UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,September 30, 2007

OR

For the transition period fromto

Commission file number 1-4801

BARNES GROUP INC.

(Exact name of registrant as specified in its charter)

(860) 583-7070

Registrant’s telephone number, including area code

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 such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

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

The registrant had outstanding 52,843,24553,775,754 shares of common stock as of May 7,October 31, 2007.

Barnes Group Inc.

Index to Form 10-Q

For the Quarterly Period Ended March 31,September 30, 2007

PART I. FINANCIAL INFORMATION

BARNES GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

See accompanying notes.

BARNES GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

See accompanying notes.

BARNES GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information:

Non-cash financing and investing activities in 2007 and 2006 include the acquisition of $36.5 million$55,875 and $23.0 million,$48,550, respectively, of intangible assets and the recognition of the corresponding liabilities in connection with the aftermarket revenue sharing programs (“RSPs”). In 2006, non-cash investing and financing activities included the issuance of $30,682 of common stock in connection with the acquisition of Heinz Hänggi GmbH, Stanztechnik.

See accompanying notes.

BARNES GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts included in the notes are stated in thousands except per share data.)

1. Summary of Significant Accounting Policies

The accompanying unaudited consolidated balance sheet and the related consolidated statements of income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. The balance sheet as of December 31, 2006 has been derived from the 2006 financial statements of Barnes Group Inc. (the “Company”). For additional information, please refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the three-monthnine-month period ended March 31,September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

See Note 109 for discussion of the impact of the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007.

2. Stock Split

In April, 2006, the Company’s Boardthird quarter of Directors declared a two-for-one2007, the Company realigned its reportable business segments by transferring the stock splitspring catalog and custom solutions business from Barnes Distribution to Barnes Industrial, whose Engineered Springs business manufactures many of the Company’s common stock, in the form ofspring products sold by this business. Segment information was adjusted on a 100 percent stock dividend. All stockholders of record on May 30, 2006 received one additional share of Barnes Group Inc. common stock for each share held on that date. The additional share of common stock was distributedretrospective basis to stockholders of record in the form of a stock dividend on June 9, 2006. All share and per-share amounts in the accompanying consolidated financial statements and notes to consolidated financial statements have been adjusted to apply the effect of the stock split retrospectively.reflect this change.

3.2. Net Income Per Common Share

For the purpose of computing diluted net income per share, the weighted-average number of shares outstanding was increased by 2,613,6094,821,804 and 2,500,7601,658,331 for the three-month periods ended March 31,September 30, 2007 and 2006, respectively, and 4,009,727 and 2,227,755 for the nine-month periods ended September 30, 2007 and 2006, respectively, to account for the potential dilutive effects of stock-based incentive plans.plans and convertible senior subordinated notes.

The calculation of weighted-average diluted shares outstanding, excludes all anti-dilutive shares. As of March 31,September 30, 2007, there were 5,519,2445,023,153 options for shares of common stock outstanding of which 4,572,069outstanding. During the three- and nine-month periods ended September 30, 2007, 4,932,053 and 4,842,408 options, respectively, were considered dilutive. As of March 31,September 30, 2006, there were 6,516,1645,082,948 options for shares of common stock outstanding of which 6,175,264outstanding. During the three-and nine-month periods ended September 30, 2006, 4,043,792 and 5,000,594 options, respectively, were considered dilutive. There were no adjustments to net income for the purposespurpose of computing income available to common stockholders for those periods.

The Company granted 677,150 stock options (667,650 after forfeitures) and 151,474 restricted stock unit awards in February, 2007 as part of its annual grant award.award grant. Of the 151,474 restricted stock unit awards, 70,500 vest upon satisfying established performance goals.

The Company had 186,000 restricted stock unit awards which had accelerated vesting provisions based upon meeting market conditions as defined in the award agreements. During the second quarter of 2007, the vesting acceleration conditions of these rights were satisfied. As a result, fifty percent of the restricted stock units (93,000 units) vested on June 20, 2007 and the remaining 50% (93,000 units) will vest on June 20, 2008.

As discussed in Note 7, the convertible senior subordinated notes due in August, 2025 (the “3.75% Convertible Notes”) are convertible, under certain circumstances, into a combination of cash and common stock of the Company. The conversion price as of March 31,September 30, 2007 was approximately $21.08$21.01 per share of common stock. As of March 31,September 30, 2007, the Company’s market price per share exceeded the conversion price of the notes. Under the net share settlement method, there were 279,4141,581,234 and 1,136,270 potential shares issuable under the notes that were considered dilutive.dilutive for the three- and nine-month periods ended September 30, 2007, respectively.

As noteddiscussed in Note 8,7, in March, 2007, the Company sold $100,000 of convertible senior subordinated notes due March, 2027.2027 (the “3.375% Convertible Notes”). These notes are convertible, under certain circumstances, into a combination of cash and common stock of the Company. The conversion price as of March 31,September 30, 2007 was approximately $28.68 per share of common stock. As of March 31,September 30, 2007, the Company’s market price per share had not exceeded the conversion price of the notes. Under the net share settlement method, there were no308,347 and 194,540 potential shares issuable under these notes that were considered dilutive.

