Unassociated Document

PART I	FINANCIAL INFORMATION	Page
Item 1.	Unaudited Condensed Financial Statements
	Haynes International, Inc. and Subsidiaries:
	Unaudited Consolidated Balance Sheets as of September 30, 2007 and December 31, 2007	1
	Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2006 and 2007	2
	Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2006 and 2007	3
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2006 and 2007	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24

PART II	OTHER INFORMATION
Item 6.	Exhibits	25
	Signatures	26
	Index to Exhibits	27

	September 30, 2007			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	5,717		$	8,444
Restricted cash - current portion		110			110
Accounts receivable, less allowance for doubtful accounts of $1,339 and $1,257, respectively		106,414			93,854
Inventories, net		286,302			304,054
Income taxes receivable		1,760			-
Deferred income taxes		10,801			11,384
Other current assets		1,457			1,368
Total current assets		412,561			419,214

Property, plant and equipment (at cost)		117,181			121,929
Accumulated depreciation		(19,321	)		(21,484	)
Net property, plant and equipment		97,860			100,445

Deferred income taxes - long term portion		22,738			23,699
Prepayments and deferred charges, net		3,702			4,066
Restricted cash - long term portion		330			220
Goodwill		41,252			41,927
Other intangible assets		8,526			8,250
Total assets	$	586,969		$	597,821
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	60,443		$	61,538
Income taxes payable		-			4,034
Accrued pension and postretirement benefits		14,647			14,388
Revolving credit facilities		35,549			28,335
Deferred revenue - current portion		2,500			2,500
Current maturities of long-term obligations		110			110
Total current liabilities		113,249			110,905

Long-term obligations (less current portion)		3,074			2,956
Deferred revenue (less current portion)		45,329			44,704
Non-current income taxes payable		-			5,384
Accrued pension and postretirement benefits		108,940			98,350
Total liabilities		270,592			262,299

Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 11,807,237 and 11,905,310 issued and outstanding at September 30, 2007 and December 31, 2007, respectively)		12			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		-			-
Additional paid-in capital		218,504			222,131
Accumulated earnings		93,880			106,896
Accumulated other comprehensive income		3,981			6,483
Total stockholders’ equity		316,377			335,522
Total liabilities and stockholders’ equity	$	586,969		$	597,821

	Three Months Ended December 31,
	2006		2007

Net revenues	$	120,463	$	146,077
Cost of sales		86,842		111,872
Gross profit		33,621		34,205
Selling, general and administrative expense		9,420		9,990
Research and technical expense		697		908
Operating income		23,504		23,307
Interest expense, net		1,809		463
Income before income taxes		21,695		22,844
Provision for income taxes		8,511		9,001
Net income	$	13,184	$	13,843
Net income per share:
Basic	$	1.32	$	1.17
Diluted	$	1.27	$	1.16
Weighted average shares outstanding:
Basic		10,000,000		11,821,842
Diluted		10,398,994		11,965,900

	Three Months Ended December 31,
	2006			2007
Cash flows from operating activities:
Net income	$	13,184		$	13,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,772			2,166
Amortization		282			276
Stock compensation expense		693			350
Excess tax benefit from option exercises		-			(2,022	)
Deferred revenue		50,000			-
Deferred revenue - portion recognized		(296	)		(625	)
Deferred income taxes		(544	)		(3,705	)
Loss on disposal of property		42			94
Change in assets and liabilities:
Accounts receivable		2,403			12,446
Inventories		(23,037	)		(17,673	)
Other assets		(2,552	)		(242	)
Accounts payable and accrued expenses		2,097			902
Income taxes		8,889			11,999
Accrued pension and postretirement benefits		(96	)		(6,307	)
Net cash provided by operating activities		52,837			11,502

Cash flows from investing activities:
Additions to property, plant and equipment		(3,139	)		(4,738	)
Change in restricted cash		110			110
Net cash used in investing activities		(3,029	)		(4,628	)

Cash flows from financing activities:
Net increase (decrease) in revolving credit		(51,003	)		(7,214	)
Proceeds from exercise of stock options		-			1,255
Excess tax benefit from option exercises		-			2,022
Payments on long-term obligations		(147	)		(154	)
Net cash used in financing activities		(51,150	)		(4,091	)

Effect of exchange rates on cash		142			(56	)
Increase (decrease) in cash and cash equivalents		(1,200	)		2,727

Cash and cash equivalents, beginning of period		6,182			5,717
Cash and cash equivalents, end of period	$	4,982		$	8,444

Supplemental disclosures of cash flow information:
Cash paid during period for: Interest (net of capitalized interest)	$	1,419		$	454
Income taxes	$	129		$	732

The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with information reflected in our Form 10-K for the year ended September 30, 2007 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three months ended December 31, 2007 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2008 or any interim period.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 addresses the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The impact of the adoption of FIN 48 on October 1, 2007, was to decrease retained earnings by $827, increase goodwill by $675, increase deferred tax assets by $3,316, and increase non-current income taxes payable by $4,818.

In conjunction with the adoption of FIN 48, we have classified uncertain tax positions as non-current income tax liabilities unless they are expected to be paid within 12 months of the balance sheet date. Income tax-related interest expense is reported as a component of income tax expense and the related liability is included in non-current income taxes payable. As of October 1, 2007, we recorded a liability of approximately $200 for the payments of interest. The liability for the payment of interest did not materially change as of December 31, 2007.

As of October 1, 2007, we were open to examination in the U.S. federal tax jurisdiction for various years from 1994 to 2007, in the U.K. for the years 2001-2007, in Switzerland for the years 2002-2007, and in France for the years 2004-2007. We are also open to examination in various state and local jurisdictions for various tax years, none of which were individually material. We are currently under audit in the U.S. federal tax jurisdiction and the state of Indiana for the September 30, 2005 tax year.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date.” The statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is required to adopt SFAS 157 beginning on October 1, 2008. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.

