosure requirements of SFAS No.
148 are presented in Note 1 of the Notes to Consolidated Financial Statements.

NOTE 2 -- INVENTORIES:

Major classifications of inventories are as follows:

NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT:

Major classifications of property, plant and equipment are as follows:

NOTE 4 -- PRODUCT WARRANTY LIABILITY:

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

The increase in expense for product warranties does not represent an upward
trend and relates to provisions for specific claims that were under negotiation
at year end.

23

NOTE 5 -- LEASES:

The Company leases equipment and office space under various operating
leases. Rent expense applicable to operating leases was $159,000, $123,000, and
$150,000 in 2003, 2002, and 2001, respectively.

Property, plant and equipment include the following amounts for leases
which have been capitalized.

Amortization of machinery and equipment under capital lease amounted to
$167,000, $149,000, and $133,000 in 2003, 2002, and 2001, respectively, and is
included in depreciation expense.

As of March 31, 2003, future minimum payments required under non-cancelable
leases are:

NOTE 6 -- DEBT:

Short-Term Debt Due Banks

The Company and its subsidiaries had short-term borrowings outstanding as
follows:

The United Kingdom subsidiary has a revolving credit facility agreement
which provides a line of credit of 1,070,000 pounds sterling ($1,691,000 at the
March 31, 2003 exchange rate) including letters of credit through June 30, 2003.
The interest rate is the bank's rate plus 1 1/2%. The bank's base rate was 3.75%
and 4% at March 31, 2003 and 2002, respectively. The United Kingdom operations
had available unused lines of credit of $17,000 at March 31, 2003. The United
Kingdom short-term bank borrowings are collateralized by assets of the United
Kingdom subsidiary which have a book value of $673,000 at March 31, 2003. The
United States operation does not provide a corporate guarantee or any security
for the United Kingdom revolving credit facility. The weighted average interest
rate on short-term borrowings in 2003 and 2002 was 3.5% and 4.4%, respectively.

24

Long-Term Debt

The Company and its subsidiaries had long-term borrowings outstanding as
follows:

The United States revolving credit facility agreement provides a line of
credit of up to $13,000,000 including letters of credit, through October 31,
2005. The agreement allows the Company to borrow at prime minus a variable
percentage based upon certain financial ratios. The Company was able to borrow
at a rate of prime minus 75 basis points at March 31, 2003 and prime minus 125
basis points at March 31, 2002.

The agreement allows the Company at any time to convert balances
outstanding not less than $2,000,000 and up to $9,000,000 into a two-year term
loan. Under this conversion feature which is available through October 2005, the
Company may convert the principal outstanding on the revolving line of credit to
a two-year term loan. The bank's prime rate was 4.25% and 4.75% at March 31,
2003 and 2002, respectively. The United States operations had available unused
lines of credit of $11,756,000 at March 31, 2003.

With the exception of capital leases, there are no long-term debt payment
requirements over the next five years.

The Company is required to pay commitment fees of 1/4% on the unused
portion of the domestic revolving credit facility. No other financing
arrangements require compensating balances or commitment fees.

The loan agreements contain provisions pertaining to the maintenance of
minimum working capital balances, tangible net worth and financial ratios as
well as restrictions on the payment of cash dividends to shareholders and
incurrence of additional long-term debt. In addition, the United States
operations cannot make any loans or advances exceeding $500,000 to any
affiliates without prior consent of the bank.

NOTE 7 -- FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
investments, and trade accounts receivable. The Company places its cash, cash
equivalents, and investments with high credit quality financial institutions and
actively evaluates the credit worthiness of these financial institutions.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers comprising the Company's customer
base and their geographic dispersion. At March 31, 2003 and 2002, the Company
had no significant concentrations of credit risk.

Letters of Credit:

The Company has entered into standby letter of credit agreements with
financial institutions relating to the guarantee of future performance on
certain contracts. At March 31, 2003 and 2002, the Company was contingently
liable on outstanding standby letters of credit aggregating $1,394,000 and
$558,000, respectively.

Foreign Exchange Risk Management:

The Company, as a result of its global operating and financial activities,
is exposed to market risks from changes in foreign exchange rates. In seeking to
minimize the risks and/or costs associated with such activities, the Company may
utilize foreign exchange forward contracts with fixed dates of maturity and
exchange rates. The Company does not hold or issue financial instruments for
trading or other speculative purposes and only contracts with high quality
financial institutions. If the counterparties to the exchange contracts do not
fulfill their obligations to deliver the contracted foreign currencies, the
Company could be at risk for fluctuations, if any,

25

required to settle the obligation. At March 31, 2003 and 2002, there were no
foreign exchange forward contracts held by the Company.

