OVERVIEW

Please refer to the Overview found in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. This Overview sets forth key management objectives and key performance indicators used by management as well as key industry and economic data tracked by management.

In the third quarter of 2007, the Company realigned its reportable business segments by transferring the stock spring catalog and custom solutions business from Barnes Distribution to Barnes Industrial, whose engineered springs business manufactures many of the spring products sold by this business. All previously reported segment information was adjusted on a retrospective basis to reflect this change.

Second Quarter 2008 Highlights

In the second quarter of 2008, sales grew 6.5% to $382.9 million primarily as a result of organic sales growth at the Barnes Aerospace segment and the strengthening of foreign currencies against the U.S. dollar throughout the Company's geographically diverse businesses.

Operating income increased 21.6% to $49.0 million in the second quarter of 2008 as all three business segments reported higher profits.

RESULTS OF OPERATIONS

Sales



                            Three months ended June 30,                   Six months ended June 30,
(in millions)          2008        2007           Change            2008        2007           Change
Barnes Aerospace      $ 114.4     $  92.4     $ 22.0     23.8 %    $ 226.7     $ 183.6     $ 43.1     23.5 %
Barnes Distribution     135.8       137.5       (1.7 )   (1.3 )%     276.7       277.3       (0.6 )   (0.2 )%
Barnes Industrial       132.9       130.0        2.9      2.3 %      268.5       259.9        8.6      3.3 %
Intersegment sales       (0.2 )      (0.4 )      0.2     36.8 %       (0.5 )      (0.6 )      0.1     14.8 %

Total                 $ 382.9     $ 359.5     $ 23.4      6.5 %    $ 771.4     $ 720.2     $ 51.2      7.1 %

The Company reported net sales of $382.9 million in the second quarter of 2008, an increase of $23.4 million or 6.5%, over the second quarter of 2007. The sales increase reflected $13.0 million of organic sales growth as a result of a $22.0 million increase at Barnes Aerospace, offset in part by lower organic sales at Barnes Distribution and Barnes Industrial. Foreign currency translation favorably impacted sales by $13.8 million in the second quarter of 2008 as foreign currencies strengthened against the U.S. dollar, primarily in Europe and Canada. Additionally, the sale of Spectrum Plastics in the first quarter of 2008 resulted in a reduction in sales of $3.4 million as compared to the 2007 period.

Sales for the six-month period ended June 30, 2008 were $771.4 million, an increase of $51.2 million, or 7.1%, over the six-month period ended June 30, 2007. The sales increase reflected $28.1 million of organic sales growth as a result of a $43.1 million increase at Barnes Aerospace, offset in part by lower organic sales at Barnes Distribution and Barnes Industrial. Foreign currency translation favorably impacted sales by $28.9 million in 2008 as foreign currencies strengthened against the U.S. dollar, primarily in Europe and Canada. Additionally, the sale of Spectrum Plastics resulted in a reduction in sales of $5.8 million as compared to the 2007 period.

Expenses and Operating Income



                                              Three months ended June 30,                  Six months ended June 30,
(in millions)                            2008        2007           Change            2008        2007          Change
Cost of sales                           $ 234.5     $ 219.8     $ 14.7      6.7 %    $ 474.4     $ 440.7     $ 33.7    7.6 %
% of sales                                 61.3 %      61.1 %                           61.5 %      61.2 %

Gross profit                              148.3       139.7        8.6      6.2 %      297.1       279.4       17.7    6.3 %
% of sales                                 38.7 %      38.9 %                           38.5 %      38.8 %

Selling and administrative expenses        99.3        99.4       (0.1 )   (0.1 )%     198.2       196.0        2.2    1.1 %
% of sales                                 25.9 %      27.7 %                           25.7 %      27.2 %

Operating income                           49.0        40.3        8.7     21.6 %       98.9        83.5       15.4   18.5 %
% of sales                                 12.8 %      11.2 %                           12.8 %      11.6 %

Operating income was $49.0 million in the second quarter of 2008, an increase of 21.6% over the same period in 2007. For the year-to-date period, operating income improved to $98.9 million, an 18.5% increase. Operating income margin for the 2008 second quarter improved to 12.8% from 11.2% a year ago and on a year-to-date basis to 12.8% in 2008 from 11.6% in 2007. All three business segments contributed to the increase in operating income and operating margin in both periods with Barnes Aerospace being the primary contributor, as the result of its higher profitable sales.