In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. The Company is currently evaluating the impact of SFAS 159 on its financial position, results of operations and cash flows.

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations ("FAS 141(R)"). FAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. FAS 141(R) also expands disclosures related to business combinations. FAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company's fiscal year 2010, except that business combinations consummated prior to the effective date must apply FAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the impact of FAS 141(R) on its financial position, results of operations and cash flows.

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 ("FAS 160"). FAS 160 requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, that changes in a parent's ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. FAS 160 will be applied prospectively, except for presentation and disclosure requirements which will be applied retrospectively, as of the beginning of the Company's fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of FAS 160 is not expected to have an impact on the Company's financial position, results of operations or cash flows.

The Company contributed $2,510 to the Company sponsored domestic pension plans, $1,072 to its other post-retirement benefit plans and $307 to the U.K. pension plan for the three months ended December 31, 2007. The Company presently expects future contributions of $6,310 to its domestic pension plans, $3,528 to its other post-retirement benefit plans and $920 to the U.K. pension plans for the remainder of fiscal 2008. The Pension Protection Act of 2006 requires funding over a seven year period to achieve 100% funded status.

On October 2, 2007, the U.S. pension plan was amended effective December 31, 2007 to freeze benefit accruals for all non-union employees in the U.S. and effective January 1, 2008, the pension multiplier used to calculate the employee's monthly benefit was increased from 1.4% to 1.6%. In addition, the Company will make enhanced matching contributions to its 401K plan equal to 60% of the non-union and union plan participant's salary deferrals, up to 6% of compensation. The Company estimates the redesign of the pension plan, including previous actions to close the plan to new non-union and union employees and the adjustment of the multiplier for non-union and union plan participants, will reduce funding requirements by $23,000 over the next six years. The offsetting estimated incremental cost of the enhanced 401K match is $2,300 over the same six year period. As a result of freezing the benefit accruals for all non-union employees in the U.S. in the first quarter of fiscal 2008, we recognized a reduction of the projected benefit obligation of $8,191, an increase to other comprehensive income (before tax) of $4,532 and a curtailment gain (before tax) of $3,659. The impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.

The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental and intellectual property matters. Future expenditures for environmental, intellectual property and other legal matters cannot be determined with any degree of certainty; however, based on the facts presently known, management does not believe that such costs will have a material effect on the Company's financial position, results of operations or cash flows.

The Company believes that any and all claims arising out of conduct or activities that occurred prior to March 29, 2004 are subject to dismissal. On March 29, 2004, the Company and certain of its subsidiaries and affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the “Bankruptcy Court”). On August 16, 2004, the Bankruptcy Court entered its Findings of Fact, Conclusions of Law, and Order Under 11 U.S.C. 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming the First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-in-Possession as Further Modified (the “Confirmation Order”). The Confirmation Order and related Chapter 11 Plan, among other things, provide for the release and discharge of prepetition claims and causes of action. The Confirmation Order further provides for an injunction against the commencement of any actions with respect to claims held prior to the Effective Date of the Plan. The Effective Date occurred on August 31, 2004. When appropriate, the Company pursues the dismissal of lawsuits premised upon claims or causes of action discharged in the Confirmation Order and related Chapter 11 Plan. The success of this strategy is dependent upon a number of factors, including the respective court’s interpretation of the Confirmation Order and the unique circumstances of each case.

The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, both of which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company believes that it has defenses to these allegations and, that if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 52 filed in the state of California, alleging that its welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The Company has since been voluntarily dismissed from all of these lawsuits on the basis of the release and discharge of claims contained in the Confirmation Order. While the Company contests such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect its liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases, at least two courts (in cases not involving Haynes) have refused to dismiss claims relating to inhalation of welding fumes containing manganese based upon a bankruptcy discharge order. Although the Company believes the facts of these cases are distinguishable from the facts of its cases, that can be no assurance that any or all claims against the Company will be dismissed based upon the Confirmation Order, particularly claims premised, in part or in full, upon actual or alleged exposure on or after the date of the Confirmation Order. It is also possible that the Company will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if the Company is found liable, could have a material adverse effect on its financial condition, results of operations or liquidity.

The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. In addition, at the request of IDEM, the Company has initiated an investigation of three additional areas at the Kokomo facility. The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective actions by the Company could be required. In addition, groundwater monitoring has begun and is ongoing on two additional solid waste management units. The Company is unable to estimate the costs of these or any further corrective action at either site, if required. Accordingly, the Company can not assure you that the costs of any future corrective action at these or any other current former sites would not have a material effect on the Company’s financial condition, results of operations or liquidity. Additionally, it is possible that the Company could be required to undertake other corrective action commitments for any other solid waste management unit existing or determined to exist at its facilities. As a condition of the post-closure permits, the Company must provide and maintain assurances to IDEM and NCDENR of the Company’s capability to satisfy post-closure groundwater monitoring and care requirements, including possible future corrective action as necessary. The Company provides these required assurances through a statutory financial assurance test as provided by Indiana and North Carolina law.

As of December 31, 2007 and September 30, 2007, the Company has accrued $1,519 for post-closure monitoring and maintenance activities. In accordance with SFAS 143, Accounting for Asset Retirement Obligations, accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $2,377 which was then discounted using an appropriate discount rate. The cost associated with closing the sites has been incurred in financial periods prior to those presented, with the remaining cost to be incurred in future periods related solely to post-closure monitoring and maintenance. Based on historical experience, the Company estimates that the cost of post-closure monitoring and maintenance will approximate $126 per year over the remaining obligation period.