Fair Value of Financial Instruments:

The estimates of the fair value of financial instruments are summarized as
follows:

INVESTMENTS -- The fair value of investments at March 31, 2003 and
2002 approximated the carrying value.

SHORT-TERM DEBT -- The carrying value of short-term debt approximates
fair value due to the short-term maturity of this instrument.

LONG-TERM DEBT -- The carrying values of credit facilities with
variable rates of interest approximate fair values.

NOTE 8 -- INCOME TAXES:

An analysis of the components of pre-tax income (loss) is presented below:

26

The reconciliation of the provision (benefit) calculated using the United
States federal tax rate with the provision for income taxes presented in the
financial statements is as follows:

The deferred income tax asset (liability) recorded in the Consolidated
Balance Sheets results from differences between financial statement and tax
reporting of income and deductions. A summary of the composition of the deferred
income tax asset follows:

Deferred income taxes include the impact of foreign net operating loss
carryforwards which may be carried forward indefinitely and investment tax
credits which expire from 2008 to 2018. A valuation allowance of $322,000 at
March 31, 2003 is deemed adequate to reserve for the foreign net loss
carryforwards which are not considered probable of realization.

The Company does not provide for additional U.S. income taxes on
undistributed earnings considered permanently invested in its United Kingdom
subsidiary. At March 31, 2003, such undistributed earnings totaled $1,221,000.
It is not practicable to determine the amount of income taxes that would be
payable upon the remittance of assets that represent those earnings.

27

NOTE 9 -- EMPLOYEE BENEFIT PLANS:

Retirement Plans

The Company has a qualified defined benefit plan covering employees in the
United States which is non-contributory. Benefits are based on the employee's
years of service and average earnings for the five highest consecutive calendar
years of compensation for the ten year period preceding retirement. The
Company's funding policy for the plan is to contribute the amount required by
the Employee Retirement Income Security Act of 1974.

The components of pension cost are:

Changes in the Company's benefit obligation, plan assets and funded status
for the pension plan are presented below:

The Company recognized an additional minimum pension liability for the
underfunded defined benefit plan. The additional minimum pension liability is
equal to the excess of the accumulated benefit obligation over plan assets and
the accrued liability. Amounts recognized in the Consolidated Balance Sheets
consist of the following:

The current portion of the pension liability as of March 31, 2003 and 2002
is included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets.

Assets of the United States plan consist primarily of equity securities at
March 31, 2003 and 2002. The unrecognized net asset at transition is being
amortized over the remaining service lives of the participants which
approximates 19 years.

The Company has a Supplemental Executive Retirement Plan which provides
retirement benefits associated with wages in excess of the legislated qualified
plan maximums. Pension expense recorded in 2003, 2002, and 2001 related to this
plan was $27,000, $26,000, and $0, respectively. At March 31, 2003 and 2002, the
related liability was $145,000 and $118,000, respectively, and is included in
the caption "Accrued Pension Liability" in the Consolidated Balance Sheets.

The Company has defined contribution plans covering substantially all
employees. Company contributions to the domestic plan are based on the
profitability of the Company and amounted to $0, $669,000, and $43,000 in 2003,
2002, and 2001, respectively. Company contributions to the United Kingdom plan
are based on a percentage of base salary which varies with the participant's
age. Company contributions were $120,000, $73,000 and $69,000 in 2003, 2002 and
2001, respectively.

The Company has a deferred compensation plan that allows certain key
employees to defer a portion of their compensation. The principal and interest
earned on the deferred balances are payable upon retirement. The accrued
compensation liability under this plan was $561,000 and $647,000 at March 31,
2003 and 2002, respectively.

Other Postretirement Benefits

In addition to providing pension benefits, the Company has a United States
plan which provides health care benefits for eligible retirees and eligible
survivors of retirees.

29

The components of postretirement benefit cost are:

The assumptions used to develop the accrued postretirement benefit
obligation were:

The medical care cost trend rate used in the actuarial computation
ultimately reduces to 4 1/2% in 2010 and subsequent years. This was accomplished
using 1/2% decrements for the years 2004 through 2010.

