10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2007
or
o	Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                     to

Commission File Number 1-8472

Hexcel Corporation

(Exact name of registrant as specified in its charter)

Delaware		94-1109521
(State of Incorporation)		(I.R.S. Employer Identification No.)
	Two Stamford Plaza
	281 Tresser Boulevard
	Stamford, Connecticut 06901-3238
	(Address of principal executive offices and zip code)
	Registrant’s telephone number, including area code:  (203) 969-0666

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  o

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.

Large Accelerated Filer    x  Accelerated Filer    o  Non-Accelerated Filer  o

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 2, 2007
COMMON STOCK	94,646,623

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

PART I.		FINANCIAL INFORMATION
	ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)
			•	Condensed Consolidated Balance Sheets — June 30, 2007 and December 31, 2006	2
			•	Condensed Consolidated Statements of Operations — The Quarters and Six-Months Ended June 30, 2007 and 2006	3
			•	Condensed Consolidated Statements of Cash Flows — The Six-Months Ended June 30, 2007 and 2006	4
			•	Notes to Condensed Consolidated Financial Statements	5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			29
	ITEM 4.	Controls and Procedures			31
PART II.		OTHER INFORMATION			32
	ITEM 1.	Legal Proceedings			32
	ITEM 1A.	Risk Factors			33
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds			33
	ITEM 4.	Submission of Matters to a Vote of Security Holders			34
	ITEM 6.	Exhibits and Reports on Form 8-K			35
SIGNATURE					36

1

PART I.  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

	(Unaudited)
(In millions, except per share data)	June 30, 2007			December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	36.0		$	25.7
Accounts receivable, net	192.0			169.8
Inventories, net	166.7			150.8
Prepaid expenses and other current assets	32.1			35.4
Assets of discontinued operations	39.7			44.1
Total current assets	466.5			425.8
Property, plant and equipment	783.7			750.3
Less accumulated depreciation	(404.9		)	(403.8		)
Net property, plant and equipment	378.8			346.5
Goodwill and intangible assets	58.9			58.5
Investments in affiliated companies	15.7			11.1
Deferred tax assets	96.4			103.0
Other assets	17.1			22.3
Assets of discontinued operations	40.0			47.3
Total assets	$	1,073.4		$	1,014.5
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities of capital lease obligations	$	2.0		$	2.5
Accounts payable	100.6			96.0
Accrued liabilities	131.1			105.6
Liabilities of discontinued operations	12.4			15.2
Total current liabilities	246.1			219.3
Long-term notes payable and capital lease obligations	401.9			409.8
Other non-current liabilities	73.1			80.8
Liabilities of discontinued operations	1.8			3.0
Total liabilities	722.9			712.9
Stockholders’ equity:
Preferred stock, no par value, 20.0 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value, 200.0 shares authorized, 96.4 shares issued at June 30, 2007 and 95.5 shares issued at December 31, 2006	1.0			1.0
Additional paid-in capital	495.8			479.3
Accumulated deficit	(126.5		)	(157.1		)
Accumulated other comprehensive income (loss)	1.8			(1.8		)
	372.1			321.4
Less – Treasury stock, at cost, 1.8 shares at June 30, 2007 and 1.7 shares at December 31, 2006	(21.6		)	(19.8		)
Total stockholders’ equity	350.5			301.6
Total liabilities and stockholders’ equity	$	1,073.4		$	1,014.5

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

2

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

	(Unaudited)
	Quarter Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2007			2006			2007			2006
Net sales	$	289.8		$	274.0		$	572.4		$	534.3
Cost of sales	219.4			206.5			430.5			402.2
Gross margin	70.4			67.5			141.9			132.1
Selling, general and administrative expenses	27.4			25.9			58.4			54.0
Research and technology expenses	8.5			7.4			18.0			14.9
Business consolidation and restructuring expenses	0.5			0.3			1.6			1.2
Operating income	34.0			33.9			63.9			62.0
Interest expense, net	6.0			6.1			11.7			12.8
Non-operating expense	—			—			0.4			—
Income from continuing operations before income taxes, equity in earnings and discontinued operations	28.0			27.8			51.8			49.2
Provision for income taxes	11.9			10.9			21.9			19.4
Income from continuing operations before equity in earnings and discontinued operations	16.1			16.9			29.9			29.8
Equity in earnings of affiliated companies, net of tax	1.4			1.1			2.4			2.2
Net income from continuing operations	17.5			18.0			32.3			32.0
Income (loss) from discontinued operations, net of tax	(8.7		)	(0.4		)	(6.8		)	0.1
Gain on sale of discontinued operations, net of tax	—			—			6.8			—
Net income	$	8.8		$	17.6		$	32.3		$	32.1
Basic net income (loss) per common share:
Continuing operations	$	0.18		$	0.19		$	0.34		$	0.34
Discontinued operations	(0.09		)	—			—			—
Net income	$	0.09		$	0.19		$	0.34		$	0.34
Diluted net income (loss) per common share:
Continuing operations	$	0.18		$	0.19		$	0.33		$	0.34
Discontinued operations	(0.09		)	—			—			—
Net income	$	0.09		$	0.19		$	0.33		$	0.34
Weighted average common shares outstanding:
Basic	94.4			93.4			94.4			93.2
Diluted	96.3			95.5			96.3			95.4

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

3

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	(Unaudited)
	Six Months Ended June 30,
(In millions)	2007			2006
Cash flows from operating activities
Net income	$	32.3		$	32.1
Income from discontinued operations, net of tax	—			(0.1		)
Net income from continuing operations	32.3			32.0
Reconciliation to net cash used for operating activities:
Depreciation and amortization	19.6			18.5
Amortization of debt discount and deferred financing costs	0.9			0.9
Deferred income taxes	14.6			11.5
Business consolidation and restructuring expenses	1.6			1.2
Business consolidation and restructuring payments	(8.6		)	(1.5		)
Equity in earnings of affiliated companies	(2.4		)	(2.2		)
Dividends from affiliated companies	—			1.3
Share-based compensation	6.7			5.3
Excess tax benefits on stock-based compensation	(3.1		)	(6.2		)
Loss on early retirement of debt	0.4			—
Changes in assets and liabilities:
Increase in accounts receivable	(19.6		)	(31.0		)
Increase in inventories	(14.2		)	(4.6		)
Decrease in prepaid expenses and other current assets	0.3			0.5
Increase (decrease) in accounts payable and accrued liabilities	8.8			(7.0		)
Changes in other non-current assets and long-term liabilities	(10.3		)	0.7
Net cash provided by operating activities	27.0			19.4
Cash flows from investing activities
Capital expenditures and deposits for property purchases	(46.0		)	(50.4		)
Proceeds from sale of discontinued operations	25.0			—
Investment in affiliated companies	(2.1		)	—
Net cash used for investing activities	(23.1		)	(50.4		)
Cash flows from financing activities
Proceeds from senior secured credit facility – revolver, net	28.0			6.6
Repayments of senior secured credit facility – term B loan	(36.2		)	(0.5		)
Repayments on capital lease obligations and other debt, net	(0.2		)	1.3
Activity under stock plans, including excess tax benefits on stock-based compensation	7.6			10.4
Net cash (used for) provided by financing activities	(0.8		)	17.8
Net cash provided by operating activities, discontinued operations	7.9			2.0
Net cash used for investing activities, discontinued operations	(1.6		)	(0.2		)
Effect of exchange rate changes on cash and cash equivalents	0.9			(0.8		)
Net increase (decrease) in cash and cash equivalents	10.3			(12.2		)
Cash and cash equivalents at beginning of period	25.7			21.0
Cash and cash equivalents at end of period	$	36.0		$	8.8
Supplemental Data:
Cash interest paid	$	13.7		$	13.6
Cash taxes paid	$	9.1		$	4.7

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

4

HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Significant Accounting Policies

In these notes, the terms “Hexcel”, “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies.

The accompanying condensed consolidated financial statements represent the consolidation of Hexcel.  Refer to Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of our significant accounting policies.

Effective January 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109 (“FIN 48”).  FIN 48 addresses diversity in practice and clarifies accounting for uncertain tax positions.  FIN 48 prescribes a comprehensive model as to how a company should recognize, present, and disclose in its financial statements uncertain tax positions a company has taken or expects to take on its tax return.  FIN 48 specifically requires companies to presume taxing authorities have full knowledge of the position and all relevant facts.  Furthermore, based on this presumption, FIN 48 requires that financial statements reflect expected future consequences of such positions.

Under FIN 48, an uncertain tax position needs to be sustainable at a more likely than not level based upon its technical merits before any benefit can be recognized.  The tax benefit is measured as the largest amount that has a cumulative probability of greater than 50% of being the final outcome.  FIN 48 substantially changes the applicable accounting model (as the prior model followed the criterion of FAS 5, “Accounting for Contingencies,” recording a liability against an uncertain tax benefit when it was probable and estimable) and has potential to cause greater volatility in income statements as more items are recognized within income tax expense.  FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information.  Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC.

 In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented.  The condensed consolidated balance sheet as of December 31, 2006 was derived from the audited 2006 consolidated balance sheet.  Interim results are not necessarily indicative of results expected for any other interim period or for the full year.  The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Hexcel Corporation’s 2006 Annual Report on Form 10-K.

Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the 2007 presentation.  In addition, one of the reclassifications resulted in an increase in long-term assets (and total assets) of $1.6 million and a corresponding increase in long-term liabilities (and total liabilities) of $1.6 million from our previously reported consolidated balance sheet as of December 31, 2006 due to the allocation of deferred tax assets to the discontinued EBGI business.

New Accounting Standards

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (“FAS 159”).  FAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value.  The Statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards.  FAS 159 is effective for fiscal years beginning after November 15, 2007 (as of January 1, 2008 for calendar year companies).  We are currently in the process of evaluating the effects of the adoption of FAS 159 on our consolidated results of operations, cash flows, and financial position.

5

In September 2006, the FASB finalized Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”), which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of FAS 157 will be applied prospectively to fair value measurements and disclosures in our condensed consolidated financial statements beginning in the first quarter of 2008.  We are currently evaluating the impact of FAS 157 on our results of operations, cash flows, and financial position.