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation (“TIMET”) for up to ten million pounds (with an option for an additional ten million pounds) of titanium metal annually at prices established by the terms of the agreement. TIMET paid the Company a $50.0 million up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. The cash received of $50.0 million will be recognized in income on a straight-line basis over the 20-year term of the agreement. The portion not recognized in income will be shown as deferred revenue on the consolidated balance sheet. The Company used the proceeds, net of expenses, of the $50 million up-front fee paid by TIMET to reduce the balance of its U.S. revolving credit facility. Revenue of $296 and $625 has been recognized related to this agreement, during the three months ended December 31, 2006 and 2007, respectively. Taxes will be paid on the up-front fee primarily in the first quarter of fiscal 2009.

Goodwill was created as a result of the Company’s reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company adopted FASB Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Pursuant to SFAS 142, goodwill is not amortized and the value of goodwill is reviewed at least annually for impairment. If the carrying value exceeds the fair value, impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment.

The Company also has patents, trademarks and other intangibles. As the patents have a finite life, they are amortized over lives ranging from two to fourteen years. As the trademarks have an indefinite life, the Company tests them for impairment at least annually. If the carrying value exceeds the fair value (determined by calculating a fair value based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of impairment. The Company has two non-compete agreements with lives of two and seven years. Amortization of the patents, non-competes and other intangibles was $282, and $276 for the three months ended December 31, 2006 and 2007, respectively.

Weighted average shares outstanding increased due to the equity offering in the second quarter of fiscal 2007 and the exercise of stock options. Anti-dilutive shares with respect to outstanding stock options have been excluded from the computation of diluted net income per share. A total of 0 and 131,000 anti-dilutive weighted average shares with respect to outstanding stock options have been excluded from the computation of diluted net income per share for the three months ended December 31, 2006 and 2007, respectively.

Note 10. Stock-Based Compensation

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 33 1/3% per year over three years from the grant date.

	Outstanding						Exercisable
Grant Date	Number of Shares		Exercise Price Per Share		Remaining Contractual Life in Years		Number of Shares		Exercise Price Per Share
August 31, 2004		201,355	$	12.80		6.67		201,355	$	12.80
May 5, 2005		8,334		19.00		7.33		-		19.00
August 15, 2005		11,667		20.25		7.67		-		20.25
October 1, 2005		10,000		25.50		7.75		5,000		25.50
February 21, 2006		33,334		29.25		8.17		-		29.25
March 31, 2006		10,000		31.00		8.25		-		31.00
March 30, 2007		126,000		72.93		9.25		-		72.93
September 1, 2007		5,000	$	83.53		9.67		-	$	83.53
		405,690						206,355

This discussion contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this discussion and may include, but are not limited to, statements regarding the intent, belief or current expectations of the Company or its management with respect to, but are not limited to (i) the Company’s strategic plans; (ii) any significant change in customer demand for its products or in demand for its customers’ products; (iii) the Company’s dependence on production levels at its Kokomo facility and its ability to make capital improvements at that facility; (iv) rapid increases in the cost of nickel, energy and other raw materials; (v) the Company’s ability to continue to develop new commercially viable applications and products; (vi) the Company’s ability to recruit and retain key employees; (vii) the Company’s ability to comply, and the costs of compliance, with applicable environmental laws and regulations;and (viii) economic and market risks associated with foreign operations and U.S. and world economic and political conditions . Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond the control of the Company.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties, some of which are discussed in Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007, may affect the accuracy of forward looking statements.

Haynes International, Inc. ("Haynes" or "the Company") is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are used primarily in the aerospace, chemical processing and land-based gas turbine industries. The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. Except for its stainless wire products, the Company competes exclusively in the high-performance nickel- and cobalt-based alloy sector, which includes high temperature resistant alloys, or HTA products, and corrosion resistant alloys, or CRA products. The Company believes it is one of four principal producers of high-performance alloys in sheet, coil and plate forms. The Company also produces its products as seamless and welded tubulars, and in bar, billet and wire forms.

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products and the Mountain Home facility specializes in high-performance alloy wire products. The Company sells its products primarily through its direct sales organization, which includes 11 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated.

Beginning at the end of the second quarter and continuing through the fourth quarter of fiscal 2007, the Company experienced a trend of increasing revenues and average selling price per pound, while gross profit as a percentage of net revenues declined. During the first quarter of fiscal 2008, net revenue and average selling price per pound began to decline along with the gross profit decline. The largest contributing factor to the decline in gross profit as a percentage of revenue is increased competition. Starting in the third quarter of fiscal 2007, the Company has experienced increased competition from competitors who produce both stainless steel and high-performance alloys. Due to a slowing stainless steel market, these competitors have increased their production levels and sales activity in high-performance alloys to keep capacity in their mills as full as possible, and they are able to offer very competitive delivery times and prices. As a result of this competition, the Company's ability to raise prices on certain products has been limited in the three most recent fiscal quarters. Historically, the Company has experienced similar price competition in the 1990's and in the early 2000's, when demand in the stainless market weakened. We believe, however, that we are in a better position to respond to the competition than we were at those times as a result of our increased emphasis on service centers and our value-added services. American Metals Market reported in January that stainless producers believe that prospects appear to be brightening in the stainless steel market and that the stage is set for a 2008 recovery in stainless spot market volume and prices, which should begin to alleviate the pricing pressure felt by the Company in recent quarters. Additionally, management believes that the completion of the upgrade to the second annealing line, which will be completed in the third quarter of fiscal 2008, will enable the Company to be competitive with respect to delivery-times and reliability.

Another factor which has negatively impacted gross profit as a percentage of net revenue is the downtime as a result of equipment upgrades and, in the first quarter of fiscal 2008, two unplanned outages. Planned and unplanned outages reduce the amount of pounds produced and shipped by the Company. Beginning in fiscal 2006, the Company began making significant investments in order to increase capacity in its sheet finishing operations, including upgrades to its cold rolling mill and one of two annealing lines, which were completed in fiscal 2007. The Company intends to complete the second phase of upgrades to its second annealing line in the third quarter of fiscal 2008, which will complete the necessary upgrades to the sheet finishing operations required to increase production capacity for high-performance alloys in sheet form from 9.0 million pounds per year to 14.0 million pounds per year. This will result in total high-performance alloy production capacity of 23.5 million pounds per year. The Company believes it will achieve its objective of producing and selling 23.5 million pounds of high-performance alloys by fiscal 2010. Management anticipates continuing to invest in the Company's equipment. The Company spent approximately $4.7 million in the first quarter of fiscal 2008 on capital improvements. Total planned fiscal 2008 capital spending is targeted at approximately $15.0 million, of which approximately $5.0 million is attributable to recurring capital maintenance projects.

