UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                    to


Commission file number 001-33288

HAYNES INTERNATIONAL, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

06-1185400(I.R.S. Employer Identification No.)1020 West Park Avenue, Kokomo, Indiana(Address of principal executive offices)

46904-9013(Zip Code)


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

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

Title of each class

Name of each exchange on which registeredCommon Stock, par value $.001 per share

NASDAQ Global Market


Securities
registered pursuant to section 12(g) of the Act:None.

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Acto Yes        ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Acto Yes        ý No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes
ý No

As of March 31, 2008, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $653,588,421
based on the closing sale price as reported on the NASDAQ Global Market. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court.  ý Yes        o No

11,984,623 shares of Haynes International, Inc. common stock were outstanding as of November 21, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held February 23, 2009 have been incorporated by reference into Part III of this report.



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TABLE OF CONTENTS

Page No.Part IItem 1.

Business


3Item 1A.

Risk Factors


19Item 1B.

Unresolved Staff Comments


25Item 2.

Properties


25Item 3.

Legal Proceedings


26Item 4.

Submission of Matters to a Vote of Security Holders


27Part IIItem 5.

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


28Item 6.

Selected Financial Data


30Item 7.

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


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


54Item 8.

Financial Statements and Supplementary Data


55Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


94Item 9A.

Controls and Procedures


94Item 9B.

Other Information


94Part IIIItem 10.

Directors, Executive Officers and Corporate Governance


95Item 11.

Executive Compensation


95Item 12.

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


95Item 13.

Certain Relationships and Related Transactions and Director Independence


95Item 14.

Principal Accounting Fees and Services


95Part IVItem 15.

Exhibits, Financial Statement Schedules


96Signatures


97Index to Exhibits


99


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This Annual Report on Form 10-K contains statements that constitute "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those statements appear in a number of places in this
Report 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, strategic
plans; trends in the industries that consume the Company's products; global economic and political uncertainties; production levels at the Company's Kokomo, Indiana facility; commercialization of the
Company's production capacity; and the Company's ability to develop new products. 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 Company's control.

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 are based are reasonable, any of those assumptions could prove to be inaccurate. 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 1.A to this Report, may affect the accuracy of forward-looking
statements.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

Part I

Item 1.    Business

Overview

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 Company's products consist of high temperature resistant alloys, or HTA
products, and corrosion resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace
market, gas turbine engines used for power generation and waste incineration, and industrial heating equipment. CRA products are used in applications that require resistance to very corrosive media
found in chemical processing, power plant emissions control and hazardous waste treatment. Management believes Haynes is one of four principal producers of high-performance alloy products
in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 63% of net revenues in fiscal 2008. The Company also produces its products as seamless and welded
tubulars, and in slab, 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 wire products. The Company's products are sold primarily through its direct sales organization, which includes 12 service
and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated. In fiscal 2008, approximately 84% of the Company's net revenues was generated by its
direct sales organization, and the remaining 16% was generated by a network of independent distributors and sales agents who supplement its direct sales efforts primarily in the United States, Europe
and Asia, some of whom have been associated with the Company for over 30 years.

3

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Available Information

The address of Company's website is www.haynesintl.com. The Company posts its reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 since May 7, 2007 on its website. For all filings made prior to that date, the Company's website includes a link to the
website of the U.S. Securities and Exchange Commission, where such filings are available. Information contained or referenced on the Company's website is not incorporated by reference and does not
form a part of this Form 10-K.

Significant Events of Fiscal 2008

The information under the caption "Significant Events of Fiscal 2008" in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations contained elsewhere in this Form 10-K is incorporated herein by reference.

Business Strategy

The Company's goal is to grow its business and increase revenues and profitability while continuing to be its customers' provider of
choice for high-performance alloys. The Company intends to penetrate and capitalize on growth in its end markets by taking advantage of its diverse product offerings and service
capabilities and to continue to increase capacity and lower costs through strategic investment in manufacturing facilities. In order to accomplish these goals, the Company intends to pursue the
following:



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Company History

The Company began operations in 1912 as the Haynes Stellite Works, which was purchased by Union Carbide and Carbon Corporation in 1920.
In 1972, the operations were sold to Cabot Corporation. In 1987, Haynes was incorporated as a stand-alone corporation in Delaware, and in 1989 Haynes was sold by Cabot Corporation to Morgan Lewis
Githens & Ahn Inc., a private investment firm. The Blackstone Group, a private investment firm, purchased Haynes from Morgan Lewis Githens & Ahn Inc. in 1997. Haynes
encountered liquidity difficulties throughout fiscal 2003 and the first half of fiscal 2004. Due to concurrent downcycles in its largest markets, and rising raw material and energy costs, the Company
could not generate sufficient cash to both satisfy its debt service obligations and fund operations. On March 29, 2004, Haynes and its U.S. subsidiaries and affiliates as of that date filed
voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. From March 29, 2004 through August 31, 2004, Haynes continued to operate as
debtor-in-possession subject to the supervision of the bankruptcy court. On August 31, 2004, Haynes emerged from bankruptcy pursuant to a court-approved plan of
reorganization. Prior to the reorganization, all of the outstanding shares of its common stock were owned by Haynes Holdings, Inc., a Delaware corporation. In connection with the
reorganization, Haynes Holdings, Inc. and Haynes International, Inc. were merged, and Haynes was the surviving corporation of the merger. Pursuant to the plan of reorganization, all of
the shares of the Company's common stock were cancelled, and 10.0 million new shares of the Company's common stock, were issued in connection with its emergence from bankruptcy. Under the terms
of the plan of reorganization, each former holder of the Company's 115/8% senior notes due September 1, 2004 received its pro rata share of 9.6 million shares of the
Company's new common stock in full satisfaction of all of the Company's obligations under the senior notes. Additionally, each former holder of the shares of common stock of Haynes
Holdings, Inc. received its pro rata share of the remaining 400,000 shares of the Company's new common stock in exchange for its outstanding shares of Haynes Holdings, Inc. common
stock. The plan of reorganization also provided for the payment or satisfaction of all secured and unsecured claims against Haynes, except as reinstated under

5

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the
plan of reorganization and except with respect to the 115/8% senior notes due September 1, 2004, which were exchanged for equity as described above.

In
the first quarter of fiscal 2005, Haynes acquired certain assets of the Branford Wire Company (the "Branford Wire Company Acquisition"), including a facility that manufactured both
stainless steel wire and high-performance alloy wire. The Company continues to produce stainless steel wire at the Haynes Wire Company, in Mountain Home, North Carolina.

On
March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock. Simultaneously the Company listed its
common stock on The NASDAQ Global Market.

Products

The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and
high-performance nickel-and cobalt-based alloys. The Company believes that the high-performance alloy sector represents less than 10% of the total alloy market.
Except for its stainless steel wire products, the Company competes exclusively in the high-performance nickel- and cobalt-based alloy sectors, which includes HTA products and CRA products.
In fiscal 2006, 2007 and 2008, HTA products accounted for approximately 68%, 69% and 73% of the Company's net revenues (excluding stainless steel wire), respectively; and sales of the Company's CRA
products accounted for approximately 32%, 31% and 27% of the Company's net revenues (excluding stainless steel wire), respectively. These percentages are based on data which include revenue associated
with sales by the Company to its foreign subsidiaries, but exclude revenue associated with sales by foreign subsidiaries to their customers. Management believes, however, that the effect of including
revenue data associated with sales by its foreign subsidiaries would not materially change the percentages presented in this section.

High Temperature Resistant Alloys.HTA products are used primarily in manufacturing components for the hot sections of gas turbine engines. Stringent safety and
performance standards in the aerospace industry result in development lead times typically as long as eight to ten years in the introduction of new aerospace-related market applications for HTA
products. However, once a particular new alloy is shown to possess the properties required for a specific application in the aerospace market, it tends to remain in use for extended periods. HTA
products are also used in gas turbine engines produced for use in applications such as naval and commercial vessels, electric power generators, power sources for offshore drilling platforms, gas
pipeline booster stations and emergency standby power stations. The following table sets

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forth
information with respect to the Company's significant high temperature resistant alloys, applications and features (new HTA development is discussed below under "Patents and Trademarks"):

Alloy and Year Introduced

End Markets and Applications(1)

FeaturesHAYNES HR-160 Alloy (1990)(2)

Waste incineration/CPI-boiler tube shields

Good resistance to sulfidation at high temperaturesHAYNES 242 Alloy (1990)(2)

Aero-seal rings

High strength, low expansion and good fabricabilityHAYNES HR-120 Alloy (1990)(2)

LBGT-cooling shrouds

Good strength-to-cost ratio as compared to competing alloysHAYNES 230 Alloy (1984)(2)

Aero/LBGT-ducting, combustors

Good combination of strength, stability, oxidation resistance and fabricabilityHAYNES 214 Alloy (1981)(2)

Aero-honeycomb seals

Good combination of oxidation resistance and fabricating among nickel-based alloysHAYNES 188 Alloy (1968)(2)

Aero-burner cans, after-burner components

High strength, oxidation resistant cobalt-base alloysHAYNES 625 Alloy (1964)

Aero/CPI-ducting, tanks, vessels, weld overlays

Good fabricability and general corrosion resistanceHAYNES 263 Alloy (1960)

Aero/LBGT-components for gas turbine hot gas exhaust pan

Good ductility and high strength at temperatures up to 1600°FHAYNES 718 Alloy (1955)

Aero-ducting, vanes, nozzles

Weldable high strength alloy with good fabricabilityHASTELLOY X Alloy (1954)

Aero/LBGT-burner cans, transition ducts

Good high temperature strength at relatively low costHAYNES Ti 3A1-2.5 Alloy (1950)

Aero-aircraft hydraulic and fuel systems components

Light weight, high strength titanium-based alloyHAYNES 25 Alloy (1950)(2)

Aero-gas turbine parts, bearings, and various industrial applications

Excellent strength, good oxidation, resistance to 1800°F


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Corrosion Resistant Alloys.CRA products are used in a variety of applications, such as chemical processing, power plant emissions control, hazardous waste
treatment, sour gas production and pharmaceutical vessels. Historically, the chemical processing market has represented the largest end-user sector for CRA products. Due to maintenance,
safety and environmental considerations, the Company believes this market continues to represent an area of potential long-term growth. Unlike aerospace applications within the HTA product
market, the development of new market applications for CRA products generally does not require long lead times. The following table sets forth information with respect

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to
certain of the Company's significant corrosion resistant alloys, applications and features (new CRA development is discussed below under "Patents and Trademarks"):

Alloy and Year Introduced

End Markets and Applications(1)

FeaturesHASTELLOY Alloy C-2000 (1995)(2)

CPI-tanks, mixers, piping

Versatile alloy with good resistance to uniform corrosionHASTELLOY Alloy B-3 (1994)(2)

CPI-acetic acid plants

Better fabrication characteristics compared to other nickel-molybdenum alloysHASTELLOY Alloy D-205 (1993)(2)

CPI-plate heat exchangers

Corrosion resistance to hot sulfuric acidULTIMET Alloy (1990)(2)

CPI-pumps, valves

Wear and corrosion resistant nickel-based alloyHASTELLOY Alloy G-50 (1989)

Oil and gas-sour gas tubulars

Good resistance to down hole corrosive environmentsHASTELLOY Alloy C-22 (1985)

CPI/FGD-tanks, mixers, piping

Resistance to localized corrosion and pittingHASTELLOY Alloy G-30 (1985)(2)

CPI-tanks, mixers, piping

Lower cost alloy with good corrosion resistance in phosphoric acidHASTELLOY Alloy B-2 (1974)

CPI-acetic acid

Resistance to hydrochloric acid and other reducing acidsHASTELLOY Alloy C-4 (1973)

CPI-tanks, mixers, piping

Good thermal stabilityHASTELLOY Alloy C-276 (1968)

CPI/FGD/oil land gas-tanks, mixers, piping

Broad resistance to many environments


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Patents and Trademarks

The Company currently maintains a total of approximately 17 U.S. patents and approximately 150 foreign counterpart patents and
applications targeted at countries with significant or potential markets for the patented products and continues to develop, manufacture and test high-performance nickel- and cobalt-based
alloys. Since fiscal 2000, the Company's technical programs have yielded six new proprietary alloys, four of which are currently commercially available and two of which are being scaled-up
to be brought to market. Of the alloys which are being commercialized, two alloys saw advancement in the process during fiscal 2008. First, HAYNES® 282® alloy, which
management believes will have significant commercial potential for the Company in the long-term, is the subject of a patent application filed in fiscal 2004. HAYNES 282 alloy has
excellent formability, fabricability and forgeability. The commercial launch of HAYNES 282 alloy occurred in October 2005 and, since that time, there have been approximately 60 customer
tests and evaluations of this product for the hot sections of gas turbines in the aerospace and land-based gas turbine markets, as well as for automotive and other
high-temperature applications. The Company will continue to actively promote HAYNES 282 alloy through customer engineering visits and technical presentations and papers. In
addition, commercialization of HASTELLOY® C-22HS® alloy also continued in fiscal 2008. The Company has been providing customers with samples of this alloy
and making technical presentations since 2004. Testing and evaluation of the alloy is ongoing with special emphasis on applications for the oil and gas market. It is important to note, however, that
both of these alloys are in the early stages of commercialization and pounds sold to date are very low compared to the Company's other proprietary alloys; furthermore, pounds in the next three to five
years are expected to remain at low levels. The Company believes that the alloys (particularly HAYNES 282 alloy) are significantly further along the commercialization curve when compared to
historical trends for other proprietary alloys introduced by the

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Company.
In addition to HAYNES 282 alloy and HASTELLOY C-22HS alloy, commercialization is also ongoing for both HASTELLOY® G-35®
and HASTELLOY® HYBRID-BC1® alloy. HASTELLOY G-35 alloy, a CRA with potential applications in the chemical processing and oil and gas industries, has
significant strength after age hardening. HASTELLOY HYBRID-BC1 alloy, a CRA with potential applications in the chemical processing and oil and gas industries, has resistance to hydrochloric and
sulfuric acid.

In
addition to the commercialization of the above alloys, the Company continues to scale-up new alloys not yet ready to begin the commercialization process. U.S. patent
applications were filed in fiscal 2006 for the HAYNES® NS-163 alloy and HAYNES® HR-224 alloy. Both of these new
materials are believed to have significant, medium to long-term commercial potential. HAYNES NS-163 alloy is a new alloy with extraordinary high-temperature
strength in sheet form, which has applications in the aerospace, land-based gas turbine and automotive markets. Data generation and fabrication trials continued through 2008, with test
marketing expected to commence in early 2009. HAYNES HR-224 alloy is an HTA with superior resistance to oxidation.

Patents
or other proprietary rights are an important element of the Company's business. The Company's strategy is to file patent applications in the U.S. and any other country that
represents an important potential commercial market to the Company. In addition, the Company seeks to protect its technology which is important to the development of the Company's business. The
Company also relies upon trade secret rights to protect its technologies and its development of new applications and alloys. The Company protects its trade secrets in part through confidentiality and
proprietary information agreements with its customers. Trademarks on the names of many of the Company's alloys have also been applied for or granted in the U.S. and certain foreign countries.

While
the Company believes its patents are important to its competitive position, significant barriers to entry continue to exist beyond the expiration of any patent period. These
barriers to entry and production include the unique equipment required to produce this material and the exacting process required to achieve the desired metallurgical properties. These processing
requirements include such items as specific annealing temperature, processing speeds and reduction per rolling pass. Management believes that the current alloy development program and these noted
barriers to entry, reduce the impact of patent expirations on the Company.

End Markets

The Company estimates that the global specialty alloy market, including stainless steels, general purpose nickel alloys and
high-performance nickel- and cobalt-based alloys, represents total production volume of approximately 38.5 billion pounds per annum. Of this total market, the Company competes in
the high-performance nickel- and cobalt-based alloy sector, which is estimated to represent approximately 200 million pounds of production per annum. The
high-performance alloy market demands diverse, specialty alloys suitable for use in precision manufacturing. Given the technologically advanced nature of the products, strict requirements
of the end users and higher-growth end markets, the Company believes the high-performance alloy sector provides greater growth potential, higher profit margins and greater means for
service, product and price differentiation than stainless steels and general purpose nickel alloys. While stainless steel and general purpose nickel alloy is generally sold in bulk through third-party
distributors, the Company's products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis.

Aerospace.The Company has manufactured HTA products for the aerospace market since the late 1930s, and has developed numerous proprietary alloys for this market.
Customers in the aerospace market tend to be the most demanding with respect to meeting specifications within very low tolerances and achieving new product performance standards. Stringent safety
standards and continuous efforts to reduce equipment weight require close coordination between the Company and its customers in the selection and

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development
of HTA products. As a result, sales to aerospace customers tend to be made through the Company's direct sales force. Demand for the Company's products in the aerospace market is based on
the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The hot sections of jet engines are subjected to substantial wear and tear
and accordingly require periodic maintenance, replacement and overhaul. The Company views the maintenance, replacement and overhaul business as an area of continuing growth.

Chemical Processing.The chemical processing market represents a large base of customers with diverse CRA applications driven by demand for key end use markets
such as automobiles, housing, health care, agriculture, and metals production. CRA products supplied by the Company have been used in the chemical processing market since the early 1930s. Demand for
the Company's products in this market is driven by the level of maintenance, repair and expansion requirements of existing chemical processing facilities, as well as the construction of new
facilities. The Company believes the extensive worldwide network of Company-owned service and sales centers, as well as its network of independent distributors and sales agents who supplement the
Company's direct sales efforts in Europe and Asia, provide a competitive advantage in marketing its CRA products in the chemical processing market.

Land-based Gas Turbines.Demand for the Company's products in this market is driven by the construction of cogeneration facilities such as base load
for electric utilities or as backup sources to fossil fuel-fired utilities during times of peak demand. Demand for the Company's alloys in the land-based gas turbine markets
has also been driven by concerns regarding lowering emissions from generating facilities powered by fossil fuels. Land-based gas turbine generating facilities have gained acceptance as
clean, low-cost alternatives to fossil fuel-fired electric generating facilities. Land-based gas turbines are also used in power barges with mobility and as
temporary base-load-generating units for countries that have numerous islands and a large coastline. Further demand is generated in mechanical drive units used for oil and gas
production and pipeline transportation, as well as microturbines that are used as back up sources of power generation for hospitals and shopping malls. In addition, with a service center in China and
sales centers in India and Singapore, the Company is well positioned to take advantage of the long-term growth potential in those areas in demand for power generation.

Other Markets.Other markets to which the Company sells its HTA products and CRA products include flue gas desulphurization (or FGD), oil and gas, waste
incineration, industrial heat treating, automotive and instrumentation. The FGD market has been driven by both legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. With the completion of the Company's recent capital projects, the Company anticipates increasing its participation in the FGD market due to the
increased production capacity and the improved cost structure which resulted from the completion of the capital projects. The Company also sells its products for use in the oil and gas market,
primarily in connection with sour gas production. In addition, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand
high-performance alloys. Markets capable of providing growth are being driven by increasing performance, reliability and service life requirements for products used in these markets which
could provide further applications for the Company's products. As part of the Branford Wire Company Acquisition, the Company also began selling stainless steel wire, but the Company's strategy has
been to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher average selling price available on high-performance alloy
wire. The Company will continue to produce some amount of stainless steel wire, sold to higher-value markets, such as the medical wire market.

Sales and Marketing and Distribution

The Company sells its products primarily through its direct sales organization, which operates from 15 total locations in the
U.S., Europe, Asia and India, 12 of which are service and sales centers. All of the Company's service and sales centers are operated either directly by the Company or though its wholly-

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owned
subsidiaries. Approximately 84% of the Company's net revenues in fiscal 2008 were generated by the Company's direct sales organization. The remaining 16% of the Company's fiscal 2008 net
revenues was generated by a network of independent distributors and sales agents who supplement the Company's direct sales in the U.S., Europe and Asia, some of whom have been associated with the
Company for over 30 years. Going forward, the Company expects its direct sales force to continue to generate approximately 85% of its total sales, although this number may increase as new
service and/or sales centers are opened.

Providing
technical assistance to customers is an important part of the Company's marketing strategy. The Company provides performance analyses of its products and those of its
competitors for its customers. These analyses enable the Company to evaluate the performance of its products and to make recommendations as to the use of those products in appropriate applications,
enabling the
products to be included as part of the technical specifications used in the production of customers' products. The Company's market development professionals are assisted by its engineering and
technology staff in directing the sales force to new opportunities. Management believes the Company's combination of direct sales, technical marketing, engineering and customer support provides an
advantage over other manufacturers in the high-performance alloy industry. This activity allows the Company to obtain direct insight into customers' alloy needs and to develop proprietary
alloys that provide solutions to customers' problems.

The
Company continues to focus on growth in foreign markets. In recent years, the Company opened a service and sales center in China, the first service and sales center operated by any
manufacturer of nickel- and cobalt-based alloys in China, and sales centers in Singapore, India and Italy. For the long-term, management continues to view China as an expanding market
opportunity for the Company, particularly in the event of continued strong gross domestic product growth. Sales from the Company's U.S. operations into China in fiscal 2000 were $0.3 million,
growing to approximately $35.9 million in fiscal 2007 and $64.0 million in fiscal 2008. Part of this growth is attributable to the China service center which opened in fiscal 2005, as
well as the acquisition and consulting agreements in fiscal 2008 with HW Limited (as described in "Significant Events of Fiscal 2008HW Limited Acquisition" in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-K). In addition, the Company continues to evaluate the possibility of
opening a second service center in China, due in part to the continued long-term growth in the Chinese markets, although global economic conditions may delay this decision.

While
the Company is making concentrated efforts to expand foreign sales, the process of growing domestic business also continues. The majority of revenue and profits continue to be
provided by sales to U.S. customers and the Company continues to pursue opportunities to expand this market. The Company's domestic expansion effort includes, but is not limited to, continued
expansion of ancillary product forms (such as wire through the Branford Wire Company Acquisition), the continued development of new high-performance alloys, the utilization of external
conversion resources to expand and improve the quality of mill-produced product, the addition of equipment in U.S. service and sales centers to improve the Company's ability to provide a
product closer to the form required by the customer and the continued effort through the technical expertise of the Company to find solutions to customer challenges.

The
following table sets forth the approximate percentage of the Company's fiscal 2008 net revenues generated through each of the Company's distribution channels.

Domestic

Foreign

TotalCompany mill direct/service and sales centers


46
%

38
%

84
%Independent distributors/sales agents


8
%

8
%

16
%Total


54
%

46
%

100
%


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The
Company's top twenty customers accounted for approximately 38%, 33% and 36% of the Company's net revenues in fiscal 2006, 2007 and 2008, respectively. No customer or group of
affiliated customers of the Company accounted for more than 10% of the Company's net revenues in fiscal 2006, 2007 or 2008.