Note 2 – Discontinued Operations

EBGI

In June of 2007, we entered into a definitive agreement to sell the U.S. electronics, ballistics and general industrial product lines (“EBGI”) portion of our reinforcements business.  The agreement includes the sale of the design, manufacturing, and selling activities related to EBGI including related property, plant and equipment and working capital.  The assets to be sold have been clearly identified and a review of the activities required to complete the divestiture plan has indicated it is unlikely significant changes will be made, or the divestiture plan will be withdrawn.  In light of these activities, we have considered the requirements of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”), and concluded that as of June 2007 the transaction satisfied the accounting considerations to be classified as assets held for sale and have reported the component as discontinued operations in our financial statements.  The sale is anticipated to close during the third quarter of 2007.

Revenues associated with the EBGI business were $45.7 million and $91.8 million for the quarter and six-months ended June 30, 2007, respectively, and were $35.6 million and $76.5 million for the quarter and six-months ended June 30, 2006, respectively.  During the second quarter of 2007, Hexcel established a pre-tax reserve of $15 million ($9.7 million after-tax) relating to the previously disclosed investigation by the U.S. Department of Justice into the use of allegedly defective Zylon fiber in ballistic vests purchased under U.S. government funded programs.  Pre-tax loss associated with the discontinued operation was $13.5 million and $10.8 million for the quarter and six-months ended June 30, 2007 and $1.5 million and $1.6 million for the quarter and six-months ended June 30, 2006, respectively.

The following table presents balance sheet information for the EBGI business as of June 30, 2007 and December 31, 2006:

(In millions)	June 30, 2007		December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	—	$	—
Accounts receivable, net	12.8		11.7
Inventories, net	22.0		20.6
Prepaid expenses and other current assets	4.9		1.3
Total current assets	39.7		33.6
Net property, plant and equipment	22.7		23.9
Goodwill	17.3		17.5
Total assets	$	79.7	$	75.0
Liabilities
Current liabilities:
Accounts payable	$	10.8	$	8.0
Other accrued liabilities	1.6		1.0
Total current liabilities	12.4		9.0
Other non-current liabilities	1.8		1.6
Total liabilities	$	14.2	$	10.6

Architectural Business

On February 28, 2007, we completed the sale of our European Architectural business.   The Architectural business sold included the design, manufacturing and selling activities related to this business including related property, plant and equipment and working capital.  Cash proceeds from the sale were $25.0 million, resulting in a net after tax gain of $6.8 million (after related expenses).  In accordance with the provisions of FAS 144, the operations of the Architectural business, including the net after tax gain on the sale, has been reported as a discontinued operation in our accompanying condensed consolidated financial statements.

6

Revenues associated with the Architectural business were $4.4 million for the quarter ended March 31, 2007 and $6.4 million and $12.2 million for the quarter and six-months ended June 30, 2006, respectively.  Pre-tax income associated with the discontinued operation was $10.8 million (including a pre-tax gain on the sale of the business of $10.5 million) for the six-months ended June 30, 2007 and $0.9 million and $1.6 million for the quarter and six-months ended June 30, 2006, respectively.

The following table presents balance sheet information for the Architectural business as of December 31, 2006:

(In millions)	December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	—
Accounts receivable, net	3.9
Inventories, net	6.2
Prepaid expenses and other current assets	0.4
Total current assets	10.5
Net property, plant and equipment	5.4
Goodwill	0.3
Deferred tax assets	0.2
Total assets	$	16.4
Liabilities
Current liabilities:
Accounts payable	$	4.3
Other accrued liabilities	1.9
Total current liabilities	6.2
Other non-current liabilities	1.4
Total liabilities	$	7.6

Note 3 — Share-Based Compensation

Share-based compensation expense was $1.9 million and $2.3 million for the quarters ended June 30, 2007 and 2006, respectively.  Share-based compensation expense was $6.7 million and $5.3 million for the six-months ended June 30, 2007 and 2006, respectively.  Share-based compensation expense capitalized for the quarters and six-months ended June 30, 2007 and 2006 was not material.  During the six-month period ended June 30, 2007 and 2006, cash received from stock option exercises and employee stock purchases was $6.2 million and $7.5 million, respectively.  We used $1.7 million and $3.3 million in cash related to the shares withheld to satisfy employee tax obligations for restricted stock units (“RSUs”) and performance accelerated restricted stock units (“PARs”) converted during the six month period ended June 30, 2007 and 2006, respectively.  We realized excess tax benefits of $3.1 million and $6.2 million in connection with stock options exercised, and RSUs and PARs converted during the six month period ended June 30, 2007 and 2006, respectively.

Restricted Stock Units

The following activity occurred with respect to our outstanding restricted stock units and performance share awards during the quarter and six-months ended June 30, 2007:

(In millions, except share data)	Number of Awards		Weighted Avg. Grant Date Fair Value per Unit
Restricted Stock Awards:
Nonvested balance at December 31, 2006	0.3		$	16.73
Granted	0.2		$	18.71
Vested	(0.1	)	$	17.68
Forfeited	—		—
Nonvested balance at June 30, 2007	0.4		$	18.20

7

(In millions, except share data)	Number of Awards	Weighted Avg. Grant Date Fair Value per Unit
Performance Restricted Stock Awards:
Nonvested balance at December 31, 2006	0.1	$	21.97
Granted	0.1	$	18.17
Vested	—	—
Forfeited	—	—
Nonvested balance at June 30, 2007	0.2	$	19.35

As of June 30, 2007, there was total unrecognized compensation cost related to nonvested RSUs and PRSUs of $6.8 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

Stock Options

A summary of option activity under the plan for the six month period ended June 30, 2007 is as follows:

(In millions, except share data)	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2006	5.2		$	9.40	5.15	$	41.3
Options granted	0.4		$	18.17
Options exercised	(0.7	)	$	8.92
Options expired or forfeited	(0.1	)	$	18.00
Outstanding at June 30, 2007	4.8		$	10.15	5.20	$	52.7
Exercisable at June 30, 2007	4.0		$	8.55		$	49.6

The total intrinsic value of options exercised during the quarter and six month period ended June 30, 2007 was $5.1 million and $8.2 million, respectively.  As of June 30, 2007, there was total unrecognized compensation cost related to nonvested stock options of $5.1 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

Valuation Assumptions in Estimating Fair Value

We estimated the fair value of stock options at the grant date using the Black Scholes option pricing model with the following assumptions:

	Six Months Ended June 30,
	2007			2006
Risk-free interest rate	4.84		%	4.50		%
Expected option life (in years) Executive	5.97			5.90
Expected option life (in years) Non-Executive	5.24			5.43
Dividend yield	—		%	—		%
Volatility	40.94		%	46.44		%
Weighted-average fair value per option granted	$	8.41		$	10.87

Retirement Provisions

Employees who terminate employment other than for “cause” (as defined in the relevant employee option agreement), and who meet the definition of retirement in the relevant employee option agreement (age 65 or age 55 with 5 or more years of service with the company), will continue to have their options vest in accordance with the vesting schedule set in the option agreement.  Similar retirement provisions also apply to RSUs and PRSUs.  RSUs are deemed to be vested when an employee reaches their defined retirement age.  PRSUs differ from RSUs as an employee who is retirement eligible is only entitled to a pro-rata portion of their shares based on the portion of the performance period elapsed prior to retirement; however, if employed at the end of the performance period they are entitled to the entire grant.  As a result of these provisions, under the terms of SFAS 123(R), we have accelerated the recognition of the compensation expense for any employee who received a grant in 2007, or 2006 and who met the above definition of retirement eligibility, or who will meet the definition during the vesting period.  This results in the majority of stock-based compensation expense being recognized in the quarter which the grant occurs.

8

Shares Authorized for Grant

As of June 30, 2007, an aggregate of 3.4 million shares were authorized for future grant under our stock plan, which covers stock options, RSUs, PRSUs and PARS.

Employee Stock Purchase Plan (“ESPP”)

In addition, we maintain an ESPP, under which eligible employees may contribute up to 10% of their base earnings toward the quarterly purchase of our common stock at a purchase price equal to 85% of the fair market value of the common stock on the purchase date.  As of June 30, 2007, the number of shares of common stock reserved for future issuances under the ESPP was 0.2 million.

Note 4 - Inventories

(In millions)	June 30, 2007		December 31, 2006
Raw materials	$	73.7	$	88.0
Work in progress	41.5		33.6
Finished goods	51.5		29.2
Total inventories	$	166.7	$	150.8

Note 5 – Retirement and Other Postretirement Benefit Plans

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees.  We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.   In December 2006, our Board of Directors voted to terminate the U.S. qualified plan as of April 1, 2007, subject to appropriate regulatory approval.  Final termination of the U.S. qualified plan is expected to occur in the next twelve months.  We have classified all liabilities of the plan as current.  Refer to our 2006 Annual Report on Form 10-K for further information regarding these plans.

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the quarters and six-months ended June 30, 2007 and 2006 were as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2007			2006			2007			2006
U.S. Defined Benefit Retirement Plans
Service cost	$	0.2		$	0.3		$	0.5		$	0.6
Interest cost	0.5			0.5			1.0			1.0
Expected return on plan assets	(0.2		)	(0.3		)	(0.4		)	(0.6		)
Net amortization and deferral	0.4			0.3			0.8			0.6
Sub-total	0.9			0.8			1.9			1.6
Curtailment and settlement loss	0.6			0.3			0.8			0.5
Net periodic benefit cost	$	1.5		$	1.1		$	2.7		$	2.1
European Defined Benefit Retirement Plans
Service cost	$	0.9		$	0.8		$	1.8		$	1.7
Interest cost	1.7			1.5			3.4			2.8
Expected return on plan assets	(1.9		)	(1.5		)	(3.8		)	(3.0		)
Net amortization and deferral	0.2			0.2			0.4			0.4
Sub-total	0.9			1.0			1.8			1.9
Curtailment and settlement loss	—			—			—			—
Net periodic benefit cost	$	0.9		$	1.0		$	1.8		$	1.9

9

Contributions

We contributed $1.7 million and $0.9 million to our U.S. qualified and nonqualified defined benefit retirement plans during the second quarters of 2007 and 2006, respectively.  Contributions were $2.0 million and $1.7 million for the six-months ended June 30, 2007 and 2006, respectively.  We expect to contribute at the minimum funding amount required in 2007, fund lump-sum payments and possibly fund the entire plan obligation by year-end, if the U.S. qualified plan’s termination is approved by the appropriate regulatory authorities during 2007.  Absent final plan termination in 2007, we plan to contribute approximately $3 million during 2007 to our U.S. qualified pension plan to fund expected lump sum payments.  Upon final termination of the U.S. qualified plan, we estimate that the final cash settlement contribution will be in the range of $10 million to $12 million and that we will record a pre-tax loss of approximately $13 million related to the unrecognized actuarial loss.  The termination will also result in the Company reducing its net periodic benefit cost by approximately $2 million per year.