4.3. Acquisitions

During 2006, the Company acquired three businesses, Heinz Hänggi GmbH, Stanztechnik (“Heinz Hänggi”), the KENT division of Premier Farnell (“KENT”) and the Nitropush product line of Orflam Industries of France (“Nitropush”). The following table reflects the unaudited pro forma operating results of the Company for the three months and nine months ended March 31,September 30, 2006, which give effect to the acquisitions as if they had occurred on January 1, 2006. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred if the acquisitions had been effective January 1, 2006 nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company, Heinz Hänggi, KENT and Nitropush adjusted for certain items including depreciation and amortization expense associated with the assets acquired and the Company’s financing arrangements. The pro forma information does not include the effects of any synergies andor cost reduction initiatives related to the acquisitions.

5.4. Comprehensive Income

Comprehensive income includes all changes in equity during a period except those resulting from the investmentinvestments by, and distributions to, stockholders. For the Company, comprehensive income for the period includes net income and other non-owner changes to equity, net of taxes.

Statements of Comprehensive Income

(Unaudited)

Defined benefit pension and other postretirement plans reflects the amortization of prior service costs and recognized losses related to such plans during the periodperiods as a result of the adoption of SFASStatement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” in the fourth quarter of 2006.

6.5. Inventories

The components of inventories consisted of:were:

		September 30, 2007			December 31, 2006
Finished goods		$	132,146		$	123,460
Work-in-process			47,630			42,898
Raw materials and supplies			36,825			32,602
		$	216,601		$	198,960

7.6. Goodwill and Other Intangible Assets

Goodwill:

The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company for the period ended March 31,September 30, 2007:

InThe purchase price allocation of the firstKENT acquisition was finalized during the third quarter of 2007. Goodwill recorded at Barnes Distribution related to KENT increased by $3,799 in 2007 changes inprimarily as a result of the recognition of assumed liabilities related to the KENT acquisition. Additionally, during 2007, goodwill recorded at Barnes Distribution was increased as a result of the contingent purchase price adjustments of £1.3 million ($2,713 U.S. Dollars) for the occurrence of certain events and the achievement of certain performance targets related to the 2005 Toolcom acquisition.

The purchase price allocation of the Hänggi acquisition was finalized during the second quarter of 2007. The changes in goodwill recorded at Barnes Industrial, formerly known as Associated Spring, resulted primarily from adjustments to the valuation of certain assets and liabilities related to the 2006 acquisitionsacquisition of KENT and Heinz Hänggi, respectively. The purchase price allocations of both acquisitions are subject to the finalization of the valuation of certain assets and liabilities and, thus, these preliminary values are subject to revision.nggi.

Other Intangible Assets:

Other intangible assets consisted of:

Amortization of intangible assets is expected to increase from approximately $10,900$11,200 in 2007 to $13,600$14,400 in 2011.

During the first quarterhalf of 2007, the Company entered into an additional aftermarket RSP agreementagreements with a major aerospace customer, General Electric Company (“General Electric”), under which the Company is the sole supplier of certain aftermarket parts to this customer. As consideration for this agreement,these agreements, the Company agreed to pay participation fees of $36,500$74,500 of which $9,125$18,625 has been paid, $27,375 will be paid in June,the fourth quarter of 2007 and the remainder$28,500 will be paid in December, 2007.

8.7. Debt

In March, 2007, the Company sold $100,000 of convertible senior subordinated notes due March 15, 2027 bearing interest at a fixed rate of 3.375%. The net proceeds from the offering were used to repay outstanding indebtedness under the Company’s revolving credit facility. The notes3.375% Convertible Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future senior debt of the Company. TheThese notes are subject to redemption at their par value at any time, at the option of the Company, on or after March 20, 2014. TheThese notes may be converted under certain circumstances, into a combination of cash and common stock of the Company at a conversion value equal to 34.8646 shares per note, equivalent to a conversion price of approximately $28.68 per share of common stock as of March 31,September 30, 2007. The first $1 of the conversion value of each note would be paid in cash and the additional conversion value, if any, would be paid in cash or common stock, at the option of the Company.

The 3.75% Convertible Notes and the 3.375% Convertible Notes are eligible for conversion upon meeting certain conditions as provided in the respective indenture agreements. From July 1, 2007 until September 30, 2007, the 3.75% Convertible Notes were eligible for conversion; however, during this period, none of the notes were converted. The Company amortizes deferred debt issuance costs over the stated term of the debt. Accordingly, the Company did not accelerate the amortization of the unamortized deferred debt issuance costs when the notes became eligible for conversion. The 3.75% Convertible Notes are eligible for conversion from October 1, 2007 until December 31, 2007. The Company continued to classify the 3.75% Convertible Notes as non-current as the Company has both the intent and ability, through its revolving credit facility, to refinance these notes on a long-term basis. The 3.375% Convertible Notes were not eligible for conversion during the third quarter of 2007 and are not eligible for conversion in the fourth quarter of 2007.