Changes in the Company's benefit obligation, plan assets and funded status
for the plan are as follows:

- ---------------
(1) On February 4, 2003, the Employee Benefits Committee of the Board of
Directors of the Board of Directors irrevocably terminated postretirement
health care benefits for current US employees, however, benefits payable to
retirees of record on April 1, 2003 remained unchanged. The accrued
postretirement benefit liability included in the Consolidated Balance Sheet
at March 31, 2003 does not reflect the reduced obligation to plan
participants due to the plan curtailment and negative plan amendment, which
is approximately $2,322,000. The liability will be reduced and the related
income will be recognized over the next 12 years.

The current portion of the postretirement benefit obligation is included in
the caption "Accrued Compensation" and the long-term portion is separately
presented in the Consolidated Balance Sheets.

30

Assumed medical care cost trend rates could have a significant effect on
the amounts reported for the postretirement benefit plan. However, due to the
caps imposed on the Company's share of the premium costs, a one percentage point
change in assumed medical care cost trend rates would not have a significant
effect on the total service and interest cost components or the postretirement
benefit obligation.

NOTE 10 -- STOCK COMPENSATION PLANS:

The 2000 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 150,000 shares of common stock in connection
with grants of incentive stock options and non-qualified stock options to
officers, key employees and outside directors. The options may be granted at
prices not less than the fair market value at the date of grant and expire no
later than ten years after the date of grant.

The 1995 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 192,000 shares of common stock in connection
with grants of incentive stock options and non-qualified stock options to
officers, key employees and outside directors. The options may be granted at
prices not less than the fair market value at the date of grant and expire no
later than ten years after the date of grant.

The Company has a Long-Term Incentive Plan which provides for awards of
share equivalent units for outside directors based upon the Company's
performance. Each unit is equivalent to one share of the Company's common stock.
Share equivalent units are credited to each outside director's account for each
of the first five full fiscal years of the director's service when the profit
target of $500,000 is met. The share equivalent units are payable in cash or
stock upon retirement. The cost of performance units earned and charged to
pre-tax income under this Plan in 2003, 2002, and 2001 was $0, $50,000, and $0,
respectively.

Information on options under the Company's plans is as follows:

At March 31, 2003, the options outstanding had a weighted average remaining
contractual life of 6.42 years. There were 224,773 options exercisable at March
31, 2003 which had a weighted average exercise price of $11.84. The remaining
options are exercisable at a rate of 20 percent per year from the date of grant.
The outstanding options expire May 2003 to October 2012. Options available for
future grants were 128,750 at March 31, 2003 and 156,550 at March 31, 2002.

NOTE 11 -- SHAREHOLDER RIGHTS PLAN:

On July 27, 2000 the Company adopted a Shareholder Rights Plan. Under the
Plan, as of September 11, 2000, one share Purchase Right ("Right") is attached
to each outstanding share of Common Stock. When and if

31

the Rights become exercisable, each Right would entitle the holder of a share of
Common Stock to purchase from the Company one one-hundredth (1/100) interest in
a share of Series A Junior Participating preferred stock, at a price of $45.00
per one one-hundredth (1/100) interest in a share of preferred stock, subject to
adjustment. The Rights become exercisable upon certain events: (i) if a person
or group of affiliated persons acquires 15% or more of the Company's outstanding
Common Stock; or (ii) if a person or group commences a tender offer for 15% or
more of the Company's outstanding Common Stock.

The Company may redeem the Rights for $.01 per Right at any time prior to
the acquisition by a person or group of affiliated persons of beneficial
ownership of 15% or more of the Company's outstanding common stock ("Acquiring
Person").

In the event that any person or group of affiliated persons become an
Acquiring Person, each holder of a Right other than Rights beneficially owned by
the Acquiring Person will have the right to receive upon exercise a number of
shares of Common Stock having a market value of twice the purchase price of the
Right. In the event that the Corporation is acquired in a merger or other
business combination transaction or fifty percent (50%) or more of its
consolidated assets or earning power is sold, each holder of a Right will have
the right to receive, upon exercise, a number of shares of common stock of the
acquiring corporation that at the time of such transaction will have a market
value of two (2) times the purchase price of the Right.

NOTE 12 -- OTHER INCOME AND EXPENSE:

During fiscal year 2003, an order from a customer in the electric power
generating industry that was previously suspended was cancelled. The contract
for the cancelled order entitled the Company to a cancellation charge of
$2,155,000, which was paid to the Company in March 2003. This income, net of
costs incurred on the contract of $354,000, is presented in the caption "Other
Income" in the 2003 Consolidated Statement of Operations.