We generally fund our U.S. nonqualified defined benefit retirement plans when benefit payments are incurred.  Under the provisions of these non-qualified plans, we expect to contribute $0.3 million in 2007 to cover unfunded benefits.  We contributed $2.6 million to our U.S. defined benefits retirement plans during the 2006 fiscal year.

In addition, we contributed $0.7 million and $0.8 million to our European defined benefit retirement plans in the second quarters of 2007 and 2006, respectively.  Total contributions were $1.3 million and $1.6 million for the six-months ended June 30, 2007 and 2006, respectively.  Meeting governing requirements, we plan to contribute approximately $2.6 million during 2007 to our European plans.  We contributed $2.6 million to our European plans during the 2006 fiscal year.

Postretirement Health Care and Life Insurance Benefit Plans

Net Periodic Postretirement Benefit Costs

Net periodic benefit costs of our postretirement health care and life insurance benefit plans were $0.1 million and $0.2 million, consisting of interest costs for second quarters of 2007 and 2006, respectively.  For the six-months ended June 30, 2007 and 2006, net periodic postretirement benefit costs were $0.3 million and $0.4 million, respectively.

Contributions

In connection with our postretirement plans, we contributed $0.3 million for both the second quarters of 2007 and 2006, and $0.6 million and $0.5 million during the six-months ended June 30, 2007 and 2006, respectively.  We periodically fund our postretirement plans to pay covered expenses as they are incurred.  Under the provisions of these post retirement plans, we expect to contribute $1.0 million in 2007 to cover unfunded benefits.  We contributed $1.0 million to our postretirement plans during the 2006 fiscal year.

Note 6 - Business Consolidation and Restructuring Programs

The aggregate business consolidation and restructuring liabilities as of June 30, 2007 and December 31, 2006, and activity for the quarter and six-months ended June 30, 2007, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2006	$	10.7		$	0.3		$	11.0
Business consolidation and restructuring expenses:
Current period expenses	0.8			0.5			1.3
Change in estimated expenses	(0.2		)	—			(0.2		)
Net business consolidation and restructuring expenses	0.6			0.5			1.1
Cash expenditures	(1.7		)	(0.5		)	(2.2		)
Currency translation adjustments	0.1			—			0.1
Balance as of March 31, 2007	$	9.7		$	0.3		$	10.0
Business consolidation and restructuring expenses:
Current period expenses	—			1.1			1.1
Change in estimated expenses	(0.6		)	—			(0.7		)
Net business consolidation and restructuring expenses	(0.6		)	1.1			0.5
Cash expenditures	(5.2		)	(1.2		)	(6.4		)
Balance as of June 30, 2007	$	3.9		$	0.2		$	4.1

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December 2006 Program

In December 2006, we announced that an organizational realignment process had begun to reorganize ourselves into a single business as well as address stranded costs resulting from divestitures associated with our portfolio realignment.  In connection with this action, we incurred severance and relocation expenses.  During the second quarter of 2007, we reduced our estimate for future severance obligations under this program by $0.2 million.  We expect this program will be substantially completed by December 31, 2007.

Business consolidation and restructuring liabilities as of June 30, 2007 and December 31, 2006, and activity for the December 2006 program for the quarter and six-months ended June 30, 2007, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment		Total
Balance as of December 31, 2006	$	7.0		$	—	$	7.0
Business consolidation and restructuring expenses	0.8			—		0.8
Cash expenditures	(0.8		)	—		(0.8		)
Currency translation adjustments	0.1			—		0.1
Balance as of March 31, 2007	$	7.1		$	—	$	7.1
Business consolidation and restructuring expenses
Current period expenses	—			—		—
Change in estimated expenses	(0.2		)	—		(0.2		)
Net business consolidation and restructuring expenses	(0.2		)	—		(0.2		)
Cash expenditures	(4.3		)	—		(4.3		)
Currency translation adjustments	0.1			—		0.1
Balance as of June 30, 2007	$	2.7		$	—	$	2.7

Electronics Program

In December 2005, we announced plans to consolidate certain glass fabric production activities at our Les Avenieres, France plants.  In January 2006, we announced plans to consolidate our U.S. electronics production activities into our Statesville, North Carolina plant and to close the plant in Washington, Georgia.  These actions were aimed at matching regional production capacities with available demand.  For the quarter and six-months ended June 30, 2007, we recognized $0.1 million and $0.2 million of expense, respectively, associated with the facility closures and consolidation activities that were expensed as incurred.  During the quarter and six-months ended June 30, 2007, we made cash payments of $0.1 million and $0.3 million, respectively, related to employee serverance and facility closures and consolidation activities.  During the quarter ended June 30, 2007 we reduced our estimate for future severance obligations under this program by $0.1 million.  As of June 30, 2007, the accrued balance for severance related to this program of $0.2 million is adequate for estimated future requirements.  The program is substantially complete.

Livermore Program

In the first quarter of 2004, we announced our intent to consolidate the activities of our Livermore, California facility into other facilities, principally the Salt Lake City, Utah plant.  During the quarter and six-months ended June 30, 2007, we recognized $1.0 million and $1.4 million of expense, respectively, associated with the facility closures and consolidation activities that were expensed as incurred.  During the quarter and six-months ended June 30, 2007, we made cash payments of $1.7 and $2.8 million, respectively, related to employee severance and facility closures and consolidation activities.  The plant ceased operations on March 31, 2007.  The Livermore facility will be demolished as part of the preparation for the sale of the property, with the related costs being expensed as incurred.  As of June 30, 2007, the accrued balance related to this program of $0.4 million is for severance obligations and is adequate for the estimated future requirements related to the program.

November 2001 Program

In November 2001, we announced a program to restructure business operations as a result of reductions in commercial aircraft production rates and due to depressed business conditions in the electronics market.  This program is substantially complete.  During the quarter and six-months ended June 30, 2007, we made cash payments of $0.3 million and $0.4 million, respectively, related to employee severance and lease obligations.  We also reduced our estimate of future severance obligations under the program by $0.4 million and $0.6 million for the quarter and six-months ended June 30, 2007, respectively.  As of June 30, 2007, the accrued balances related to this program are for future severance obligations of $0.6 million and lease payments of $0.2 million that will continue into 2009 and are adequate for the estimated future requirements related to the program.

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Note 7 - Notes Payable and Capital Lease Obligations

(In millions)	June 30, 2007		December 31, 2006
Senior secured credit facility - revolver due 2010	$	28.0	$	—
Senior secured credit facility - term B loan due 2012	147.4		183.6
European credit and overdraft facilities	0.2		0.3
6.75% senior subordinated notes due 2015	225.0		225.0
Total notes payable	400.6		408.9
Capital lease obligations	3.3		3.4
Total notes payable and capital lease obligations	$	403.9	$	412.3
Notes payable and current maturities of long-term liabilities	$	2.0	$	2.5
Long-term notes payable and capital lease obligations, less current maturities	401.9		409.8
Total notes payable and capital lease obligations	$	403.9	$	412.3

Senior Secured Credit Facility

Term loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 0.50% to 0.75% or LIBOR plus a margin that can vary from 1.50% to 1.75%, while revolving loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.25% to 1.00%, or LIBOR plus a margin that can vary from 1.25% to 2.00%. The margin in effect for a borrowing at any given time depends on our consolidated leverage ratio. The weighted average interest rate for the actual borrowings on the Senior Secured Credit Facility was 7.05% and 7.07% for the quarter and six-months ended June 30, 2007, respectively.   Borrowings made under the LIBOR option during the six-months ended June 30, 2007 were made at interest rates ranging from 6.81% to 7.13%.

The Senior Secured Credit Facility was entered into by and among Hexcel Corporation and certain lenders. In connection with the Senior Secured Credit Facility, two of our U.S. subsidiaries, Clark-Schwebel Holding Corp. and Hexcel Reinforcements Corp. (the “Guarantors”), entered into a Subsidiary Guaranty under which they guaranteed the obligations of Hexcel Corporation under the Senior Secured Credit Facility. In addition, Hexcel Corporation and the Guarantors entered into a Security Agreement in which Hexcel Corporation and the Guarantors pledged certain assets as security for the Senior Secured Credit Facility. The assets pledged include, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and the Guarantors, and 65% of the share capital of Hexcel’s Danish subsidiary and first-tier U.K. subsidiary.

In accordance with the terms of the Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio of 4.00 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 3.25 (based on the ratio of total debt to EBITDA) throughout the term of the Senior Secured Credit Facility.  The Senior Secured Credit Facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments (including dividends), making capital expenditures, entering into transactions with affiliates and prepaying subordinated debt. In addition, the Senior Secured Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default.

The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of June 30, 2007 and 2006, we had issued letters of credit totaling $3.9 million and $4.4 million, respectively, under the Senior Secured Credit Facility.  In addition, the Company had letters of credit totaling $0.2 million outside the Senior Secured Credit Facility as of June 30, 2007 and 2006, respectively.

6.75% Senior Subordinated Notes, due 2015

The senior subordinated notes are unsecured senior subordinated obligations of Hexcel Corporation. Interest accrues at the rate of 6.75% per annum and is payable semi-annually in arrears on February 1 and August 1, beginning on August 1, 2005. The senior subordinated notes mature on February 1, 2015. We may not redeem the senior subordinated notes prior to February 1, 2010, except that we may use the net proceeds from one or more equity offerings at any time prior to February 1, 2008 to redeem up to 35% of the aggregate principal amount of the notes at 106.75% of the principal amount, plus accrued and unpaid interest. We will have the option to redeem all or a portion of the senior subordinated notes at any time during the one-year period beginning February 1, 2010 at 103.375% of principal plus accrued and unpaid interest. This percentage decreases to 102.25% for the one-year period beginning February 1, 2011, to 101.125% for the one-year period beginning February 1, 2012 and to 100.0% any time on or after February 1, 2013. In the event of a “change of control” (as defined in the indenture), we are generally required to make an offer to all note holders to purchase all outstanding senior subordinated notes at 101% of the principal amount plus accrued and unpaid interest.