On September 19, 2007, the Company entered into a fourth amended and restated revolving credit agreement (the “Amended Credit Agreement”) with certain participating banks and financial institutions. The Amended Credit Agreement extended the maturity date of the facility to September 2012; increased the borrowing capacity of Barnes Group Switzerland GmbH to 100% of the credit line; decreased the interest rate to LIBOR plus a spread ranging from 0.30% to 1.15%, depending on the Company’s debt ratio at the time of the borrowing; and amended various financial and restrictive covenants, including the removal of the Consolidated Net Worth covenant. The available bank credit of $400,000 and other provisions of the revolving credit agreement remained unchanged.

As of September 30, 2007, $93,775 was borrowed under the Company’s $400,000 borrowing facility. The Company’s borrowing capacity is limited by various debt covenants in the Company’s debt agreements. The most restrictive covenant required the Company to maintain a ratio of Consolidated Total Debt to EBITDA, as defined in the Amended Credit Agreement, of not more than 4.00 times at September 30, 2007, decreasing to 3.75 times for fiscal quarters ending after September 30, 2009. The actual ratio at September 30, 2007 was 2.11 times and would have allowed additional borrowings in excess of the Company’s currently unused credit lines of $306,225.

9.8. Pension and Other Postretirement Benefits

Pension and other postretirement benefits expenses consisted of the following:

10.9. Income Taxes

The Company adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recorded an adjustment of $1,688 for unrecognized tax benefits which was accounted for as a reduction to the January 1, 2007 retained earnings balance. As of January 1, 2007, the total amount of unrecognized tax benefits recorded in the statement of financial position in accordance with this Interpretation is $9,399, of which $8,219, if recognized, would impact the effective tax rate.

The Company recognizes accrued interest accrued related to unrecognized tax benefits and penalties in income tax expense. Approximately $310 is included in the unrecognized tax benefits recorded as of January 1, 2007, for the payment of interest and a minimal amount for penalties associated with those positions.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdictions,jurisdiction, and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by various taxing authorities, including the Internal Revenue Service (the “IRS”) in the U.S. (the “IRS”) and the taxing authorities in other major jurisdictions such as Brazil, Canada, France, Germany, Mexico, Singapore, Sweden, Switzerland and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.

The

In connection with an IRS completed its review of the Companyaudit for the tax years 2000 through 2002. The2002, the IRS has proposed changesadjustments to these tax years which could result in a tax cost of approximately $16,500, plus a potential penalty of 20% of the tax assessment plus interest. These adjustments related to foreign income inclusion of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments and is currently protestingengaged in discussions with the proposed IRS tax assessment.Appeals Office of the IRS. The Company and its advisors believe the Company’s tax position on the issues raised by the IRS is correct and, therefore, the Company will continue to vigorously defend its position. The Company and its advisors believe the Company will prevail on this issue. It is the Company’s belief that the two parties could come to resolution of these issues within the next 12 months. Any additional impact on the Company’s liability for income taxes cannot presently be determined, but the Company believes it is adequately provided for and the outcome will not have a material impact on its results of operations, financial position or cash flows.

A recently enacted change to tax laws in Mexico is expected to have a one-time adverse impact of no greater than $3,300 on income tax expense in the fourth quarter of 2007 due to the adjustment of deferred tax assets.

11.10. Information on Business Segments

The following table sets forth information about the Company’s operations by its three reportable business segments:

The aftermarket RSP agreementagreements entered into in the first quarter of 2007 added $36,500$74,500 of intangible assets to the Barnes Aerospace segment assets.

See Note 1 for discussion of the Company’s realignment of its reportable business segments in the third quarter of 2007.

12.11. Commitments and Contingencies

Product Warranties

The Company provides product warranties in connection with the sale of products. From time to time, the Company is subject to customer claims with respect to product warranties. Product warranty liabilities were not significant as of March 31,September 30, 2007.

Contingent Payments

In connection with the Toolcom Supplies Ltd. acquisition in August, 2005, approximately £2.2 million of the purchase price were payable within two years of the closing date, contingent upon the occurrence of certain events or the achievement of certain performance targets. In 2006, £0.9 million (approximately $1,700) were earned and paid. The remaining balance of £1.3In 2007, £0.8 million (approximately $2,559) as$1,600) were earned and paid in the second quarter and £0.5 million (approximately $1,100) were earned and paid in the third quarter. As of March 31,September 30, 2007, will be recorded if and when paid.there were no remaining contingent payments related to the Toolcom Supplies Ltd. acquisition.

In connection with the Service Plus Distributors, Inc. acquisition in September, 2005, $3,700 of the purchase price could be earned within three years of the closing date, contingent upon the occurrence of certain events or the achievement of certain performance targets. In 2006, $1,500 was earned and paid. The remaining balance of $2,200 as of March 31, 2007 will be recorded if and when paid.