Net
revenues and net income in fiscal 2006, 2007 and 2008 were generated primarily by the Company's U.S. operations. Sales to domestic customers comprised approximately 61%, 61% and 54%
of the Company's net revenues in fiscal 2006, 2007 and 2008, respectively. In addition, the majority of the Company's operating costs are incurred in the U.S., as all of its manufacturing facilities
are located in the U.S. It is expected that net revenues and net income will continue to be highly dependent on the Company's domestic sales and manufacturing facilities in the U.S.

The
Company's foreign and export sales were approximately $169.3 million, $215.9 million, and $292.9 million for fiscal 2006, 2007 and 2008, respectively. Additional
information concerning foreign operations and export sales is set forth in Note 13 to the consolidated financial statements included elsewhere in this Form 10-K.

Manufacturing Process

High-performance alloys require a lengthier, more complex production process and are more difficult to manufacture than
lower-performance alloys, such as stainless steel alloys. The alloying elements in high-performance alloys must be highly refined during melting, and the manufacturing process must be
tightly controlled to produce precise chemical properties. The resulting alloyed material is more difficult to process because, by design, it is more resistant to deformation. Consequently,
high-performance alloys require that a greater force be applied when hot or cold working and are less susceptible to reduction or thinning when rolling or forging. This results in more
cycles of rolling, annealing and pickling compared to a lower-performance alloy to achieve proper dimensions. Certain alloys may undergo as many as 40 distinct stages of melting, remelting, annealing,
forging, rolling and pickling before they achieve the specifications required by a customer. The Company manufactures its high-performance alloys in various forms, including sheet, plate,
billet/ingot, tubular, wire and other forms.

The
manufacturing process begins with raw materials being combined, melted and refined in a precise manner to produce the chemical composition specified for each
high-performance alloy. For most high-performance alloys, this molten material is cast into electrodes and additionally refined through electroslag remelting. The resulting
ingots are then forged or rolled to an intermediate shape and size depending upon the intended final product form. Intermediate shapes destined for flat products are then sent through a series of hot
and cold rolling, annealing and pickling operations before being cut to final size.

The
argon oxygen decarburization gas controls in the Company's primary melt facility remove carbon and other undesirable elements, thereby allowing more tightly-controlled chemistries,
which in turn produce more consistent properties in the high-performance alloys. The argon oxygen decarburization gas control system also allows for statistical process control monitoring
in real time to improve product quality.

The
Company has a four-high Steckel rolling mill for use in hot rolling material. The four-high Steckel mill was installed in 1982 and is one of only two such
mills in the high-performance alloy industry. The mill is capable of generating approximately 12.0 million pounds of separating force and rolling a plate up to 72 inches
wide. The mill includes integrated computer controls (with automatic gauge control and programmed rolling schedules), two coiling Steckel furnaces and five heating furnaces. Computer-controlled
rolling schedules for each of the hundreds of combinations of product shapes and sizes the Company produces allow the mill to roll numerous widths and gauges to exact specifications without stoppages
or changeovers.

12

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The
Company also operates a three-high rolling mill and a two-high rolling mill, each of which is capable of custom processing much smaller quantities of material
than the four-high Steckel mill. These mills provide the Company with significant flexibility in running smaller batches of varied products in response to customer requirements. The
Company believes the flexibility provided by the three-high and two-high mills provides the Company an advantage over its major competitors in obtaining smaller specialty
orders.

Investments
in plant and equipment will allow the Company to increase capacity, reduce unplanned equipment outages, produce higher quality products at reduced costs and improve working
capital management. The Company spent $16.2 million in fiscal 2007 and $18.7 million in fiscal 2008 on plant and equipment upgrades. The significant investments over the last several
years are a result of under-investment in prior years, as well as increases in customer demand. The principal benefits of these investments are increased capacity, improved machine reliability,
improved product quality, increased processing efficiency and reduced maintenance costs. The improved reliability will help reduce the risk of unplanned outages similar to those that occurred in the
fourth quarter of fiscal 2005. Depending upon economic conditions, the Company may make further equipment upgrades in fiscal 2009; however, capital projects in fiscal 2009 will be focused on improving
and maintaining the equipment reliability and will not likely equal the amount spent in either fiscal 2007 or fiscal 2008. At this time, management does not anticipate prolonged planned equipment
outages as a result of upgrades in fiscal 2009.

Backlog

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 Company's backlog orders
have shipped within six months and
approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the Company's business conducted at its service and sales centers on a spot or
"just-in-time" basis.

Consolidated Backlog at Fiscal Quarter End

2005

2006

2007

2008(in millions)1st quarter

$
110.9

$
203.5

$
206.9

$
247.82nd quarter


134.8


207.4


237.6


254.53rd quarter


159.2


200.8


258.9


252.64th quarter


188.4


206.9


236.3


229.2


Raw Materials

In fiscal 2008, nickel, a major component of many of the Company's products, accounted for approximately 51% of raw material costs, or
approximately 33% of total cost of sales. Each pound of high-performance alloy contain, on average, 45% nickel. Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt
materials consist of virgin raw material, purchased scrap and internally produced scrap.

The
average nickel price per pound for cash buyers for the 30 day period ended on the last day of the period presented, as reported by the London Metals Exchange for
September 30, 2006, 2007 and 2008, was $13.67, $13.40 and $8.07, respectively. While the price of nickel was lower for fiscal 2008 than fiscal 2007, the lower price of nickel was offset by
increased prices for other raw materials that are significant in the manufacture of the Company's products such as molybdenum, cobalt and chromium.

Since
most of the Company's products are produced pursuant to specific orders, the Company purchases materials against known production schedules. The materials are purchased from
several

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different
suppliers through various arrangements including annual contracts and spot purchases, and involve a variety of pricing mechanisms. Because the Company maintains a policy of pricing its
products at the time of order placement, the Company attempts to establish selling prices with reference to known costs of materials, thereby reducing the risk associated with changes in the cost of
raw materials. However, to the extent that the price of nickel fluctuates rapidly, there may be an unfavorable effect on the Company's gross profit margins. The Company periodically purchases material
forward with certain suppliers.

Research and Technical Support

The Company's technology facilities are located at the Kokomo headquarters and consist of 19,000 square feet of offices and
laboratories, as well as an additional 90,000 square feet of paved storage area. The Company has seven fully equipped technology testing laboratories, including a mechanical test lab, a
metallographic lab, an electron microscopy lab, a corrosion lab, a high temperature lab and a welding lab. These facilities also contain a reduced scale, fully equipped melt shop and process lab. As
of September 30, 2008, the technology, engineering and technological testing staff consisted of 28 persons, 10 of whom have engineering or science degrees, including 5 with
doctoral degrees, with the majority of degrees in the field of metallurgical engineering.

Research
and technical support costs primarily relate to efforts to develop new proprietary alloys and in the development of new applications for already existing alloys. The Company
spent approximately $2.7 million, $3.1 million and $3.4 million for research and technical support activities for fiscal 2006, 2007 and 2008, respectively.

During
fiscal 2008, research and development projects were focused on new alloy development, new product form development and new alloy concept validation, all relating to products for
the aerospace, land-based gas turbine, chemical processing and oil and gas industries. In addition, significant projects were conducted to generate technical data in support of major
market application opportunities in areas such as solid oxide fuel cells, biotechnology (including waste incineration of toxic properties and manufacturing of pharmaceuticals), chemical processing and
power generation.

Competition

The high-performance alloy market is a highly competitive market in which eight to ten producers participate in various
product forms. The Company's primary competitors include Special Metals Corporation, which is now a part of Precision Cast Parts, Allegheny Technologies, Inc. and Krupp VDM GmbH, a
subsidiary of Thyssen Krupp Stainless. The Company faces strong competition from domestic and foreign manufacturers of both high-performance alloys (similar to those the Company produces)
and other competing metals. The Company may face additional competition in the future to the extent new materials are developed, such as plastics or ceramics that may be substituted for the Company's
products. The Company also believes that it will face increased competition from non-U.S. entities in the next five to ten years, especially from competitors located in Eastern Europe and
Asia. Additionally, in recent years the Company has benefited from a weak U.S. dollar, which makes the goods of foreign competitors more expensive to import into the U.S. In the event that the U.S.
dollar strengthens, the Company may face increased competition in the U.S. from foreign competitors.

Starting
in the fourth quarter of fiscal 2007, the Company experienced increased competition from competitors who produce both stainless steel and high-performance alloys.
Due to a continued slowness in the stainless steel market, management believes these competitors increased their production levels and sales activity in high-performance alloys to keep
capacity in their mills as full as possible, while offering very competitive prices and delivery times. As a result of this competition, the Company's ability to raise prices on certain products has
been limited, and in some cases prices were lowered, in the six most recent

14

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fiscal
quarters. Historically, the Company experienced similar price competition in the 1990's and in the early 2000's, when demand in the stainless market weakened.

Employees

As of September 30, 2008, the Company employed approximately 1,138 full-time employees worldwide. All eligible
hourly employees at the Kokomo plant and the Lebanon, Indiana service and sales center (approximately 537 in the aggregate) are covered by a collective bargaining agreement. In July 2007, the Company
entered into a new collective bargaining agreement with the United Steelworkers of America, which will expire in June 2010. Management believes that current relations with the union are satisfactory.
None of the employees of the Company's Arcadia, Louisiana, Mountain Home, North Carolina, European or Asian operations are represented by a labor union.

Environmental Matters

The Company's facilities and operations are subject to various foreign, federal, state and local laws and regulations relating to the
protection of human health and the environment, including those governing the discharge of pollutants into the environment and the storage, handling, use, treatment and disposal of hazardous
substances and wastes. Violations of these laws and regulations can result in the imposition of substantial penalties and can require facilities improvements. In addition, the Company may be required
in the future to comply with additional regulations pertaining to the emission of hazardous air pollutants under the Clean Air Act. However, since these regulations have not been proposed or
promulgated, the Company cannot predict the cost, if any, associated with compliance with such regulations. Expenses related to environmental compliance were approximately $2.0 million for
fiscal 2008 and are expected to be approximately $2.0 million for fiscal 2009. Although there can be no assurance, based upon current information available to the Company, the Company does not
expect that costs of environmental contingencies, individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of
operations or liquidity. The Company's facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued findings of violations of governing laws,
regulations and permits. In the past five years, the Company has paid administrative fines, none of which has had a material effect on the Company's financial condition, for alleged violations
relating to environmental matters, including the handling and storage of hazardous wastes, requirements relating to its Title V Air Permit, requirements relating to the handling of polychlorinated
biphenyls and violations of record keeping and notification requirements relating to industrial waste water discharge. Capital expenditures of approximately $0.59 million were made for
pollution control improvements during fiscal 2008, with additional expenditures of approximately $2.7 million for similar improvements planned for fiscal 2009.

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 fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South
Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI,
be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.

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

15

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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 action by the Company could be required. In addition, in August,
2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a leak in the pipeline
from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to this disclosure.

Historical
nitric acid spills were discovered at the Arcadia, Louisiana location in fiscal 2008. Analytical results were received in March, 2008 and the site assessment was provided to
the Louisiana Department of Environmental Quality ("LDEQ") in May. Remediation of the spill, including the purchase of new equipment, was substantially complete in fiscal 2008. A preliminary
assessment of the LDEQ authorized the Company's proposed remedial actions. In August, 2008, LDEQ submitted a second round of inquiries after an existing sump pump was removed. The Company is in the
process or responding to LDEQ's inquiries.

The
Company is unable to estimate the costs of any further corrective action at these sites, 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 closure and post-closure groundwater monitoring
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.

The
Company may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. The Company's
operations generate hazardous substances, and, while a large percentage of these substances are reclaimed or recycled, the Company also accumulates hazardous substances at each of its facilities for
subsequent transportation and disposal off-site by third parties. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to
exist are subject to claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and state counterparts. CERCLA imposes strict, joint and several
liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties. The Company may have generated hazardous
substances disposed of at other sites potentially subject to CERCLA or equivalent state law remedial action. Thus, there can be no assurance that the Company will not be named as a potentially
responsible party at sites in the future or that the costs associated with those sites would not have a material adverse effect on the Company's financial condition, results of operations of
liquidity.

16

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Executive Officers

The following table sets forth certain information concerning the persons who served as executive officers as of September 30,
2008. Please see "Significant Events of Fiscal 2008CEO Transition" in Item 7 Management's Discussion and Analysis contained elsewhere in this Form 10-K. Except
as indicated in the following paragraphs, the principal occupations of these persons have not changed during the past five years.

Name

Age

Position with Haynes International, Inc.Francis J. Petro


68

President and Chief Executive Officer; DirectorAugust A. Cijan


53

Vice PresidentFacilities PlanningMichael Douglas


56

Vice PresidentTubular ProductsAnastacia S. Kilian


34

Vice PresidentGeneral Counsel & Corporate SecretaryJames A. Laird


57

Vice PresidentMarketing, Research & DevelopmentMarlin C. Losch


48

Vice PresidentNorth America SalesMarcel Martin


58

Vice PresidentFinance, Treasurer, Chief Financial OfficerDaniel W. Maudlin


42

Controller and Chief Accounting OfficerJean C. Neel


49

Vice PresidentCorporate AffairsScott R. Pinkham


41

Vice PresidentManufacturingCris R. Ostrand


44

Vice PresidentInternational SalesGregory M. Spalding


52

Vice PresidentHaynes Wire & Chief Operating OfficerJeffrey L. Young


51

Vice President & Chief Information Officer


Mr. Petro
was elected President and Chief Executive Officer and a director of the Company in January 1999. From 1995 to the time he joined the Company, Mr. Petro was
President and Chief Executive Officer of Inco Alloys International, a company owned by The International Nickel Company of Canada. Mr. Petro retired from his executive positions with the
Company, effective September 30, 2008, although he remained as a director.

Mr. Cijan
has served as Vice PresidentFacilities Planning of the Company since March 2008. Prior to this, Mr. Cijan served as Vice President of Operations
since April 1996 and prior to that also served as Manufacturing Manager since joining the Company in 1993.

Mr. Douglas
has served as Vice PresidentTubular Products, operating of the Arcadia Tubular Products Facility since joining the Company in May 2005. From 1994 to 2005,
Mr. Douglas was Executive Vice President and Managing Director of Interactive Resource Management. Mr. Douglas has over twenty years of prior executive management experience in the
metals industry.

Ms. Kilian
has served as Vice PresidentGeneral Counsel & Corporate Secretary since July 2006. Prior to joining the Company, beginning in 2000,
Ms. Kilian was a lawyer in private practice with the law firm Ice Miller LLP in Indianapolis, Indiana.

Mr. Laird
has served as Vice PresidentMarketing, Research & Development of the Company since September 2007. Prior to this Mr. Laird served as Vice
PresidentInternational Sales & Marketing since July 2000, after having served in various sales and marketing positions with the Company since 1983.

Mr. Losch
has served as Vice PresidentNorth American Sales since February 2006. Mr. Losch was Midwest Regional Manager prior to this and has served in various
marketing, quality, engineering and production positions since joining the Company in February 1988.

Mr. Martin
was elected Vice PresidentFinance, Treasurer and Chief Financial Officer on July 1, 2004, after having served as Controller and Chief Accounting
Officer of the Company since October 2000. From 1996 to 2000 Mr. Martin was Vice President of Finance and Chief Financial Officer of Duferco Farrell Corporation.

17

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Mr. Maudlin
has served as Controller and Chief Accounting Officer effective as of September 20, 2004. Prior to his employment with the Company, Mr. Maudlin was
corporate controller at Jordan Specialty Plastics, Inc. from April, 2001. Prior to that he served as Group Controller for Heritage Environmental Services, Inc. from May 1991 through
April 2001. Mr. Maudlin is a licensed CPA in the state of Indiana.

Ms. Neel
has served as Vice PresidentCorporate Affairs of the Company since April 2000, after having served as Director, Corporate Affairs since joining the Company
in July 1999.

Mr. Pinkham
has served as Vice PresidentManufacturing since March 2008. Prior to that he served as Vice PresidentManufacturing Planning, after having
served in various manufacturing and production capacities since joining the Company in August 1999.

Mr. Ostrand
has served as Vice PresidentInternational Sales since September 1, 2007, after serving as Regional Manager, Midwest Region, since joining the
Company in March 2006. Prior to joining the Company, Mr. Ostrand was Vice President of Sales for Triumph Components, a division of
Triumph Group, Inc. from 1996 to 2004, and as the Program Manager for Timken Alcor Aerospace Technologies from 2004 to 2006.

Mr. Spalding
has served as Vice PresidentHaynes Wire & Chief Operating Officer since February 2006. Prior to this he served as Vice President, North American
Sales since he joined the Company in July 1999.

Mr. Young
has served as Vice President & Chief Information Officer since November 2005, after having served in various Information Technology positions since joining the
Company in November 1984.

18

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Item 1A.    Risk Factors

Risks Related to Our Business

Our revenues may fluctuate widely based upon changes in demand for our customers' products.

Demand for our products is dependent upon and derived from the level of demand for the machinery, parts and equipment produced by our
customers, which are principally manufacturers and fabricators of machinery, parts and equipment for highly specialized applications.
Historically, certain of the markets in which we compete have experienced unpredictable, wide demand fluctuations. Because of the comparatively high level of fixed costs associated with our
manufacturing processes, significant declines in those markets have had a disproportionately adverse impact on our operating results.

Since
we became an independent company in 1987, we have, in several instances, experienced substantial year-to-year declines in net revenues, primarily as a
result of decreases in demand in the industries to which our products are sold. In 1992, 1999, 2002 and 2003, our net revenues, when compared to the immediately preceding year, declined by
approximately 24.9%, 15.4%, 10.3% and 21.2%, respectively. We may experience similar fluctuations in our net revenues in the future. Additionally, demand is likely to continue to be subject to
substantial year-to-year fluctuations as a consequence of industry cyclicality, as well as other factors, and such fluctuations may have a material adverse effect on our
financial condition or results of operation.

Worldwide
economic conditions have recently deteriorated significantly and may remain depressed, or could worsen, in the foreseeable future. These conditions may have a material adverse
effect on demand for our customers' products and, in turn, on demand for our products. If these conditions persist or worsen, our results of operations and financial condition could be materially
adversely affected.

Profitability in the high-performance alloy industry is highly sensitive to changes in sales volumes.

The high-performance alloy industry is characterized by high capital investment and high fixed costs. The cost of raw
materials is the primary variable cost in the manufacture of our high-performance alloys and, in fiscal 2008, represented approximately 64% of our total cost of sales. Other manufacturing
costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element. Profitability is, therefore, very sensitive to changes in volume, and relatively
small changes in volume can result in significant variations in earnings.

We are subject to risks associated with global economic and political uncertainties

Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic
climate and our performance and the performance of our customers. The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict. The
continuing credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business and
our financial condition. In addition to the impact that the global financial crisis has already had, we may face significant challenges if conditions in the financial markets do not improve or
continue to worsen. For example, an extension of the credit crisis to other industries could adversely impact overall demand for our products, which could have a negative effect on our revenues.

In
addition, we are subject to various domestic and international risks and uncertainties, including changing social conditions and uncertainties relating to the current and future
political climate. Changes in governmental policies (particularly those that would limit or reduce defense spending) could have an adverse effect on our financial condition and may reduce our
customers' demand for our products and/or depress pricing of those products used in the defense industry or which have other military applications, resulting in a material adverse impact on our
business, prospects, results of operations, revenues and cash flows. Furthermore, any actual armed hostilities, and any future terrorist attacks in the U.S. or abroad,

19

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could
also have an adverse impact on the U.S. economy, global financial markets and our business. The effects may include, among other things, a decrease in demand in the aerospace industry due to
reduced air travel, as well as reduced demand in the other industries we serve. Depending upon the severity, scope and duration of these effects, the impact on our financial position, results of
operations, and cash flows could be material.

Risks Associated with the Commercial Aerospace Industry

A significant portion of the sales of our high-performance alloys represent products sold to customers in the commercial
aerospace industry. The aerospace industry has historically been cyclical due to factors both external and internal to the airline industry. These factors include general economic conditions, airline
profitability, consumer demand for air travel, varying fuel and labor costs, price competition, and international and domestic political conditions such as military conflict and the threat of
terrorism. The length and degree of cyclical fluctuation are influenced by these factors and therefore are difficult to predict with certainty. Demand for our products in this segment is subject to
these cyclical trends. A downturn in the commercial aerospace industry would adversely affect the prices at which we are able to sell these and other products, and our results of operations, business
and financial condition could be materially adversely affected.

Changes
in the economic environment and the financial condition of airlines can also result in rescheduling or cancellation of orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indication of near-term business activity, but may be indicative of potential business levels over a longer-term horizon. For example, the Boeing Company
experienced a labor strike (which was resolved in October 2008) that has prevented it from building new aircraft, and has experienced delays in the introduction of its new 787 aircraft. These events
have created uncertainty in the aerospace supply chain generally and, if they persist for a significant length of time, could have a material adverse effect on our results of operations.

Our operations are dependent on production levels at our Kokomo facility.

Our principal assets are located at our primary integrated production facility in Kokomo, Indiana and at our production facilities in
Arcadia, Louisiana and in Mountain Home, North Carolina. The Arcadia and Mountain Home plants rely to a significant extent upon feedstock produced at the Kokomo facility. Any production failures,
shutdowns or other significant problems at the Kokomo facility could have a material adverse effect on our financial condition and results of operations. We believe that we maintain adequate property
damage insurance to provide for reconstruction of damaged equipment, as well as business interruption insurance to mitigate losses resulting from any production shutdown caused by an insured loss;
however, there can be no assurance that such insurance will be adequate to cover such losses which may have a material adverse effect on our financial condition.

Although capital upgrades will allow us to produce more than 23.5 million pounds of high-performance alloys annually, our ability to increase net revenues
and profitability depends upon our success in effectively utilizing this new capacity.

We have announced that our capital upgrade program will allow us to increase sheet production capacity from 9 million pounds
annually to 14 million pounds annually, increasing total high-performance alloy production capacity to more than 23.5 million pounds. Our ability to utilize this capacity
depends greatly upon continuing demand in our end-markets, successfully increasing our market share and continued acceptance of our new products into the marketplace. Any failure to
effectively utilize the increased capacity may negatively impact our ability to increase net revenues, profitability and net income.

20

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During periods of lower demand in other alloy markets, some of our competitors may use their available capacity to produce higher volumes of high-performance
alloys, which leads to increased competition in the high-performance alloy market.