The indenture contains various customary covenants including, but not limited to, restrictions on incurring debt, making restricted

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payments (including dividends), the use of proceeds from certain asset dispositions, entering into transactions with affiliates, and merging or selling all or substantially all of our assets. The indenture also contains many other customary terms and conditions, including customary events of default, some of which are subject to grace and notice periods.

European Credit and Overdraft Facilities

In addition to the Senior Secured Credit Facility, certain of our European subsidiaries have access to limited credit and overdraft facilities provided by various local banks. These credit and overdraft facilities are primarily uncommitted facilities that are terminable at the discretion of the lenders. The aggregate maturities of the European credit and overdraft facilities are classified as current, as they are repayable on demand.

Note 8 – Non-Operating Expense

During the first quarter of 2007, we made mandatory principal prepayments on the term loan portion of our Senior Secured Credit Facility of $35.4 million with the net proceeds received from assets sales.  The asset sales related to the December 2006 sale of our 50% interest in TechFab (a joint venture of our former Reinforcements business unit) and the February 2007 sale of our European Architectural business.  As a result of the prepayment, we recorded a $0.4 million loss on early retirement of debt resulting from the accelerated write-off of related deferred financing costs.

Note 9 – Income Taxes

On January 1, 2007 we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  As a result of the implementation of FIN 48, the Company recognized a $0.9 million increase in the liability for unrecognized tax benefits.  This increase in liability resulted in a decrease to the January 1, 2007 retained earnings balance in the amount of $1.6 million, a decrease in deferred tax liabilities of $1.0 million, and an increase in accrued interest of $1.7 million.  The amount of unrecognized tax benefits at January 1, 2007 is $15.3 million of which $12.1 million would impact our effective tax rate, if recognized.  In addition, we recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in income tax expense in the condensed consolidated statements of operations.  As of January 1, 2007, we had recorded a liability of $2.9 million for the payment of interest.

We are subject to taxation in the U.S. and various states and foreign jurisdictions.  The U.S. federal statute of limitations remains open for the year 2003 and onward.   Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Austria (2002 onward), Belgium (2004 onward), France (2004 onward), Spain (2002 onward) and UK (2003 onward).  We are currently under examination in various U.S. state and foreign jurisdictions.

As of January 1, 2007, we had uncertain tax positions for which it is reasonably possible that amounts of unrecognized tax benefits could significantly change over the next year.  These uncertain tax positions relate to our tax returns from 2002 onward, some of which are currently under examination by certain European taxing authorities.  We are unable to provide an estimate of possible change to the unrecognized tax benefits related to these tax positions.

We expect that the amount of unrecognized tax benefits will continue to change in the next twelve months as a result of ongoing tax deductions, the outcomes of audits and the passing of the statute of limitations, but that these changes are not expected to have a significant impact on our results of operations or the financial position.

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Note 10 - Net Income per Common Share

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2007			2006			2007		2006
Basic net income per common share:
Net income from continuing operations	$	17.5		$	18.0		$	32.3	$	32.0
Income (loss) from discontinued operations	(8.7		)	(0.4		)	—		0.1
Net income	$	8.8		$	17.6		$	32.3	$	32.1
Weighted average common shares outstanding	94.4			93.4			94.4		93.2
Net income from continuing operations per common share	$	0.18		$	0.19		$	0.34	$	0.34
Income (loss) from discontinued operations per common share	(0.09		)	—			—		—
Basic net income per common share	$	0.09		$	0.19		$	0.34	$	0.34
Diluted net income (loss) per common share:
Net income from continuing operations	$	17.5		$	18.0		$	32.3	$	32.0
Income (loss) from discontinued operations	(8.7		)	(0.4		)	—		0.1
Net income	$	8.8		$	17.6		$	32.3	$	32.1
Weighted average common shares outstanding – Basic	94.4			93.4			94.4		93.2
Plus incremental shares from assumed conversions:
Restricted stock units	0.3			0.3			0.4		0.3
Stock options	1.6			1.8			1.5		1.9
Weighted average common shares outstanding – Dilutive	96.3			95.5			96.3		95.4
Net income from continuing operations per common share	$	0.18		$	0.19		$	0.33	$	0.34
Income (loss) from discontinued operations per common share	(0.09		)	—			—		—
Diluted net income per common share	$	0.09		$	0.19		$	0.33	$	0.34

Total shares underlying stock options of 0.7 million were excluded from the computation of diluted net income per share for both the quarter and six-months ended June 30, 2007, as they were anti-dilutive.

Note 11 - Comprehensive Income

Comprehensive income represents net income and other gains and losses affecting stockholders’ equity that are not reflected in the condensed consolidated statements of operations.  The components of comprehensive income for the quarters and six-months ended June 30, 2007 and 2006 were as follows:

	Quarter Ended June 30,					Six-Months Ended June 30,
(In millions)	2007			2006		2007			2006
Net income from continuing operations	$	17.5		$	18.0	$	32.3		$	32.0
Currency translation adjustments	2.1			7.9		3.6			10.0
Minimum pension obligation	0.4			—		0.8			(0.2		)
Net unrealized (losses) gains on financial instruments	(0.2		)	2.8		(0.9		)	5.9
Comprehensive income from continuing operations	$	19.8		$	28.7	$	35.8		$	47.7

Note 12 - Derivative Financial Instruments

Cross-Currency Interest Rate Swap Agreement

In 2003, we entered into a cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007.  We entered into this agreement to effectively hedge interest and principal payments relating to an inter-company loan denominated in Euros.  The balance of the loan at June 30, 2007, after scheduled amortization, was 4.5 million Euros.  The fair value and carrying amount of this swap agreement was a liability of $1.3 million at June 30, 2007.  During the quarters and six-months ended June 30, 2007 and 2006, hedge ineffectiveness was immaterial.  An immaterial net decrease for the quarter and six-months ended June 30, 2007 was recognized as a component of “accumulated comprehensive loss.”  Over the next twelve months,

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unrealized losses of $0.2 million recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

In September 2006, we entered into a cross-currency interest rate swap agreement to hedge a portion of our net Euro investment in Hexcel France SA.  To the extent it is effective, gains and losses are recorded as an offset in the cumulative translation account, the same account in which translation gains and losses on the investment in Hexcel France SA are recorded.  All other changes, including any difference in current interest, are excluded from the assessment of effectiveness and are thereby included in operating income as a component of interest expense.  The impact to interest expense for the quarter and six-months ended June 30, 2007 was a reduction of $0.2 million and $0.4 million, respectively.  This agreement has a notional value of $63.4 million, a term of five years, and is scheduled to mature on September 20, 2011.  We receive interest in U.S. dollars quarterly and pay interest in Euros on the same day.  U.S. interest is based on the three month LIBOR rate.  Euro interest is based on the three month EURIBOR.  The fair value of the swap at June 30, 2007 and December 31, 2006 was a liability of $4.4 million and $2.7 million, respectively.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  We entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through June 2009.  The aggregate notional amount of these contracts was $66.6 million at June 30, 2007. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the quarters  and six-months ended June 30, 2007 and 2006, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six-months ended June 30, 2007 and 2006 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2007			2006			2007			2006
Unrealized gains (losses) at beginning of period	$	3.4		$	(0.5	)	$	3.9		$	(2.3	)
(Gains) Losses reclassified to net sales	(0.9		)	0.1			(1.7		)	0.7
Increase in fair value	0.8			2.6			1.1			3.8
Unrealized gains at end of period	$	3.3		$	2.2		$	3.3		$	2.2

Unrealized gains of $3.3 million recorded in “accumulated other comprehensive income,” net of tax, as of June 30, 2007 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

Note 13 – Investments in Affiliated Companies

As of June 30, 2007, we have equity ownership investments in two Asian joint ventures.  In connection therewith, we have considered the accounting and disclosure requirements of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, and believe that these investments would be considered “variable interest entities.”  However, we also believe that we are not the primary beneficiary of such entities, and therefore, are not required to consolidate these entities.

BHA Aero Composite Parts Co., Ltd.

In 1999, Hexcel, Boeing International Holdings, Ltd. (“Boeing International”) and China Aviation Industry Corporation I (“AVIC”) formed a joint venture, BHA Aero Composite Parts Co., Ltd. (“BHA Aero”). This joint venture is located in Tianjin, China, and manufactures composite parts for secondary structures and interior applications for commercial aircraft.  Summary information related to our investment in BHA Aero follows:

	As of June 30,
(In millions)	2007			2006
Equity ownership	40.48		%	40.48		%
Last twelve months’ (“LTM”) revenues	$	31.3		$	21.3
Equity investment balance	$	6.8		$	5.7
Accounts receivable balance	$	2.2		$	2.4

On January 26, 2005, BHA Aero completed the refinancing of its bank debt, which resulted in a new five year bank term loan agreement supported by a pledge of BHA Aero’s fixed assets and guarantees from Boeing and AVIC.  As part of the refinancing, we agreed to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million.   Our reimbursement agreement with Boeing and AVIC relating to the BHA Aero joint

15

venture meets the definition of a guarantee in accordance with the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (“FIN 45”).  Accordingly, we recorded a $0.5 million liability, and a corresponding increase in our investment in BHA Aero, during the first quarter of 2005 based upon the estimated fair value of the guarantee.  Apart from outstanding accounts receivable balances, our investment in this venture, and our agreement to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, we have no other significant exposures to loss related to BHA Aero.

Asian Composites Manufacturing Sdn. Bhd.

In 1999, we formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. (“Asian Composites”), with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad), to manufacture composite parts for secondary structures for commercial aircraft.  Our initial ownership interest in this joint venture, which is located in Alor Setar, Malaysia, was 25%.

In November 2006, Hexcel, Boeing Worldwide Operations Limited and Sime Link Sdn. Bhd. entered into an agreement to purchase Naluri Corporation Berhad’s equity interest in Asian Composites, which will increase each respective equity ownership interest in this joint venture to 33.33%.  We paid $2.1 million in cash to purchase this additional equity interest when the transaction was completed on February 8, 2007.