Income Taxes

See Note 109 for contingencies related to income taxes.

With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month and nine-month periods ended March 31,September 30, 2007 and 2006, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 8,November 2, 2007 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. PricewaterhouseCoopers LLP has not carried out any significant or additional tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended, for their report on the unaudited consolidated financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933, as amended.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Barnes Group Inc.

We have reviewed the accompanying consolidated balance sheetssheet of Barnes Group Inc. and its subsidiaries as of March 31,September 30, 2007 and 2006, and the related consolidated statements of income and of cash flows for each of the three-month and nine-month periods ended March 31,September 30, 2007 and 2006 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and 2006. This interim financial information is the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 109 to the consolidated financial information, the Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes –- an interpretation of FASB Statement No. 109, effective January 1, 2007.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006, and the related consolidated statements of income, of changes in stockholders’ equity and of cash flows for the year then ended management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006;(not presented herein), and in our report dated February 23, 2007, we expressed an unqualified opinions thereon. Theopinion on those consolidated financial statements and management’s assessmentstatements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2006 is fairly stated in all material respects in relation to the effectiveness of internal control over financial reporting referred to above are not presented herein.consolidated balance sheet from which it has been derived.

Item 2.

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

OVERVIEW

Please refer to the Overview found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. This Overview sets forth key management objectives and key performance indicators used by management as well as key industry and economic data tracked by management. Additionally, as

As discussed in Note 21 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, the Company’s Board of Directors declared a two-for-one stock split in the secondthird quarter of 2006.2007 the Company realigned its reportable business segments by transferring the stock spring catalog and custom solutions business from Barnes Distribution to Barnes Industrial, whose Engineered Springs business manufactures many of the spring products sold by this business. All share and per share amounts have beenpreviously reported segment information was adjusted on a retrospective basis to reflect the effect of the stock split.this change.

FirstThird Quarter 2007 Highlights

In the firstthird quarter of 2007, the Company achieved recordreported sales of $360.7$360.4 million, an increase of 20.3%11.9% over 2006, driven by a combination of organic growth, primarily in Barnes Aerospace, and incremental sales from recent acquisitions. Operating income improved 53.6%31.2% as a result of profitable sales growth and operational improvements.

The Company completed the sale of $100.0 million of 3.375% Convertible Senior Subordinated Notes due in March, 2027. The proceeds were used to repay outstanding indebtedness under the Company’s revolving credit facility.

Barnes Aerospace added to its aftermarket RSP investment by enteringentered into an additional aftermarket RSP agreement with General Electric, further expanding its long-term position for aftermarketAmended and Restated Credit Agreement in September 2007 which, among other things, extended the maturity date of the facility through September 2012, increased the borrowing capacity of Barnes Group Switzerland GmbH to 100% and decreased the interest rate.

Management continued the Project Catalyst initiative to accelerate the pace of improvement within Barnes Distribution. Project Catalyst consists of four initiatives: global product sourcing, logistics and network optimization, sales of aircraft engine parts.and margin improvement, and European market development, including the KENT integration.

RESULTS OF OPERATIONS

Sales

The Company reported net sales of $360.7$360.4 million in the firstthird quarter of 2007, an increase of $60.8$38.4 million or 20.3%11.9%, over the firstthird quarter of 2006. The sales increase reflected $25.4 million of organic sales growth primarily at Barnes Aerospace, including sales from the aftermarket RSPs. Additionally, the 2006 acquisitionsacquisition of KENT and Heinz Hänggi contributed $22.7 million and $8.6$6.8 million of incremental sales to the Barnes Distribution and Barnes Industrial segments, respectively.segment. Foreign currency translation favorably impacted sales by $4.1$6.2 million in 2007 as foreign currencies strengthened against the U.S. Dollar, primarily in Europe.

Sales for the nine-month period ended September 30, 2007 were $1,080.6 million, an increase of $149.8 million, or 16.1%, over the 2006 period, driven by $70.7 million of organic sales growth and $64.6 million from acquisitions. KENT added $51.7 million of incremental sales to the Barnes Distribution segment while the Hänggi acquisition contributed $12.9 million of incremental sales to the Barnes Industrial segment. Foreign currency translation favorably impacted sales by $14.5 million in 2007 as foreign currencies strengthened against the U.S. Dollar, primarily in Europe.

Expenses and Operating Income

Operating income was $43.2$40.1 million in the firstthird quarter of 2007, an increase of 53.6%31.2% over the same period in 2006, driven primarily by increases at2006. For the year-to-date period, operating income improved to $123.6 million, a 41.4% increase. Barnes Aerospace and Barnes Industrial.Industrial were the primary contributors to the increase in operating income in both periods. Operating income margin for the quarter improved to 12.0%11.1% from 9.5% a year ago and on a year-to-date basis to 11.4% in 2007 from 9.4% a year ago.in 2006.