In addition to high-performance alloys, our primary competitors also produce and sell a broad range of other alloys,
including stainless steel and titanium, while we produce primarily high-performance alloys. There are significant elements of fixed costs in the operating structure of these competitors,
which can only be absorbed by keeping production levels high. For that reason, if our competitors are unable to fill their production capacity
with their core alloys such as stainless steel and titanium, they are likely to increase their production of high-performance alloys. These higher production levels will lead to increased
competition, such as we are experiencing now, in the high-performance alloy market, creating downward pricing pressures as a result of increased product in the market and more aggressive
lead times and could have a material adverse effect on our net revenues and results of operations.

Rapid increases in the price of nickel may materially adversely affect our operating results.

To the extent that the price of nickel or other raw materials rises rapidly, there may be a negative effect on our gross profit
margins. In fiscal 2008, nickel, a major component of many of our products, accounted for approximately 51% of our raw material costs, or approximately 33% of our total costs of sales. We enter into
several different types of sales contracts with our customers, some of which allow us to pass on increases in nickel prices to our customers. In other cases, we price our products at the time of
order, which allows us to establish prices with reference to known costs of materials, but which does not allow us to offset an unexpected rise in the price of nickel. We may not be able to
successfully offset rapid increases in the price of nickel or other raw materials in the future. In the event that raw material price increases occur that we are unable to pass on to our customers,
our cash flows or results of operations would be materially adversely affected.

Increases in energy costs and raw material costs may have a negative impact on our performance and financial condition.

Since fiscal 2003 and through fiscal 2008, our aggregate raw material and energy costs have consistently risen. Nickel, cobalt and
molybdenum, the primary raw materials used to manufacture our products, all have experienced significant fluctuations in price. Continued growth in China has contributed to increased demand for many
of the raw materials used in our manufacturing processes, which has led to increased prices for these raw materials. The Company uses natural gas in the manufacturing process to reheat material for
purposes of annealing and forming. Continuing increases in raw material and energy costs could have a material adverse effect on our cash flows or results of operation.

Failure to successfully develop, commercialize, market and sell new applications and new products could adversely affect our business.

We believe that our proprietary alloys and metallurgical manufacturing expertise provide us with a competitive advantage over other
high-performance alloy producers. Our ability to maintain this competitive advantage depends on our ability to continue to offer products that have equal or better performance
characteristics than competing products at competitive prices. Our future growth will depend, in part, on our ability to address the increasingly demanding needs of our customers by enhancing the
properties of our existing alloys, by timely developing new applications for our existing products, and by timely developing, commercializing, marketing and selling new products. If we are not
successful in these efforts, we may experience difficulties that delay or prevent the successful development, commercialization, marketing and selling of these products, or if our new products and
product enhancements do not adequately meet the requirements of the marketplace and achieve market acceptance, our revenues, cash flows and results of operations could be negatively affected.

21

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We may be adversely affected by environmental, health and safety laws, regulations, costs and other liabilities.

We are subject to various foreign, federal, state and local environmental, health and safety laws and regulations, including those
governing the discharge of pollutants into the environment, the storage, handling, use, treatment and disposal of hazardous substances and wastes and the health and safety of our employees. Under
these laws and regulations, we may be held liable for all costs arising out of any release of hazardous substances on, under or from any of our current or former properties or any off-site
location to which we sent or arranged to be sent wastes for disposal or treatment, and such costs may be material. We could also be held liable for any and all consequences arising out of human
exposure to such substances or other hazardous substances that may be attributable to our products or other environmental damage. In addition, some of these laws and regulations require our facilities
to operate under permits that are subject to renewal or modification. These laws, regulations and permits can require expensive pollution control equipment or operational changes to limit actual or
potential impacts to the environment. Violations of these laws, regulations or permits can also result in the imposition of substantial penalties, permit revocations and/or facility shutdowns.

We
have received permits from the environmental regulatory authorities in Indiana and North Carolina to close and to provide post-closure monitoring and care for certain
areas of our Kokomo and Mountain Home facilities that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. We are required to
monitor groundwater and to continue post-closure maintenance of the former disposal areas at
each site. As a result, we are aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. Additionally, it is possible that we could be
required to undertake other corrective action commitments for any other solid waste management unit existing or determined to exist at our facilities. We are unable to estimate the costs of any
further corrective action at either site, if required. Accordingly, we cannot assure you that the costs of future corrective action at these or any other current or former sites will not have a
material adverse effect on our financial condition, results of operations or liquidity.

We
may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. Our operations generate
hazardous substances, many of which we accumulate at our facilities for subsequent transportation and disposal off-site or recycling by third parties. Generators of hazardous substances
which are transported to disposal sites where environmental problems are alleged to exist are subject to liability under CERCLA and state counterparts. In addition, we may have generated hazardous
substances disposed of at sites which are subject to CERCLA or equivalent state law remedial action. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon
hazardous substance generators, site owners and operators and other potentially responsible parties regardless of fault. We cannot assure you that we will not be named as a potentially responsible
party at sites in the future or that the costs associated with current or future additional sites would not have a material adverse effect on our financial condition, results of operations or
liquidity.

Environmental
laws are complex, change frequently and have tended to become increasingly stringent over time. While we have budgeted for future capital and operating expenditures to
comply with environmental laws, we cannot assure you that environmental laws will not change or become more stringent in the future. Therefore, we cannot assure you that our costs of complying with
current and future environmental, health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances will not materially adversely affect our
business, results of operations or financial condition. See "BusinessEnvironmental Matters."

22

---



We could be required to make additional contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.

Our estimates of liabilities and expenses for pension benefits incorporates significant assumptions including the rate used to discount
the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, retirement age and mortality). Our
results of operations, liquidity, or stockholders' equity in a particular period could be affected by a decline in the rate of return on plan assets, the rate used to discount the future estimated
liability, or a reduction in the market value of plan assets.

If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their
employment at any time. The loss of any of our senior management team could harm our business. The announcement of the loss of one of our key employees could negatively affect our stock price. Our
ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face
challenges in hiring, training, managing and retaining employees in certain areas including metallurgical researchers, equipment technicians, and sales and marketing staff. If we are unable to
recruit, hire and retain skilled employees, our new product and alloy development and commercialization could be delayed, and our marketing and sales efforts could be hindered, which would adversely
impact our competitiveness and financial results.

The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

We anticipate we will continue to derive a significant portion of our revenues from operations in international markets. As we continue
to expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts and retain distributors and train their personnel in countries where language,
cultural or regulatory impediments may exist. We cannot ensure that distributors, regulators or other government agencies will continue to accept our products, services and business practices. In
addition, we purchase raw materials on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of raw materials from
international sources, subject us to the different trade regulations, including the Foreign Corrupt Practices Act, or FCPA, and other laws. Compliance with such regulations is costly. Any failure to
comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including
imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and
regulatory obligations could result in the disruption of our shipping, sales and service activities. Our international sales operations expose us and our representatives, agents and distributors to
risks inherent in operating in foreign jurisdictions, including:



23

---





We
cannot ensure you that one or more of these factors will not harm our business. Any material decrease in our international revenues or inability to expand our international operations
would adversely impact our revenues, results of operations and financial condition.

Although a collective bargaining agreement is in place for certain employees, union or labor disputes could still disrupt the manufacturing process.

All eligible hourly employees at the Kokomo plant and the Lebanon, Indiana service and sales center (approximately 537 in the aggregate
as of September 30, 2008) are covered by a collective bargaining agreement. In fiscal 2007, the collective bargaining agreement was extended until June 2010. Even though a collective bargaining
agreement is in place, it is still possible that union or labor disputes could disrupt our manufacturing process. We intend to renegotiate the collective bargaining agreement in fiscal 2010 prior to
the expiration of the agreement currently in place. Management believes that current relations with the union are satisfactory. We cannot assure you, however, that the renegotiation of the collective
bargaining agreement in 2010 will not lead to a labor stoppage and negative effect on earnings.

Risks Related to Shares of Our Common Stock

Our stock price is subject to fluctuations as a result of being traded on a public exchange which may not be related to our performance.

The stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly
volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common
stock could be subject to wide fluctuations in response to a number of factors, including those listed elsewhere in this "Risk Factors" section and others such as:



24

---





You may not receive a return on investment through dividend payments nor upon the sale of your shares of our common stock.

We do not anticipate paying any dividends to our stockholders in the near term. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, projected liquidity, contractual restrictions, restrictions imposed by
applicable law and other factors our board of directors deems relevant. You also may not realize a return on your investment upon selling your shares of our common stock.

Provisions of our certificate of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control.

Some provisions in our certificate of incorporation and by-laws, as well as Delaware statutes, may have the effect of
delaying, deferring or preventing a change in control. These provisions, including those regulating the nomination of directors, may make it more difficult for other persons, without the approval of
our Board of Directors, to launch takeover attempts that a stockholder might consider to be in his or her best interest. These provisions could limit the price that some investors might be willing to
pay in the future for shares of our common stock.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Manufacturing Facilities.The Company owns manufacturing facilities in the following locations:



The
Kokomo plant, the Company's primary production facility, is located on approximately 180 acres of industrial property and includes over 1.0 million square feet of
building space. There are three sites consisting of (1) a headquarters and research laboratory; (2) primary and secondary melting, annealing furnaces, forge press and several smaller hot
mills; and (3) the Company's four-high Steckel mill and sheet product cold working equipment, including two cold strip mills. All alloys and product forms other than tubular and
wire goods and drawn wire, are produced in Kokomo.

The
Arcadia plant is located on approximately 42 acres of land, and includes 135,000 square feet of buildings on a single site. Arcadia uses feedstock produced in Kokomo to
fabricate welded and seamless alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. Manufacturing processes at Arcadia require cold pilger mills, weld mills,
draw benches, annealing furnaces and pickling facilities.

The
Mountain Home plant is located on approximately 29 acres of land, and includes approximately 100,000 square feet of building space. The Mountain Home facility is primarily
used to manufacture finished high-performance alloy wire and specialty stainless steel wire. A limited amount of warehousing is also done at this facility.

The
owned facilities located in the United States are subject to a mortgage which secures the Company's obligations under its U.S. revolving credit facility with a group of lenders led
by Wachovia Capital Finance Corporation. For more information see "Management's Discussion and Analysis of

25

---



Financial
Condition and Results of Operations" and Note 7 to the consolidated financial statements included elsewhere in this Form 10-K.

Service and Sales Centers.The service and sales centers contain equipment capable of precision laser and water jet processing services to cut and shape products
to customers' precise specifications. The Company owns service and sales centers in the following locations:



The
Openshaw plant, located near Manchester, England, consists of approximately 7 acres of land and over 200,000 square feet of buildings on a single site. The Company closed the
manufacturing portion of the Openshaw plant in fiscal 2004 and is sourcing the required bar product for customers from external vendors. This closure did not have a material effect on the overall
revenue of the U.K. operation or overall operations or financial position. In April 2005, the Company sold 8 acres of the Openshaw site for a profit of $2.1 million, but retained
ownership of the buildings. It is anticipated that Haynes will continue to own and operate the balance of the land, totaling 7 acres, and the buildings.

In
addition, the Company leases service and sales centers in the following locations:



Sales Centers.The Company leases sales centers in the following locations:



All
owned and leased service and sales centers not described in detail above are single site locations and are less than 100,000 square feet. The Company believes that its existing
facilities are suitable for its current business needs.

Item 3.    Legal Proceedings

The Company is subject to extensive federal, state and local laws and regulations. Future developments and increasingly stringent
regulations could require us to make additional unforeseen expenditures for these matters. The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its
business and operations. Such litigation includes federal and state EEOC administrative actions and litigation and administrative actions relating to environmental matters. For more information see
"Item 1. BusinessEnvironmental Matters." Litigation may result in substantial costs and may divert management's attention and resources, and the level of future expenditures for
legal matters cannot be determined with any degree of certainty. Nonetheless, based on the facts presently known, management does not believe that expenditures for legal proceedings will have a
material effect on its financial position, results of operations or liquidity.

26

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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 issued in connection with the Company's emergence from
Chapter 11 reorganization. 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, it cannot assure you
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.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company's stockholders during the fourth quarter of fiscal 2008.

27

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is listed on the NASDAQ Global Market ("NASDAQ") and traded under the symbol "HAYN". The following table
sets forth, for the periods indicated, the high and low closing prices for the Company's common stock as reported by NASDAQ since the Company's listing on March 23, 2007.

Fiscal quarter ended:

High

LowSeptember 30, 2008

$
60.44

$
43.00June 30, 2008

$
68.33

$
54.38March 31, 2008

$
67.37

$
43.78December 31, 2007

$
88.77

$
66.60September 30, 2007

$
100.10

$
66.47June 30, 2007

$
92.23

$
69.74March 31, 2007 (from March 23)

$
74.40

$
70.51


Prior
to the Company's listing on NASDAQ and following the Company's emergence from bankruptcy in August 2004, trading in the Company's common stock occurred from time to time on an
unsolicited basis on the pink sheets. The following table sets forth the range of high and low closing bid prices by fiscal quarter for the common stock as reported through Pink Sheets LLC.
Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

Fiscal quarter ended:

High

LowMarch 31, 2007 (through March 23)

$
71.67

$
39.00December 31, 2006

$
54.00

$
36.00


The
range of the Company's common stock price on NASDAQ from October 1, 2007 to September 30, 2008 was $43.00 to $88.87. The closing price of the common stock was $46.83 on
September 30, 2008.

As
of October 31, 2008, there were approximately 11 record holders of the Company's common stock.

Since
fiscal 2004, the Company has not declared cash dividends on shares of its common stock. The Company does not have any current plans to pay cash dividends or make any other
distributions on shares of the Company's common stock in the near term. Instead, the Company intends to retain any earnings for use in the operation and expansion of its business.

The
Company did not sell any unregistered securities or repurchase any of its equity securities during fiscal 2008.

28

---



Equity Compensation Plan Information

The following table provides information as of September 30, 2008 regarding shares of the Company's common stock issuable
pursuant to its stock option plans:

Plan Category

Number of securities to
be issued upon exercise
of outstanding options

Weighted-average
exercise price of
outstanding options

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the second column)Equity compensation plans approved by security holders(1)


448,377
(2)
$
43.24


267,000
(2)


---

Cumulative Total Stockholder Return

The graph below compares the cumulative total stockholder return on the Company's common stock to the cumulative total return of the
Russell 2000 Index, S&P MidCap Index, and Peer Group for each of the last four fiscal years ended September 30, 2008. The cumulative total return assumes an investment of $100 on
September 30, 2004 and the reinvestment of any dividends during the period. The Russell 2000 is a broad-based index that includes smaller market capitalization stocks. The S&P MidCap 400
Index is the most widely used index for mid-sized companies. Management believes that the S&P MidCap 400 is representative of companies with similar market and economic
characteristics to Haynes. Furthermore, we also believe the Russell 2000 Index is representative of the Company's current market capitalization status and this index is also provided on a comparable
basis. The companies included in the Peer Group Index are: Allegheny Technologies, Inc., Titanium Metals Corporation, RTI International Metals, Inc., Universal Stainless & Alloy
Products, Inc. and Carpenter Technologies Corp. Management believes that the companies included in the Peer Group, taken as a whole, provide a meaningful comparison in terms of competition,
product offerings and other relevant factors. The total stockholder return for the peer group is weighted according to the respective issuer's stock market capitalization at the beginning of each
period.

29

---



GRAPHIC

---

2004

2005

2006

2007

2008Haynes International, Inc.


100.00


227.27


354.54


776.09


425.73Russell 2000


100.00


116.56


126.64


140.58


123.01S&P MidCap 400


100.00


120.76


127.15


149.20


126.98Peer Group


100.00


174.76


341.76


527.51


249.67


Item 6.    Selected Financial Data

On March 29, 2004, the Company and its U.S. subsidiaries and U.S. affiliates on that date filed for reorganization relief under
Chapter 11 of the U.S. Bankruptcy Code. A plan of reorganization was filed on May 25, 2004, amended on June 29, 2004, confirmed by order of the bankruptcy court on
August 16, 2004, and became effective on August 31, 2004. The historical consolidated financial statements of predecessor Haynes International, Inc. have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and, for periods subsequent to March 29,
2004, in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7,Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code.As of August 31, 2004, the effective date of the plan of reorganization, successor Haynes International, Inc. began operating its
business under a new capital structure and adopted fresh start reporting for its consolidated financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the
historical consolidated financial information for predecessor Haynes International, Inc. is not comparable to financial information of successor Haynes International, Inc. for periods
after August 31, 2004.

Set
forth below are selected financial data of predecessor Haynes International, Inc. and successor Haynes International, Inc. This information should be read in
conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
The selected historical consolidated financial data as of and for the years ended September 30, 2008, 2007, 2006 and 2005 and for the period September 1, 2004 through
September 30, 2004 are derived from the consolidated financial statements of successor Haynes International, Inc. The selected historical consolidated financial data for the period
October 1, 2003 through August 31, 2004, are derived from the consolidated financial statements of predecessor Haynes International, Inc.

30

---



Amounts
below are in thousands, except backlog, which is in millions, share and per share information and average nickel price.

Predecessor

SuccessorEleven Months
Ended
August 31,
2004

One Month
Ended
September 30,
2004(1)

Year Ended
September 30,
2005(1)

Year Ended
September 30,
2006(1)

Year Ended
September 30,
2007(1)

Year Ended
September 30,
2008(1)Statement of Operations Data:Net revenues

$
209,103

$
24,391

$
324,989

$
434,405

$
559,836

$
637,006Cost of sales


171,652


26,136
(2)

288,669
(2)

325,573
(2)

408,752
(2)

492,349
(2)Selling, general and administrative expense


24,038


2,658


32,963


40,296


39,441


42,277Research and technical expense


2,286


226


2,621


2,659


3,116


3,441Restructuring and other charges(4)


4,027


429


628








Operating income (loss)


7,100


(5,058
)

108


65,877


108,527


98,939Interest expense, net


13,929


348


6,353


8,024


3,939


1,025Reorganization items(5)


(177,653
)













Net income (loss)


170,734


(3,646
)

(4,134
)

35,540


66,120


62,778Net income (loss) per share:Basic

$
1,707,340

$
(0.36
)
$
(0.41
)
$
3.55

$
6.07

$
5.27Diluted

$
1,707,340

$
(0.36
)
$
(0.41
)
$
3.46

$
5.89

$
5.22Weighted average shares outstanding:Basic


100


10,000,000


10,000,000


10,000,000


10,896,067


11,903,289Diluted


100


10,000,000


10,000,000


10,270,642


11,230,101


12,026,440SuccessorSeptember 30,2004(1)

2005(1)

2006(1)

2007(1)

2008(1)Balance Sheet Data(2):Working capital

$
61,826

$
59,494

$
101,864

$
299,312

$
330,357Property, plant and equipment, net


80,035


85,125


88,921


97,860


107,302Total assets


360,758


387,122


445,860


586,969


617,567Total debt


85,993


106,383


120,043


38,733


14,909Long-term portion of debt


2,462


414


3,097


3,074


1,582Accrued pension and postretirement benefits


120,019


122,976


126,488
(3)

123,587
(3)

115,359
(3)Stockholders' equity


115,576


111,869


151,548


316,377
(6)

379,5432004

2005

2006

2007

2008Consolidated Backlog at Fiscal Quarter End(7):1st quarter

$
54.7

$
110.9

$
203.5

$
206.9

$
247.82nd quarter


69.6


134.8


207.4


237.6


254.53rd quarter


82.6


159.2


200.8


258.9


252.64th quarter


93.5


188.4


206.9


236.3


229.2Year Ended September 30,2004

2005

2006

2007

2008Average nickel price per pound(8)

$
6.02

$
6.45

$
13.67

$
13.40

$
8.07


---

31

---



32

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Quarterly Market Information

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 breakdown of net revenues, shipments and average selling prices to the markets served by Haynes 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-K.

Quarter Ended

Quarter EndedDecember 31,
2006

March 31,
2007

June 30,
2007

September 30,
2007

December 31,
2007

March 31,
2008

June 30,
2008

September 30,
2008Backlog(1)Dollars (in thousands)

$
206,859

$
237,589

$
258,867

$
236,256

$
247,775

$
254,470

$
252,598

$
229,196Pounds (in thousands)


7,575


8,454


8,551


7,397


8,274


8,706


8,335


7,575Average selling price per pound

$
27.31

$
28.10

$
30.27

$
31.94

$
29.95

$
29.23

$
30.30

$
30.26Average nickel price per poundLondon Metals Exchange(2)

$
15.68

$
21.01

$
18.92

$
13.40

$
12.11

$
14.16

$
10.23

$
8.07


---

Quarter Ended

Quarter EndedDecember 31,
2006

March 31,
2007

June 30,
2007

September 30,
2007

December 31,
2007

March 31,
2008

June 30,
2008

September 30,
2008Net revenues(in thousands)Aerospace

$
43,827

$
48,232

$
55,317

$
63,796

$
59,442

$
63,472

$
62,857

$
61,501Chemical processing


38,778


37,701


31,495


39,986


40,805


37,404


49,165


38,718Land-based gas turbines


20,076


27,993


26,812


28,120


25,505


33,506


31,004


34,102Other markets


15,671


20,352


24,598


25,638


18,887


26,085


18,811


22,809Total product revenue


118,352


134,278


138,222


157,540


144,639


160,467


161,837


157,130Other revenue


2,111


3,058


2,865


3,410


1,438


3,304


4,503


3,688Net revenues

$
120,463

$
137,336

$
141,087

$
160,950

$
146,077

$
163,771

$
166,340

$
160,818Shipments by markets(in thousands of pounds)Aerospace


1,780


1,701


1,973


2,206


2,154


2,190


2,319


2,188Chemical processing


1,479


1,322


1,082


1,238


1,312


1,287


1,649


1,140Land-based gas turbines


1,144


1,382


1,256


1,311


1,060


1,742


1,519


1,641Other markets


1,053


1,320


1,538


923
(1)

681


861


732


800Total shipments


5,456


5,725


5,849


5,678


5,207


6,080


6,219


5,769Average selling price per poundAerospace

$
24.62

$
28.36

$
28.04

$
28.92

$
27.60

$
28.98

$
27.11

$
28.11Chemical processing


26.22


28.52


29.11


32.30


31.10


29.06


29.82


33.96Land-based gas turbines


17.55


20.26


21.35


21.45


24.06


19.23


20.41


20.78Other markets


14.88


15.42


15.99


27.78


27.73


30.30


25.70


28.51Total product(excluding other revenue)


21.89


23.45


23.63


27.75


27.78


26.39


26.03


27.24Total average selling price(including other revenue)


22.08


23.99


24.12


28.35


28.05


26.94


26.75


27.88


---

33

---





Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Please refer to page 1 of this Form 10-K for a cautionary statement regarding forward-looking information.