Cost of sales increased 6.7% in the second quarter of 2008 compared with the same period in 2007, the result of higher sales levels. The increase in cost of sales was slightly higher than the 6.5% increase in sales and resulted in a 0.2 percentage point reduction in gross profit margin to 38.7%. Gross profit margins decreased as a result of the shift in the overall sales mix from the higher gross margin distribution business to the lower gross margin aerospace manufacturing business. On a year-to-date basis, the 7.6% increase in cost of sales in 2008 was slightly higher than the 7.1% increase in sales which resulted in a reduction in the gross margin of 0.3 percentage points to 38.5%.

Selling and administrative expenses remained flat in the second quarter of 2008 compared to the same period in 2007. As a percentage of sales, selling and administrative expenses decreased from 27.7% in the second quarter of 2007 to 25.9% in the second quarter of 2008 and from 27.2% in the first half of 2007 to 25.7% in the first half of 2008 primarily as a result of a shift in the sales mix to the manufacturing businesses, which have lower selling and administrative expenses, as well as the impact of expense reduction initiatives and lower selling expenses at Barnes Distribution. These improvements were offset by the higher expenses from the increased sales volumes as well as approximately $3.5 million comprised of severance costs incurred by each of the business segments including costs associated with the second quarter 2008 expense reduction actions, and costs associated with the retirement of the former Senior Vice President, Finance and Chief Financial Officer.

Other Income/Expense

Other expenses, net of other income, increased $0.3 million in the second quarter of 2008 compared to the same period of 2007. Interest expense decreased $1.4 million in the second quarter of 2008 as a result of lower interest rates. For the six-month period ended June 30, 2008, other expenses, net of other income, included the $1.2 million loss on the sale of Spectrum Plastics.

Income Taxes

The Company's effective tax rate for the first half of 2008 was 21.4%, which resulted in an effective tax rate for the second quarter of 2008 of 20.6%, compared with 19.9% in the first half of 2007 and 20.3% for the full year 2007. The increase in the effective tax rate from the full year 2007 rate was primarily driven by the projected shift in the mix of income to higher taxing jurisdictions.

In connection with an Internal Revenue Service audit for the tax years 2000 through 2002, the IRS proposed adjustments to these tax years of approximately $16.5 million, plus a potential penalty of 20% of the tax assessment plus interest. The adjustment relates to the federal taxation of foreign income of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments and is currently engaged with the Appeals Office of the IRS. The Company believes its tax position on the issues raised by the IRS is correct and, therefore, the Company will continue to vigorously defend its position. The Company believes it will prevail on this issue. Any additional impact on the Company's liability for income taxes cannot presently be determined, but the Company believes it is adequately provided for and the outcome will not have a material impact on its results of operations, financial position or cash flows.

Net Income and Net Income per Share



                                               Three months ended June 30,               Six months ended June 30,
(in millions, except per share data)        2008       2007         Change             2008       2007       Change
Net income                                $   34.6    $  28.4   $  6.2     21.9 %    $   68.0    $ 56.0   $ 12.0   21.4 %

Net income per share:
Basic                                     $    .64    $   .53   $  .11     20.8 %    $   1.26    $ 1.06   $  .20   18.9 %
Diluted                                        .60        .49      .11     22.4 %        1.20       .99      .21   21.2 %

Average common shares outstanding:
Basic                                         54.3       53.1      1.2      2.2 %        54.2      52.9      1.3    2.6 %
Diluted                                       57.4       57.7     (0.3 )   (0.7 )%       56.7      56.5      0.2    0.5 %

Basic and diluted net income per share increased 20.8% and 22.4%, respectively, in the second quarter of 2008 as compared to 2007. The increase in basic shares outstanding reduced the percentage increase in net income per share as compared to the percentage increase in net income. Basic average shares outstanding increased primarily as a result of shares issued for employee stock plans. Diluted average shares outstanding decreased primarily as a result of the decrease in the dilutive effect of potentially issuable shares under the employee stock plans and the convertible notes offset in part by the increase in basic average shares outstanding.