Cost of sales increased 15.9%11.1% in the firstthird quarter of 2007 compared with the same period in 2006 primarily as a result of the higher sales levels. The increase in cost of sales was lower than the 20.3%11.9% increase in sales and resultedresulting in a 2.30.5 percentage point improvement in gross margin. Gross profit margins improved by more than three percentage points in Barnes Industrial andat Barnes Aerospace, driven primarily by increased sales fromboth in the higher margin businesses, particularlyaftermarket RSPs and in the Heinzmanufacturing business, and at Barnes Industrial, driven primarily by the higher margin Hänggi acquisition and the RSPs,sales, higher selling prices and operational efficiencies. Barnes Distribution’s gross margin was up slightly overlower than the prior year, period, primarilymainly as a result of the KENT acquisition.costs of activities associated with Project Catalyst.

Selling and administrative expenses increased 19.1%7.0% in the firstthird quarter of 2007 compared to the same period in 2006. Selling and administrative expenses asAs a percentage of sales, declinedselling and administrative expenses decreased from 27.0%27.3% in the firstthird quarter of 2006 to 26.8%26.1% in the same period of 2007. This declinedecrease was due in partprimarily to a reduction in pensionincreased OEM and other postretirement benefit costs. This wasaftermarket RSP sales at Barnes Aerospace which have lower selling and administrative expense components, offset in part by higher selling and administrative expenses as a percentage of sales at Barnes Distribution, which included costs related to KENT including approximately $0.7 million of integration costs.Project Catalyst.

Other Income/Expense

Other expenses, net of other income, decreased $0.2$0.3 million in the firstthird quarter of 2007 compared to the same period of 2006, primarily as result of lower foreign exchange losses offset, in part, by higher bank facility fees under the revolving credit agreement.losses. Interest expense increased $2.6decreased $0.6 million in the third quarter of 2007, driven by a shift from higher variable-rate debt in 2006 to lower fixed-rate debt in 2007 primarily as a result of the sale of the 3.375% Convertible Notes issued in the first quarter of 2007, primarily due to higher average borrowings used primarily to fund the 2006 acquisitions.2007.

Income Taxes

The Company’s effective tax rate for the first nine months of 2007 was 19.4%, which resulted in an effective tax rate for the third quarter of 2007 was 23.4%of 18.3%, compared with 21.2%21.7% in the first quarternine months of 2006 and 20.8% for the full year 2006. Changes in the Company’s tax rate are largely dependent on the mix between domestic and international earnings. The increasedecrease in the effective tax rate from 2006 was primarily driven by lower Barnes Distribution earnings in North America and additional earnings from the shiftRevenue Sharing Programs in mix of income to higher taxing jurisdictions. The Company expects the tax rate to remain in the low to mid-20% range in the medium term.Singapore, a lower-taxing jurisdiction.

In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the IRS. Theconnection with an IRS completed its review of the Companyaudit for the tax years 2000 through 2002. The2002, the IRS has proposed changesadjustments to these tax years which could result in a tax cost of approximately $16.5 million, plus a potential penalty of 20% of the tax assessment plus interest. The adjustments related to foreign income inclusion of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments and is currently protestingengaged in discussions with the proposed IRS tax assessment.Appeals Office of the IRS. The Company and its advisors believe the Company’s tax position on the issues raised by the IRS is correct and, therefore, the Company will continue to vigorously defend its position. The Company and its advisors believe the Company will prevail on this issue. It is the Company’s belief that the two parties could come to resolution of these issues within the next 12 months. Any additional impact on the Company’s liability for income taxes cannot presently be determined, but the Company believes it is adequately provided for and the outcome will not have a material impact on its results of operations, financial position or cash flows.

A recently enacted change to tax laws in Mexico is expected to have a one-time adverse impact of no greater than $3.3 million on income tax expense in the fourth quarter of 2007 due to the adjustment of deferred tax assets.

Net Income and Net Income per Share

Basic and diluted net income per share increased 40%44.4% and 39%34.3%, respectively, in the third quarter of 2007 as compared to 2006. The increase in basic and diluted average shares outstanding impactedreduced the percentage increase in net income per share whenas compared to the percentage increase in net income. Basic and diluted average shares outstanding increased primarily as a result of 1,628,676 shares issued for employee stock plans and, in addition for the Heinz Hänggi acquisitionnine-month period, due to the 1,628,676 shares of common stock issued in the second quarter of 2006 andfor the Hänggi acquisition. Diluted average shares issued foroutstanding increased period over period as a result of the increase in basic average shares outstanding as well as the increase in the dilutive effect of potentially issuable shares under the employee stock plans.plans and the convertible notes. This dilutive effect was in large part driven by the increase in the Company’s stock price.