Apart from any outstanding accounts receivable and our investment in this joint venture, we have no other significant exposures to loss related to Asian Composites.   Summary information related to our investment in Asian Composites follows:

	Quarter Ended June 30,
(In millions)	2007			2006
Equity ownership	33.33		%	25.00		%
LTM revenues	$	29.2		$	22.7
Equity investment balance	$	8.4		$	4.1
Accounts receivable balance	$	0.4		$	1.2

Note 14 - Segment Information

The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions.  We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices.  Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

Effective January 1, 2007, we revised our operating segments to reflect our strategic and operational realignment and to focus on advanced structural materials.  We have eliminated our three former global business units and consolidated all our composites related activities into a single organization.  Based upon our review of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, we have concluded that we will now report two operating segments, Composite Materials and Engineered Products.  As of June 30, 2007, the EBGI Reinforcements segment, has been reclassified as discontinued operations (see footnote 2).

In addition to the product line-based segmentation of our business, we also monitor sales into our principal end markets as a means to understanding demand for our products.  Therefore, for each operating segment, we have also reported disaggregated sales by end market.

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Financial information for our business segments for the quarters and six-months ended June 30, 2007 and 2006 is as follows:

	Unaudited
(In millions)	Composite Materials			Engineered Products		Corporate & Other			Total
Second Quarter 2007
Net sales to external customers:
Commercial aerospace	$	110.7		$	44.0	$	—		$	154.7
Industrial	75.6			0.3		—			75.9
Space and defense	45.6			13.6		—			59.2
Net sales to external customers	231.9			57.9		—			289.8
Intersegment sales	8.4			0.9		(9.3		)	—
Total sales	240.3			58.8		(9.3		)	289.8
Operating income	38.2			5.1		(9.3		)	34.0
Depreciation and amortization	9.0			0.9		—			9.9
Business consolidation and restructuring expenses	(0.2		)	0.7		—			0.5
Stock-based compensation expense	0.9			0.2		0.8			1.9
Capital expenditures and deposits for property purchases	29.0			0.8		0.7			30.5
Second Quarter 2006
Net sales to external customers:
Commercial aerospace	$	108.5		$	33.5	$	—		$	142.0
Industrial	74.7			1.1		—			75.8
Space and defense	44.0			12.2		—			56.2
Net sales to external customers	227.2			46.8		—			274.0
Intersegment sales	7.3			0.3		(7.6		)	—
Total sales	234.5			47.1		(7.6		)	274.0
Operating income	36.4			6.1		(8.6		)	33.9
Depreciation and amortization	8.4			0.8		0.1			9.3
Business consolidation and restructuring expenses	0.2			0.1		—			0.3
Stock-based compensation expense	0.6			0.1		1.6			2.3
Capital expenditures and deposits for property purchases	24.7			0.9		0.6			26.2
Six Months Ended June 30, 2007
Net sales to external customers:
Commercial aerospace	$	214.9		$	83.8	$	—		$	298.7
Industrial	149.3			0.7		—			150.0
Space and defense	97.9			25.8		—			123.7
Net sales to external customers	462.1			110.3		—			572.4
Intersegment sales	18.3			1.7		(20.0		)	—
Total sales	480.4			112.0		(20.0		)	572.4
Operating income	75.1			10.0		(21.2		)	63.9
Depreciation and amortization	17.6			1.9		0.1			19.6
Business consolidation and restructuring expenses	1.2			0.4		—			1.6
Stock-based compensation expense	2.5			0.5		3.7			6.7
Capital expenditures and deposits for property purchases	43.2			1.3		1.5			46.0
Six Months Ended June 30, 2006
Net sales to external customers:
Commercial aerospace	$	211.9		$	66.6	$	—		$	278.5
Industrial	141.9			2.4		—			144.3
Space and defense	87.0			24.5		—			111.5
Net sales to external customers	440.8			93.5		—			534.3
Intersegment sales	14.4			0.2		(14.6		)	—
Total sales	455.2			93.7		(14.6		)	534.3
Operating income	69.4			11.6		(19.0		)	62.0
Depreciation and amortization	16.7			1.7		0.1			18.5
Business consolidation and restructuring expenses	1.2			0.1		(0.1		)	1.2
Stock-based compensation expense	1.7			0.3		3.3			5.3
Capital expenditures and deposits for property purchases	47.5			1.1		1.8			50.4

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Goodwill and Intangible Assets

The carrying amount of goodwill and intangibles assets by segment is as:

(In millions)	June 30, 2007		December 31, 2006
Composite Materials	$	42.9	$	42.5
Engineered Products	16.0		16.0
Goodwill and intangible assets	$	58.9	$	58.5

The carrying value of the intangible asset included above was $2.5 million at June 30, 2007 and December 31, 2006.

Note 15 – Commitments and Contingencies

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, health and safety matters. We estimate and accrue our liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates may or may not include potential recoveries from insurers or other third parties and are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Environmental Claims and Proceedings

We are subject to various U.S. and international federal, state and local environmental, and health and safety laws and regulations.  We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste.

As of June 30, 2007, our aggregate environmental related accruals were $4.4 million.  As of June 30, 2007, $2.4 million was included in accrued liabilities, with the remainder included in other non-current liabilities.  As related to certain of our environmental matters, the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount.  If we had accrued for these matters at the high end of the range of possible outcomes, our accrual would have been $2.8 million higher at June 30, 2007.  These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

Environmental remediation spending charged directly to our reserve balance for the quarter and six-months ended June 30, 2007 was $0.5 million and $1.3 million, respectively.  In addition, our operating costs relating to environmental compliance for the quarter  and six-months ended June 30, 2007 were approximately $2.0 million and $3.9 million, respectively, and were charged directly to expense.  Capital expenditures for environmental matters approximated $0.1 million in the six-months ended June 30, 2007.

Other Proceedings

Indemnity Claim

Hercules Incorporated (“Hercules”) was one of our co-defendants in certain previously disclosed antitrust lawsuits relating to carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg.  As previously disclosed, Hercules filed an action against us in New York seeking a declaratory judgment that, pursuant to a 1996 Sale and Purchase Agreement (whereby we acquired the carbon fiber and prepreg assets of Hercules), we were required to indemnify Hercules  for its settlements in the antitrust lawsuits and for any

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liability claims that may be asserted by any of the opt-outs from those suits.  On April 30, 2007, the New York court, on summary judgment, dismissed the indemnity counts in Hercules’ complaint.  Hercules has filed a notice of appeal. Hercules also claims that Hexcel failed to cooperate with Hercules’ defense in the antitrust cases; this claim remains in the case as it was not part of the motion for summary judgment.

Hercules also has notified the Company of two other antitrust liabilities for which it seeks indemnification under the 1996 Sale and Purchase Agreement: (i) Hercules has been sued by Cytec Industries Inc for an unspecified amount of antitrust damages in connection with Cytec’s purchases of carbon fiber products from Hercules and other defendants in the antitrust lawsuits (Cytec was a co-defendant in these lawsuits); and (ii) Hercules has entered into an “amicable” settlement with The Boeing Company and Hitco Inc (both of which were opt-outs) to settle similar antitrust claims for $3.8 million.  These additional claims were not in front of the New York court, but if the judgment is affirmed they should be invalid. The Company is not in a position to predict the outcome of the lawsuit with Hercules, but intends to defend it vigorously.

Zylon Matter

As previously disclosed,  we have been cooperating with the U.S. Department of Justice (“DOJ”) in its investigation  into the use of allegedly defective Zylon fiber in ballistic vests designed and produced by our customers and purchased under U.S. government funded programs. During the first quarter of 2007 the DOJ asserted its belief that it had sufficient grounds to file civil claims under the False Claims Act, other federal statutes, and common law, against us and two of our employees, arising from our sales of Zylon fabric to vest manufacturers. The DOJ has instituted litigation based on similar grounds against the sole manufacturer of the Zylon fiber and against our largest customer for Zylon fabric that was incorporated into government funded vests (the customer is currently in bankruptcy).  While we deny any liability regarding the DOJ’s assertions, in order to avoid the distraction, cost and uncertainties of litigation, we entered into settlement discussions with the DOJ.  Based on these discussions, but subject to final DOJ approval, we anticipate a settlement of the United States’ claims for defective Zylon vests it funded, for $15 million without any admission of wrongdoing on the part of the Company or any employee.  We would agree to continue cooperating with the DOJ in its investigation and would seek a determination from an appropriate U.S. agency that we would not be suspended or debarred from obtaining government contracts as a result of settling this matter.

Austrian Exotherm Claim

On August 4, 2006, at our Neumarkt, Austria, manufacturing facility, resin being mixed exothermed, releasing gases and smoke into and outside of the facility.  Our internal investigation revealed that the cause of the exotherm was a failure of the mixing mechanism.  Three employees of our Austrian subsidiary, Hexcel Composites GmbH, have been charged under Section 180 of the Austrian Criminal Code; the charge is that they deliberately caused a violation of an environmental law or regulation when the gases and smoke were released.  Hexcel Composites GmbH has not been charged, although it could be charged under the same Section.  We have offered independent counsel to the employees at our expense.  We are not in a position to predict the outcome of the case against the employees or whether a charge will be filed against Hexcel Composites GmbH, but we will defend any charges vigorously.

Product Warranty

We provide for an estimated amount of product warranty expense at the time revenue is recognized.  This estimated amount is provided by product and based on historical warranty experience.  In addition, we periodically review our warranty accrual and record any adjustments as deemed appropriate.  Warranty expense for the quarter and six-months ended June 30, 2007, and accrued warranty cost, included in “accrued liabilities” in the condensed consolidated balance sheets at June 30, 2007 and December 31, 2006, was as follows:

(In millions)	Product Warranties
Balance as of December 31, 2006	$	4.5
Warranty expense	0.6
Deductions and other	(0.3		)
Balance as of March 31, 2007	$	4.8
Warranty expense	0.3
Deductions and other	(0.6		)
Balance as of June 30, 2007	$	4.5

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Portfolio Review

In July of 2006, we announced our intention to explore strategic alternatives for portions of our previously reported Reinforcements operating segment.  In order to take full advantage of the many growing applications for advanced composite materials, we decided to narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb, matrix and engineered products product lines.  In doing so, we decided to combine our Reinforcements activities related to advanced composites with our previously reported Composites and Structures operating segments into a single organization, and explore the sale of our European Architectural business, our EBGI products lines and our interest in the TechFab joint venture, previously reported within the Reinforcements operating segment.