Overview of Business

The global 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-steel wire products, the Company competes exclusively in the high-performance alloy sector, which
includes high-temperature resistant alloys, or HTA, and corrosion resistant alloys, or CRA. HTA and CRA products accounted for 69% and 31%, respectively, of the Company's net revenues in
fiscal 2007, and 73% and 27%, respectively, of the Company's net revenues in fiscal 2008 (in each case excluding stainless steel wire). Based on available industry data, the Company believes that it
is one of four principal producers of high-performance alloys in flat product form, which includes sheet, coil and plate forms.
Flat products accounted for 71% of shipment pounds and 68% of net revenues in fiscal 2007, and 63% of shipment pounds and 63% of net revenues in fiscal 2008. The Company also produces its alloys as
seamless and welded tubulars, and in bar, billet and wire forms. On a historical basis, flat products have accounted for a majority of the Company's net revenues, and are anticipated to continue to do
so on a prospective basis.

The
Company's direct sales organization, which consists of 12 Company-operated service and/or sales centers in the U.S., Europe, Asia and India, generated approximately 82%, 85% and 84%
of the Company's net revenues in fiscal 2006, fiscal 2007 and fiscal 2008, respectively. The remaining 18%, 15% and 16% of the Company's net revenues in fiscal 2006, fiscal 2007 and fiscal 2008,
respectively, were generated by a network of independent distributors and sales agents who supplement the Company's direct sales efforts in all markets. Going forward, the Company expects its direct
sales force to continue to generate approximately 85% of it's of total sales, although this number may increase as new service and sales centers are opened.

Net
revenues and net income in fiscal 2007 and fiscal 2008 were generated primarily by the Company's U.S. operations. Sales to domestic customers comprised approximately 61% of net
revenues in fiscal 2007 and 54% in fiscal 2008. In addition, the majority of the Company's operating costs are incurred in the U.S., as all of its manufacturing facilities are located in the U.S.
Although the Company expects international sales to increase as it pursues its business strategy, for the foreseeable future, net revenues and net income will continue to be highly dependent on
domestic sales and manufacturing facilities in the U.S.

Sales
to customers outside the U.S. represented approximately 39% of the Company's net revenues in fiscal 2007 and 46% in fiscal 2008. It is anticipated that sales to customers outside
of the U.S. will continue to grow with the addition of foreign service and sales centers. Although no data is available, management believes a portion of the material that is sold to U.S. distributors
and fabricators is resold and shipped overseas.

The
high-performance alloy industry is characterized by high capital investment and high fixed costs. Profitability is, therefore, very sensitive to changes in volume, and
relatively small changes in volume can result in significant variations in earnings. The cost of raw materials is the primary variable cost in the manufacture of high-performance alloys
and represents approximately 64% in fiscal 2008 of the Company's total cost of sales. Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a
significant fixed element within a certain relevant range of production.

Lead
times from order to shipment can be a competitive factor, as well as an indication of the strength of the demand for high-performance alloys. The Company's current
average lead times from order to shipment for mill-produced products, depending on product form, can be as short as 4 weeks and as long as 30 weeks. An order from a service
and sales center can be filled in less than one week, depending upon the availability of materials in stock.

34

---



Significant Events of Fiscal 2008



The Company announced on April 4, 2008 that Francis Petro had informed the Board of his intention to retire as the Company's
President and Chief Executive Officer at the end of his existing employment agreement on September 30, 2008 and to continue to serve as a member of the Board of Directors.

On
September 9, 2008, the Company announced that Mark Comerford was appointed as the new President and Chief Executive Officer of the Company reporting directly to the Board of
Directors. Mr. Comerford assumed his new position effective upon Mr. Petro's retirement from the Company.

Before
joining the Company, Mr. Comerford was President of Alloy Products, the largest business unit within Brush Wellman Inc. Since 1998, Mr. Comerford served in
various positions for Brush Wellman Inc. both in the U.S. and Southeast Asia. In addition to his considerable experience at Brush Wellman Inc., Mr. Comerford also held positions
at Carpenter Technology and American Brass in various metallurgical engineering, international and commercial management positions.



Beginning at the end of the second quarter of fiscal 2007 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
further erosion in gross profit as a percentage of net revenues. Compared to the first quarter of fiscal 2008, net revenue increased in the second quarter, but average selling price per pound and
gross profit as a percentage of net revenue continued to decline. The decline in gross profit as a percentage of net revenue from the first quarter to the second quarter of fiscal 2008 should be
analyzed in light of the fact that the first quarter of fiscal 2008 included a one-time benefit of $3.7 million related to a pension curtailment gain. Adjusting for this gain, the
gross profit as a percentage of net revenue improved in the second quarter when compared to the first quarter. Although gross profit as a percentage of revenue in the third quarter of fiscal 2008 was
lower than the same period in fiscal 2007, it showed improvement over the first and second quarter of fiscal 2008.

Gross
profit as a percentage of revenue in the fourth quarter of fiscal 2008 was 21.4%, which is lower than in same period of fiscal 2007 and also lower than the previous quarter of
fiscal 2008. It was anticipated that gross profit as a percentage of revenue for the fourth quarter of fiscal 2008 would be approximately 24.4%, which would have been a slight improvement over the
third quarter of fiscal 2008 and slightly below 25.0% from the fourth quarter of fiscal 2007. One cause of the shortfall from forecast was reduced production volume of sheet product through the
finishing operation as a result of issues associated with new annealing lines, including mechanical commissioning and the preparation of new standard operating procedures. It is anticipated that this
process will be completed in the first quarter of fiscal 2009.

In
addition to these operational challenges, pricing competition continued to increase in the fourth quarter of fiscal 2008. Starting in the third quarter of fiscal 2007, the Company
experienced increasing competition from competitors who produce both stainless steel and high-performance alloys. Due to continued slowness in the stainless steel market, management
believes these competitors increased their production levels and sales activity in high-performance alloys to keep capacity in their mills as full as possible, while offering very
competitive prices and delivery times. As a result of this competition, the Company's ability to raise prices on certain products has been limited, and in some cases prices were lowered, in the six
most recent fiscal quarters. Historically, the Company experienced similar price competition in the 1990's and in the early 2000's, when demand in the stainless market weakened.

This
competition should soften as the stainless market improves. However, based on the current economic environment there is significant uncertainty as to when that may occur and the
possibility exists that the stainless market may continue to deteriorate. Management believes, however, that the Company

35

---



continues
to improve its ability to respond to the competition as a result of an increased emphasis on service centers, value-added services and an improving cost structure which has resulted from the
capital expenditure program. It is anticipated that, with the completion of the upgrade to the second annealing line and improved processing capabilities, the Company's delivery-times and reliability
will continue to improve.



On June 2, 2008 the Company announced the expansion of its relationship with HW Limited and its affiliated companies in Hong
Kong and China for sales of Haynes' products throughout Asia. Under the acquisition agreement (and the related consulting agreement), which became effective on June 1, Haynes' sales and
marketing presence in Asia has been greatly expanded. The sales force of HW Limited's Chinese affiliate was integrated into the Haynes operations in China expanding Haynes' direct sales organization
by eight people, which Haynes believes will lead to a more effective organization. In addition to overseeing this expanded organization, HW Limited's principal, Helen Wang, will promote Haynes'
products and services to customers in select markets in Asia, including China, Taiwan, South Korea, Singapore, Thailand, Laos, Malaysia, Vietnam, Indonesia, Cambodia, Philippines, Australia, and New
Zealand. This consulting arrangement is one component of the Company's continued campaign to grow its market presence in China and the rest of Asia. The asset acquisition and related agreements
increased fixed assets $0.015 million, increased non-compete agreement by $0.5 million and increased goodwill by $2.5 million.



Beginning in fiscal 2006, the Company began making significant investments in order to improve reliability and increase capacity in its
sheet finishing operations. Upgrades to its cold rolling mill and one of two annealing lines were completed in fiscal 2007. Equipment upgrades to the second annealing line were completed in the third
quarter of fiscal 2008, with commissioning starting in the fourth quarter. Due to the complexity of the commissioning process and development of new standard operating procedures, the commission
process progressed at a slower pace than expected, and is anticipated to be complete in the first quarter of fiscal 2009. These upgrades to the sheet finishing operations have increased the production
capacity for high-performance alloys in sheet form from 9.0 million pounds per year to 14.0 million pounds per year. The Company's objective is to produce and sell at least
23.5 million pounds of high-performance alloys by no later than fiscal 2010. However, based on the current economic environment achieving that goal is uncertain. Management is in
the process of evaluating the positive impact of the upgrades to sheet finishing capacity and other capital upgrades since fiscal 2005 on total high-performance alloy capacity across all
product forms. Management believes that the upgrades will allow the Company to produce high-performance alloy volumes in excess of the original estimate of 23.5 million pounds which
fits well with the long-term growth potential of the Company's markets. In addition, management believes that the completion of these upgrades has had a positive impact on gross profit as
a percentage of net revenue due to improved operating efficiency, reduced operating cost, improved quality and expanded product capability.



During the last two fiscal years, the Company has taken action to reduce the funding requirements of its Defined Benefit Pension Plans.
New salaried employees hired after December 31, 2005 and new hourly employees hired after June 30, 2007 are not eligible to participate in the Defined Benefit Pension Plans. Also, 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

36

---



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 $23.0 million over the next six years. The offsetting estimated incremental cost of the enhanced 401K match is $2.3 million 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, the Company recognized a reduction of the
projected benefit obligation of $8.2 million, an increase to other comprehensive income (before tax) of $4.5 million and a curtailment gain (before tax) of $3.7 million. The
impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.

Overview of Markets

The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for
the periods shown.

2004(1)

2005

2006

2007

2008Amount

% of
Total

Amount

% of
Total

Amount

% of
Total

Amount

% of
Total

Amount

% of
TotalNet Revenues
(dollars in millions)Aerospace

$
98.1


42.0
%
$
126.1


38.8
%
$
165.8


38.2
%
$
211.2


37.7
%
$
247.3


38.8
%Chemical processing


61.4


26.3


76.2


23.5


129.4


29.8


148.0


26.4


166.1


26.1Land-based gas turbines


41.1


17.6


67.1


20.6


77.9


17.9


103.0


18.4


124.1


19.5Other markets


31.1


13.3


53.2


16.4


56.4


13.0


86.3


15.4


86.6


13.6Total product


231.7


99.2


322.6


99.3


429.5


98.9


548.5


97.9


624.1


98.0Other revenue(2)


1.8


0.8


2.4


0.7


4.9


1.1


11.3


2.1


12.9


2.0Net revenues

$
233.5


100.0
%
$
325.0


100.0
%
$
434.4


100.0
%
$
559.8


100.0
%
$
637.0


100.0
%U.S.

$
143.6


61.5
%
$
196.5


60.5
%
$
265.1


61.0
%
$
343.9


61.4
%
$
344.1


54.0
%Foreign

$
89.9


38.5
%
$
128.5


39.5
%
$
169.3


39.0
%
$
215.9


38.6
%
$
292.9


46.0
%Shipments by Market
(millions of pounds)Aerospace


5.5


36.7
%

6.1


29.2
%

7.1


32.9
%

7.7


33.9
%

8.9


38.2
%Chemical processing


4.2


28.0


3.8


18.2


5.0


23.1


5.1


22.5


5.4


23.2Land-based gas turbines


3.5


23.3


4.7


22.5


4.8


22.2


5.1


22.5


6.0


25.8Other markets


1.8


12.0


6.3


30.1


4.7


21.8


4.8


21.1


3.0


12.8Total Shipments


15.0


100.0
%

20.9


100.0
%

21.6


100.0
%

22.7


100.0
%

23.3


100.0
%Average Selling Price Per PoundAerospace

$
17.84




$
20.63




$
23.28




$
27.57




$
27.94Chemical processing


14.62





19.84





25.97





28.89





30.83Land-based gas turbines


11.74





14.25





16.27





20.22





20.82Other markets


17.28





8.50
(3)




11.87
(3)




17.84
(3)




28.17
(3)Total product(4)


15.45





15.42





19.84





24.15





26.81Total average selling price


15.57





15.53





20.07





24.65





27.37


---

37

---



Demand in the Company's markets remained strong in fiscal 2008, with solid results in net revenues, volume and pricing in fiscal 2008 as compared
to fiscal 2007, in spite of increased levels of competition. Management believes that year-to-year improvement in net revenues was driven by several strategies intended to
optimize returns and strengthen financial results. For example, with demand solid and the Company's capacity limited as a result of the Company's capital upgrade program, the Company focused on
selling the highest volumes into the applications and markets that provided the highest average selling price. In fiscal 2008 this strategy was particularly effective in the chemical processing and
flue-gas desulphurization industries. In addition, the Company continued to diversify its market base, expanding the industries served in the "Other Markets" category and also continuing
to diversify geographically, focusing on its presence in China and the rest of Asia. This strategy resulted in the increase in export sales from 39% of total sales in fiscal 2007 to 46% of total sales
in fiscal 2008.

Although
revenue and volumes from quarter-to-quarter through both fiscal 2007 and 2008 tended to show strength, the backlog in the latter portion of fiscal 2008
began to exhibit signs of the weakening economic environment in specific market categories. The backlog at the end of fiscal 2008 declined from the third quarter by approximately 9% in both revenue
dollars and pounds, while the average selling price remained essentially flat. Revenue dollars and volumes in the backlog were essentially flat between September 30, 2007 and
September 30, 2008, while the average selling price declined approximately 5%, in part as a result of a 40% decline in the cost of nickel between periods. Revenue dollars and volume in the
backlog at October 31, 2008 declined by 4% from September 30, 2008, while average selling price remained essentially flat.

Aerospace
demand was robust in fiscal 2008, as illustrated by the Company's high level of sales in this market. Haynes is well positioned to continue meeting current levels of demand and
the anticipated increased level of demand in the latter part of fiscal 2009 or early fiscal 2010. Internal projects supporting this growth include the completion of upgrades to the Company's cold
rolling mill in fiscal 2007 and both annealing lines in fiscal 2008 (which increased flat product finishing capacity by five million pounds), the installation of a new pilger mill at the Arcadia
facility, also in fiscal 2008 (which increased capacity of seamless tubing), and continued expansion of the value-added operations in the Company's service centers. Although the order book for both
Boeing and Airbus continues to be substantial, the push-out of delivery schedules for the Dreamliner 787 and A380 are having an unfavorable effect on order entry and backlog. Although it
is uncertain what the effect will be over the next six to twelve months, it is clear that aerospace revenues and pounds shipped will be lower in fiscal 2009 as compared to fiscal 2008. The aerospace
backlog dollars declined by approximately 10% from the end of the third quarter of fiscal 2008 to the end of the fourth quarter of fiscal 2008. The aerospace backlog dollars through the end of October
declined another 3% from the end of September, 2008. Even though the commercial OEM portion of the business is likely to slow though at least the first and second quarters of fiscal 2009, management
believes the MRO portion is likely to be less as affected because of the required maintenance schedules for engines currently in use.

Pounds
shipped in the land-based gas turbine market in fiscal 2008 increased significantly from the previous year. Management believes, subject to global economic conditions,
long-term demand in the land-based gas turbine market will continue to be solid, due to higher activity in power generation, oil and gas production, and alternative power
systems application. In addition, land-based gas turbines are favored in electric generating facilities due to low capital cost at installation, flexibility in use of alternative fuels

38

---



and
fewer SO2 emissions than the traditional fossil fuel-fired facilities. However, based on the current economic environment, it is anticipated that volumes for fiscal 2009
will be lower then fiscal 2008 although it is uncertain by how much. The Company's backlog for the land-based gas turbine market declined by 7% from the end of the third quarter to the end
of the fourth quarter of fiscal 2008 and declined another 5% from September to October 2008. A portion of this decline is associated with the project business which historically does not recur evenly
through the year.

Sales
to the chemical processing industry increased year over year, however, pounds shipped in the fourth quarter of fiscal 2008 were lower than the comparable quarter of the prior year
and substantially lower than the third quarter of fiscal 2008. This is reflective of the sporadic project business, and the global economic downturn. Although there is some cyclicality as a result of
project business expected in this market from quarter to quarter, historically the chemical processing industry slows as a result of an overall economic slowdown as has been seen in recent quarters.
Management believes the reduced backlog is the result of a temporary dip in project business, but also a longer-term trend resulting from the economic environment. Backlog dollars declined
by 23% from the end of the third fiscal quarter of 2008 to the end of the fourth fiscal quarter of 2008. During the month of October, 2008, the backlog for the chemical processing industry declined by
an additional 1%.

The
Company also continues its efforts to expand volumes sold into the industries which make up the "Other Markets" category. The industries in this category focus on upgrading overall
quality, improving product performance through increased efficiency, prolonging product life, and lowering long-term costs. Companies in these industries are looking to achieve these goals
through the use of "Advanced Materials" which supports the increased use of high-performance alloys in an expanding number of applications. On a year-to-year basis,
after reducing for pounds of stainless steel wire, volume was essentially flat. Management intends to continue to invest in growing smaller markets included in this category because of the significant
long-term opportunities. The backlog level for the "Other Markets" was consistent through fiscal 2008 and increased by 5% from the end of the third quarter of fiscal 2008 to the end of the
fourth quarter of fiscal 2008. Although in October, 2008, "Other Markets" backlog dollars declined by 5%.

The
Company's financial performance in fiscal 2007 and 2008 is reflective of the strength in the markets it serves. However, as noted in the preceding narrative, the activity in these
markets, as reflected in the decline of the backlog, reflects the caution being exhibited by the Company's customers. Going into fiscal 2009, the global financial crisis, overall economic weakness,
the competitive environment and the cautious approach of the Company's customers to restocking will make repeating
the performance of fiscal 2007 and fiscal 2008 unlikely for net revenues and gross profit. However, the Company is well positioned financially to maintain profit levels during this slowdown and resume
strong revenue and earnings growth once conditions improve.

Note on Wire Product

The high-performance alloy wire produced at the Company's wire facility is reflected within the appropriate category where
the wire is sold. For example, high-performance alloy wire produced for use in the chemical processing market is reflected in that category. The stainless steel wire is reflected in the
"Other Markets" category and reduced the average selling price per pound within that category on a comparative basis. The Company's strategy is to reduce production of stainless steel wire and
increase production of high-performance alloy wire due to higher average selling price obtained from high-performance alloy wire. The Company will continue to produce some
amount of stainless wire sold to higher-value markets, such as the medical wire market. During fiscal 2008, this category included $2.6 million of net revenue, which represented
0.5 million pounds of stainless steel wire product, as compared to $7.3 million of net revenue and 2.2 million pounds of stainless steel wire product in fiscal 2007.

39

---



Impact of Fresh Start Reporting on Cost of Sales

Upon implementation of the plan of reorganization, fresh start reporting was adopted by the Company in accordance with
SOP-90-7. Under fresh start reporting, the reorganization value is allocated to the Company's net assets based on their relative fair values in a manner similar to the
accounting provisions applied to business combinations under Statement of Financial Standards No. 141,Business Combinations("SFAS
No. 141").

The
Company's operating income was reduced by the recognition of the fair market value adjustments to the Company's assets required by the adoption of fresh start reporting. Cost of
sales included $5.5 million, $30.2 million, $4.8 million, $3.8 million and $3.8 million of these costs in the one month period ended September 30, 2004 and
the years ended September 30, 2005, 2006, 2007 and 2008, respectively.

The
fair market value adjustments to the historical basis of assets are being recognized as follows (dollars in thousands):

Fair Value
Adjustment

Recognition
Period

Expense
Recognized
from
September 1
to
September 30,
2004(3)

Expense
Recognized
from
October 1,
2004 to
September 30,
2005(3)

Expense
Recognized
from
October 1,
2005 to
September 30,
2006(3)

Expense
Recognized
from
October 1,
2006 to
September 30,
2007(3)

Expense
Recognized
from
October 1,
2007 to
September 30,
2008(3)Goodwill

$
41,252


N/A
(1)
$


$


$


$


$
Inventory


30,497


6 months
(2)

5,083


25,414








Machinery and equipment


41,628


14 years


245


2,974


3,124


2,975


3,084Buildings


(859
)

12 years


(6
)

(72
)

(72
)

(72
)

(72
)Land


41


N/A














Trademarks


3,800


N/A
(1)













Patents


8,667


2 to 14 years


164


1,886


1,750


912


768$
5,486

$
30,202

$
4,802

$
3,815

$
3,780


---

40

---





Results of Operations

Year Ended September 30, 2008 Compared to Year Ended September 30, 2007

The following table includes a breakdown of net revenues, shipments, and average selling prices to the markets served by Haynes for the
periods shown.

($
in thousands)

Year Ended September 30,

Change2007

2008

Amount

%Net revenues

$
559,836


100.0
%
$
637,006


100.0
%
$
77,170


13.8
%Cost of sales


408,752


73.0
%

492,349


77.3
%

83,597


20.5
%Gross profit


151,084


27.0
%

144,657


22.7
%

(6,427
)

(4.3
)%Selling, general and administrative expense


39,441


7.0
%

42,277


6.6
%

2,836


7.2
%Research and technical expense


3,116


0.6
%

3,441


0.5
%

325


10.4
%Operating income


108,527


19.4
%

98,939


15.5
%

(9,588
)

(8.8
)%Interest income


(227
)

0.0
%

(188
)

0.0
%

39


17.2
%Interest expense


4,166


0.7
%

1,213


0.2
%

(2,953
)

(70.9
)%Income before income taxes


104,588


18.7
%

97,914


15.4
%

(6,674
)

(6.4
)%Provision for income taxes


38,468


6.9
%

35,136


5.5
%

(3,332
)

(8.7
)%Net income

$
66,120


11.8
%
$
62,778


9.9
%
$
(3,342
)

(5.1
)%


By market

Year Ended
September 30,

Change2007

2008

Amount

%Net revenues(dollars in thousands)Aerospace

$
211,172

$
247,272

$
36,100


17.1
%Chemical processing


147,960


166,092


18,132


12.3
%Land-based gas turbines


103,001


124,117


21,116


20.5
%Other markets


86,259


86,592


333


0.4
%Total product revenue


548,392


624,073


75,681


13.8
%Other revenue


11,444


12,933


1,489


13.0
%Net revenues

$
559,836

$
637,006

$
77,170


13.8
%Pounds by markets(in thousands)Aerospace


7,660


8,851


1,191


15.5
%Chemical processing


5,121


5,388


267


5.2
%Land-based gas turbines


5,093


5,962


869


17.1
%Other markets


4,834


3,074


(1,760
)

(36.4
)%Total shipments


22,708


23,275


567


2.5
%Average selling price per poundAerospace

$
27.57

$
27.94

$
0.37


1.3
%Chemical processing


28.89


30.83


1.94


6.7
%Land-based gas turbines


20.22


20.82


0.60


3.0
%Other markets


17.84


28.17


10.33


57.9
%Total product(excluding other revenue)


24.15


26.81


2.66


11.0
%Total average selling price(including other revenue)


24.65


27.37


2.72


11.0
%


41

---



Net Revenues.Net revenues increased by $77.2 million, or 13.8%, to $637.0 million in fiscal 2008 from $559.8 million in fiscal 2007. Volume
for all products increased by 2.5% to 23.3 million pounds in fiscal 2008 from 22.7 million pounds in fiscal 2007. Volume of high-performance alloys increased by 11.2% to
22.8 million pounds in fiscal 2008 as compared to 20.5 million pounds in fiscal 2007. Volume of stainless steel wire decreased by 77.3% to 0.5 million pounds in fiscal 2008 as
compared to 2.2 million pounds in fiscal 2007 as a result of the Company's strategy to reduce production of stainless steel wire and increase production of high-performance alloy
wire due to higher average selling price available on high-performance alloy wire. It is anticipated that there will continue to be a recurring amount of stainless steel wire produced and
sold into certain specialty markets. The aggregate average selling price per pound for all products increased by 11.0% to $27.37 per pound in fiscal 2008 from $24.65 per pound in fiscal 2007 because
of changes in product mix (including market, form and alloy), an increased level of service center value-added business, and changes in raw material prices. Although nickel prices were lower for
fiscal 2008 than fiscal 2007, the lower price of nickel was offset by increased prices for other raw materials that are significant in the manufacture of the Company's products, such as molybdenum,
cobalt and chromium. Increased competition unfavorably impacted both average selling price and volume. The Company's consolidated backlog decreased by $7.1 million, or 3.0%, to
$229.2 million at September 30, 2008 from $236.3 million at September 30, 2007. This was the result of the combination of a 2% increase in pounds and a 5% decrease in
average selling price. Management believes completion of the expansion and upgrade of the Company's sheet finishing operations should continue to help the Company compete more effectively on lead time
and cost, resulting in decreasing pricing pressure.