Financial Performance by Business Segment

Barnes Aerospace

Barnes Aerospace achievedreported sales of $91.2$103.2 million in the firstthird quarter of 2007, an increase of 36.2%33.6% over the firstthird quarter of 2006.2006, and $286.8 million for the first nine months of 2007, a 31.5% increase over the comparable 2006 period. The third quarter sales increase reflects growth of 63.0%36.3% in aftermarket sales due primarily to thegrowth in RSP sales of 88.5% to $15.5 million, due in part to additional RSPs, and increasedan increase of 11.2% in overhaul and repair sales. Salessales to original equipment manufacturers (“OEMs”)$19.1 million. Manufacturing sales increased 26.3%32.4% for the quarter on the strength of the OEM backlog. Barnes Aerospace generated orders inbacklog of the first quarter of 2007 of $103.7 million, which included $64.0 million of commercial orders.manufacturing business. The order backlog at Barnes Aerospace at the end of the firstthird quarter of 2007 was $415.6$469.9 million, up from $403.0 million at December 31, 2006. Approximately 61%60% of the backlog at March 31,September 30, 2007 is expected to be shipped within the next 12 months. The year-to-date sales increase reflects growth of 43.4% in aftermarket sales due primarily to growth in RSP sales of 74.6% to $38.3 million, due in part to additional RSPs, and a 27.7% increase in overhaul and repair sales to $55.8 million. Manufacturing sales increased 26.4% for the year-to-date period on the strength of the backlog from the manufacturing business.

Barnes Aerospace’s firstthird quarter 2007 operating profit was $16.8$20.7 million, an increase of 97.1%82.6% from the 2006 third quarter. For the year-to-date period, operating profit in 2007 increased 84.0% to $56.1 million from the comparable 2006 period. Operating profit was positively impacted by the profit contribution from the highly profitable aftermarket RSPs as well as the higher sales volume increases in both the overhaul and repair, and OEMmanufacturing businesses.

Outlook: Sales in the commercial OEMmanufacturing business are expected to grow based on the strong commercial engine order backlog and Barnes Aerospace’s participation in certain strategic engine programs. In addition, managementManagement expects continued aftermarket sales growth based on the strength of the aftermarket maintenance, repair and overhaul (“MRO”) business reflecting industry fundamentals and strategic maintenance and repair contracts. Continued sales growth is also expected in the spare parts business.business primarily as a result of incremental sales from the two RSPs signed in the first half of 2007. Management is focused on meeting increased demand by transferring production to Singapore, and between domestic locations, through operational improvements and adding capacity domestically, and internationally.including a new Ogden, Utah facility, which is expected to be operational in the second half of 2008. Operating profits are expected to continue to be positively impacted by the aftermarket RSPs and solid contributions from the sales volume increases in the MRO and OEMmanufacturing businesses. As part of the aftermarket RSP program,programs, the management fees paidpayable to its customer increase generally in the fourth or later years of each program. These and other similar fees have been and will be deducted from sales and will result in a tempering of aftermarket RSP sales growth and operating margins. Such additional fees were incurred for the first time under the first RSP agreement in 2007. Barnes Aerospace continues to focus on operational and productivity efficiencies to improve long-term results. Costs associated with the transfer of production,The capacity expansion and new product introductions willproject in Ogden is expected to negatively impact near-term operating profits.profits by approximately $0.6 million in the fourth quarter of 2007.

Barnes Distribution

Barnes Distribution achievedreported sales of $152.5$132.0 million in the firstthird quarter of 2007, a 22.6%6.6% increase over the firstthird quarter of 2006 as a result of $22.7$6.8 million of incremental sales from the 2006 acquisition of KENT and organic sales growth of $3.7 million.KENT. Organic sales grew in large partdecreased $1.3 million primarily as a result of softness in Barnes Distribution’s North American markets and as a result of the short-term effects of implementing certain Project Catalyst initiatives. Partially offsetting this decline is the positive impact of price increases and continued growth in corporate and Tier II accounts. Foreign currency translation favorably impacted sales by approximately $1.7$2.7 million in the third quarter of 2007 as foreign currencies strengthened against the U.S. Dollar, primarily in Europe.Europe and Canada. Sales were $409.3 million in the first nine months of 2007, a 17.2% increase over the comparable 2006 period primarily as a result of the KENT acquisition in July 2006.

Barnes Distribution’s operating profit for the firstthird quarter of 2007 increased 13.5% over the same period in 2006 as a result of higher selling pricesdecreased $3.3 million, or 55.5%, and theoperating profit contribution from the recent acquisition of KENT. However, operating margins decreased in 2007 as compared to 2006, primarily due to lower margins at KENT which included approximately $0.7 million of integration costs. Additionally, in the first quarternine months of 2007 Barnes Distribution’sdecreased 27.6%. The three- and nine-month periods ended September 30, 2007 included costs of approximately $1.5 million and $4.4 million, respectively, related to Project Catalyst, primarily from the KENT integration. Additionally, operating profit reflected a shift in the business mix to lower margin customers,was negatively impacted by an increase in field compensation as a result of an investment in a larger fixed cost sales force and higher supplier costs and freight costs.as compared to the 2006 period. These costs were largelypartially offset through higher selling prices.prices and by lower incentive compensation as compared to the 2006 period.