In addition to planned downtime required in order to complete these upgrades, from time to time the Company has also experienced unplanned outages, such as those which occurred in the first quarter of fiscal 2008, which also reduce production levels. As a result of these unplanned outages, the Company produces and ships fewer pounds, resulting in lower revenues in the quarter in which they occur. In addition, it was more difficult to recover quickly from the unplanned outages in the first quarter due to the planned downtime that was also scheduled. Management believes that the investments in the Company's equipment over the last several years and continuing this year (including increasing capacity of the sheet finishing operations described above) have significantly and will continue to improve operating efficiency by increasing capacity, reducing unplanned downtime and manufacturing costs, and improving delivery performance, working capital management and product quality. In addition, it will enable us to recover more quickly from unplanned outages.

Set forth below is selected data relating to the Company’s backlog, the 30-day average nickel price per pound as reported by the London Metals Exchange, as well as a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown. These data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q.

⁽¹⁾

The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog information does not reflect that portion of the business conducted at service and sales centers on a spot or “just-in-time” basis.

	Quarter Ended
	December 31, 2006		March 31, 2007		June 30, 2007		September 30, 2007		December 31, 2007
*Net revenues* (in thousands)
Aerospace	$	43,827	$	48,232	$	55,317	$	63,796	$	59,442
Chemical processing		38,778		37,701		31,495		39,986		40,805
Land-based gas turbines		20,076		27,993		26,812		28,120		25,505
Other markets		15,671		20,352		24,598		25,638		17,772
Total product revenue		118,352		134,278		138,222		157,540		143,524
Other revenue		2,111		3,058		2,865		3,410		2,553
Net revenues	$	120,463	$	137,336	$	141,087	$	160,950	$	146,077
*Pounds by markets* (in thousands)
Aerospace		1,780		1,701		1,973		2,206		2,154
Chemical processing		1,479		1,322		1,082		1,238		1,312
Land-based gas turbines		1,144		1,382		1,256		1,311		1,060
Other markets⁽¹⁾		1,053		1,320		1,538		923		681
Total shipments		5,456		5,725		5,849		5,678		5,207

*Average selling price per pound*
Aerospace	$	24.62	$	28.36	$	28.04	$	28.92	$	27.60
Chemical processing		26.22		28.52		29.11		32.30		31.10
Land-based gas turbines		17.55		20.26		21.35		21.45		24.06
Other markets		14.88		15.42		15.99		27.78		26.10
Total product (excluding other revenue)		21.69		23.45		23.63		27.75		27.56
Total average selling price (including other revenue)		22.08		23.99		24.12		28.35		28.05

($ in thousands)	Three Months Ended
	December 31,								Change
	2006				2007				Amount			%
Net revenues	$	120,463	100.0	%	$	146,077	100.0	%	$	25,614			21.3	%
Cost of sales		86,842	72.1	%		111,872	76.6	%		25,030			28.8	%
Gross profit		33,621	27.9	%		34,205	23.4	%		584			1.7	%
Selling, general and administrative expense		9,420	7.8	%		9,990	6.8	%		570			6.1	%
Research and technical expense		697	0.6	%		908	0.6	%		211			30.3	%
Operating income		23,504	19.5	%		23,307	16.0	%		(197	)		(0.8	)%
Interest expense, net		1,809	1.5	%		463	0.3	%		(1,346	)		(74.4	)%
Income before income taxes		21,695	18.0	%		22,844	15.6	%		1,149			5.3	%
Provision for income taxes		8,511	7.1	%		9,001	6.2	%		490			5.8	%
Net income	$	13,184	10.9	%	$	13,843	9.5	%	$	659			5.0	%

	Three Months Ended
	December 31,				Change
	2006		2007		Amount			%
*Net revenues* (in thousands)
Aerospace	$	43,827	$	59,442	$	15,615			35.6	%
Chemical processing		38,778		40,805		2,027			5.2	%
Land-based gas turbines		20,076		25,505		5,429			27.0	%
Other markets		15,671		17,772		2,101			13.4	%
Total product revenue		118,352		143,524		25,172			21.3	%
Other revenue		2,111		2,553		443			21.0	%
Net revenues	$	120,463	$	146,077	$	25,614			21.3	%

*Pounds by markets* (in thousands)
Aerospace		1,780		2,154		374			21.0	%
Chemical processing		1,479		1,312		(167	)		(11.3	)%
Land-based gas turbines		1,144		1,060		(84	)		(7.3	)%
Other markets		1,053		681		(372	)		(35.3	)%
Total shipments		5,456		5,207		(249	)		(4.6	)%

*Average selling price per pound*
Aerospace	$	24.62	$	27.60	$	2.97			12.1	%
Chemical processing		26.22		31.10		4.88			18.6	%
Land-based gas turbines		17.55		24.06		6.51			37.1	%
Other markets		14.88		26.10		11.22			75.4	%
Total product (excluding other revenue)		21.69		27.56		5.87			21.1	%
Total average selling price (including other revenue)		22.08		28.05		5.97			27.0	%