Financial Performance by Business Segment

Barnes Aerospace



                           Three months ended June 30,                 Six months ended June 30,
   (in millions)        2008         2007         Change          2008        2007          Change
   Sales              $   114.4     $ 92.4     $ 22.0   23.8 %   $ 226.7     $ 183.6     $ 43.1   23.5 %
   Operating profit        23.9       18.6        5.3   28.5 %      46.2        35.4       10.8   30.4 %
   Operating margin        20.9 %     20.1 %                        20.4 %      19.3 %

Barnes Aerospace achieved sales of $114.4 million in the second quarter of 2008, an increase of 23.8% over the second quarter of 2007, and $226.7 million for the first half of 2008, a 23.5% increase over the first half of 2007. The second quarter and year-to-date sales increases reflect growth of 29.5% and 27.7%, respectively, in aftermarket sales due primarily to growth in aftermarket RSP sales and to a lesser extent increased maintenance, overhaul and repair sales ("MRO"). Manufacturing sales grew 21.0% and 21.5% in the second quarter and year-to-date periods, respectively, on the strength of the manufacturing sales order backlog. The order backlog at Barnes Aerospace at the end of the second quarter of 2008 was $424.4 million, a 10.2% decrease from the record high $472.6 million at December 31, 2007 due in part to lower orders combined with order deferments primarily related to delays in the delivery schedule on a major engine program. Approximately 61% of the backlog at June 30, 2008 is expected to be shipped within the next 12 months.

Barnes Aerospace's second quarter 2008 operating profit was $23.9 million, an increase of 28.5% from the comparable 2007 period. For the year-to-date period, operating profit in 2008 increased 30.4% to $46.2 million from the 2007 period. Operating profit for the quarter and year-to-date periods was positively impacted by the profit contribution from the higher margin aftermarket RSPs as well as the higher sales volume in both the MRO and manufacturing businesses. This was partially offset by higher costs in the MRO business as it continues to drive improvements in the manufacturing of a spare parts product line introduced in the second half of 2007.

Outlook: Sales in the commercial aerospace manufacturing business are expected to grow based on the strong commercial engine order backlog and Barnes Aerospace's participation in certain strategic engine programs. However, the rate of manufacturing sales growth is expected to moderate in the second half of 2008 in part as a result of the delay in the delivery schedule on certain engine programs which Barnes Aerospace participates in. Management expects aftermarket sales growth above industry levels based on the strength of the MRO market reflecting industry fundamentals and long-term maintenance and repair contracts, and in the spare parts manufacturing business primarily as a result of RSP-driven demand. Sales growth in the aftermarket business may be adversely impacted by the industry dynamics related to higher fuel costs and airline mergers, which have resulted in announced plans to retire older, less fuel-efficient aircraft. However, the aircraft retirements are not expected to significantly impact this business as Barnes Aerospace's aftermarket business has focused on the newer generation, more fuel-efficient airplane and engine platforms. Management is concentrating on meeting increased demand by adding capacity in strategic locations both domestically and internationally, and through operational improvements. Operating profits should continue to be positively impacted by the mix of contributions from sales volume increases in the aftermarket and manufacturing businesses. As part of the aftermarket RSP programs, the management fees payable to its customer increase generally in the fourth or later years of each program. These and other similar fees are deducted from sales and temper aftermarket RSP sales growth and operating margins.

Barnes Distribution



                           Three months ended June 30,                   Six months ended June 30,
  (in millions)       2008        2007           Change            2008        2007           Change
  Sales              $ 135.8     $ 137.5     $ (1.7 )   (1.3 )%   $ 276.7     $ 277.3     $ (0.6 )   (0.2 )%
  Operating profit       5.4         3.7        1.7     48.9 %       12.4         9.9        2.5     25.5 %
  Operating margin       4.0 %       2.7 %                            4.5 %       3.6 %

Barnes Distribution recorded sales of $135.8 million in the second quarter of 2008, a 1.3% decrease from the second quarter of 2007, and $276.7 million in the first half of 2008, a 0.2% decrease from the first half of 2007. The decreases in the second quarter of 2008 and the first half of 2008 were primarily a result of a reduction in organic sales of $7.1 million and $12.3 million, respectively. Lower organic sales were due to softness in certain markets served by Barnes Distribution in North America, primarily in the transportation-related and certain manufacturing markets, and the impact of initiatives which created sales force disruption in the United States and the United Kingdom. These decreases in sales were offset by the favorable impact of foreign currency translation of $5.4 million and $11.7 million in the second quarter of 2008 and the first half of 2008, respectively, as foreign currencies strengthened against the U.S. dollar, primarily in Europe.