In December of 2006, we completed the sale of our interest in TechFab, a South Carolina based manufacturer of non-woven reinforcement materials, to our joint venture partner for $22.0 million in cash.  The purchase agreement contained limited indemnification provided by us related to certain liabilities incurred prior to the date of sale.   As a result of the sale, we recognized a pre-tax gain of $15.7 million (after-tax gain of $10.0 million) in the fourth quarter of 2006.

In February of 2007, we completed the sale of our European Architectural business.  Cash proceeds from the sale were $25.0 million.  The purchase agreement contained customary representations, warranties and indemnifications.   As a result of the sale, we recognized an after-tax gain of $6.8 million in the first quarter of 2007.

We signed a definitive agreement on June 21, 2007 to sell the EBGI portion of our reinforcements business for $62.5 million plus up to $12.5 million of additional payments dependent upon future sales of the Ballistics product line.  The additional payments will be recorded as income when earned.  The transaction is anticipated to close in the third quarter, at which time we expect to record an after-tax loss of approximately $2 – $3 million.

Upon completion of the EBGI sale our previously announced portfolio review will have reached a successful conclusion, resulting in total cash proceeds, before any earnout payments, of approximately $110 million and a net after-tax gain of approximately $14 – $15 million.

Financial Overview

Second Quarter Results

	(Unaudited)
	Quarter Ended June 30,
(In millions, except per share data)	2007			2006
Net sales	$	289.8		$	274.0
Gross margin %	24.3		%	24.6		%
Operating income	$	34.0		$	33.9
Operating income %	11.7		%	12.4		%
Provision for income taxes	$	11.9		$	10.9
Equity in earnings of affiliated companies, net of tax	$	1.4		$	1.1
Net income from continuing operations	$	17.5		$	18.0
Loss from discontinued operations, net of tax	$	(8.7	)	$	(0.4	)
Net income	$	8.8		$	17.6
Diluted net income (loss) per common share:
From continuing operations	$	0.18		$	0.19
From discontinued operations	$	(0.09	)	$	—

Results of Operations

Net Sales: Net sales of $289.8 million for the second quarter of 2007 were $15.8 million, or 5.8%, higher than the $274.0 million of net sales for the second quarter of 2006.  The increase was driven by continued growth in the Commercial Aerospace and Space & Defense markets.  Had the same U.S. dollar, British pound sterling and Euro exchange rates applied in the second quarter of 2006 as in the second quarter of 2007, net sales for the second quarter of 2006 would have been $281.4 million, resulting in second quarter of 2007 sales being 3.0% higher than the second quarter of 2006 on a constant currency basis.

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The following table summarizes net sales to third-party customers by segment and end market for the quarters ended June 30, 2007 and 2006, respectively:

	Unaudited
(In millions)	Commercial Aerospace			Industrial			Space & Defense			Total
Second Quarter 2007
Composite Materials	$	110.7		$	75.6		$	45.6		$	231.9
Engineered Products	44.0			0.3			13.6			57.9
Total	$	154.7		$	75.9		$	59.2		$	289.8
	53		%	26		%	21		%	100		%
Second Quarter 2006
Composite Materials	$	108.5		$	74.7		$	44.0		$	227.2
Engineered Products	33.5			1.1			12.2			46.8
Total	$	142.0		$	75.8		$	56.2		$	274.0
	52		%	28		%	20		%	100		%

Second quarter 2006 data has been reclassified for purposes of comparison to our operating segments, redefined as of January 1, 2007 to reflect our strategic and operational realignment and to focus on advanced structural materials.  In addition, we have reclassified certain of our reinforcement for composites product sales between markets to reflect improvements in the tracking of sales to end market applications and have reclassified our remaining European electronics sales to the Industrial market.  The reclassification of certain reinforcement for composite revenues resulted in the movement of about $18.2 million of commercial aerospace sales to industrial and space & defense markets for the second quarter of 2006.  This reclassification did not impact our previously reported Airbus and Boeing commercial aircraft sales.

Commercial Aerospace: Net sales increased $12.7 million, or 8.9%, to $154.7 million for the second quarter of 2007, as compared to net sales of $142.0 million for the second quarter of 2006.  If adjusted to eliminate the changes in exchange rates, total sales to commercial aerospace applications would have increased by $10.7 million, or 7.4%, compared to the first quarter of 2006.  The sales growth was led by revenues to Boeing and its subcontractors and to the regional and business jet markets, reflecting increased aircraft production, growth in demand for aircraft engine and nacelle manufactures, as well as the new 787.

Sales to the A380 program continue to be at low quarterly levels.  As a result, Airbus related sales were lower in the second quarter of 2007 than in the second quarter of 2006.  Although we currently do not expect A380 demand to begin to recover until 2008, comparisons for the second half of 2007 to the second half of 2006 become easier as the A380 delays were evident in those quarters as well.

Industrial: Net sales of $75.9 million for the second quarter of 2007 were essentially flat  when compared to the net sales for the same quarter of 2006.  Computed using the same exchange rates as applied in the second quarter of 2007, constant currency sales to this market decreased 5.0% year-on-year from $79.9 million. Industrial sales in the second quarter of 2006 were more than 10% higher than any other quarter in 2006.  The industrial market consists of primarily of wind, recreation, auto and other industrial sub-segments.

The wind market had mid-teens sales growth compared to the second quarter of 2006 in constant currency.  While our current wind business is primarily in Europe, global demand remains strong and we intend to add manufacturing capacity in China to meet regional growth.  Strong sales performance in wind enegy markets was more than offset by weaker sales from recreation, auto and other industrial markets.  European winter recreation market was unfavorably impacted by warm weather in Europe, while other industrial sales were lower than last year as we continue to refine our focus on selected customers and applications.

Space & Defense: Net sales to this market for the second quarter of 2007 were $59.2 million, an increase of $3.0 million, or 5.3%, when compared to the second quarter of 2006.  Computed using the same foreign currency exchange rates as applied in the second quarter of 2007, net sales to this market of $57.5 million in the second quarter 2006 were up $1.7 million, or 3.0%, year-on-year.  Demand from military fixed wing and rotor craft applications remains solid, but the timing of orders in this market remains difficult to predict from a quarter to quarter basis.

Gross Margin:  Gross margin for the second quarter of 2007 was $70.4 million, or 24.3% of net sales, compared with $67.5 million, or 24.6% of net sales, for the same period in 2006.  The increase in gross margin reflects the contribution of higher net sales. However, gross margin as a percentage of net sales declined slightly due to unplanned equipment outages resulting in higher maintenance, labor and freight costs.  Depreciation and amortization expense, included in cost of sales, for the second quarter of 2007 was $8.7 million compared to $8.5 million in the second quarter of 2006.

Selling, General and Administrative Expenses (“SG&A”):  SG&A expenses of $27.4 million for the second quarter of 2007 were $1.5 million higher than the second quarter of 2006.  SG&A expenses were 9.5% of net sales for both the second quarter of 2007

21

and the second quarter of 2006.  The year-over year increase in SG&A expenses includes the impact of exchange rates and costs incurred related to personnel changes.

Research and Technology Expenses (“R&T”):  R&T expenses for the second quarter of 2007 were $8.5 million, or 2.9% of net sales, compared with $7.4 million, or 2.7% of net sales, for the second quarter of 2006.  The year-over-year increase in R&T expenses reflects the increase in qualification activities for new programs, including increased spending within the Engineered Products operating segment as a result of certification testing of Boeing 787 components made from the new HexMC system.

Operating Income:  Operating income was $34.0 million, or 11.7% of net sales, in the second quarter of 2007, compared with $33.9 million, or 12.4% of net sales, in the second quarter of 2006.  Activity levels for the Company remain extremely high.  Aerospace qualification processes are underway in a number of locations including our new carbon fiber precursor line in Decatur, AL; a new prepreg facility in Stade, Germany; the new carbon fiber line in Salt Lake City, UT; and for prepreg products transferred as part of the Livermore, CA closure.  We have also begun the training of newly hired Spanish employees in Salt Lake City to assure a timely start-up of our new fiber line in the Madrid area early next year.

Operating income for the Composite Materials operating segment was $1.8 million higher this quarter versus last year, primarily due to the favorable impact of higher sales volumes.  Operating income for the Engineered Products operating segment decreased $1.0 million compared to last year.  This unfavorable impact is primarily due to increased R&T expenses.  The year-on-year increase in Corporate operating expenses of $0.9 million resulted from cost incurred related to personnel changes and increased costs of tax compliance.

Interest Expense:  Interest expense was $6.0 million for the second quarter of 2007, compared to $6.1 million for the second quarter of 2006.  The $0.1 million reduction in interest expense primarily reflects lower borrowings as a result of proceeds from the asset sales, partially offset by lower capitalized interest expense  in 2007 as a result of completing parts of the carbon fiber capacity expansion.

Provision for Income Taxes:  The provision for income taxes for the second quarter of 2007 was $11.9 million, or 42.5% of income before income taxes.  This compares to the provision for income taxes of $10.9 million, or 39.2% of income before taxes in the second quarter of 2006.  The increase was primarily due to the recording of a tax provision for exposures which have been accounted for in accordance with FIN 48.  It is expected that FIN 48 will increase the volatility of the effective tax rate.  We do have several tax audits in progress which could impact our tax rate for the year; however, at this time it is not possible to predict the outcome or its impact.

Equity in Earnings of Affiliated Companies: Equity in earnings of affiliated companies for the second quarter of 2007 was $1.4 million, compared to $1.1 million in the second quarter of 2006.  The year-over-year increase is due to the improved operating performance at our joint ventures in China and Malaysia.  Equity in earnings of affiliated companies does not affect the Company’s cash flows.  For further information, see Note 13 to the accompanying condensed consolidated financial statements.

Income from Continuing Operations:  Net income from continuing operations was $17.5 million, or $0.18 per diluted share for the quarter ended June 30, 2007 compared to $18.0 million, or $0.19 per diluted share for the quarter ended June 30, 2006.  The higher tax rate in 2007 reduced diluted income per share by $0.01 compared to 2006.

Loss from Discontinued Operations, Net:  Loss from discontinued operations was $8.7 million for the second quarter of 2007, compared to a $0.4 million loss for the second quarter of 2006.  The increase in loss from discontinued operations reflects the after-tax charge of $9.7 million recognized in connection with the anticipated settlement of claims relating to the previously disclosed investigation by the U.S. Department of Justice into the use of allegedly defective Zylon fiber in ballistic vests purchased under U.S. government funded programs.  Excluding this charge, the discontinued operations had $1.0 million of income in the second quarter of 2007, as compared to the $0.4 million loss last year, which reflects an approximate 60% increase in the ballistics sales compared to last year.