Sales
to the aerospace industry increased by 17.1% to $247.3 million in fiscal 2008 from $211.2 million in fiscal 2007, due to a 1.3% increase in the average selling price
per pound combined with a 15.5% increase in volume. The increase in the average selling price per pound is due to improved product mix that includes a higher percentage of specialty alloy products
which have a higher value and a generally higher average selling price when compared to the product mix sold in fiscal 2007, and the effect of passing through higher raw material costs.

Sales
to the chemical processing industry increased by 12.3% to $166.1 million in fiscal 2008 from $148.0 million in fiscal 2007, due to a 6.7% increase in the average
selling price per pound combined with a 5.2% increase in volume. The increase in the average selling price per pound is primarily due to the effect of passing through higher raw material costs and
changes in product mix (including form and alloy) when compared to the product mix sold in fiscal 2007. Volume in this market is affected by the project oriented nature of the market and economic
activity.

Sales
to the land-based gas turbine industry increased by 20.5% to $124.1 million for fiscal 2008 from $103.0 million in fiscal 2007, due to an increase of 3.0%
in the average selling price per pound combined with a 17.1% increase in volume. The increase in the average selling price per pound is due to improved market demand and changes in form and alloys
compared to fiscal 2007. Volume increased as a result of higher billet volume for fiscal 2008 compared to fiscal 2007.

Sales
to other markets increased by 0.4% to $86.6 million in fiscal 2008 from $86.3 million in fiscal 2007, due to a 57.9% increase in average selling price per pound,
which was partially offset by a 36.4% decrease in volume. The primary reason for the increase in average selling price per pound and 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. Stainless steel
wire volume decreased by 77.3%, while volume of high-performance alloys sold to other markets decreased by 2.4% in fiscal 2008 as compared to fiscal 2007. Also contributing to the increase
in average selling price is the change in product mix (both form and alloy), market demand and passing through of higher raw material costs compared to fiscal 2007. The primary reason for the decrease
in total sales volume of high-performance alloys in the "other markets" category is due to a large FGD project which was included in fiscal 2007 and did not repeat this year.

42

---



Other Revenue.Other revenue increased by 13.0% to $12.9 million in fiscal 2008 from $11.4 million for fiscal 2007. The increase is due to higher
activity in toll conversion, revenue recognized from the twenty
year agreement to provide conversion services to Titanium Metals Corporation (as described in Note 13 of the accompanying consolidated financial statements), scrap sales and miscellaneous
sales.

Cost of Sales.Cost of sales increased to $492.3 million, or 77.3% of net revenues in fiscal 2008 compared to $408.7 million, or 73.0% of net
revenues in fiscal 2007. Cost of sales increased as a result of a combination of the following factors: (i) increased volumes, (ii) increased manufacturing costs due to planned and
unplanned equipment outages, (iii) changes in product mix due to an increase in the production and sale of higher-cost alloy and forms, (iv) increased energy costs, and
(v) increased raw material costs of molybdenum, cobalt and chromium partially offset by the lower nickel costs. In fiscal 2007 cost of sales was increased due to a one-time bonus
accrual to union employees upon ratification of the collective bargaining agreement of $2.2 million (or 0.4% of net revenue), which did not repeat in fiscal 2008. This decrease was partially
offset by higher wage rates for union employees and increased fringe benefit costs in fiscal 2008. Cost of sales in fiscal 2008 was also decreased by a $3.7 million (0.6% 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 overall increase in cost of sales as a
percentage of net revenues (and the corresponding decline in gross profit as a percentage of net revenue) can also be attributed to the increased competition (which lowered net revenue) as discussed
above under "Overview". While the price of nickel was lower for fiscal 2008 than fiscal 2007, the lower price of nickel was offset by increased prices for other raw materials that are significant in
the manufacture of the Company's products, such as molybdenum, cobalt and chromium. As reported by the London Metals Exchange, the average price per pound for 30-day cash buyers of nickel
at September 30, 2008 was $8.07 compared to $13.40 at September 30, 2007, and the average price over the course of fiscal 2008 was higher than the 30-day cash average at
September 30, 2008.

Selling, General and Administrative Expense.Selling, general and administrative expense increased by $2.8 million to $42.3 million in fiscal 2008
from $39.4 million in fiscal 2007 due to: (i) higher business activity causing commissions and sales expenses to increase $3.9 million, and (ii) the fiscal 2007 reduction
in allowance for doubtful accounts of $0.4 million compared to fiscal 2008 to reflect the write-off history. These increases were partially offset by a decrease in stock
compensation expense of $1.5 million. Selling, general and administrative expenses as a percentage of net revenues decreased to 6.6% for fiscal 2008 compared to 7.0% for fiscal 2007 due
primarily to increased revenues.

Research and Technical Expense.Research and technical expense slightly increased by $0.3 million to $3.4 million, or 0.5% of net revenues, in fiscal
2008 compared to $3.1 million, or 0.6% of net revenues, in fiscal 2007 due to normal inflationary increases and increased staff levels earlier in fiscal 2008 required to support the transition
of retiring employees.

Operating Income.As a result of the above factors, operating income in fiscal 2008 was $98.9 million compared to $108.5 million in fiscal 2007.

Interest Expense.Interest expense decreased by $3.0 million to $1.2 million in fiscal 2008 from $4.2 million for fiscal 2007. The decrease is
due to a lower average balance outstanding resulting from: (i) the Company's application of proceeds from the equity offering that occurred near the end of the second quarter of fiscal 2007,
(ii) cash generated from operations, and (iii) proceeds from the exercise of stock options which were used to reduce the outstanding debt balance.

Income Taxes.Income tax expense decreased to $35.1 million in fiscal 2008 from $38.5 million in fiscal 2007 due to lower pretax income. The
effective tax rate for fiscal 2008 was 35.9% compared to 36.8% in fiscal 2007. The decrease in effective tax rate is primarily attributable to (i) lower blended state tax rate in the U.S. due
to an apportionment change and (ii) a higher manufacturers deduction for U.S. based facilities.

Net Income.As a result of the above factors, net income decreased by $3.3 million, or 5.1%, to $62.8 million in fiscal 2008 compared to
$66.1 million in fiscal 2007.

43

---



Year Ended September 30, 2007 Compared to Year Ended September 30, 2006

The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the
periods shown.

($
in thousands)

Year Ended September 30,

Change2006

2007

Amount

%Net revenues

$
434,405


100.0
%
$
559,836


100.0
%
$
125,431


28.9
%Cost of sales


325,573


74.9
%

408,752


73.0
%

83,179


25.5
%Gross profit


108,832


25.1
%

151,084


27.0
%

42,252


38.8
%Selling, general and administrative expense


40,296


9.3
%

39,441


7.0
%

(855
)

(2.1
)%Research and technical expense


2,659


0.6
%

3,116


0.6
%

457


17.2
%Operating income


65,877


15.2
%

108,527


19.4
%

42,650


64.7
%Interest expense, net


8,024


1.8
%

3,939


0.7
%

(4,085
)

(50.9
)%Income before income taxes


57,853


13.3
%

104,588


18.7
%

46,735


80.8
%Provision for (benefit from) income taxes


22,313


5.1
%

38,468


6.9
%

16,155


72.4
%Net income (loss)

$
35,540


8.2
%
$
66,120


11.8
%
$
30,580


86.0
%


By market

Year Ended
September 30,

Change2006

2007

Amount

%Net revenues(dollars in thousands)Aerospace

$
165,747

$
211,172

$
45,425


27.4
%Chemical processing


129,422


147,960


18,538


14.3
%Land-based gas turbines


77,947


103,001


25,054


32.1
%Other markets


56,350


86,259


29,909


53.1
%Total product revenue


429,466


548,392


118,926


27.7
%Other revenue


4,939


11,444


6,505


131.7
%Net revenues

$
434,405

$
559,836

$
125,431


28.9
%Pounds by markets(in thousands)Aerospace


7,121


7,660


539


7.6
%Chemical processing


4,984


5,121


137


2.7
%Land-based gas turbines


4,790


5,093


303


6.3
%Other markets


4,749


4,834


85


1.8
%Total shipments


21,644


22,708


1,064


4.9
%Average selling price per poundAerospace

$
23.28

$
27.57

$
4.29


18.4
%Chemical processing


25.97


28.89


2.93


11.3
%Land-based gas turbines


16.27


20.22


3.95


24.3
%Other markets


11.87


17.84


5.98


50.4
%Total product(excluding other revenue)


19.84


24.15


4.31


21.7
%Total average selling price(including other revenue)


20.07


24.65


4.58


22.8
%


44

---



Net Revenues.Net revenues increased by $125.4 million, or 28.9%, to $559.8 million in fiscal 2007 from $434.4 million in fiscal 2006. Volume
for all products increased by 4.9% to 22.7 million pounds in fiscal 2007 from 21.6 million pounds in fiscal 2006. Volume of high-performance alloys increased by 11.5% to
20.5 million pounds in fiscal 2007 as compared to 18.4 million pounds in fiscal 2006. Volume of stainless steel wire decreased by 32.3% to 2.2 million pounds in fiscal 2007 as
compared to 3.2 million pounds in fiscal 2006 as a result of the Company's strategy to reduce production of stainless steel wire and increase production of high-performance alloy
wire due to higher average selling price available on high-performance alloy wire. The average selling price per pound for all products increased by 22.8% to $24.65 per pound in fiscal
2007 from $20.07 per pound in fiscal 2006 due primarily to good market demand and passing through higher raw material costs. The Company's consolidated backlog increased by $29.4 million, or
14.2%, to $236.3 million at September 30, 2007 from $206.9 million at September 30, 2006.

Sales
to the aerospace industry increased by 27.4% to $211.2 million in fiscal 2007 from $165.8 million in fiscal 2006, due to a 18.4% increase in the average selling price
per pound combined with a 7.6% increase in volume. The increase in the average selling price per pound was due to improved product mix that included a higher percentage of specialty alloy products and
forms with a higher value and average selling price when compared to the product mix sold in fiscal 2006, and the effect of passing through higher raw material costs. Volume improved due to good
market demand as reflected in the strength in the build rate for new aircraft.

Sales
to the chemical processing industry increased by 14.3% to $148.0 million in fiscal 2007 from $129.4 million in fiscal 2006, due to a 11.3% increase in the average
selling price per pound combined with a 2.7% increase in volume. The increase in the average selling price per pound was due to improved market demand and the effect of passing through higher raw
material costs.

Sales
to the land-based gas turbine industry increased by 32.1% to $103.0 million for fiscal 2007 from $77.9 million in fiscal 2006, due to an increase of 24.3%
in the average selling price per pound combined with a 6.3% increase in volume. The increase in the average selling price per pound was due to improved market demand and the effect of passing through
higher raw material costs. Volume improved as a result of the generally improved economy and higher demand from power generation, oil and gas production, and alternative power systems applications.

Sales
to other markets increased by 53.1% to $86.3 million in fiscal 2007 from $56.4 million in fiscal 2006, due to a 50.4% increase in average selling price per pound
combined with a 1.8% increase in volume. The primary reason for the selling price increase was a decrease in the volume of stainless steel wire of 32.3%, and an increase in volume of
high-performance alloys sold to other markets of 75.4% in fiscal 2007 as compared to fiscal 2006. The increase in the average selling price was also due to market demand and passing
through of higher raw material costs compared to fiscal 2006. The reason for the increase in total sales volume of the "other markets" category was due to the Company's continuing effort to expand the
amount sold into this category and the number of other markets within this category the Company services beyond the traditional three major markets typically discussed. In fiscal 2007 sales to the
flue gas desulphurization (FGD) market increased by $14.4 million, or 178.0%, to $22.5 million and volume increased by 120.2%, compared to fiscal 2006. As previously discussed, the
volume of stainless steel wire decreased in fiscal 2007 when compared to fiscal 2006 as a result of the Company's strategy to reduce production of stainless steel wire to allow greater production of
high-performance wire.

Other Revenue.Other revenue increased by 131.7% to $11.4 million in fiscal 2007 from $4.9 million for fiscal 2006. The increase was due to higher
activity in toll conversion, revenue recognized from the TIMET agreement, scrap sales and miscellaneous sales.

Cost of Sales.Cost of sales as a percentage of net revenues decreased to 73.0% in fiscal 2007 from 74.9% in fiscal 2006. This decrease in the percentage was
attributed to a combination of the following factors: (i) improved product pricing combined with overall improvement in volume, which resulted in the increased absorption of fixed manufacturing
costs, (ii) reductions in manufacturing cost resulting from the

45

---



capital
improvements program, and (iii) decreases in energy costs (primarily natural gas). These positive factors were partially offset by higher raw material costs and a bonus payment to union
employees upon ratification of the collective bargaining agreement of $2.2 million (0.4% of net revenue). Raw material costs were significantly higher in fiscal 2007 than in fiscal 2006,
primarily as a result of increased prices for nickel, which made up approximately 63% of the Company's raw material costs. Although, as reported by the London Metals Exchange, the average price per
pound for 30-day cash buyers of nickel at September 30, 2007 was $13.40 compared to $13.67 at September 30, 2006, the average price over the course of fiscal 2007 was higher
than fiscal 2006.

Selling, General and Administrative Expense.Selling, general and administrative expense decreased by $0.9 million to $39.4 million in fiscal 2007
from $40.3 million in fiscal 2006. The decrease was primarily attributable to $1.1 million of costs incurred in fiscal 2006 related to strategic alternatives that did not repeat in
fiscal 2007. Selling, general and administrative expense as a percentage of net revenues decreased to 7.0% in fiscal 2007 compared to 9.3% for fiscal 2006 due primarily to the increased level of net
revenues.

Research and Technical Expense.Research and technical expense increased slightly by $0.5 million to $3.1 million, or 0.6% of net revenues, in fiscal
2007 compared to $2.7 million, or 0.6% of net revenues, in fiscal 2006.

Operating Income.As a result of the above factors, operating income in fiscal 2007 was $108.5 million compared to $65.9 million in fiscal 2006.

Interest Expense.Interest expense decreased by $4.1 million to $3.9 million in fiscal 2007 from $8.0 million for fiscal 2006. The decrease
was due to a lower average balance outstanding slightly offset by a higher interest rate and less interest capitalized on long-term capital projects.

Income Taxes.Income tax expense increased to $38.5 million in fiscal 2007 from $22.3 million in fiscal 2006 due to higher pretax income. The
effective tax rate for fiscal 2007 was 36.8% compared to 38.6% in fiscal 2006. The decrease in effective tax rate was primarily attributable to (i) amended tax returns to claim favorable items
from extraterritorial income exclusion and foreign tax credits and (ii) higher foreign taxable income at a lower tax rate as compared to taxable income in the U.S. at a higher tax rate.

Net Income.As a result of the above factors, net income increased by $30.6 million, or 86.0%, to $66.1 million in fiscal 2007 compared to
$35.5 million in fiscal 2006.

46

---





Liquidity and Capital Resources



During fiscal 2008, the Company's primary sources of cash were (i) cash from operations (ii) borrowings under its U.S.
revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation (Central) (described below), and (iii) the exercise of an additional 177,386 stock options in
fiscal 2008. At September 30, 2008, the Company had cash and cash equivalents of approximately $7.1 million compared to cash and cash equivalents of approximately $5.7 million at
September 30, 2007.

Net
cash provided by operating activities was $41.3 million in fiscal 2008, as compared to cash provided by operating activities of $4.6 million in fiscal 2007. At
September 30, 2008, inventory balances (net of foreign currency adjustments) were approximately $21.6 million higher than at September 30, 2007, as a result of the continued
increase in costs of raw materials, a higher level of inventory required to be maintained to support the increased level of sales and a level of safety stock in order to continue production and
shipments through the planned outages related to the capital upgrades. In addition, the
pension and postretirement benefits balance decreased by $12.5 million due to the payments to the plans and plan amendments. Net cash used in investing activities was $21.6 million in
fiscal 2008, as a result of the continuing capital expenditure program and the Asian distribution expansion and acquisition. As a result of the above, borrowings on the revolving credit facility
decreased by $23.7 million. Taxes will be paid related to the TIMET transaction primarily in the first quarter of fiscal 2009. Also included in cash from financing activities is
$3.2 million for the excess tax benefit from the exercise of 177,386 stock options in fiscal 2008.

Net
cash provided by operating activities was $4.6 million (which includes the proceeds, net of expenses, of the $50.0 million up-front payment received from
TIMET) in fiscal 2007, as compared to cash provided by operating activities of $0.3 million in fiscal 2006. At September 30, 2007, inventory balances (net of foreign currency
adjustments) were approximately $103.1 million higher than at September 30, 2006, as a result of the continued increase in costs of raw materials (nickel, molybdenum and cobalt), a
higher level of inventory required to be maintained to support the increased level of sales and a level of safety stock in order to continue production and shipments through the planned outages
related to the capital upgrades. In addition, the accounts receivable balance increased by $26.3 million due to the increased level of sales. Slightly offsetting the inventory and accounts
receivable increase is an increase in accounts payable and accrued expenses, which provided cash of $12.6 million. Net cash used in investing activities was $16.1 million in fiscal 2007,
as a result of the continuing capital expenditure program. Borrowings on the revolving credit facility decreased by $81.0 million as a result of application of the proceeds from the Company's
sale of common stock and cash generated from operations, which included the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET, to reduce
borrowings. Taxes will be paid related to the TIMET transaction primarily in the first quarter of fiscal 2009. Also included in cash from financing activities is $10.9 million for the excess
tax benefit from the exercise of 450,000 stock options in the underwritten public offering and the exercise of an additional 157,237 stock options in the fourth quarter of fiscal 2007.



The Company's sources of cash for fiscal 2009 are expected to consist primarily of cash generated from operations, cash on hand, and
borrowings under the U.S. revolving credit facility. The U.S. revolving credit facility provides borrowings in a maximum amount of $120.0 million, subject to a borrowing base formula and
certain reserves. At September 30, 2008, the Company had cash of approximately $7.1 million, an outstanding balance of $11.8 million on the U.S. revolving credit facility and
access to a total of approximately $108.2 million under the U.S. revolving credit facility, subject to borrowing base and certain

47

---



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 September 30, 2008, the U.S. revolving credit facility had an outstanding balance of $11.8 million. During fiscal 2008 it bore interest at a
weighted average interest rate of 5.36%. 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 September 30, 2008, the most recent required measurement
date under the agreement documentation, 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.



Haynes and Wachovia Capital Finance Corporation (Central) ("Wachovia") entered into a Second Amended and Restated Loan and Security
Agreement (the "Amended Agreement") with an effective date of November 18, 2008, which amended and restated the revolving credit facility between Haynes and Wachovia dated August 31,
2004. Among other items, the Amended Agreement extends the maturity date of the U.S. revolving credit facility to September 30, 2011, increases the margin included in the interest rate from
1.5% per annum to 2.5% per annum, permits the Company to pay dividends and repurchase common stock if certain financial metrics are met, and eliminates the EBITDA covenant. The maximum revolving loan
amount under the Amended Agreement continues to be $120.0 million.



The Company's primary uses of cash over the next twelve months are expected to consist of expenditures related
to:



Planned
fiscal 2009 capital spending is targeted at approximately $15.1 million, most of which is maintenance spending. Depending upon economic conditions, the Company may make
further upgrades in fiscal 2009; however, capital projects in fiscal 2009 will be focused on improving and maintaining the equipment reliability and are not planned to equal the amount spent in either
fiscal 2007 or fiscal 2008. At this time, management does not anticipate prolonged planned equipment outages as a result of upgrades in fiscal 2009.

48

---



Contractual Obligations

The following table sets forth the Company's contractual obligations for the periods indicated, as of September 30, 2008:

Payments Due by PeriodContractual Obligations(1)

Total

Less than
1 year

1-3 Years

3-5 Years

More than
5 years(in thousands)Debt obligations (including interest)(2)

$
13,522

$
13,522

$


$


$
Operating lease obligations


10,588


3,305


3,724


1,157


2,402Capital lease obligations


395


33


66


66


230Raw material contracts


70,045


55,495


14,550





Mill supplies contracts


208


208








Capital projects


1,387


1,387








Pension plan(3)


41,137


9,057


18,180


13,900


Other postretirement benefits(4)


48,000


4,200


9,000


9,800


25,000Non-compete obligations(5)


330


110


220





Total

$
185,612

$
87,317

$
45,740

$
24,923

$
27,632


---

At
September 30, 2008, the Company also had $0.03 million outstanding under a letter of credit. The letter of credit is outstanding in connection with a building lease
obligation.

Inflation

Historically, the Company has had the ability to pass on to customers both increases in consumable costs and material costs because of
the value-added contribution the material makes to the final product. Material comprises the most significant portion of the product costs. Nickel, cobalt and molybdenum, the primary raw materials
used to manufacture the Company's products, all have experienced significant fluctuations in price. Until now the Company has been able to pass the cost on to the customers, however, in the future the
Company may not be able to successfully offset rapid increases in the price of nickel or other raw material. In the event that raw material price increases occur that the Company is unable to pass on
to its customers, its cash flows or results of operations would be materially adversely affected.