Net Revenues. Net revenues increased by $25.6 million, or 21.3%, to $146.1 million in the first quarter of fiscal 2008 from $120.5 million in the same period of fiscal 2007. Volume for all products decreased by 4.6% to 5.2 million pounds in the first quarter of fiscal 2008 from 5.5 million pounds in the same period of fiscal 2007. Volume of high-performance alloys increased by 4.9% to 5.0 million pounds in the first quarter of fiscal 2008 from 4.8 million pounds in the same period of fiscal 2007. Volume of stainless steel wire decreased by 71.5% to 0.2 million pounds in the first quarter of fiscal 2008 from 0.7 million pounds in the same period of fiscal 2007 as a result of the Company’s strategy to focus on the production and sales of high-performance alloy wire. It is anticipated, however, that there will continue to be a recurring level of stainless steel wire produced and sold into certain specialty markets. The aggregate average selling price per pound increased by 27.0% to $28.05 per pound in the first quarter of fiscal 2008 from $22.08 per pound in the same period of fiscal 2007 because of changes in product mix (both form and alloy), an increased level of service center value-added business (which also reflects a higher average cost per pound), reduced project business and higher raw material prices. Although nickel prices were lower in the first quarter of fiscal 2008 than in the same period of fiscal 2007, prices rose for other raw materials which are significant in the manufacture of the Company's products, such as molybdenum, cobalt and chromium. As discussed above under "Overview", unfavorably impacting both volume and average selling price is increased competition, while planned and unplanned outages lowered production in the quarter. The Company’s consolidated backlog increased by $11.5 million, or 4.9%, to $247.8 million at December 31, 2007 from $236.3 million at September 30, 2007. Management continues to expect the demand for high-performance alloys to be positively driven by the continuation of favorable trends in the aerospace, chemical processing (including new construction and maintenance) and land-based gas turbine markets, subject to world economic conditions.

Sales to the aerospace market increased by 35.6% to $59.4 million in the first quarter of fiscal 2008 from $43.8 million in the same period of fiscal 2007, due to a 12.1% increase in the average selling price per pound combined with a 21.0% increase in volume. The increase in the average selling price per pound is due to changes in product mix and the effect of passing through higher raw material costs. Product mix reflects a higher percentage of specialty alloy products and forms with a higher average selling price when compared to the product mix sold in the same period of fiscal 2007. Volume has improved due to market demand as reflected in the continued strength in the build rate for new aircraft.

Sales to the chemical processing market increased by 5.2% to $40.8 million in the first quarter of fiscal 2008 from $38.8 million in the same period of fiscal 2007, due to an 18.6% increase in the average selling price per pound, partially offset by a 11.3% decrease in volume. The increase in the average selling price reflects a higher percentage of sales of specialty alloy product and the Company's ability to pass through higher raw material costs to customers. Volume has declined due to the project oriented nature of the market where the comparisons of volume shipped between quarters can be affected by timing, quantity and order size of the project business which also impacts average selling price per pound.

Sales to the land-based gas turbine market increased by 27.0% to $25.5 million for the first quarter of fiscal 2008 from $20.1 million in the same period of fiscal 2007, due to an increase of 37.1% in the average selling price per pound, partially offset by a 7.3% decrease in volume. The increase in the average selling price is due to the effect of a change in product mix (both form and alloy) and the Company's ability to pass through higher raw material costs to customers. Volume decreased as a result of lower billet volume (caused by ordering patterns) in the first quarter of fiscal 2008 compared to the same period of fiscal 2007. However, due to the relatively lower average selling price of billet, the decreased billet volume had a positive impact on average selling price.

Sales to other markets increased by 13.4% to $17.8 million in the first quarter of fiscal 2008 from $15.7 million in the same period of fiscal 2007, due to a 75.4% increase in average selling price per pound, which was partially offset by a 35.3% decrease in volume. The primary reason for the reduction in total volume was a decrease in the volume of stainless steel wire as a result of the Company’s strategy to reduce production of stainless steel wire and focus on the production and sale of high-performance alloy wire. Volume of stainless steel wire decreased by 71.5%, while volume of all forms of high-performance alloy sold to other markets increased 29.8% in the first quarter of fiscal 2008 compared to the same period of fiscal 2007. The increased volume of high-performance alloy in the “other markets” category is primarily due to the Company’s continuing effort to increase sales into markets such as flue gas desulphurization ("FGD") markets, which fall into this category and to expand the number of other markets. The increase in average selling price is primarily due to the higher percentage of high-performance alloys which have a higher average selling price compared to stainless steel. Also contributing to the increase in average selling price is the change in product mix (both form and alloy) and the Company's ability to pass through higher raw material costs to customers.

Cost of Sales. Cost of sales increased to $111.9 million, and 76.6% of net revenues, in the first quarter of fiscal 2008, compared to $86.8 million, and 72.1% of net revenues, in the same period of fiscal 2007. Cost of sales in the first quarter of fiscal 2008 grew as a result of increased volumes, increased raw materials costs, and product mix due to an increase in the production and sale of higher-cost alloy and forms. In addition, labor costs increased in the first quarter of fiscal 2008 compared to the same period in fiscal 2007 due to increased wage rates for union employees and increased fringe benefit costs. These increases in cost of sales were partially offset by a $3.7 million (2.5% of net revenue) pension curtailment gain, which was recorded due to an amendment to freeze future pension benefit accruals for non-union employees in the U.S. The increase in cost of sales as a percentage of net revenues (and the corresponding decline in gross profit as a percent of net revenue) can be attributed to the increased cost of sales, and increased competition (which lowered net revenue) and planned and unplanned equipment outages, as discussed above under "Overview".

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 6.1% to $10.0 million in the first quarter of fiscal 2008 from $9.4 million in the same period of fiscal 2007 due to general inflationary increases and higher business activity. Selling, general and administrative expenses as a percentage of net revenues decreased to 6.8% in the first quarter of fiscal 2008 compared to 7.8% for the same period of fiscal 2007 due primarily to increased level of revenues. It is anticipated that SG&A expense for all of fiscal 2008 will increase by approximately 6% compared to fiscal 2007.