In January 2003, the workforce in the United States was restructured by
eliminating positions at the staff and senior management levels in an effort to
reduce costs. As a result, a restructuring charge of $658,000 was recognized,
which included severance and related employee benefit costs. This charge is also
included in the caption "Other Expense" in the 2003 Consolidated Statement of
Operations. As of March 31, 2003, the liability included in the Consolidated
Balance Sheet related to this restructuring is $390,000.

In January 2002, the Company received notice from a customer to cancel four
orders for the electric power generating industry. The contracts for the
cancelled orders entitled the Company to cancellation charges amounting to
$4,168,000 which was paid to the Company in April 2002. This income, net of
costs incurred on the contracts of $179,000, is presented separately in the
caption "Other Income" in the 2002 Consolidated Statement of Operations.

NOTE 13 -- RELATED PARTY TRANSACTIONS:

In April 2000, the Board of Directors adopted a Long-Term Stock Ownership
Plan to encourage officers and directors to broaden their equity ownership in
the Company. The Board authorized the sale under the Plan of up to 160,000
shares of the Company's common stock that was held as treasury stock. Of the
amount authorized, eligible participants purchased 117,800 shares at fair market
value. The eligible participants paid cash equal to the par value of the shares
and a note receivable was recorded by the Company for the remaining balance due
on the purchase of the shares. The notes receivable are fixed rate interest
bearing notes with a term of ten years. The notes are repayable in equal
quarterly installments beginning June 30, 2002. The notes, which are full
recourse notes, contain certain provisions which grant a security interest to
the Company in the shares and any proceeds from the sale of the shares.

NOTE 14 -- SEGMENT INFORMATION:

The Company's business consists of two operating segments based upon
geographic area. These segments were determined based upon the manner in which
financial information is used by management in operating the Company. The United
States segment designs and manufactures heat transfer and vacuum equipment. Heat

32

transfer equipment includes surface condensers, Heliflows, water heaters and
various types of heat exchangers. Vacuum equipment includes steam jet ejector
vacuum systems and liquid ring vacuum pumps. These products are sold
individually or combined into package systems for use in several industrial
markets. The Company also services and sells spare parts for its equipment. The
operating segment located in the United Kingdom manufactures vacuum equipment
which includes liquid ring vacuum pumps, Dryflo pumps, piston pumps, ejectors
and complete vacuum pump systems.

Intersegment sales represent intercompany sales made based upon a
competitive pricing structure. All intercompany profits in inventory are
eliminated in the consolidated accounts and are included in the eliminations
caption below. In computing segment net income or loss, corporate expenses
incurred by the United States segment have been charged to the United Kingdom
segment on a management fee basis. Operating segment information is presented
below:

The operating segment information above is reconciled to the consolidated
totals as follows:

Total segment interest income, interest expense, depreciation and
amortization and expenditures for long-lived assets are equivalent to the
consolidated totals for each of these items. Operating segments incurred
research and development costs of $187,000, $248,000, and $250,000 in 2003,
2002, and 2001, respectively.

Net sales by product line follows:

34

The breakdown of net sales and long-lived assets by geographic area is:

QUARTERLY FINANCIAL DATA (UNAUDITED):

A capsule summary of the Company's unaudited quarterly results for 2003 and
2002 is presented below:

- ---------------

(1) In the fourth quarter, the Company recognized income from cancellation
charges, net of related costs, of $1,801,000 and $3,989,000 in 2003 and
2002, respectively. (See Note 12).

(2) In the fourth quarter of 2003, the Company recognized a restructuring charge
of $658,000. (See Note 12).

35

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders of
Graham Corporation
Batavia, New York

We have audited the accompanying consolidated balance sheets of Graham
Corporation and subsidiaries as of March 31, 2003 and 2002, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2003. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Graham Corporation and
subsidiaries as of March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 16, 2003

36

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information called for under this Item is set forth in statements under
"Election of Directors" on page 5 and "Executive Officers" on page 8 of the
Company's Proxy Statement for its 2003 Annual Meeting of Stockholders, which
statements are hereby incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information called for under this Item is set forth in statements under
"Compensation of Directors" on page 7 of the Company's Proxy Statement for its
2003 Annual Meeting of Stockholders and also under "Executive Compensation" on
pages 8 to 13 of such proxy statement, which statements are hereby incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The information called for under this Item is set forth in statements under
"Security Ownership of Certain Beneficial Owners and Management" on pages 2-4 of
the Company's Proxy Statement for its 2003 Annual Meeting of Stockholders, which
statements are hereby incorporated herein by reference.