49

---



Critical Accounting Policies and Estimates



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, asset impairments, retirement benefits, matters related to product liability lawsuits 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, pension asset mix and, in some cases, actuarial techniques, and various
other factors that are believed to be reasonable under the
circumstances. The results of this process form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company
routinely 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's accounting policies are more fully described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. The
Company has identified certain critical accounting policies, which are described below. The following listing of policies is not intended to be a comprehensive list of all of the Company's accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.



Revenue is recognized when collectability is reasonably assured and when title passes to the customer which is generally at the time of
shipment (F.O.B. shipping point or at a foreign port for certain export customers). Allowances for sales returns are recorded as a component of net revenues in the periods in which the related sales
are recognized. Management determines this allowance based on historical experience and the Company has not had any history of returns that have exceeded its recorded allowances. Should returns
increase above historical experience, additional allowances may be required.



The Company has defined benefit pension and postretirement 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 plan 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 postretirement 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.

The
Company believes the expected rate of return on plan assets of 8.5% is a reasonable assumption on a long-term perspective based on its asset allocation of 55% equity, 43%
fixed income and 2% other. The Company's assumption for expected rate of return for plan assets for
equity, fixed income, and real estate/other are 10.25%, 5.5% and 8.5%, respectively. This position is supported through a review of investment criteria, and consideration of historical returns over a
several year period.

50

---



Salaried
employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an
enhanced matching program of the defined contribution plan (401(k)). Effective December 31, 2007, the U.S. pension plan was amended to freeze benefits for all non-union employees in
the U.S.



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. 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 amount 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 amount. 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 combination of a market value approach using quoted market prices and an income approach using discounted cash
flow projections. Changes in the market value and cash flow projections of the Company could have significant impact on whether or not goodwill is impaired and the amount of the impairment.
Assumptions and estimates with respect to estimated future cash flows used in the evaluation are subject to a high degree of judgment and complexity. The Company reviewed goodwill and trademarks for
impairment as of August 31, 2008, and concluded no impairment adjustment was necessary. However, as a result of a recent decline in the Company's common stock price, goodwill will be evaluated
on a quarterly basis for potential impairment if such conditions continue.



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 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 for the date of grant and vest 331/3% per year over three years from the grant date.

On
October 1, 2005, the Company adopted SFAS 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. 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, expected forfeiture rate, and expected lives of the options.

51

---





The Company accounts for income taxes in accordance with SFAS 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 bases 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 and the expected reversal date of temporary differences to be deducted on future income tax returns. In its evaluation of the need for a valuation
allowance, the Company assesses prudent and feasible tax planning strategies and expected reversal dates. 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.

On
October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48)Accounting for Uncertainty in Income
Taxesan interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement
recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to reversal of tax positions, balance sheet
classification, interest and penalties, interim period accounting, disclosure and transition.

Recently Issued Accounting Pronouncements

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 measurement date." On February 12, 2008, the FASB issued Staff Position 157-2 ("FSP 157-2") which delays the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore for
financial assets and liabilities 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 (excluding nonfinancial assets and liabilities) beginning on October 1, 2008. The Company does not expect the implementation of SFAS 157 and
FSP 157-2 in fiscal 2009 to have a material impact on its financial position, results of operations or 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 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 required to adopt SFAS 159 beginning October 1, 2008. Due to making no election
on any of the Company's instruments, the adoption of SFAS No. 159 on October 1, 2008 had no impact on the Company's consolidated financial statements.

In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007),Business Combinations("SFAS 141(R)").
SFAS 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

52

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expense.
SFAS 141(R) also expands disclosures related to business combinations. SFAS 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 SFAS 141(R) income tax requirements immediately upon adoption. The Company is
currently evaluating the impact of SFAS 141(R) related to future acquisitions, if any, 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("SFAS 160"). SFAS 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. SFAS 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 SFAS 160 is not expected to have an impact on the Company's financial position, results of operations
or cash flows.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities("SFAS 161")an amendment of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is
intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position,
financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will
adopt SFAS 161 on October 1, 2009 and is currently evaluating the effect the adoption will have on its consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles("SFAS 162").
SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that
are presented in conformity with U.S. GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. Any effect of applying the provisions of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error
Corrections. The Company will adopt SFAS 162 once it is effective and is currently evaluating the effect the
adoption will have on its consolidated financial statements.

In
April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3,Determination of the Useful Life of Intangible
Assets("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141R,Business Combinations, and other U.S. GAAP.
This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.

53

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices. The Company is exposed to various market
risks, including changes in interest rates, foreign currency exchange rates and the price of nickel, which is a commodity.

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 September 30, 2007 and 2008.
A hypothetical 10% increase in the interest rate on variable rate debt would have resulted in additional interest expense of approximately $0.3 million for the fiscal year ended
September 30, 2007 and $0.1 million for the fiscal year ended September 30, 2008. 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 foreign subsidiaries maintain receivables and payables denominated in currencies other than their functional currency or
the U.S. dollar. The foreign subsidiaries manage their own foreign currency exchange risk. The U.S. operations transact their foreign sales in U.S. dollars, thereby avoiding fluctuations in foreign
exchange rates. Any exposure aggregating more than $500,000 requires approval from the Company's Vice President of Finance. The Company is not currently party to any currency contracts.

Fluctuations
in the price of nickel, the Company's 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 the Company may not be able to successfully offset a rapid increase in the cost of raw material in the future as it has been able to in the past.

54

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Item 8.    Financial Statements and Supplementary Data

HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Haynes International, Inc. as of September 30, 2008 and 2007 and for the years ended September 30, 2008,
September 30, 2007 and September 30, 2006

PageReport of Independent Registered Public Accounting Firm


56Consolidated Balance Sheets


58Consolidated Statements of Operations


59Consolidated Statements of Comprehensive Income


60Consolidated Statements of Stockholders' Equity


61Consolidated Statements of Cash Flows


62Notes to Consolidated Financial Statements


63


55

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Haynes International, Inc.
Kokomo, IN

We
have audited the accompanying consolidated balance sheets of Haynes International, Inc. and subsidiaries (the "Company") as of September 30, 2008 and 2007, and the
related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2008. We also have
audited the Company's internal control over financial reporting as of September 30, 2008, based on the criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial
reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Haynes International, Inc. and
subsidiaries as of September 30, 2008 and

56

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2007,
and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on the
criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

As
discussed in Notes 2 and 8 to the consolidated financial statements, effective October 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48,Accounting for Uncertainty in Income Taxes, and effective September 30, 2007, the Company adopted Statement of Financial
Accounting Standard No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans.

/s/ DELOITTE & TOUCHE LLP

Indianapolis, IN
November 24, 2008

57

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (in thousands, except share and per share data)

September 30,
2007

September 30,
2008ASSETSCurrent assets:Cash and cash equivalents

$
5,717

$
7,058Restricted cashcurrent portion


110


110Accounts receivable, less allowance for doubtful accounts of $1,339 and $1,354 respectively


106,414


99,295Inventories


286,302


304,915Income taxes receivable


1,760


Deferred income taxes


10,801


9,399Other current assets


1,457


2,573Total current assets


412,561


423,350Property, plant and equipment, net


97,860


107,302Deferred income taxeslong term portion


22,738


32,310Prepayments and deferred charges


3,702


2,741Restricted cashlong term portion


330


220Goodwill


41,252


43,737Other intangible assets, net


8,526


7,907Total assets

$
586,969

$
617,567LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
48,254

$
41,939Accrued expenses


12,189


12,729Income taxes payable





7,482Accrued pension and postretirement benefits


14,647


15,016Revolving credit facilities


35,549


11,812Deferred revenuecurrent portion


2,500


2,500Current maturities of long-term obligations


110


1,515Total current liabilities


113,249


92,993Long-term obligations (less current portion)


3,074


1,582Deferred revenue (less current portion)


45,329


42,830Non-current income taxes payable





276Accrued pension and postretirement benefits


108,940


100,343Total liabilities


270,592


238,024Commitments and contingencies (Notes 9 and 10)





Stockholders' equity:Common stock, $0.001 par value (40,000,000 shares authorized, 11,807,237 and
11,984,623 shares issued and outstanding at September 30, 2007 and
September 30, 2008, respectively)


12


12Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)





Additional paid-in capital


218,504


225,821Accumulated earnings


93,880


155,831Accumulated other comprehensive income (loss)


3,981


(2,121
)Total stockholders' equity


316,377


379,543Total liabilities and stockholders' equity

$
586,969

$
617,567


The accompanying notes are an integral part of these consolidated financial statements.

58

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except share and per share data)

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Net revenues

$
434,405

$
559,836

$
637,006Cost of sales


325,573


408,752


492,349Gross profit


108,832


151,084


144,657Selling, general and administrative expense


40,296


39,441


42,277Research and technical expense


2,659


3,116


3,441Operating income


65,877


108,527


98,939Interest income


(97
)

(227
)

(188
)Interest expense


8,121


4,166


1,213Income before income taxes


57,853


104,588


97,914Provision for income taxes


22,313


38,468


35,136Net income

$
35,540

$
66,120

$
62,778Net income per share:Basic

$
3.55

$
6.07

$
5.27Diluted

$
3.46

$
5.89

$
5.22Weighted average shares outstanding:Basic


10,000,000


10,896,067


11,903,289Diluted


10,270,642


11,230,101


12,026,440


The
accompanying notes are an integral part of these consolidated financial statements.

59

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (in thousands)

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Net income

$
35,540

$
66,120

$
62,778Other comprehensive income (loss), net of tax:Pension curtailment








2,701Pension and postretirement


(217
)

217


(5,429
)Foreign currency translation adjustment


1,570


3,441


(3,374
)Other comprehensive income (loss)


1,353


3,658


(6,102
)Comprehensive income

$
36,893

$
69,778

$
56,676


The
accompanying notes are an integral part of these consolidated financial statements.

60

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (in thousands, except share data)

Common Stock







Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-in
Capital

Accumulated
Earnings
(Deficit)

Deferred
Stock
Compensation

Total
Stockholders'
EquityShares

ParBalance October 1, 2005


10,000,000

$
10

$
120,972

$
(7,780
)
$
(821
)
$
(512
)
$
111,869Net income











35,540








35,540Other comprehensive income

















1,353


1,353Reclass reporting of deferred stock compensation








(821
)




821





Stock compensation








2,786











2,786Balance September 30, 2006


10,000,000


10


122,937


27,760





841


151,548Net income











66,120








66,120Other comprehensive income

















3,658


3,658Adoption of SFAS No. 158 (net of tax)

















(518
)

(518
)Equity offering, net


1,200,000


1


72,751











72,752Exercise of stock options


607,237


1


19,680











19,681Stock compensation








3,136











3,136Balance September 30, 2007


11,807,237


12


218,504


93,880





3,981


316,377Net income











62,778








62,778Other comprehensive loss

















(6,102
)

(6,102
)Adoption of FIN 48











(827
)







(827
)Exercise of stock options


177,386





5,667











5,667Stock compensation








1,650











1,650Balance September 30, 2008


11,984,623

$
12

$
225,821

$
155,831

$


$
(2,121
)
$
379,543


The accompanying notes are an integral part of these consolidated financial statements.

61

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Cash flows from operating activities:Net income

$
35,540

$
66,120

$
62,778Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


6,926


7,501


8,934Amortization


1,964


1,146


1,119Stock compensation expense


2,786


3,136


1,650Excess tax benefit from option exercises





(10,869
)

(3,187
)Deferred revenue





50,000


Deferred revenueportion recognized





(2,171
)

(2,499
)Deferred income taxes


(2,644
)

3,928


(7,511
)Pension curtailment gain








(3,659
)Loss on disposition of property


140


134


321Change in assets and liabilities, net of effect from acquisition:Accounts receivable


(18,125
)

(26,308
)

5,121Inventories


(30,122
)

(103,100
)

(21,569
)Other assets


(216
)

(2,573
)

28Accounts payable and accrued expenses


(925
)

12,558


(4,021
)Income taxes


1,901


8,754


12,604Accrued pension and postretirement benefits


3,043


(3,680
)

(8,826
)Net cash provided by operating activities


268


4,576


41,283Cash flows from investing activities:Additions to property, plant and equipment


(10,668
)

(16,226
)

(18,685
)Asian distribution expansion and acquisition








(3,000
)Change in restricted cash


110


110


110Net cash used in investing activities


(10,558
)

(16,116
)

(21,575
)Cash flows from financing activities:Net increase (decrease) in revolving credit facility


12,368


(81,287
)

(23,737
)Proceeds from equity offering, net





72,752


Proceeds from exercise of stock options





8,478


2,480Excess tax benefit from option exercises





10,869


3,187Changes in long-term obligations


1,009


(119
)

(135
)Net cash provided by (used in) financing activities


13,377


10,693


(18,205
)Effect of exchange rates on cash


209


382


(162
)Increase (decrease) in cash and cash equivalents


3,296


(465
)

1,341Cash and cash equivalents:Beginning of period


2,886


6,182


5,717End of period

$
6,182

$
5,717


7,058Supplemental disclosures of cash flow information:Cash paid during period for:Interest (net of capitalized interest)

$
7,992

$
3,794

$
1,115Income taxes

$
23,148

$
26,072

$
32,410


The accompanying notes are an integral part of these consolidated financial statements.

62

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (in thousands, except per share data and otherwise noted)

Note 1    Background and Organization

Description of Business

Haynes International, Inc. and its subsidiaries (the "Company" or "Haynes") develops, manufactures, markets and distributes
technologically advanced, high-performance alloys primarily for use in the aerospace, land-based gas turbine and chemical processing industries. The Company's products are
high-temperature resistant alloys ("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are used by manufacturers of equipment that is subjected to extremely high
temperatures, such as jet engines for the aerospace industry, gas turbine engines for power generation, waste incineration, and industrial heating equipment. The Company's CRA products are used in
applications that require resistance to extreme corrosion, such as chemical processing, power plant emissions control and hazardous waste treatment. The Company produces its
high-performance alloys primarily in sheet, coil and plate forms. In addition, the Company produces its products as seamless and welded tubulars, and in slab, bar, billets and wire forms.

High-performance
alloys are characterized by highly engineered often proprietary, metallurgical formulations primarily of nickel, cobalt and other metals with complex
physical properties. The complexity of the manufacturing process for high-performance alloys is reflected in the Company's relatively high average selling price per pound, compared to the
average selling price of other metals, such as carbon steel sheet, stainless steel sheet and aluminum. The
high-performance alloy industry has significant barriers to entry such as the combination of (i) demanding end-user specifications, (ii) a multi-stage
manufacturing process, and (iii) the technical sales, marketing and manufacturing expertise required to develop new applications.

Note 2    Summary of Significant Accounting Policies

A.    Principles of Consolidation and Nature of Operations

The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries. All intercompany transactions
and balances are eliminated. The Company has manufacturing facilities in Kokomo, Indiana; Mountain Home, North Carolina; and Arcadia, Louisiana with distribution service centers in Lebanon, Indiana;
LaMirada, California; Houston, Texas; Windsor, Connecticut; Paris, France; Openshaw, England; Zurich, Switzerland; and Shanghi, China; and sales offices in Singapore; Milan, Italy; Chennai, India; and
Shanghai, China.



On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its
common stock at a price of $65.00 per share. The net proceeds to the Company after underwriting discounts, commissions and offering expenses (aggregating $5,248) were $72,752. As a part of the
offering, certain employees and directors exercised 450,000 stock options and the payment of the exercise price for those stock options resulted in an additional $6,083 in proceeds to the Company.
Simultaneously, the Company listed its common stock on The NASDAQ Global Market.



On June 2, 2008 the Company announced the expansion of its relationship with HW Limited and its affiliated companies in Hong
Kong and China for sales of Haynes products throughout Asia. Under the

63

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

acquisition
agreement (and the related consulting agreement), which became effective on June 1, Haynes' sales and marketing presence in Asia has been greatly expanded. The sales force of HW
Limited's Chinese affiliate was integrated into the Haynes operations in China expanding Haynes' direct sales organization by eight people, which Haynes believes will lead to a more effective
organization. In addition to overseeing this expanded organization, HW Limited's principal, Helen Wang will promote Haynes' products and services to customers in select markets in Asia, including
China, Taiwan, South Korea, Singapore, Thailand, Laos, Malaysia, Vietnam, Indonesia, Cambodia, Philippines, Australia, and New Zealand. This arrangement is one component of the Company's continued
campaign to grow its market presence in China and the rest of Asia. The purchase price of $3,000 was allocated to fixed assets $15, non-compete agreement $500 and goodwill $2,485.

B.    Cash and Cash Equivalents

The Company considers all highly liquid investment instruments, including investments with original maturities of three months or less at acquisition, to be cash
equivalents, the carrying value of which approximates fair value due to the short maturity of these investments.

C.    Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company
markets its products to a diverse customer base, both in the United States of America and overseas. Trade credit is extended based upon evaluation of each customer's ability to perform its obligation,
which is updated periodically. The Company purchases credit insurance for certain foreign trade receivables.

D.    Revenue Recognition

The Company recognizes revenue when collectability is reasonably assured and when title passes to the customer which is generally at the time of shipment with
freight terms of FOB shipping point or at a foreign port for certain export customers. Allowances for sales returns are recorded as a component of net sales in the periods in which the related sales
are recognized. The Company determines this allowance based on historical experience and has not had a history of returns that have exceeded recorded allowances.

E.    Inventories

Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO")
method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market or scrap
value, if applicable, based upon assumptions about future demand and market conditions.

F.     Intangible Assets and Goodwill

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 SFAS No. 142,Goodwill and Other

64

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

Intangible Assets. Pursuant to SFAS No. 142 goodwill is not amortized and the value of goodwill is reviewed at least annually for impairment. If the carrying amount
exceeds the fair value, impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment. Fair value was estimated using a combination of a market value approach
using quoted market prices and an income approach using discounted cash flow projections.

Goodwill
was also created in June 2008 related to the acquisition of assets and related agreements entered into with HW Limited and its affiliated companies in Hong Kong and China,
including the acquisition of office equipment and non-compete agreements.

The
Company also has patents, trademarks and other intangibles. As the patents have a definite 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 trademarks may exist resulting in a charge to earnings to the extent of impairment. The Company has non-compete agreements with lives of 2 to
7 years. Amortization of the patents, non-competes and other intangibles was $1,964, $1,146, and $1,119 for the years ended September 30, 2006, 2007 and 2008, respectively.

Goodwill
and trademarks were tested for impairment on August 31, 2008 with no impairment recognized because the fair values exceeded the carrying values.

The
following represents a summary of intangible assets and goodwill at September 30, 2007 and 2008:

September 30, 2007

Gross
Amount

Accumulated
Amortization

Carrying
AmountGoodwill

$
41,252

$


$
41,252Patents

$
8,667

$
(4,712
)
$
3,955Trademarks


3,800





3,800Non-compete


840


(266
)

574Other


465


(268
)

197$
13,772

$
(5,246
)
$
8,526September 30, 2008

Gross
Amount

Accumulated
Amortization

Carrying
AmountGoodwill

$
43,737

$


$
43,737Patents

$
8,667

$
(5,480
)
$
3,187Trademarks


3,800





3,800Non-compete


1,340


(488
)

852Other


465


(397
)

68$
14,272

$
(6,365
)
$
7,907


65

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

The
following table presents the changes in the carrying amount of goodwill for the year ended September 30, 2008:

Balance at September 30, 2007

$
41,252Acquisition HW Limited


2,485Balance at September 30, 2008

$
43,737Estimate of Aggregate Amortization Expense:
Year Ending September 30,2009


8962010


4472011


4342012


3592013


350


G.    Property, Plant and Equipment

Additions to property, plant and equipment are recorded at cost with depreciation calculated primarily by using the straight-line method based on
estimated economic useful lives which are generally as follows:

Building and improvements

40 yearsMachinery and equipment

514 yearsOffice equipment and computer software

310 yearsLand improvements

20 years


Expenditures
for maintenance and repairs and minor renewals are charged to expense; major renewals are capitalized. Upon retirement or sale of assets, the cost of the disposed assets and
the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations.

The
Company records capitalized interest for long-term construction projects to capture the cost of capital committed prior to the placed in service date as a part of the
historical cost of acquiring the asset. The amount of interest capitalized was $496, $308 and $642 for the years ended September 30, 2006, 2007 and 2008, respectively.

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.

66

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

H.    Environmental Remediation

When it is probable that a liability has been incurred or an asset of the Company has been impaired, a loss is recognized assuming the amount of the loss can be
reasonably estimated. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into
consideration the expected costs of post-closure monitoring based on historical experience.

I.     Pension and Postretirement Benefits

The Company has defined benefit pension and postretirement 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 plan assets, 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 postretirement 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. Salaried employees hired
after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined
contribution plan (401(k)). Effective December 31, 2007, the U.S. pension plan was amended to freeze benefits for all non-union employees in the U.S.

J.     Foreign Currency Exchange

The Company's foreign operating entities' financial statements are stated in the functional currencies of each respective country, which are the local currencies.
All assets and liabilities are translated to U.S. dollars using exchange rates in effect at the end of the year, and revenues and expenses are translated at the weighted average rate for the year.
Translation gains or losses are recorded as a separate component of comprehensive income (loss) and transaction gains and losses are reflected in the consolidated statements of operations.

K.    Research and Technical Costs

Research and technical costs related to the development of new products and processes are expensed as incurred. Research and technical costs for the years ended
September 30, 2006, 2007 and 2008, were $2,659, $3,116, and $3,441, respectively.

L.    Income Taxes

The Company accounts for income taxes in accordance with SFAS 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 its evaluation of the need for a valuation
allowance, the Company assesses prudent and feasible tax

67

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

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.

On
October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48)Accounting for Uncertainty in Income
Taxesan interpretation of SFAS 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to
reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition. The impact of adoption of FIN 48 on October 1,
2007, was to decrease accumulated earnings by $827, increased goodwill by $675, increase deferred tax asset by $3,316, and increase non-current income taxes payable by $4,818 (including
$241 of interest).

M.   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 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 331/3% per year over three years from the grant date.

On
October 1, 2005, the Company adopted SFAS 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. The amount of compensation cost is 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, expected forfeiture rate, and expected lives of the options.

N.    Financial Instruments and Concentrations of Risk

The Company accounts for derivative instruments in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities. The Company may periodically enter into forward currency exchange contracts to minimize the variability in the Company's operating results arising from foreign

68

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

exchange
rate movements. The Company does not engage in foreign currency speculation. At September 30, 2008 and 2007, the Company had no foreign currency exchange options outstanding.