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Year-to-Date Results

	(Unaudited)
	Six Months Ended June 30,
(In millions, except per share data)	2007			2006
Net sales	$	572.4		$	534.3
Gross margin %	24.8		%	24.7		%
Operating income	$	63.9		$	62.0
Operating income %	11.2		%	11.6		%
Non-operating expense	$	0.4		$	—
Provision for income taxes	$	21.9		$	19.4
Equity in earnings of affiliated companies, net of tax	$	2.4		$	2.2
Net income from continuing operations	$	32.3		$	32.0
Income (loss) from discontinued operations, net of tax	$	(6.8	)	$	0.1
Gain on sale of discontinued operations, net of tax	$	6.8		$	—
Net income	$	32.3		$	32.1
Diluted net income per common share:
From continuing operations	$	0.33		$	0.34
From discontinued operations	$	—		$	—

Results of Operations

Net Sales: Net sales of $572.4 million for the first half of 2007 were $38.1 million, or 7.1%, higher than the $534.3 million of net sales for the first half of 2006.  The increase was driven by growth in the Commercial Aerospace, Space & Defense and Industrial markets.  Had the same U.S. dollar, British pound sterling and Euro exchange rates applied in the first half of 2006 as in the first half of 2007, net sales for the first half of 2006 would have been $550.0 million, resulting in first half of 2007 sales being 4.1% higher than the first half of 2006 on a constant currency basis.

The following table summarizes net sales to third-party customers by segment and end market for the six-months ended June 30, 2007 and 2006, respectively:

	Unaudited
(In millions)	Commercial Aerospace			Industrial			Space & Defense			Total
First Half 2007
Composite Materials	$	214.8		$	149.3		$	98.0		$	462.1
Engineered Products	83.9			0.7			25.7			110.3
Total	$	298.7		$	150.0		$	123.7		$	572.4
	52		%	26		%	22		%	100		%
First Half 2006
Composite Materials	$	211.9		$	141.9		$	87.0		$	440.8
Engineered Products	66.6			2.4			24.5			93.5
Total	$	278.5		$	144.3		$	111.5		$	534.3
	52		%	27		%	21		%	100		%

First half 2006 data has been reclassified for purposes of comparison to our operating segments, redefined as of January 1, 2007 to reflect our strategic and operational realignment and to focus on advanced structural materials.  In addition, we have reclassified certain of our reinforcement for composites product sales between markets to reflect improvements in the tracking of sales to end market applications and have reclassified our remaining European electronics sales to the Industrial market.  The reclassification of certain reinforcement for composite revenues resulted in the movement of about $34.9 million of commercial aerospace sales to industrial and space & defense markets for the first half of 2006.  This reclassification did not impact our previously reported Airbus and Boeing commercial aircraft sales.

Commercial Aerospace: Net sales increased $20.2 million, or 7.3%, to $298.7 million for the first half of 2007, as compared to net sales of $278.5 million for the first half of 2006.  If adjusted to eliminate the changes in exchange rates, total sales to commercial aerospace applications would have increased by $15.3 million, or 5.4%, compared to the first half of 2006.  The sales growth was led by revenues to Boeing and its subcontractors and to the regional and business jet markets, reflecting increased aircraft production, growth in demand for aircraft engine and nacelle manufactures, as well as the new 787.

Sales for the A380 program continued at a low level throughout the first six months of 2007.  As a result, Airbus sales were lower

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in the first half of 2007 than in the first half of 2006.  The A380 delay is expected to effect year-on-year revenue comparisons for much of 2007.

Industrial: Net sales of $150.0 million for the first half of 2007 were $5.7 million or 4.0% higher than the net sales of $144.3 million for the same half of 2006.  Computed using the same exchange rates as applied in the first half of 2006, constant currency sales to this market decreased 1.9% year-on-year from $152.9 million.  Sales of composite products to wind energy applications increased double digits over the prior year due to the continued underlying growth in global wind turbine installations.  Sales to auto, recreation and other industrial markets were slightly lower in the first half of 2007 compared to the first half of 2006.  European winter recreation market was unfavorably impacted by warm weather in Europe, while other industrial sales were lower than last year as we continue to refine our focus on selected customers and applications.

Space & Defense: Net sales to this market for the first half of 2007 were $123.7 million, an increase of $12.2 million, or 10.9%, when compared to the first half of 2006.  Computed using the same foreign currency exchange rates as applied in the first half of 2006, net sales to this market of $113.7 million were up $10.0 million, or 8.8%, year-on-year.  Sales increased due to increased demand for military fixed wing and rotor craft applications across all geographic regions, and the inventory corrections made by the customers last year appear to be completed.  While timing of sales to this market remain difficult to predict on a quarter to quarter basis, the year to date results are in line with our expectations.

Gross Margin:  Gross margin for the first half of 2007 was $141.9 million, or 24.8% of net sales, compared with $132.1 million, or 24.7% of net sales, for the same period last year.  The increase in gross margin reflects the contribution of higher net sales, the mix of those sales and the continuing benefits obtained from our cost containment focus.  These improvements were partially offset by increased costs in the second quarter due to unplanned equipment outages, which resulted in higher maintenance, freight and labor than expected.  Depreciation and amortization expense for the first half of 2007 was $17.4 million compared to $16.7 million in the first half of 2006.

Selling, General and Administrative Expenses (“SG&A”):  SG&A expenses of $58.4 million for the first half of 2007 were $4.4 million higher than the first half of 2006.  SG&A expenses were 10.2% of net sales in the first half of 2007 compared to 10.1% of net sales in the first half of 2006.  The year-over year increase in SG&A expenses includes an increase of $1.4 million related to share based compensation, primarily reflecting the expense associated with grants issued during the first half of 2007, $1.4 million due to exchange rates and the rest primarily due to salary inflation and personnel changes.  The first half of 2006 includes $1.2 million of transaction costs associated with the March 2006 secondary offering.

Research and Technology Expenses (“R&T”):  R&T expenses for the first half of 2007 were $18.0 million, or 3.1% of net sales, compared with $14.9 million, or 2.8% of net sales, for the first half of 2006.  The majority of the year-over-year increase in R&T expenses reflects our increased spending on qualifications for new programs, including certification testing of Boeing 787 components made from the new HexMC system.

Operating Income:  Operating income was $63.9 million, or 11.2% of net sales, in the first half of 2007, compared with $62.0 million, or 11.6% of net sales, in the first half of 2006.  The $1.9 million increase in operating income is due in part to greater sales and better product mix for first half of 2007 resulting in an increase in gross margin, partially offset by the increase in operating expenses discussed above.

Operating income for the Composite Materials operating segment was $5.7 million higher for the first half versus last year, primarily due to the favorable impact of higher sales volumes.  Operating income for the Engineered Products operating segment decreased $1.6 million compared to last year.  This unfavorable impact is primarily due to increased R&T expenses.  The year-on-year increase in Corporate operating expenses of $2.9 million resulted from higher stock based compensation costs, cost incurred related to personnel changes and increased costs of tax compliance.

Non-Operating Expense:  During the first half of 2007, we made mandatory principal prepayments on the term loan portion of our Senior Secured Credit Facility of $35.4 million as a result of net proceeds received from assets sales.  The asset sales related to the December 2006 sale of our 50% interest in TechFab (a joint venture of our former Reinforcements business unit) and the February 2007 sale of our European Architectural business.  As a result of the prepayment, we recorded a $0.4 million loss on early retirement of debt resulting from the accelerated write-off of related deferred financing costs.

Interest Expense:  Interest expense was $11.7 million for the first half of 2007, compared to $12.8 million for the first half of 2006.  The $1.1 million reduction in interest expense primarily reflects lower borrowings as a result of repayments from proceeds from the asset sales.

Provision for Income Taxes:  The provision for income taxes for the first half of 2007 was $21.9 million, or 42.3% of income before income taxes.  This compares to the provision for income taxes of $19.4 million, or 39.4% of income before taxes in the first half of 2006. The increase was primarily due to the recording of a tax provision for exposures which have been accounted for in accordance with FIN 48.  It is expected that FIN 48 will increase the volatility of the effective tax rate.  We do have several tax audits in progress which could impact our tax rate for the year; however, at this time it is not possible to predict the outcome or its impact.

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Equity in Earnings of Affiliated Companies: Equity in earnings of affiliated companies for the first half of 2007 was $2.4 million, compared to $2.2 million in the first half of 2006.  The year-over-year increase is due to the improved operating performance at our joint ventures in China and Malaysia. partially offset by the sale of TechFab LLC in December 2006.  Equity in earnings of affiliated companies does not affect the Company’s cash flows.  For further information, see Note 13 to the accompanying condensed consolidated financial statements.

Income from Continuing Operations:  Net income from continuing operations was $32.3 million, or $0.33 per diluted share for the six-months ended June 30, 2007 compared to $32.0 million, or $0.34 per diluted share for the six-months ended June 30, 2006.  The higher tax rate in 2007 reduced diluted income per share by $0.02 compared to 2006.

Income from Discontinued Operations, Net:  Income from discontinued operations was zero for the first half of 2007, compared to $0.1 million for the first half of 2006.  The first half of 2007 results included an after-tax gain of $6.8 million on the sale of our European Architectural business, offset by an after-tax charge of $9.7 million recognized in connection with the anticipated settlement of claims relating to the previously disclosed investigation by the U.S. Department of Justice into the use of allegedly defective Zylon fiber in ballistic vests purchased under U.S. government funded programs recognized during the first half of 2007.

Business Consolidation and Restructuring Programs

The aggregate business consolidation and restructuring liabilities as of June 30, 2007 and December 31, 2006, and activity for the quarter and six-months ended June 30, 2007, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2006	$	10.7		$	0.3		$	11.0
Business consolidation and restructuring expenses:
Current period expenses	0.8			0.5			1.3
Change in estimated expenses	(0.2		)	—			(0.2		)
Net business consolidation and restructuring expenses	0.6			0.5			1.1
Cash expenditures	(1.7		)	(0.5		)	(2.2		)
Currency translation adjustments	0.1			—			0.1
Balance as of March 31, 2007	$	9.7		$	0.3		$	10.0
Business consolidation and restructuring expenses:
Current period expenses	—			1.1			1.1
Change in estimated expenses	(0.6		)	—			(0.7		)
Net business consolidation and restructuring expenses	(0.6		)	1.1			0.5
Cash expenditures	(5.2		)	(1.2		)	(6.4		)
Balance as of June 30, 2007	$	3.9		$	0.2		$	4.1

See footnote 6 located on page 10 for further details on the business consolidation and restructuring programs.