Barnes Distribution's operating profit for the second quarter of 2008 increased 48.9% to $5.4 million and operating profit in the first half of 2008 increased 25.5% to $12.4 million, primarily as a result of operational and productivity improvements in the North American business realized from Project Catalyst actions focused on improving the profitability of the business. Additionally, costs associated with Project Catalyst were approximately $2.0 million in the second quarter of 2007. Offsetting these improvements were the underperformance of the European business, reduced profitability from lower sales levels, and a severance charge of approximately $1.5 million in the U.S., Canada and the United Kingdom to align Barnes Distribution's cost base with current sales levels.

Outlook: Management continues to focus on growing profitable organic sales and operating profits within Barnes Distribution. Organic sales may be negatively impacted by challenging global economic conditions and are largely dependent upon the retention of its customers and sales force worldwide. Profitable growth in North America is expected primarily as a result of targeted market segmentation initiatives, the recent cost base alignment actions and the change in sales force compensation which focuses on market pricing, customer retention and penetration, and adding new customers in core markets. Profitable growth in Europe is dependent on continued improvements in operational performance and realization of the benefits of the recent cost base alignment actions coupled with sales growth. Operating profit in the second half of 2008 is expected to be positively impacted by the benefits from the Project Catalyst initiatives undertaken in 2007 including the actions focused on sales and margin improvement, expanded global product sourcing, European market development, and logistics and network optimization. Costs associated with additional productivity and profitability initiatives may negatively impact near-term operating profits. Management continues to actively monitor its supplier price increases in an effort to share these increases with its customers.

Barnes Industrial



                            Three months ended June 30,                Six months ended June 30,
    (in millions)        2008          2007         Change          2008        2007         Change
    Sales              $   132.9      $ 130.0     $ 2.9   2.3 %   $  268.5     $ 259.9     $ 8.6   3.3 %
    Operating profit        19.7         18.1       1.6   8.9 %       40.3        38.2       2.1   5.5 %
    Operating margin        14.8 %       13.9 %                       15.0 %      14.7 %

Sales at Barnes Industrial for the second quarter of 2008 were $132.9 million, a 2.3% increase from the second quarter of 2007, and $268.5 million for the first half of 2008, a 3.3% increase from 2007. Organic sales were down slightly in the 2008 periods as sales growth in the specialty businesses was offset by declines in the primarily North American-based engineered springs businesses. The declines in North America resulted from weaker economic conditions as compared to 2007, particularly in the North American transportation market. Additionally, the sale of Spectrum Plastics resulted in a reduction in sales of $3.4 million and $5.8 million for the second quarter of 2008 and first half of 2008, respectively. These decreases were offset by the favorable impact on sales of foreign currency translation of approximately $8.4 million in the second quarter of 2008 and $17.2 million in the first half of 2008 as foreign currencies strengthened against the U.S. Dollar, primarily in Europe.

Barnes Industrial's second quarter 2008 operating profit was $19.7 million, an 8.9% improvement from the comparable 2007 period. The higher operating profit resulted primarily from higher sales levels in the higher margin specialty businesses, productivity and process improvements, and pricing initiatives. These increases were offset in part by the impact on operating profit of the lower sales in the engineered springs businesses. On a year-to-date basis, operating profit increased 5.5% to $40.3 million as a result of similar factors.

Outlook: Management continues to be focused on profitable organic sales growth in 2008 and leveraging the benefits of the diversified industrial end markets in which Barnes Industrial has a market presence and competitive advantage, primarily in the U.S., Europe and Asia. However, growth in the global economy is uncertain given current economic conditions. In particular, management expects sales in certain North American markets, mainly those served by its engineered springs businesses, to continue to be soft. Additionally, the inflationary pressure on commodity prices is increasing, which could negatively impact profitability in the near-term. Management continues to focus on improving profitability through organic sales growth, pricing initiatives, cost structure optimization, and productivity and process improvement actions, though the costs of such initiatives may negatively impact near-term operating profits.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses the Company's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Of particular importance in the management of liquidity are cash flows generated from operating activities, capital expenditure levels, dividends, capital stock transactions, effective utilization of surplus cash positions and adequate lines of credit.