Outlook: Sales are expected to continue to be impacted by the health of certain markets in which Barnes Distribution operates, primarily in North America, competitive pressures and Project Catalyst activities. Management, through its Project Catalyst initiatives, is focused on growing profitable organic sales and accelerating the pace of improvement within Barnes Distribution with a goal to achieve 10% or bettersignificant operating marginsmargin improvements in 2008. Management expects continued sales growth in 2007 driven by the favorable impact of the KENT acquisition which further enhanced Barnes Distribution’s European presence. Organic sales growth is expected as a result of Barnes Distribution’s emphasis on improving sales force productivity, customer profitability and leveraging the benefits of the KENT acquisition in Europe. Management is focused on improving operating profit through strategicStrategic actions focused on profitable sales, expanded global product sourcing, and logistics and network optimization. Theoptimization and profitable sales growth are expected to positively impact operating profit in 2008. In addition, as part of Project Catalyst, management expects to substantially complete the KENT integration is expected to be completed during 2007 and management expects to benefit from synergistic cost savings beginning in late 2007.2008. Costs associated with the improvement initiatives,Project Catalyst, including the KENT integration, will negatively impact near-term operating profits.profits, including approximately $3.3 million in the fourth quarter of 2007.

Barnes Industrial

Sales at Barnes Industrial for the firstthird quarter of 2007 were $119.6$125.6 million, a 7.7%3.5% increase from the firstthird quarter of 2006. The increase in 2007 resulted primarily from the 2006 acquisitionfavorable impact on sales of Heinz Hänggi which contributed $8.6foreign currency translation of approximately $3.5 million in sales. Foreign currency translation favorably impacted sales by approximately $2.4 millionthe third quarter of 2007 as foreign currencies strengthened against the U.S. Dollar, primarily in Europe. This increase wasAdditionally, Barnes Industrial recorded slight organic sales growth in the third quarter of 2007 as a result of increased sales in the retention rings and nitrogen gas products businesses as compared to the 2006 period offset by lower sales in the precision valve business. On a declineyear-to-date basis, sales at Barnes Industrial were $385.5 million, a 5.9% increase from 2006. The increase in organic sales.this period was primarily a result of the Hänggi acquisition which contributed $12.9 million of incremental sales in 2007 and the favorable impact on sales of foreign currency translation of approximately $9.0 million.

Barnes Industrial’s firstthird quarter 2007 operating profit was $16.2$16.8 million, a 52.3%27.1% improvement from the comparable 2006 period. The higher operating profit resulted primarily from increased sales mainly in the profit contribution from the recent acquisition of Heinz Hänggi as well asretention rings and nitrogen gas products businesses and higher profits from operationalHänggi. Additionally, the 2006 period included $0.6 million of reorganization costs related to a plant closure and costs for the transfer of certain production to lower-cost facilities. On a year-to-date basis, operating profit increased 39.1% to $55.0 million primarily as a result of the incremental operating profit from the Hänggi acquisition and profit improvements primarily in the Engineered Springs business. Additionally, lower pension and postretirement benefit expense favorably impacted operating profit in the 2007 period.

Outlook: Barnes Industrial continues to strengthen its operations through investments in capacity, geographic expansion and acquisitions. Management expects modest sales growth into 2008 as a result of improvements in certain industrial end markets which primarily impact its business during 2007 despite an expected decreasenitrogen gas, retention rings and precision forming businesses. However, management expects sales in the heavy duty truck market.Engineered Springs and precision valve businesses to be impacted by softness in the transportation and compressor markets, respectively. The integration of the stock spring catalog and custom solutions business into the Engineered Springs business is expected to positively impact operating results as management leverages the benefits of the third quarter 2007 realignment to Barnes Industrial. Management is focusedcontinues to focus on profitableimproving profitability through sales growth, through increased market penetration, and improving the operational performance of its businesses through the transfer of certain products to lower-cost facilities and productivity initiatives.and process improvement initiatives and is considering product rationalization and realignment activities within Barnes Industrial. The potential 2007 charges associated with these actions are currently estimated at approximately $3.0 million to $3.5 million on a pre-tax basis.

LIQUIDITY AND CAPITAL RESOURCES

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

The Company’s ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths. Management continues to focus on cash flow and working capital management, and anticipates that operating activities in 2007 will generate significant cash. This operating cash flow may be supplemented with external borrowings to meet near-term organic business expansion and the Company’s current financial commitments. Any future acquisitions are expected to be financed through internal cash, borrowings and equity, or a combination thereof.

Cash Flow

Operating activities provided $0.7$87.2 million in cash in the first threenine months of 2007 compared to a use of $2.5$69.8 million in the first quarternine months of 2006. Compared to the first quarter of 2006 period, operating cash flows in the 2007 period were positively impacted by the improved operating performance, offset in part by a higher investment in working capital.