Income Taxes. Income tax expense increased to $9.0 million in the first quarter of fiscal 2008 from $8.5 million in the same period of fiscal 2007 primarily due to higher pretax income. The effective tax rate for the first quarter of fiscal 2008 was 39.4% compared to 39.2% in the same period of fiscal 2007. The increase in the effective tax rate is primarily attributable to the impact of FIN 48 during the three months ended December 31, 2007 which increased the effective tax rate by 0.7 points partially offset by a higher Internal Revenue Code Section 199 manufacturer’s deduction (which provides a deduction for manufacturing activities in the U.S.) and higher foreign tax credits available. It is expected that the effective tax rate for fiscal 2008 will be approximately between 38.0% and 39.0%.

During the first quarter of fiscal 2008, the Company’s primary sources of cash were cash from operations, borrowings under its U.S. revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation (Central) (described below) and proceeds from the exercise of stock options (including related tax benefits). At December 31, 2007, Haynes had cash and cash equivalents of approximately $8.4 million compared to cash and cash equivalents of approximately $5.7 million at September 30, 2007.

Net cash provided by operating activities was $11.5 million in the first quarter of fiscal 2008 compared to $52.8 million in the same period of fiscal 2007. Several items contributed to the difference. First, cash provided by operating activities in the first quarter of fiscal 2007 included the proceeds of the $50.0 million up-front payment received from Titanium Metals Corporation as a result of the Conversion Services Agreement entered into in that quarter. Second, inventory balances (net of foreign currency adjustments) at December 31, 2007 were $17.7million higher than at September 30, 2007, as a result of both planned and unplanned outages and increased levels of inventory required to support an increased sales level in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007. Third, cash generated from a decrease in accounts receivable of $12.4 million. Net cash used in investing activities was $4.6 million in the first quarter of fiscal 2008 compared to $3.0 in the first quarter of fiscal 2007, primarily as a result of the ongoing capital expenditure program. Net cash used in financing activities included a reduction in borrowings on the revolving credit facility by $7.2 million as a result of cash generated from operations and proceeds from exercise of stock options (including excess tax benefits) of $3.3 million.

The Company’s sources of cash for fiscal 2008 are expected to consist primarily of cash generated from operations, cash on hand, and borrowings under both the U.S. revolving credit facility and the U.K. revolving credit facility (described below). The U.S. revolving credit facility and the U.K. revolving credit facility combine to provide borrowings in a maximum amount of $135.0 million, subject to a borrowing base formula and certain reserves. At December 31, 2007, the Company had cash and cash equivalents of approximately $8.4 million, an outstanding balance of $28.3 million on the U.S. revolving credit facility, an outstanding balance of zero on the U.K. revolving credit facility and access to a total of approximately $103.7 million under both facilities ($91.6 million in the United States and $12.1 million in the U.K.) in each case subject to borrowing base and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

U.S. revolving credit facility: The U.S. revolving credit facility provides for revolving loans in a maximum amount of $120.0 million. Borrowings under the U.S. revolving credit facility bear interest at the Company’s option at either Wachovia Bank, National Association’s “prime rate,” plus up to 1.5% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 3.0% per annum. As of December 31, 2007, the U.S. revolving credit facility had an outstanding balance of $28.3 million. During the first three months of fiscal 2008, the U.S. revolving credit facility bore interest at a weighted average interest rate of 6.85%. In addition, the Company must pay monthly in arrears a commitment fee of 0.375% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments, and processing. The Company is subject to certain covenants as to adjusted EBITDA and fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens, the sale of assets and the declaration of dividends and other distributions on the Company’s capital stock. As of December 31, 2007, the most recent required measurement date under the agreement, the Company was in compliance with these covenants. The U.S. revolving credit facility matures on April 12, 2009. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including equity interests in its U.S. subsidiaries, but excluding its four-high Steckel rolling mill and related assets, which are pledged to TIMET. The U.S. revolving credit facility is also secured by a pledge of 65% of the equity interests in each of the Company’s foreign subsidiaries.

U.K. revolving credit facility: The Company’s U.K. subsidiary, Haynes International, Ltd., or Haynes U.K., has entered into an agreement with a U.K.-based lender providing for a $15.0 million revolving credit facility. During the third quarter of fiscal 2007, the Company amended the U.K. revolving credit facility, which was set to mature April 2, 2007, to extend the maturity date to April 2, 2008, reduce the margin included in the interest rate from 3% per annum to 2.25% per annum, and to reduce the commitment fee on the daily undrawn and/or unutilized balance of the facility from 0.375% to 0.25%. The Company is currently evaluating options to renew or replace this facility upon its maturity with one of similar availability. Haynes U.K. is required to pay interest on loans made under the U.K. revolving credit facility in an amount equal to LIBOR (as calculated in accordance with the terms of the U.K. revolving credit facility), plus 2.25% per annum. As of December 31, 2007, the U.K. revolving credit facility had an outstanding balance of zero. Availability under the U.K. revolving credit facility is limited by eligible receivables, eligible inventory and certain reserves established by the lender in accordance with the terms of the U.K. revolving credit facility. Haynes U.K. must meet certain financial covenants relating to tangible net worth and cash flow. As of December 31, 2007, the most recent measurement date required under the U.K. revolving credit facility, Haynes U.K. was in compliance with these covenants. The U.K. revolving credit facility is collateralized by a pledge of substantially all of the assets of Haynes U.K.