(b) SECURITY OWNERSHIP OF MANAGEMENT

The information called for under this Item is set forth in statements under
"Security Ownership of Certain Beneficial Owners and Management" on pages 2-4,
"Election of Directors" on page 5 and "Executive Compensation" on pages 8 to 13
of the Company's Proxy Statement for its 2003 Annual Meeting of Stockholders,
which statements are hereby incorporated herein by reference.

(c) CHANGES IN CONTROL

(Not applicable.)

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for under this Item is set forth in statements under
"Certain Relationships and Related Transactions" on page 16 of the Company's
Proxy Statement for its 2003 Annual Meeting of Stockholders, which statements
are hereby incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

The Company's President and Chief Executive Officer and its Vice
President-Finance and Chief Financial Officer each have independently evaluated
the Company's disclosure controls and procedures as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c) within 90 days of the filing of this Annual Report
on Form 10-K and each regards such controls as satisfactorily effective.

There have been no significant changes to any such controls or in other
factors that could significantly affect such controls, subsequent to the date of
their evaluation by each of the CEO and the CFO.

37

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable for fiscal years ending before December 15, 2003.

ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) The following are Financial Statements and related information
filed as part of this Annual Report on Form 10-K.

(a) (2) In addition to the above, the following Financial Statement
Schedules and related information are required to be filed as part of this
Annual Report on Form 10-K by Items 8 and 14(d) of Form 10-K:

Other financial statement schedules not included in this Annual Report on
Form 10-K have been omitted because they are not applicable or because the
required information is shown in the financial statements or notes thereto.

No items have been reported on Form 8-K since the Company's filing of Form
10-Q for the quarter ended December 31, 2002.

38

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders of
Graham Corporation
Batavia, New York

We have audited the consolidated financial statements of Graham Corporation
and subsidiaries as of March 31, 2003 and 2002, and for each of the three years
in the period ended March 31, 2003 and have issued our report thereon dated May
16, 2003; such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of Graham Corporation and
subsidiaries, listed in Item 16. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 16, 2003

39

GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

- ---------------
Notes:

(a) Represents foreign currency translation adjustment.

(b) Represents a bad debt recovery and a foreign currency translation
adjustment.

(c) Represents a reversal of the reserve.

(d) Represents a write-off of obsolete inventory thereby reducing inventory and
the reserve.

(e) Represents the final settlement payment for the Batavia Landfill EPA claim.

40

(a) (3) The following exhibits are required to be filed by Item 14(c) of
Form 10-K:

- ---------------
+ Incorporated herein by reference from the Annual Report of Registrant on
Form 10-K for the fiscal year ended March 31, 1998.

++ Incorporated herein by reference from the Registrant's Proxy Statement for
its 2001 Annual Meeting of Shareholders.

+++ Incorporated herein by reference from the Registrant's Proxy Statement for
its 2000 Annual Meeting of Shareholders.

* Incorporated herein by reference from the Annual Report of Registrant on
Form 10-K for the year ended December 31, 1989.

** Incorporated herein by reference from the Registrant's Current Report on
Form 8-K dated August 23, 2000 and Registrant's Form 8-A dated September
15, 2000.

*** Incorporated herein by reference from the Registrant's Proxy Statement for
its 1991 Annual Meeting of Shareholders.

**** Incorporated herein by reference from the Registrant's Proxy Statement for
its 1996 Annual Meeting of Shareholders.

41

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.

GRAHAM CORPORATION

DATE: June 5, 2003 By /s/ J.RONALD HANSEN
-----------------------------------------------------
J. Ronald Hansen
Vice President-Finance & Administration and Chief
Financial Officer (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

42

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER

I, Alvaro Cadena, certify that:

1. I have reviewed this Annual Report on Form 10-K of Graham Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: June 9, 2003 /s/ ALVARO CADENA
----------------------------------------------
Alvaro Cadena
President and Chief Executive Officer

43

CERTIFICATION OF
CHIEF FINANCIAL OFFICER

I, J. Ronald Hansen, certify that:

1. I have reviewed this Annual Report on Form 10-K of Graham Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: June 9, 2003 /s/ J. RONALD HANSEN
----------------------------------------------
J. Ronald Hansen
Vice President-Finance &
Administration Chief Financial Officer

44

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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, 2003

------------------------

GRAHAM CORPORATION

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