Cash used by investing activities in the first quarternine months of 2007 approximatedwas $82.5 million compared to $214.1 million in the same levelcomparable 2006 period. In 2006, $96.1 million and $45.2 million of cash were used in 2006 as lower proceeds fromfor the disposition of property, plantHänggi and equipment were offset by lower capital expenditures and RSP payments.KENT acquisitions, respectively. Capital expenditures in 2007 were $11.6$32.9 million compared to $12.8$32.6 million in 2006. For the Company in total, capital expenditures2006 and are expected to be in the $45 - - $50 million range for the full year 2007. In addition, the Company made participation fee payments related to the aftermarket RSPs of $11.8$45.8 million in 2007 as compared to $12.2$35.4 million for the same period in 2006. At March 31,As of September 30, 2007, the Company hashad a $51.9$55.9 million liability payable in 2007 and 2008 for participation fees under the aftermarket RSPs which is included in accounts payable.

Cash from financing activities in the first quarternine months of 2007 included a net increasedecrease in borrowings of $21.6$5.8 million compared to an increase of $37.7$146.0 million in the comparable 2006 period. Proceeds in both periodsthe 2006 period were used primarily to finance operating activitiesfund the acquisitions of Hänggi and KENT and to repay borrowings from The Development Bank of Singapore which became due in the U.S., particularly working capital requirements, as well as to fund capital expenditures and dividends.June 2006. The 2007 net increasedecrease in borrowings includes the sale of $100.0 million of convertible subordinated debt, the proceeds of which were used to pay down borrowings under the revolving credit facility. Other financing activitiesProceeds from the issuance of common stock decreased $12.8 million primarily from lower stock option exercises in the 2007 included $3.0 million of fees related to the convertible debt issuance.period. Total cash used to pay dividends increased in the first quarternine months of 2007 by $1.3$3.3 million over the comparable 2006 period, to $6.6$21.6 million due to an increase in the quarterly cash dividend per share and in the number of shares outstanding. The quarterly cash dividend will increaseOther financing activities in 2007 included $3.6 million of fees related to $0.14 per share in the second quarterissuance of 2007.the 3.75% Convertible Notes, offset by $4.9 million of excess tax benefits related to stock options exercised.

At March 31,September 30, 2007, the Company held $25.0$22.6 million in cash and cash equivalents, nearly all of which are primarily held outside of the U.S. Management continues to focus on lowering the cash balance to an optimal level by taking full advantage of the international financing structure that was completed in 2006.

The Company maintains borrowing facilities with banks to supplement internal cash generation. At March 31,September 30, 2007, $131.3$93.8 million was borrowed at an interest rate of 6.07%6.05% under the Company’s $400.0 million borrowing facility which matures in January 2011.September 2012. The Company had no$7.1 million of borrowings under uncommitted short-term bank credit lines at March 31,September 30, 2007. As a result of the completion of the $100.0 million convertible senior subordinated3.75% Convertible Notes debt offering, approximately 70%74% of the Company’s total borrowings as of March 31,at September 30, 2007 are comprised of fixed rate debt.

Borrowing capacity is limited by various debt covenants in the Company’s debt agreements. The most restrictive borrowing covenant requires the Company to maintain a ratio of Consolidated Total Debt to EBITDA, as defined in the revolving credit agreement, of not more than 4.00 times at March 31,September 30, 2007. The ratio requirement will decrease to 3.75 times for any fiscal quarter ending after September 30, 2007.2009. The actual ratio at March 31,September 30, 2007 was 2.482.11 times and would have allowed additional borrowings in excess of $275.4the Company’s currently unused credit lines of $306.2 million.

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

OTHER MATTERS

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The most significant areas involving management judgments and estimates are described in Management’s Discussion and Analysis of Financial Conditions and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes to such judgments and estimates. Actual results could differ from those estimates.

Recent Accounting Changes

In September, 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This Statement will be effective for the Company in 2008. The Company is currently evaluating the impact this Statement will have on the Company’s financial position, results of operations and cash flows.

In February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits the measurement of certain financial instruments at fair value with subsequent unrealized gains and losses recorded in earnings. This Statement will be effective for the Company in 2008. The Company is currently evaluating the impact this Statement will have on the Company’s financial position, results of operations and cash flows.

EBITDA

Earnings before interest expense, income taxes, and depreciation and amortization (“EBITDA”) for the first quarternine months of 2007 were $54.9$159.8 million compared to $36.8$118.2 million in the first quarternine months of 2006. EBITDA is a measurement not in accordance with generally accepted accounting principles (“GAAP”). The Company defines EBITDA as net income plus interest expense, income taxes and depreciation and amortization which the Company incurs in the normal course of business. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP, and the reader should not consider it as an alternative to net income, net cash provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company’s operating performance. The Company’s definition of EBITDA may not be comparable with EBITDA as defined by other companies. Accordingly, the measurement has limitations depending on its use. The Company believes EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors.

Following is a reconciliation of EBITDA to the Company’s net income (in millions):