Planned fiscal 2008 capital spending is targeted at $15.0 million, $4.7 million of which was spent in the first quarter. The main projects for fiscal 2008 include continuing the upgrade of the annealing line at the Kokomo, Indiana facility and the installation of a new pilger mill at the Arcadia, Louisiana facility. The upgrade on the annealing line is scheduled to be completed in two phases during fiscal 2008. The first phase during which the line was out of service, started in December 2007 and is now scheduled for completion during the first week of February, several days ahead of schedule. The second phase of the upgrade is scheduled to start in April 2008 and to finish in June 2008. The annealing line will again be out of service during this period. It is expected that, during this downtime, sheet production will decrease slightly from historical levels. In addition, it may be more difficult to recover quickly from unplanned outages during periods of planned downtime. Construction for the pilger mill installation is ongoing and it is anticipated that the mill will be operational by the end of May. Management believes that the completion of these capital projects and the related improvements in reliability and performance of the equipment will have a positive effect on profitability, working capital management and our ability to recover more quickly from unplanned outages.

The Company is also evaluating the desirability of possible additional capital expansion projects to capitalize on current market opportunities. Additionally, acceleration of future capital spending beyond what is currently planned may occur in order to accelerate the realization of the benefits such as improved working capital management, reduced manufacturing cost and increased capacity. Consideration will also be given to potential strategic acquisitions similar to the November 2004 Branford Acquisition which complemented the Company’s product line, reduced production costs and increased capacity.

	Payments Due by Period
Contractual Obligations⁽¹⁾⁽⁶⁾	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years

Debt obligations (including interest)⁽²⁾	$	32,299	$	3,415	$	28,884	$	—	$	—
Operating lease obligations		10,250		3,937		4,389		1,527		397
Raw material contracts		81,652		79,740		1,912		—		—
Mill supplies contracts		331		331		—		—		—
Capital projects		11,509		11,509		—		—		—
Pension plan⁽³⁾		41,538		9,788		21,490		10,260		—
Other postretirement benefits⁽⁴⁾		49,400		4,600		9,800		10,000		25,000
Non-compete obligations⁽⁵⁾		330		110		220		—		—
Total	$	227,309	$	113,430	$	66,695	$	21,787	$	25,397

(1)	Taxes are not included in the table. Payments for taxes in fiscal 2008 are expected to be approximately $36.0 million (excluding taxes related to the TIMET conversion services agreement which are expected to be paid in first quarter of fiscal 2009 of approximately $18.3 million).
(2)	Interest is calculated annually using the principal balance and current interest rates as of December 31, 2007.
(3)	The Company has a funding obligation to contribute an additional $40,310 to the domestic pension plan arising from the Pension Protection Act of 2006. These payments will be tax deductible. All benefit payments under the domestic pension plan will come from the plan and not the Company. The Company expects its U.K. subsidiary to contribute $1,228 in fiscal 2008 to the U.K. Pension Plan arising from an obligation in the U.K. debt agreement.
(4)	Represents expected post-retirement benefits only.
(5)	Pursuant to an escrow agreement, as of April 11, 2005, the Company established an escrow account to satisfy its obligation to make payments under a non-compete agreement entered into as part of the Branford Acquisition. This amount is reported as restricted cash.
(6)	We adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes, on October 1, 2007 which had an impact of increasing the non-current income taxes payable by $4,818. Taxes are not included in the table. It is not possible to determine in which future period the tax liability might be paid out.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date.” The statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is required to adopt SFAS 157 beginning on October 1, 2008. The Company is currently evaluating the impact, if any, of SFAS 157 on the Company's financial position, results of operations and cash flows.

In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS 159 on the consolidated financial statements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, retirement benefits and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company constantly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.

The Company has defined benefit pension and post-retirement plans covering most of its current and former employees. Significant elements in determining the assets or liabilities and related income or expense for these plans are the expected return on plans assets (if any), the discount rate used to value future payment streams, expected trends in health care costs, and other actuarial assumptions. Annually, the Company evaluates the significant assumptions to be used to value its pension and post-retirement plan assets and liabilities based on current market conditions and expectations of future costs. If actual results are less favorable than those projected by management, additional expense may be required in future periods. As a result of the 2004 Chapter 11 reorganization there were no changes to terms of these benefits.

The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. Assumptions and estimates with respect to estimated future cash flows used in the evaluation of long-lived assets impairment are subject to a high degree of judgment and complexity. The Company reviews goodwill for impairment annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Recoverability of goodwill is measured by a comparison of the carrying value to the fair value. If the carrying amount exceeds its fair value, an impairment charge is recognized to the extent that the implied fair value exceeds its carrying value. The implied fair value of goodwill is the residual fair value, if any, after allocating the fair value to all of the assets (recognized and unrecognized) and all of the liabilities. The fair value is generally determined using a market value approach. The Company reviews the trademarks for impairment annually or more frequently if events or circumstances indicate that the carrying amount of trademarks may be impaired. If the carrying amount exceeds the fair value (determined by calculating a fair value based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of impairment. The Company reviewed goodwill and trademarks for impairment as of August 31, 2007, and concluded no impairment adjustment was necessary. No events or circumstances have occurred that would indicate the carrying value of goodwill or trademarks may be impaired since its testing date.

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The original option plan was adopted in 2004 pursuant to the plan of reorganization and provides the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a new option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years for the date of grant and vest 33 1/3% per year over three years from the grant date.

On October 1, 2005, the Company adopted FASB Statement No. 123 (R), Share-Based Payment, a replacement of SFAS No. 123, Accounting for Stock-Based Compensation, and a rescission of APB Opinion No. 25, Accounting for Stock Issued to Employees. The statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement applies to all awards granted after the effective date and to modifications, repurchases or cancellations of existing awards. Additionally, under the modified prospective method of adoption, the Company recognizes compensation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards calculated under SFAS No. 123 and 148 for pro forma disclosures. The amount of compensation cost will be measured based upon the grant date fair value. The fair value of the option grants is estimated on the date of grant using the Black-Scholes option pricing model with assumptions on dividend yield, risk-free interest rate, expected volatilities, and expected lives of the options.