Financial
instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At September 30, 2008,
and periodically throughout the year, the Company has maintained cash balances in excess of federally insured limits. The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value because of the relatively short maturity of these instruments. In addition, the carrying amount of the Company's debt approximates fair value.

During
2008, 2007 and 2006 the Company did not have sales to any group of affiliated customers that were greater than 10% of net revenues. The Company generally does not require
collateral with the exception of letters of credit with certain foreign sales. Credit losses have been within management's expectations. In addition, the Company purchases credit insurance for certain
foreign trade receivables. The Company does not believe it is significantly vulnerable to the risk of near-term severe impact from business concentrations with respect to customers,
suppliers, products, markets or geographic areas.

O.    Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and 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, asset impairment, 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, pension asset 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 routinely
reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.

P.     Earnings Per Share

The Company accounts for earnings per share in accordance with SFAS No. 128,Earnings Per Share.
SFAS 128 requires two presentations of earnings per share"basic" and "diluted." Basic earnings per share is computed by dividing net income available to common stockholders for the
period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is
increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued less any treasury stock purchased. The treasury
stock method is used, which assumes that the Company will use the proceeds from the exercise of the options to purchase shares of stock for treasury.

69

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

Basic
and diluted net income per share were computed as follows:

Years ended September 30,(in thousands, except share and per share data)

2006

2007

2008Numerator:Net income

$
35,540

$
66,120

$
62,778Denominator:Weighted average shares outstandingBasic


10,000,000


10,896,067


11,903,289Effect of dilutive stock options


270,642


334,034


123,151Weighted average shares outstandingDiluted


10,270,642


11,230,101


12,026,440Basic net income per share

$
3.55

$
6.07

$
5.27Diluted net income per share

$
3.46

$
5.89

$
5.22Number of shares excluded as their effect would be anti-dilutive


71,250


95,750


224,000


Anti-dilutive
shares with respect to outstanding stock options have been properly excluded from the computation of diluted net income per share.

Q.    Recently Issued Accounting Pronouncements

On October 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN 48")Accounting for Uncertainty in Income
Taxesan interpretation of SFAS 109,Accounting for Income Taxes. ("FIN 48") prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to
reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.

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 measurement date." On February 12, 2008, the FASB issued Staff
Position 157-2 ("FSP 157-2") which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore for financial assets and liabilities 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 (excluding nonfinancial assets and liabilities) beginning on
October 1, 2008. The Company does not expect the implementation of SFAS 157 and FSP 157-2 in fiscal 2009 to have a material impact on its financial position, results
of operations or 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 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

70

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. The Company is required to adopt SFAS 159
beginning October 1, 2008. Due to making no election on any of the Company's instruments, the adoption of SFAS No. 159 on October 1, 2008 had no impact on the Company's
consolidated financial statements.

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) related to
future acquisitions, if any, 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.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities("SFAS 161")an amendment of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is
intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position,
financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will
adopt SFAS 161 on October 1, 2009 and is currently evaluating the effect the adoption will have on its consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles("SFAS 162").
SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that
are presented in conformity with U.S. GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to

71

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

AU
Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Any effect of applying the provisions
of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154,Accounting Changes and Error
Corrections. The Company will adopt SFAS 162 once it is effective and is currently evaluating the effect the adoption will have on its consolidated financial statements.

In
April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3,Determination of the Useful Life of Intangible
Assets("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141R,Business Combinations, and other U.S. GAAP.
This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.

72

---





HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

R.    Comprehensive Income (Loss)

Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income
(loss) consists of net income (loss) and other comprehensive income (loss) items, including pension and foreign currency translation adjustments, net of tax when applicable.

Year Ended
September 30, 2006

Year Ended
September 30, 2007

Year Ended
September 30, 2008Pre-tax

Tax

Net

Pre-tax

Tax

Net

Pre-tax

Tax

NetNet income







$
35,540







$
66,120







$
62,778Other comprehensive income (loss):Pension curtailment







$








$


$
4,532

$
(1,831
)
$
2,701Pension and postretirement


(310
)

93


(217
)

310


(93
)

217


(8,789
)

3,360


(5,429
)Foreign currency translation adjustment


1,951


(381
)

1,570


3,700


(259
)

3,441


(3,169
)

(205
)

(3,374
)Other comprehensive income (loss)

$
1,641

$
(288
)
$
1,353

$
4,010

$
(352
)
$
3,658

$
(7,426
)
$
1,324

$
(6,102
)Total comprehensive income







$
36,893







$
69,778







$
56,676


The following is a breakdown of accumulated other comprehensive income net of the effects:

Accumulated
Other
Comprehensive
Income (Loss) at
September 30,
2007

Other
Comprehensive
Loss for the
year ended
September 30,
2008

Accumulated
Other
Comprehensive
Income (Loss)
at
September 30,
2008Foreign Currency Translation Adjustment

$
4,499

$
(3,374
)
$
1,125Pension and Postretirement


(518
)

(2,728
)

(3,246
)$
3,981

$
(6,102
)
$
(2,121
)


Note 3    Inventories

Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO") method. The following is a
summary of the major classes of inventories:

September 30,
2007

September 30,
2008Raw materials

$
16,218

$
20,343Work-in-process


162,266


155,782Finished goods


106,419


127,653Other


1,399


1,137$
286,302

$
304,915


73

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 4    Property, Plant and Equipment

The following is a summary of the major classes of property, plant and equipment:

September 30,
2007

September 30,
2008Land and land improvements

$
4,088

$
4,400Buildings


8,908


12,527Machinery and equipment


95,491


116,095Construction in process


8,694


1,501117,181


134,523Less accumulated depreciation


(19,321
)

(27,221
)$
97,860

$
107,302


The
Company has $844 of assets under a capital lease for equipment related to the service center operation in Shanghai, China.

Note 5    Accrued Expenses

The following is a summary of the major classes of accrued expenses:

September 30,
2007

September 30,
2008Employee compensation

$
5,819

$
8,310Taxes, other than income taxes


1,396


1,511Other


4,974


2,908$
12,189

$
12,729


74

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 6    Income Taxes

The components of income before provision for income taxes are as follows:

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Income before income taxes:U.S.

$
55,282

$
93,790

$
86,124Foreign


2,571


10,798


11,790Total

$
57,853

$
104,588

$
97,914Income tax provision (benefit):Current:U.S. Federal

$
19,466

$
24,382

$
34,580Foreign


632


2,571


3,038State


5,020


6,689


2,273Total


25,118


33,642


39,891Deferred:U.S. Federal


(2,439
)

3,229


(6,499
)Foreign


282


367


194State


(648
)

1,230


1,550Total


(2,805
)

4,826


(4,755
)Total provision for income taxes

$
22,313

$
38,468

$
35,136


The
provision for income taxes applicable to results of operations differed from the U.S. federal statutory rate as follows:

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Statutory federal tax rate


35
%

35
%

35
%Tax provision at the statutory rate

$
20,248

$
36,605

$
34,270Foreign tax rate differentials


13


(841
)

(894
)Provision for state taxes, net of federal taxes


2,987


5,153


2,987U.S. tax on distributed and undistributed earnings of foreign subsidiaries


66


743


793Manufacturer's deduction


(665
)

(525
)

(1,260
)Extraterritorial income exclusion





(1,021
)

Tax credits





(573
)

(558
)Other, net


(336
)

(1,073
)

(202
)Provision at effective tax rate

$
22,313

$
38,468

$
35,136


During
fiscal 2008 the Company's effective tax rate was favorably impacted by amended state tax returns that were filed to take advantage of adjustments to the sales apportionment
factors related to

75

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 6    Income Taxes (Continued)

foreign
sales. Similarly, during fiscal 2007 the Company's effective tax rate was favorably impacted primarily by amended tax returns that were filed to take advantage of the extraterritorial income
exclusion and various tax credits not previously claimed.

Deferred
tax assets (liabilities) are comprised of the following:

September 30,
2007

September 30,
2008Current deferred tax assets (liabilities):Inventories

$
3,626

$
3,983Pension and postretirement benefits


5,808


3,000Accrued expenses and other


419


601Accrued compensation and benefits


1,144


1,419Tax credit carryforwards


644


Other foreign related


(840
)

(568
)TIMET Agreement





964Total net current deferred tax assets


10,801


9,399Noncurrent deferred tax assets (liabilities):Property, plant and equipment, net


(17,587
)

(17,660
)Intangible assets


(2,971
)

(2,523
)Undistributed earnings of foreign subsidiary


(1,266
)

(1,275
)Pension and postretirement benefits


42,538


35,092Accrued compensation and benefits


1,788


1,574TIMET Agreement





16,522Other accruals


236


580Total net noncurrent deferred tax assets


22,738


32,310Net deferred tax assets (liabilities)

$
33,539

$
41,709


The
Company has excluded undistributed earnings of $32,018 of three foreign affiliates from its calculation of deferred tax liabilities because they will be permanently invested for the
foreseeable future. Should management decide in the future to repatriate all or a portion of these undistributed earnings, the Company would then be required to provide for taxes on such amounts.

On
October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48)Accounting for Uncertainty in Income
Taxesan interpretation of SFAS 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to
reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.

The
impact of the adoption of FIN 48 on October 1, 2007, was to decrease accumulated earnings by $827, increase goodwill by $675, increase deferred tax assets by $3,316,
and increase non-current income taxes payable by $4,818 (including $241 of interest).

76

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 6    Income Taxes (Continued)

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at October 1, 2007

$
4,577Gross Increasescurrent period tax positions


Gross Decreasescurrent period tax positions


Gross Increasestax positions in prior periods


Gross Decreasestax positions in prior periods


(4,313
)Gross Decreasessettlements with taxing authorities


Gross Decreaseslapse of statute of limitations


Balance at September 30, 2008

$
264


The
amount of unrecognized tax benefits changed during fiscal 2008 due to international tax positions being effectively settled, including the reduction of goodwill of $675. The total
amount of unrecognized tax benefits that would, if recognized, affect the effective income tax rate is $173 as of September 30, 2008. Additionally, as consistent with prior periods, the Company
recognized accrued interest expense and penalties related to the unrecognized tax benefits as additional income tax expense. The total amount of accrued interest and penalties was approximately $12
and $0 respectively, as of September 30, 2008. A decrease in interest of $229 was recognized during the year.

As
of September 30, 2008, the Company is open to examination in the U.S. federal income tax jurisdiction for the September 30, 2007 tax year, in the U.K. for the years
2002-2007, in Switzerland for the years 2003-2007, and in France for the years 2006-2007. The Company is also open to examination in Singapore, China, Italy, and
India and in various states in the U.S., none of which were individually material. The Company is not currently under audit in any jurisdiction.

Of
the unrecognized tax benefits noted above, the Company does not anticipate any significant changes to occur in unrecognized tax benefits over the next 12 months.

Note 7    Debt



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 September 30, 2008, the U.S. revolving credit facility had an outstanding balance of $11.8 million. During fiscal 2008 it bore interest at a
weighted average interest rate of 5.36%. 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 September 30, 2008, the most recent required measurement
date, the Company was in

77

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 7    Debt (Continued)

compliance
with these financial 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 Titanium Metals Corporation (see discussion of TIMET agreement at Note 15). 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.



Haynes and Wachovia Capital Finance Corporation (Central) ("Wachovia") entered into a Second Amended and Restated Loan and Security
Agreement (the "Amended Agreement") with an effective date of November 18, 2008, which amended and restated the revolving credit facility between Haynes and Wachovia dated August 31,
2004. Among other items, the Amended Agreement extends the maturity date of the revolving credit facility to September 30, 2011, increases the margin included in the interest rate from 1.5% per
annum to 2.5% per annum, permits the Company to pay dividends and repurchase common stock if certain financial metrics are met, and eliminates the EBITDA covenant. The maximum revolving loan amount
under the Amended Agreement continues to be $120.0 million.



The Company's U.K. subsidiary, Haynes International, Ltd., or Haynes U.K., previously had an agreement with a U.K.-based lender
providing for a $15.0 million revolving credit facility. During April 2008, the term of the U.K. revolving credit facility ended. The Company replaced this facility with a multi-currency
overdraft facility. The overdraft facility has a limit of 2.0 million pound sterling ($3,556). Haynes U.K. is required to pay interest on overdrafts in an amount equal to the Bank's Sterling
Base Rate (in accordance with the terms facility), plus 1.1% per annum. As of September 30, 2008, the overdraft facility had an outstanding balance of zero.

Debt
and long-term obligations consist of the following (in thousands):

September 30,
2007

September 30,
2008Revolving Credit AgreementU.S. Facility, 7.24% 2007; 4.64% 2008, expires April 2009

$
35,549

$
11,812Three year mortgage note, 3.1%, due in December 2008 (Swiss Subsidiary)

$
1,409

$
1,405Other long-term obligations


1,775


1,6923,184


3,097Less amounts due within one year


110


1,515$
3,074

$
1,582


Other
long-term obligations primarily represents environmental post-closure monitoring and maintenance activities.

78

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 7    Debt (Continued)

The
carrying amount of debt approximates fair value, because substantially all debt bears interest at variable interest rates.

At
September 30, 2008, the Company had access to approximately $108,159 under its credit agreement (based on borrowing base and certain reserves). The Company's British subsidiary
(Haynes International LTD) has an overdraft facility of 2,000 Sterling ($3,556) all of which was available on September 30, 2008. The Company's French subsidiary (Haynes International,
SARL) has an overdraft banking facility of 1,200 Euro ($1,689) of which 418 Euro ($588) was available on September 30, 2008. The Company's Swiss subsidiary (Nickel-Contor AG) had
an overdraft banking facility of 1,000 Swiss Francs ($890) all of which was available on September 30, 2008.

Maturities
of long-term debt are as follows at September 30, 2008:

Year Ending2009

$
1,5152010


952011


952012


2013


2014 and thereafter


1,392$
3,097


Note 8    Pension Plan and Retirement Benefits

Defined Contribution Plans

The Company sponsors a defined contribution plan (401(k)) for substantially all U.S. employees. The Company contributes an amount equal
to 50% of an employee's contribution to the plan up to a maximum contribution of 3% of the employee's salary, except for all salaried employees and hourly employees hired after June 30, 2007
that are not eligible for the U.S. pension plan. The Company contributes an amount equal to 60% of an employee's contribution to the plan up to a maximum contribution of 6% of the employee's salary
for this group. Expenses associated with this plan for the years ended September 30, 2006, 2007 and 2008 totaled $586, $665 and $1,091, respectively.

The
Company sponsors certain profit sharing plans for the benefit of employees meeting certain eligibility requirements. There were no contributions to these plans for the years ended
September 30, 2006, 2007 and 2008.

79

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

Defined Benefit Plans

The Company has non-contributory defined benefit pension plans which cover most employees in the U.S. and certain foreign
subsidiaries. In the U.S. salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible
for an enhanced matching program of the defined contribution plan (401(k)). On October 3, 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, the Company 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.

Benefits
provided under the Company's domestic defined benefit pension plan are based on years of service and the employee's final compensation. The Company's funding policy is to
contribute annually an amount deductible for federal income tax purposes based upon an actuarial cost method using actuarial and economic assumptions designed to achieve adequate funding of benefit
obligations. The Pension Protection Act of 2006 requires funding over a seven year period to achieve 100% funded status.

The
Company has non-qualified pensions for current and former executives of the Company. Non-qualified pension plan expense (income) for the years ended
September 30, 2006, 2007 and 2008 was $297, $418 and $(129), respectively. Accrued liabilities in the amount of $2,583 and $2,831 for these benefits are included in accrued pension and
postretirement benefits at September 30, 2008 and 2007, respectively.

During
fiscal 2007 the pension plan for union employees was amended, increasing the pension multiplier used to calculate the employee's monthly benefit from 1.4% to 1.6% for union
employees. The impact of the multiplier increase is a plan amendment of $6,195 that will be charged to pension expense over the average remaining service period of employees expected to receive
benefits under the plan.

In
addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all domestic employees become
eligible for these benefits, if they reach normal retirement age while working for the Company. During March 2006, the Company communicated to employees and plan participants a negative plan amendment
that caps the Company's liability related to total retiree health care costs at $5,000 annually effective January 1, 2007. An updated actuarial valuation was performed at March 31, 2006,
which reduced the accumulated postretirement benefit liability due to this plan amendment by $46,313 that will be amortized as a reduction to expense over an eight year period. This amortization
period began in April 2006 thus reducing the amount of expense recognized for the second half of fiscal 2006 and the respective future periods.

80

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

The
Company made contributions of $8,360 and $3,690 to fund its domestic Company-sponsored pension plan for the year ended September 30, 2008 and 2007, respectively. The Company's
U.K. subsidiary made contributions of $1,067 and $1,228 for the year ended September 30, 2008 and 2007, respectively, to the U.K. pension plan.

In
September 2006, the FASB issued Statement of Financial Accounting Standard No. 158,Employers' Accounting For Defined Pension and Other Post Retirement
Plans("SFAS 158"). SFAS 158 requires employers to recognize the obligations associated with the funded status of a benefit plan in their statement of financial
position. The provisions of SFAS 158 were adopted as of September 30, 2007. The impacts of adoption are presented within this note.

The
Company uses a September 30 measurement date for its plans. The status of employee pension benefit plans and other postretirement benefit plans are summarized below:

Defined Benefit Pension Plans



Postretirement
Health Care BenefitsYear Ended September 30,
2007

Year Ended September 30,
2008



Year Ended September 30,
2007

Year Ended September 30,
2008Change in Benefit Obligation:Projected benefit obligation at beginning of year

$
172,311

$
183,993



$
76,857

$
80,044Service cost


4,188


2,761




1,444


1,307Interest cost


9,986


10,757




4,461


4,859Plan amendment


6,195


4,096







Curtailment gain





(8,191
)






Actuarial losses (gains)


562


(19,339
)



1,694


(14,394
)Employee contributions


78


62







Benefits paid


(9,327
)

(9,536
)



(4,412
)

(4,052
)Projected benefit obligation at end of year

$
183,993

$
164,603



$
80,044

$
67,764Change in Plan Assets:Fair value of plan assets at beginning of year

$
130,753

$
143,281



$


$
Actual return (loss) on assets


16,859


(23,643
)






Employer contributions


4,918


9,427




4,412


4,052Employee contributions


78


62







Benefits paid


(9,327
)

(9,536
)



(4,412
)

(4,052
)Fair value of plan assets at end of year

$
143,281

$
119,591



$


$
Funded Status of Plan:Unfunded status

$
(40,712
)
$
(45,012
)


$
(80,044
)
$
(67,764
)


81

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

Amounts recognized in the consolidated balance sheets are as follows:

Defined Benefit
Pension Plans

Postretirement
Health Care Benefits

Non-Qualified
Pension Plans

All Plans
CombinedSeptember 30,

September 30,

September 30,

September 30,2007

2008

2007

2008

2007

2008

2007

2008Accrued benefit liability

$
(40,712
)
$
(45,012
)
$
(80,044
)
$
(67,764
)
$
(2,831
)
$
(2,583
)
$
(123,587
)
$
(115,359
)Accumulated other comprehensive loss (income)


9,959


24,451


(8,956
)

(19,191
)







1,003


5,260Net amount recognized

$
(30,753
)
$
(20,561
)
$
(89,000
)
$
(86,955
)
$
(2,831
)
$
(2,583
)
$
(122,584
)
$
(110,099
)Amounts expected to be recognized from AOCI into the statement of operations in the following year:Amortization of net loss

$


$


$
1,630

$
482

$


$


$
1,630

$
482Amortization of prior service cost


1,033


808


(5,789
)

(5,789
)







(4,756
)

(4,981
)$
1,033

$
808

$
(4,159
)
$
(5,307
)
$


$


$
(3,126
)
$
(4,499
)


The accumulated benefit obligation for the pension plans was $162,656 and $154,526 at September 30, 2007 and 2008, respectively.

The impact of adopting SFAS No. 158 as of
September 30, 2007 was as follows:

Before
Application
of SFAS
No. 158

Adjustments

After
Application
of SFAS
No. 158Deferred income taxes

$
33,054

$
485

$
33,539Total assets


586,484


485


586,969Accrued pension and postretirement benefits


122,584


1,003


123,587Total liabilities


269,589


1,003


270,592Accumulated other comprehensive income, net of tax


4,499


(518
)

3,981Total stockholders' equity


316,895


(518
)

316,377


The
Company follows SFAS No. 106,Employers Accounting for Postretirement Benefits Other Than Pensions,which requires the cost of
postretirement benefits to be accrued over the years employees provide service to the date of their full eligibility for such benefits. The Company's policy is to fund the cost of claims on an annual
basis.

82

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

The
components of net periodic pension cost and postretirement health care benefit cost are as follows:

Defined Benefit Pension PlansYear Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Service cost

$
3,746

$
4,188

$
2,761Interest cost


9,009


9,986


10,757Expected return on assets


(10,349
)

(10,512
)

(11,432
)Amortization of prior service cost








808Curtailment gain








(3,659
)Net periodic cost (benefit)

$
2,406

$
3,662

$
(765
)




Postretirement Health Care BenefitsYear Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Service cost

$
2,152

$
1,444

$
1,307Interest cost


5,904


4,461


4,859Amortization of unrecognized prior service cost


(2,895
)

(5,789
)

(5,789
)Recognized actuarial loss


1,690


1,660


1,630Net periodic cost

$
6,851

$
1,776

$
2,007


83

---





HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

Assumptions

A 6.0% (6.4%-2007) annual rate of increase for ages under 65 and an 6.2% (6.9%-2007) annual rate of increase
for ages over 65 in the costs of covered health care benefits were assumed for 2008, gradually decreasing for both age groups to 5.0% (5.0%-2007) by the year 2011. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects in 2008:

1-Percentage Point
Increase

1-Percentage Point
DecreaseEffect on total of service and interest cost components

$
352

$
(268
)Effect on accumulated postretirement benefit obligation


0


0


The
effect on accumulated postretirement benefit obligation is zero due to the negative plan amendment that caps the Company costs at $5,000 per year.

The
actuarial present value of the projected pension benefit obligation and postretirement health care benefit obligation for the domestic plans at September 30, 2007 and 2008
were determined based on the following assumptions:

September 30,
2007

September 30,
2008Discount rate


6.25
%

7.50
%Rate of compensation increase (pension plan only)


4.00
%

4.00
%


The
net periodic pension and postretirement health care benefit costs for the domestic plans were determined using the following assumptions:

Defined Benefit Pension and
Postretirement Health Care PlansYear Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Discount rate


5.750%
(1)

6.000
%

6.250
%Expected return on plan assets


8.500
%

8.500
%

8.500
%Rate of compensation increase (pension plan only)


4.000
%

4.000
%

4.000
%






84

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)



Plan Assets and Investment Strategy

The Company's domestic pension plans weighted-average asset allocations by asset category are as follows:

September 30,2007

2008Equity Securities


61
%

55
%Debt Securities


37
%

43
%Real Estate


0
%

0
%Other


2
%

2
%Total


100
%

100
%


The
primary financial objectives of the Plan are to minimize cash contributions over the long-term and preserve capital while maintaining a high degree of liquidity. A
secondary financial objective is, where possible, to avoid significant downside risk in the short-run. The objective is based on a long-term investment horizon so that interim
fluctuations should be viewed with appropriate perspective.