The Company's ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths. Management continues to focus on cash flow and working capital management, and anticipates that operating activities in 2008 will generate significant cash. This operating cash flow may be supplemented with external borrowings to meet near-term organic business expansion and the Company's current financial commitments. Any future acquisitions are expected to be financed through internal cash, borrowings and equity, or a combination thereof.

The Company regularly reviews its capital commitments and needs and the availability of financing through institutional sources and capital markets. The Company expects to pursue opportunities to raise additional capital from time to time as it determines to be advisable based upon its capital needs, financing capabilities and market conditions.

Cash Flow



                                             Six months ended
                                                 June 30,
             (in millions)                   2008         2007       Change
             Operating activities          $    40.2     $  44.6     $  (4.4 )
             Investing activities              (57.4 )     (61.6 )       4.2
             Financing activities               20.9         5.0        15.9
             Exchange rate effect                0.8        (1.0 )       1.8

             Increase (decrease) in cash   $     4.5     $ (13.0 )   $  17.5

Operating activities provided $40.2 million in cash in the first half of 2008 compared to $44.6 million in the first half of 2007. Compared to the 2007 period, operating cash flows in the 2008 period were positively impacted by improved operating performance, offset by investments in working capital. At Barnes Aerospace, this includes payments for the investment in inventory related to a spare parts product line introduced in the second half of 2007.

Cash used by investing activities in the first half of 2008 was $57.4 million compared to $61.6 million in the comparable 2007 period and includes participation fee payments related to the aftermarket RSPs of $35.8 million in the 2008 period and $36.3 million in the 2007 period. As of June 30, 2008, the Company had a $21.8 million liability under the RSPs which is included in accounts payable. Capital expenditures in the first half of 2008 were $26.1 million compared to $22.9 million in 2007. The Company expects capital spending in 2008 to be $45.0 million to $50.0 million. Additionally, investing activities in the first half of 2008 include the net proceeds of $5.1 million from the sale of Spectrum Plastics.

Cash from financing activities in the first half of 2008 included a net increase in borrowings of $33.6 million compared to an increase of $13.8 million in the comparable 2007 period. Proceeds in both periods were used to finance working capital requirements, capital expenditures, revenue sharing program payments and dividends. The 2007 net increase in borrowings includes the sale of $100.0 million of the 3.375% Convertible Notes, the proceeds of which were used to pay down borrowings under the revolving credit facility. Total cash used to pay dividends increased in the first half of 2008 by $2.2 million over the comparable 2007 period, to $16.3 million due to an increase in the number of shares outstanding and an increase in the quarterly cash dividend per share to $0.14 per share in the second quarter of 2007 and $0.16 per share in the second quarter of 2008. Other financing activities in 2007 included $3.6 million of fees related to the convertible debt issuance.

At June 30, 2008, the Company held $25.1 million in cash and cash equivalents, the majority of which are held outside of the U.S. In general, the repatriation of cash to the U.S. would have adverse tax consequences and the balances remain outside of the U.S. to fund future international growth investments, including capital expenditures, acquisitions and aftermarket RSP participation fees.

The Company maintains borrowing facilities with banks to supplement internal cash generation. At June 30, 2008, $189.7 million was borrowed at an interest rate of 2.95% under the Company's $400.0 million borrowing facility which matures in September 2012. Additionally, at June 30, 2008, the Company had $8.0 million of borrowings under uncommitted short-term bank credit lines at an interest rate of 4.63%. At June 30, 2008, the Company's total borrowings are comprised of approximately 57% fixed rate debt and approximately 43% variable rate debt. The interest payments on approximately 50% of the variable rate interest debt have been converted into payments of fixed interest plus the borrowing spread under the terms of the interest rate swap agreements described in Note 7 of the Notes to the Consolidated Financial Statements.

Borrowing capacity is limited by various debt covenants in the Company's debt agreements. The most restrictive borrowing covenant requires the Company to maintain a ratio of Consolidated Total Debt to EBITDA, as defined in the amended and restated revolving credit agreement, of not more than 4.00 times at June 30, 2008. The ratio requirement will decrease to 3.75 times for any fiscal quarter ending after September 30, 2009. The actual ratio at June 30, 2008 was 2.13 times and would have allowed additional borrowings of $409.3 million.

The Company believes its credit facilities, coupled with cash generated from operations, are adequate for its anticipated near-term requirements.

OTHER MATTERS

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and . . .