The Company accounts for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence. In addition to the reorganization of the Company, the results of operations have improved due to improved market conditions as evidenced by its increasing backlog. In its evaluation of the need for a valuation allowance, the Company assesses prudent and feasible tax planning strategies. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 addresses the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The impact of the adoption of FIN 48 on October 1, 2007, was to decrease retained earnings by $0.8 million, increase goodwill by $0.7 million, increase deferred tax assets by $3.3 million, and increase non-current income taxes payable by $4.8 million.

In conjunction with the adoption of FIN 48, we have classified uncertain tax positions as non-current income tax liabilities unless they are expected to be paid within 12 months of the balance sheet date. Income tax-related interest expense is reported as a component of income tax expense and the related liability is included in non-current income taxes payable. As of October 1, 2007, we recorded a liability of approximately $0.2 million for the payments of interest. The liability for the payment of interest did not materially change as of December 31, 2007.

Changes in interest rates affect the Company’s interest expense on variable rate debt. All of the Company’s outstanding debt was variable rate debt at December 31, 2007. A hypothetical 10% increase in the interest rate on variable rate debt would have resulted in additional interest expense of approximately $604,000 for the three months ended December 31, 2006 and $200,000 for the three months ended December 31, 2007. The Company has not entered into any derivative instruments to hedge the effects of changes in interest rates.

The foreign currency exchange risk exists primarily because the three foreign subsidiaries maintain receivables and payables denominated in currencies other than their functional currency or the U.S. dollar. Each foreign subsidiary manages its own foreign currency exchange risk. The Company's U.S. operations transact their foreign sales in U.S. dollars, thereby avoiding fluctuations in foreign exchange rates. Any U.S. dollar exposure aggregating more than $500,000 requires approval from the Company’s Chief Financial Officer, Vice President of Finance. Most of the currency contracts to buy U.S. dollars are with maturity dates less than six months. At December 31, 2007, the Company had no foreign currency exchange contracts outstanding.

Fluctuations in the price of nickel, our most significant raw material, subject the Company to commodity price risk. The Company manages its exposure to this market risk through internally established policies and procedures, including negotiating raw material escalators within product sales agreements, and continually monitoring and revising customer quote amounts to reflect the fluctuations in market prices for nickel. The Company does not use derivative instruments to manage this market risk. The Company monitors its underlying market risk exposure from a rapid change in nickel prices on an ongoing basis and believes that it can modify or adapt its strategies as necessary. The Company periodically purchases raw material forward with certain suppliers. However, there is a risk that we may not be able to successfully offset a rapid increase in the cost of raw material in the future as we have been able to in the past.

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2007 in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Number Assigned In Regulation S-K Item 601		Description of Exhibit
(3)	3.01	Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
	3.02	Amended and Restated Bylaws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
(4)	4.01	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
	4.02	Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 2.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
	4.03	Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 2.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
(10)	10.01	Summary of 2008 Management Incentive Plan (incorporated by reference to Item 5.02 of the Haynes International, Inc. Form 8-K filed December 6, 2007).
(31)	31.01*	Rule 13a-14(a)/15d-14(a) Certification.
	31.02*	Rule 13a-14(a)/15d-14(a) Certification.
(32)	32.01*	Section 1350 Certifications.

Delaware		06-1185400
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1020 West Park Avenue, Kokomo, Indiana		46904-9013
(Address of principal executive offices)		(Zip Code)

	Three Months Ended December 31,
	2006		2007
Net income	$	13,184	$	13,843
Other comprehensive income (loss), net of tax:
Pension curtailment		_		2,701
Foreign currency translation adjustment		1,373		(199	)
Comprehensive income	$	14,557	$	16,345

	September 30, 2007		December 31, 2007
Raw Materials	$	16,218	$	20,031
Work-in-process		162,266		163,251
Finished Goods		106,419		118,117
Other, net		1,399		2,655
	$	286,302	$	304,054

	Three Months Ended December 31,
	Pension Benefits						Other Benefits
	2006			2007			2006			2007
Service cost	$	990		$	706		$	427		$	361
Interest cost		2,306			2,688			1,319			1,115
Expected return		(2,457	)		(2,851	)		-			-
Amortizations		-			201			(1,221	)		(1,032	)
Curtailment gain		-			(3,659	)		-			-
Net periodic benefit cost	$	839		$	(2,915	)	$	525		$	444

September 30, 2007	Gross Amount		Accumulated Amortization			Carrying Amount
Goodwill	$	41,252	$	—		$	41,252
Patents		8,667		(4,712	)		3,955
Trademarks		3,800		—			3,800
Non-compete		840		(266	)		574
Other		465		(268	)		197
	$	55,024	$	(5,246	)	$	49,778

	(765) 456-6000
(Registrant's telephone number, including area code)

Estimate of Aggregate Amortization Expense:
Year Ended September 30,
2008 (remainder of fiscal year)	$	830
2009		816
2010		376
2011		363
2012		288

	Three Months Ended December 31,
(in thousands except share and per share data)	2006		2007
Numerator:
Net Income	$	13,184	$	13,843
Denominator:
Weighted average shares outstanding - Basic		10,000,000		11,821,842
Effect of dilutive stock options		398,994		144,058
Weighted average shares outstanding - Diluted		10,398,994		11,965,900

Basic net income per share	$	1.32	$	1.17
Diluted net income per share	$	1.27	$	1.16

Grant Date	Fair Value		Dividend Yield			Risk-free Interest Rate			Expected Volatility			Expected Life
March 30, 2007	$	19.06		0	%		4.54	%		30.00	%		3 years
September 1, 2007	$	21.42		0	%		4.16	%		30.00	%		3 years

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at September 30, 2007		503,763		$	30.52
Granted		0			-
Exercised		(98,073	)		12.80
Outstanding at December 31, 2007		405,690		$	34.80		7.74 Years	$	14,578,989
Vested or expected to vest		405,690		$	34.80		7.74 Years	$	14,578,989
Exercisable at December 31, 2007		206,355		$	13.11		6.69 Years	$	11,636,829