The
desired investment objective is a long-term real rate of return on assets that is approximately 7.00% greater than the assumed rate of inflation as measured by the
Consumer Price Index, assumed to be 1.50%, equaling a nominal rate of return of 8.50%. The target rate of return for the Plan has been based upon an analysis of historical returns supplemented with an
economic and structural review for each asset class. The Company realizes that the market performance varies and
that a 7.00% real rate of return may not be meaningful during some periods. The Company also realizes that historical performance is no guarantee of future performance.

It
is the policy of the Plan to invest assets with an allocation to equities as shown below. The balance of the assets shall be maintained in fixed income investments, and in cash
holdings, to the extent permitted below.

Asset
classes as a percent of total assets:

Asset Class

Target(1)Equity


60
%Fixed Income


35
%Real Estate and Other


5
%






The
U.K. pension plan assets use a similar strategy and investment objective.

85

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 8    Pension Plan and Retirement Benefits (Continued)

Contributions and Benefit Payments

The Company expects to contribute approximately $7,990 to its domestic pension plans, $4,200 to its domestic other postretirement
benefit plans, and $1,067 to the U.K. pension plan in fiscal 2009.

Pension
and postretirement health care benefits (which include expected future service) are expected to be paid out of the respective plans as follows:

Fiscal Year Ending September 30

Pension

Postretirement
Health Care2009

$
10,110

$
4,2002010


10,328


4,4002011


10,742


4,6002012


10,950


4,8002013


11,427


5,0002014-2018 (in total)


64,166


25,000


Note 9    Commitments

The Company leases certain transportation vehicles, warehouse facilities, office space and machinery and equipment under cancelable and non-cancelable leases, most of which
expire within 10 years and may be renewed by the Company. Rent expense under such arrangements totaled $3,042, $3,404 and $3,770 for the years ended September 30, 2006, 2007 and 2008,
respectively. Rent expense does not include income from sub-lease rentals totaling $180, $180 and $150 for the years ended September 30, 2006, 2007 and 2008, respectively. Future
minimum rental commitments under non-cancelable operating leases at September 30, 2008, are as follows:

Operating2009

$
3,3052010


2,2932011


1,4312012


6752013


4822014 and thereafter


2,402$
10,588


Future
minimum rental commitments under non-cancelable operating leases have not been reduced by minimum sub-lease rentals of $969 due in the future.

Note 10    Environmental and Legal

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

86

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 10    Environmental and Legal (Continued)

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. A third recently-filed case with similar allegations was pending in the state of Texas, but recently plaintiffs in that case
agreed to dismiss their claims against Haynes. The Company believes that it has defenses to these allegations and, that if the Company was 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.

87

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 10    Environmental and Legal (Continued)

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 fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South
Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI,
be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.

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 action by the Company could be required.
In addition, in August, 2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a
leak in the pipeline from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to
this disclosure.

Historical
nitric acid spills were discovered at the Arcadia, Louisiana location in fiscal 2008. Analytical results were received in March, 2008 and the site assessment was provided to
the Louisiana Department of Environmental Quality ("LDEQ") in May. Remediation of the spill, including the purchase of new equipment, was substantially complete in fiscal 2008. A preliminary
assessment of the LDEQ authorized the Company's proposed remedial actions. In August, 2008, LDEQ submitted a second round of inquiries after an existing sump pump was removed. The Company is in the
process or responding to LDEQ's inquiries.

As
of September 30, 2007 and September 30, 2008, the Company has accrued $1,519 and $1,517, respectively, for post-closure monitoring and maintenance
activities. In accordance with Statement of Position 96-1,Environmental Remediation Liabilities, 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 $2,231 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 $125 per year over the remaining obligation
period.

88

---





HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 11    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 331/3% per year over three years from the grant date.

The
fair value of option grants was estimated as of the date of the grant pursuant FASB No. 123(R),Share-Based Payment,a
replacement of SFAS No. 123,Accounting For Stock-Based Compensation, and rescission of APB Opinion No. 25, Accounting for Stock Issued to
Employees.The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life,
risk-free interest rates, expected forfeitures and dividend yields. The volatility is based on historical volatility of the Company's common stock over the most recent period commensurate
with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected
term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. The
expected forfeiture rate is based upon historical experience. The dividend yield assumption is based on the Company's history and expectation regarding dividend payouts. The fair value of option
grants include the assumptions for grants in fiscal 2006, 2007, and 2008 are as follows:

Grant Date

Fair
Value

Dividend
Yield

Risk-free
Interest Rate

Expected
Volatility

Expected
LifeOctober 1, 2005

$
11.81


0
%

2.74
%

70.00
%
3 yearsFebruary 21, 2006

$
14.43


0
%

4.68
%

70.00
%
3 yearsMarch 31, 2006

$
15.33


0
%

4.83
%

70.00
%
3 yearsMarch 30, 2007

$
19.06


0
%

4.54
%

30.00
%
3 yearsSeptember 1, 2007

$
21.42


0
%

4.16
%

30.00
%
3 yearsMarch 31, 2008

$
16.41


0
%

1.88
%

42.00
%
3 years


On
March 31, 2008, the Company granted 130,000 options at an exercise price of $54.00, the fair market value of the Company's common stock on the day prior to the date of the
grant. During the year ended September 30, 2008 177,386 options were exercised which generated $2,480 cash and increased the shares of common stock by 177,386 shares.

The
stock-based employee compensation expense for the years ended September 30, 2006, 2007 and 2008 was $2,786 ($1,699 net of tax or $0.17 per fully diluted share), $3,136 ($1,866
net of tax or $0.17 per fully diluted share), $1,650 ($983 net of tax or $0.08 per fully diluted share), respectively. The remaining unrecognized compensation expense at September 30, 2008 was
$3,185 to be recognized over a weighted average vesting period of 1.51 years.

89

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 11    Stock-based Compensation (Continued)

The
following table summarizes the activity under the stock option plans:

Number of
Shares

Aggregate
Intrinsic
Value

Weighted
Average
Exercise
Prices

Weighted
Average
Remaining
Contractual
LifeOutstanding at September 30, 2007


503,763




$
30.52Granted


130,000





54.00Exercised


(177,386
)
$
9,400


13.98Canceled


(8,000
)Outstanding at September 30, 2008


448,377

$
5,862

$
43.24


7.83 yrs.Vested or expected to vest


448,377

$
5,862

$
43.24


7.83 yrs.Exercisable at September 30, 2008


210,700

$
4,270

$
26.57


6.61 yrs.




Grant Date

Exercise Price
Per Share

Remaining
Contractual
Life in Years

Outstanding
Number of
Shares

Exercisable
Number of
SharesAugust 31, 2004

$
12.80


5.92


136,565


136,565May 5, 2005


19.00


6.58


8,334


8,334August 15, 2005


20.25


6.92


10,477


10,477October 1, 2005


25.50


7.00


5,000


February 21, 2006


29.25


7.42


25,001


8,333March 31, 2006


31.00


7.50


10,000


5,000March 30, 2007


72.93


8.50


121,000


40,324September 1, 2007


83.53


8.92


5,000


1,667March 31, 2008


54.00


9.50


127,000


448,377


210,700


During
the first quarter of fiscal 2006, in accordance with the modified prospective transition method, the Company eliminated its balance in stockholders' equity of deferred stock
compensation, which represented unrecognized compensation cost for non-vested stock options.

SFAS 123(R)
requires that forfeitures be estimated over the vesting period, rather than being recognized as a reduction of compensation expense when the forfeiture actually
occurs. The cumulative effect of the use of the estimated forfeiture method for prior periods upon adoption of SFAS 123(R) was not material.

90

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 12    Quarterly Data (unaudited)

The unaudited quarterly results of operations of the Company for the years ended September 30, 2007 and 2008 are as follows:

2007Quarter EndedDecember 31

March 31

June 30

September 30Net revenues

$
120,463

$
137,336

$
141,087

$
160,950Gross profit


33,621


40,333


36,939
(1)

40,191Net income


13,184


17,404


17,741
(2)

17,791Net income per share:Basic

$
1.32

$
1.70

$
1.52

$
1.53Diluted

$
1.27

$
1.63

$
1.49

$
1.50




2008Quarter EndedDecember 31

March 31

June 30

September 30Net revenues

$
146,077

$
163,771

$
166,340

$
160,818Gross profit


34,205


35,920


40,117


34,415Net income


13,843
(3)

15,063


17,564


16,308Net income per share:Basic

$
1.17

$
1.27

$
1.47

$
1.36Diluted

$
1.16

$
1.25

$
1.46

$
1.35


---

Note 13    Segment Reporting

The Company operates in one business segment: the design, manufacture, marketing and distribution of technologically advanced, high-performance alloys for use in the
aerospace, land-based gas turbine and

91

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 13    Segment Reporting (Continued)

chemical
processing industries. The Company has operations in the United States, Europe and China, which are summarized below. Sales between geographic areas are made at negotiated selling prices.

Year Ended
September 30,
2006

Year Ended
September 30,
2007

Year Ended
September 30,
2008Net Revenue by Geography:United States

$
265,133

$
343,920

$
344,118Europe


117,676


142,641


167,522China


25,429


35,872


63,950Other


26,167


37,403


61,416Net Revenues

$
434,405

$
559,836

$
637,006Net Revenue by Product Group:High temperature resistant alloys

$
295,395

$
386,287

$
465,014Corrosive resistant alloys


139,010


173,549


171,992Net revenues

$
434,405

$
559,836

$
637,006


The
Net Revenue by Geography for Europe and Other have been restated from $114,026 to $142,641 for Europe and from $66,018 to $37,403 for Other for the year ended September 30,
2007, and from $101,448 to $117,676 for Europe and from $42,395 to $26,167 for Other for the year ended September 30, 2006, as the Company previously used the pre-translation
balance from their reporting disclosure support versus the U.S. dollar translated balance in calculating the Europe and Other Net Revenues.

September 30,
2007

September 30,
2008Long-lived Assets by Geography:United States

$
143,043

$
153,846Europe


4,262


3,856China


333


1,244Total long-lived assets

$
147,638

$
158,946


Note 14    Valuation and Qualifying Accounts

Balance at
Beginning
of Period

Charges
(credits) to
Expense

Deductions(1)

Balance at
End
of PeriodAllowance for doubtful accounts receivables:September 30, 2008

$
1,339

$
100

$
(85
)
$
1,354September 30, 2007


1,751


(311
)

(101
)

1,339September 30, 2006


1,514


373


(136
)

1,751


---

92

---



HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data and otherwise noted)

Note 15    Deferred Revenue

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 of titanium metal annually. TIMET paid the Company a $50,000 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. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to
loan up to $12,000 to the
Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted to TIMET a security interest on its four-high steckel
rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other than cold
reduced titanium tubing). The Company has also agreed not to provide titanium conversion services to any entity other than TIMET for the term of the Conversion Services Agreement. The cash received of
$50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the up-front fee not recognized in income is shown
as deferred revenue on the consolidated balance sheet. Taxes will be paid on the up-front fee primarily in the first quarter of fiscal 2009. The agreement contains certain default provisions which
could result in contract termination and damages, including the Company being required to return the unearned portion of the up-front fee.

93

---





Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 September 30, 2008 to ensure 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 U.S. Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of fiscal 2008 there were no changes in the Company's internal controls over financial reporting or in other
factors that have or are reasonably likely to materially affect these controls.

Management's Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined by Exchange Act rules 13a-15(f) and 15d-15(f)) for the Company. With the participation of the Chief Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations (COSO) of The Treadway Commission. Based on our assessment, management has concluded that, as of September 30, 2008, the Company's internal
control over financial reporting is effective based on those criteria.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The
Company's effectiveness of internal control over financial reporting as of September 30, 2008 has been audited by Deloitte and Touche LLP, an independent registered
public accounting firm, and Deloitte & Touche has issued a report on the Company's internal control over financial reporting.

|                                                                          |  |                                                             
|------------------------------------------------------------------------- |  | ------------------------------------------------------------
|Mr. Mark Comerford,
President & Chief Executive Officer
November 24, 2008 |  | Mr. Marcel Martin,
Chief Financial Officer
November 24, 2008

Item 9B.    Other Information

The information contained under "LiquidityExtension of U.S. Revolving Credit Facility" in Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations contained elsewhere in this Form 10-K is incorporated herein.

94

---





Part III

Item 10.    Directors, Executive Officers and Corporate Governance.

The information included under the caption "BusinessExecutive Officers" in this Form 10-K, and under
the captions "Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate GovernanceCode of Ethics", "Corporate GovernanceCorporate
Governance Committee and Director Nominations", "Corporate GovernanceCommittee Structure", and "Corporate GovernanceIndependence of the Board of Directors and Committee
Members" in the Proxy Statement is incorporated herein by reference.

Item 11.    Executive Compensation.

The information included under the captions "Executive Compensation", "Corporate GovernanceCompensation Committee
Interlocks and Insider Participation" and "Corporate GovernanceDirector Compensation Program" in the Proxy Statement is incorporated herein by reference in response to this item.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information contained under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
in the Proxy Statement and "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity Compensation Plan Information" in this
Form 10-K is incorporated herein by reference in response to this item. For additional information regarding the Company's stock option plans, please see Note 11 in the Notes
to Consolidated Financial Statements in this report.

Item 13.    Certain Relationships and Related Transactions.

There are no transactions since the beginning of fiscal 2008, or any currently proposed transaction in which the Company is or was a
participant in which any "related person", within the meaning of Section 404(a) of Regulation S-K under the Securities Act of 1933, had or will have a material interest. The
information contained under the caption "Corporate GovernanceIndependence of Board of Directors and Committee Members" in the Proxy Statement is incorporated herein by reference in
response to this item.

Item 14.    Principal Accountant Fees and Services.

The information included under the caption "Independent Registered Accounting Firm" in the Proxy Statement is incorporated herein by
reference in response to this item.

95

---



Part IV

Item 15.    Exhibits, Financial Statement Schedules

The
Financial Statements are set forth under Item 8 in this Form 10-K.

Financial
Statement Schedules are omitted as they are not required, are not applicable, or the information is shown in the Notes to the Consolidated Financial Statements.

96

---





SIGNATURES

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

HAYNES INTERNATIONAL, INC.By:

/s/ MARK COMERFORD Mark Comerford
President and Chief Executive Officer
Date: November 24, 2008


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

Signature

Title

Date/s/ MARK COMERFORD Mark Comerford

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

November 24, 2008/s/ MARCEL MARTIN Marcel Martin

Chief Financial Officer (Principal Financial Officer)

November 24, 2008/s/ DAN MAUDLIN Dan Maudlin

Controller and Chief Accounting Officer (Principal Accounting Officer)

November 24, 2008/s/ JOHN C. COREY John C. Corey

Chairman of the Board, Director

November 24, 2008/s/ PAUL J. BOHAN Paul J. Bohan

Director

November 24, 2008/s/ DONALD C. CAMPION Donald C. Campion

Director

November 24, 2008/s/ ROBERT H. GETZ Robert H. Getz

Director

November 24, 2008


97

---



Signature

Title

Date/s/ TIMOTHY J. MCCARTHY Timothy J. McCarthy

Director

November 24, 2008/s/ FRANCIS J. PETRO Francis J. Petro

Director

November 24, 2008/s/ WILLIAM P. WALL William P. Wall

Director

November 24, 2008/s/ RONALD W. ZABEL Ronald W. Zabel

Director

November 24, 2008


98

---





INDEX TO EXHIBITS

| |  |  |      |  |                                                                                                                                                                                                                                                                                                                                  
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 2.1  |  | First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-In-Possession dated June 29, 2004 (incorporated by reference to Exhibit 2.1 to the Haynes
International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                  
| |  |  | 2.2  |  | Asset Purchase Agreement by and among Haynes Wire Company, The Branford Wire and Manufacturing Company, Carolina Industries, Inc., and Richard Harcke, dated as of October 28, 2004 (incorporated by reference to
Exhibit 2.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
| |  |  | 3.1  |  | Restated Certificate of Incorporation of Haynes International, Inc. (reflecting all amendments through February 20, 2007) (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc.
Registration Statement on Form S-1, Registration No. 333-140194).                                                          
| |  |  | 3.2  |  | Amended and Restated By-laws 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).                                                                                                                         
| |  |  | 4.1  |  | 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).                                                                                                                                                  
| |  |  | 4.2  |  | Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 hereof).                                                                                                                                                                                                           
| |  |  | 4.3  |  | Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 hereof).                                                                                                                                                                                                                    
| |  |  | 10.1 |  | Form of Termination Benefits Agreements by and between Haynes International, Inc. and certain of its employees (incorporated by reference to Exhibit 10.1 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194).                                                                    
| |  |  | 10.2 |  | Haynes International, Inc. Death Benefit Plan, effective January 1, 2003 (incorporated by reference to Exhibit 10.2 to the Haynes International, Inc. Registration Statement on Form S-1,
Registration No. 333-140194).                                                                                                          
| |  |  | 10.3 |  | Amendment No. One to the Haynes International, Inc. Death Benefit Plan, dated August 30, 2004 (incorporated by reference to Exhibit 10.3 to the Haynes International, Inc. Registration Statement on
Form S-1, Registration No. 333-140194).                                                                                     
| |  |  | 10.4 |  | Haynes International, Inc. Supplemental Executive Retirement Plan, Plan Document effective January 1, 2002 (incorporated by reference to Exhibit 10.4 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194).                                                                        
| |  |  | 10.5 |  | Amendment No. One to the Haynes International, Inc. Supplemental Executive Retirement Plan, dated August 30, 2004 (incorporated by reference to Exhibit 10.5 to the Haynes International, Inc.
Registration Statement on Form S-1, Registration No. 333-140194).                                                                 
| |  |  | 10.6 |  | Haynes International Inc. Supplemental Executive Retirement Plan(s), Master Trust Agreement, effective January 1, 2003 (incorporated by reference to Exhibit 10.6 to the Haynes International, Inc.
Registration Statement on Form S-1, Registration No. 333-140194).                                                            
| |  |  | 10.7 |  | Amendment No. One to the Master Trust Agreement, dated August 30, 2004 (incorporated by reference to Exhibit 10.7 to the Haynes International, Inc. Registration Statement on Form S-1, Registration
No. 333-140194).                                                                                                            
| |  |  | 10.8 |  | Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, effective January 1, 2002 (incorporated by reference to Exhibit 10.8 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194).                                                                          

99

---



| |  |  |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 10.9    |  | Amendment No. One to the Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 30, 2004 (incorporated by reference to Exhibit 10.9 to the Haynes International,
 Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                                                                                                  
| |  |  | 10.10** |  | Second Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., Haynes Wire Company, the Lenders (as defined therein), Wachovia Capital Finance Corporation (Central), as agent for
the Lenders, and Bank One, N.A., as documentation agent, dated November 18, 2008.                                                                                                                         
| |  |  | 10.11   |  | Consulting, Non-Competition and Confidentiality Agreement by and between Richard Harcke and Haynes Wire Company, dated November 5, 2004 (incorporated by reference to Exhibit 10.14 to the Haynes International,
 Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                                                                                       
| |  |  | 10.12   |  | Form of Director Indemnification Agreement between Haynes International, Inc. and certain of its directors named in the schedule to the Exhibit (incorporated by reference to Exhibit 10.21 to the Haynes
International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                                                                                
| |  |  | 10.13*  |  | Conversion Services Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006 (incorporated by reference to Exhibit 10.22 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194). Portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
| |  |  | 10.14   |  | Access and Security Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006 (incorporated by reference to Exhibit 10.23 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194).                                                                                                                                                              
| |  |  | 10.15   |  | Summary of 2008 Management Incentive Plan (incorporated by reference to Item 5.02 of the Haynes International, Inc. Form 8-K filed December 6, 2008).                                                                                                                                                                                                                                                                          
| |  |  | 10.16   |  | Haynes International, Inc. 2007 Stock Option Plan as adopted by the Board of Directors on January 18, 2007 (incorporated by reference to Exhibit 10.26 to the Haynes International, Inc. Registration
Statement on Form S-1, Registration No. 333-140194).                                                                                                                                                                     
| |  |  | 10.17   |  | Form of Non-Qualified Stock Option Agreement to be used in conjunction with grants made pursuant to the Haynes International, Inc. 2007 Stock Option Plan (incorporated by reference to Exhibit 10.27 to the
Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                                                                      
| |  |  | 10.18   |  | Second Amended and Restated Haynes International, Inc. Stock Option Plan as adopted by the Board of Directors on January 22, 2007 (incorporated by reference to Exhibit 10.28 to the Haynes International,
 Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                                                                                             
| |  |  | 10.19   |  | Form of Non-Qualified Stock Option Agreements between Haynes International, Inc. and certain of its executive officers and directors named in the schedule to the Exhibit pursuant to the Haynes International,
 Inc. Second Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.29 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).            
| |  |  | 10.20   |  | Form of Indemnification Agreement with Anastacia S. Kilian (incorporated by reference to Exhibit 10.31 to the Haynes International, Inc. Registration Statement on Form S-1, Registration
No. 333-140194).                                                                                                                                                                                                                     
| |  |  | 10.21** |  | Employment Agreement by and between Haynes International, Inc. and Mark Comerford dated September 8, 2008.                                                                                                                                                                                                                                                                                                                     

100

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| |  |  |        |  |                                                                                                                                                                                                                                                                                                                                                               
| |  |  | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| |  |  | 10.22  |  | Non-Qualified Stock Option Agreement by and between Haynes International, Inc. and Mark Comerford, dated October 1, 2008 (incorporated by reference to Exhibit 10.2 to Haynes International, Inc.
Form 8-K filed October 7, 2008).                                                                                                                            
| |  |  | 10.23  |  | Amended and Restated Executive Employment Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 31, 2004 (incorporated by reference to Exhibit 10.10 to the Haynes
International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).                                                                     
| |  |  | 10.24  |  | Non-Qualified Stock Option Agreement between Haynes International, Inc. and its President and Chief Executive Officer pursuant to the Haynes International, Inc. Second Amended and Restated Stock Option Plan
(incorporated by reference to Exhibit 10.30 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
| |  |  | 21.1** |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                               
| |  |  | 23.1** |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                             
| |  |  | 31.1** |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                             
| |  |  | 31.2** |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                             
| |  |  | 32.1** |  | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                   

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