Financial Condition

Liquidity:  As of June 30, 2007, we had cash and cash equivalents of $36.0 million.  Aggregate borrowings as of June 30, 2007 under the Senior Secured Credit Facility were $175.4 million, consisting of $147.4 million of the term loan and $28.0 million of the revolver loan.  The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of June 30, 2007, we had issued letters of credit under the Senior Secured Credit Facility totaling $3.9 million.  Our total debt, net of cash, as of June 30, 2007 was $367.9 million, a decrease of $18.7 million from total debt, net of cash of $386.6 million as of December 31, 2007.

In addition, we have additional borrowing capacity under various European credit and overdraft facilities, which could be utilized to meet short-term working capital and operating cash requirements.  As of June 30, 2007, we had outstanding borrowings of $0.2 million under these facilities.  The European credit and overdraft facilities are uncommitted lines and can be terminated at the option of the lender.

Net cash from operating activities is the primary source of funds to finance working capital and capital expenditures.  Short-term liquidity requirements consist primarily of normal recurring operating expenses; costs associated with legacy business matters, including costs related to our retirement benefit plans, capital expenditures and debt service requirements.  We expect to meet these short-term requirements through net cash from operating activities and our revolving credit facility.  Total undrawn availability under the Senior Secured Credit Facility as of June 30, 2007 was $93.1 million.  As of June 30, 2007, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations.  We expect to meet long-term liquidity requirements through cash provided by operations and if necessary, supplemented with long-term borrowings and other debt or equity financing.  The

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availability and terms of any such financing will depend upon market and other conditions at the time.  Proceeds received from our divestiture activities will be used to reduce debt and finance capital expenditures.

Operating Activities:  Net cash provided by operating activities was $27.0 million in the first half of 2007, as compared to net cash provided by operating activities of $19.4 million in the first half of 2006.  The year-on-year increase in net cash from operations primarily reflects less of a working capital increase in 2007 compared to 2006.

Investing Activities:  Net cash used for investing activities was $23.1 million in the first half of 2007 compared with $50.4 million of net cash used for investing activities in the first half of 2006.  The year-on-year fluctuation is primarily attributable to $25.0 million proceeds received from the sale of the European Architectural business during the first quarter of 2007.  Capital expenditures during the first half of 2007 were $46.0 million versus $50.4 million for the comparable prior year period.  The Company expects to complete the carbon fiber line in Spain by the end of the year, which will complete the initial carbon fiber expansion program previously announced.  That program also included the precursor line in Decatur, Al and a carbon fiber line in Salt Lake City, UT, both of which are fully operational and in the midst of the aerospace qualification process.

Financing Activities:  Net cash used for financing activities was $0.8 million in the first half of 2007 compared with $17.8 million of net cash provided by financing activities in the first half of 2006.  During the first six-months of 2007, we repaid $36.2 million to our Senior Secured Credit Facility compared to the repayment of $0.5 million during the first six-months of 2006.

Financial Obligations and Commitments: As of June 30, 2007, current maturities of notes payable and capital lease obligations were $2.0 million.  The next significant scheduled debt maturity will not occur until 2010, with annual debt and capital lease maturities ranging from $2.2 million to $7.0 million prior to 2010 (refer to MD&A in our 2006 Annual Report on Form 10-K for further details regarding our financial obligations and commitments).  Short-term debt obligations include $0.2 million of drawings under European credit and overdraft facilities.  The European credit and overdraft facilities provided to certain of our European subsidiaries by lenders outside of the Senior Secured Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders.  We have entered into several capital leases for buildings and warehouses with expirations through 2012.  In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of June 30, 2007, we had issued letters of credit under the Senior Secured Credit Facility totaling $3.9 million.  The term loan under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012 and the revolving loan under the credit facility is scheduled to expire on March 1, 2010.

During the first quarter of 2005, we issued $225.0 million principal amount of 6.75% senior subordinated notes.  The senior subordinated notes mature on February 1, 2015.

Total letters of credit issued and outstanding were $4.1 million as of June 30, 2007. Approximately $3.9 million of these letters of credit were issued under the revolving credit portion of the Senior Secured Credit Facility, with the remaining $0.2 million issued separately from this facility.  While the letters of credit issued on our behalf will expire under their terms in 2007 and 2008, all of these will likely be re-issued.

During the first quarter of 2005, we entered into a reimbursement agreement with Boeing and AVIC in connection with the recapitalization of BHA Aero.  The reimbursement agreement provides that we would reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million.

Our ability to make scheduled payments of principal, or to pay interest on, or to refinance our indebtedness, including our public notes, or to fund planned capital expenditures, will depend on our future performance and conditions in the financial markets.  Our future performance is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  We have significant leverage and there can be no assurance that we will generate sufficient cash flow from our operations, or that sufficient future borrowings will be available under the Senior Secured Credit Facility, to enable us to service our indebtedness, including our public notes, or to fund our other liquidity needs.

In December of 2006 the Company announced its plans to terminate the Hexcel U.S. qualified pension plan.  We expect to receive approval from the appropriate regulatory authorities and settle the plan within the next twelve months.  When such approval is obtained, we estimate that the final cash settlement contribution will be in the range of $10 million to $12 million.  We also estimate that upon final termination the Company will record a pre-tax loss of approximately $13 million related to the unrecognized actuarial loss.  With effect from the termination, the Company’s net periodic benefit cost is anticipated to reduce by approximately $2 million per year.

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Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP.  In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our condensed consolidated financial statements are prepared.  On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP.  However, because future events and their effects cannot be determined with certainty, actual results may differ from our assumptions and estimates, and such differences could be material.

We describe our significant accounting policies and critical accounting estimates in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.  There were no significant changes in our accounting policies and estimates since the end of fiscal 2006, except as noted below.

Effective January 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109 (“FIN 48”).  FIN 48 addresses the diversity in practice and clarifies the accounting for uncertain tax positions.  FIN 48 prescribes a comprehensive model as to how a company should recognize, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on its tax return.  FIN 48 specifically requires companies to presume that the taxing authorities have full knowledge of the position and all relevant facts.  Furthermore, based on this presumption, FIN 48 requires that the financial statements reflect expected future consequences of such positions.

Under FIN 48 an uncertain tax position needs to be sustainable at a more likely than not level based upon its technical merits before any benefit can be recognized.  The tax benefit is measured as the largest amount that has a cumulative probability of greater than 50% of being the final outcome.  FIN 48 substantially changes the applicable accounting model (as the prior model followed the criterion of FAS 5, “Accounting for Contingencies,” recording a liability against an uncertain tax benefit when it was probable and estimable) and is likely to cause greater volatility in income statements as more items are recognized within income tax expense.  FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits.

Recently Issued Accounting Pronouncements

  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (“FAS 159”).  FAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value.  The Statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards.  FAS 159 is effective for fiscal years beginning after November 15, 2007 (as of January 1, 2008 for calendar year companies).  We are currently in the process of evaluating the effects of the adoption of FAS 159 on our consolidated results of operations, cash flows, and financial position.

In September 2006, the FASB finalized Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”), which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of FAS 157 will be applied prospectively to fair value measurements and disclosures in our condensed consolidated financial statements beginning in the first quarter of 2008.  We are currently evaluating the impact of FAS 157 on our results of operations, cash flows, and financial position.

Forward-Looking Statements

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.  These statements also relate to future prospects, developments and business strategies.  These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” and similar terms and phrases, including references to assumptions.  Such statements are based on current expectations, are inherently uncertain, and are subject to changing assumptions.

Such forward-looking statements are not guarantees or predictions of outcomes and involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the forward-looking statements. Actual results could differ materially because of factors such as a) the timing of deliveries for the Airbus A380 program; b) timing of the regulatory approvals for the

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 termination of the US qualified pension plan; c) obtaining final settlement approval from the US Department of Justice in the Zylon matter, and d) completion of the EBGI sale as planned. In addition, other factors include, but are not limited to, the following: changes in general economic and business conditions; changes in current pricing and cost levels; changes in political, social and economic conditions and local regulations, particularly in Asia and Europe; foreign currency fluctuations; changes in the number of and type of commercial aircraft ordered and delivered; reductions in sales to any significant customers, particularly Airbus or Boeing; changes in sales mix of our products; changes in government defense procurement budgets; changes in requirements for space & defense programs and disruptions of established supply channels.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected.  In addition to other factors that affect our operating results and financial position, neither past financial performance nor our expectations should be considered reliable indicators of future performance.  Investors should not use historical trends to anticipate results or trends in future periods.  Further, our stock price is subject to volatility.  Any of the factors discussed above could have an adverse impact on our stock price.  In addition, failure of sales or income in any quarter to meet the investment community’s expectations, as well as broader market trends, can have an adverse impact on the our stock price.  We do not undertake an obligation to update our forward-looking statements or risk factors to reflect future events or circumstances.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As a result of our global operating and financing activities, we are exposed to various market risks that may affect our consolidated results of operations and financial position.  These market risks include, but are not limited to, fluctuations in interest rates, which impact the amount of interest we must pay on certain debt instruments, and fluctuations in currency exchange rates, which impact the U.S. dollar value of transactions, assets and liabilities denominated in foreign currencies. Our primary currency exposures are in Europe, where we have significant business activities.  To a lesser extent, we are also exposed to fluctuations in the prices of certain commodities, such as electricity, natural gas, aluminum and certain chemicals.

We attempt to net individual exposures, when feasible, taking advantage of natural offsets.  In addition, we employ interest rate swap agreements and foreign currency forward exchange contracts for the purpose of hedging certain specifically identified interest rate and net currency exposures.  The use of such financial instruments is intended to mitigate some of the risks associated with fluctuations in interest rates and currency exchange rates, but does not eliminate such risks.  We do not use financial instruments for trading or speculative purposes.

Interest Rates

Our financial results are affected by interest rate changes on certain of our debt instruments.  Without the benefit of interest rate swap agreements our ratio of floating debt to total debt was about 44% as of June 30, 2007.  In order to manage our exposure to interest rate movements or variability, we may from time-to-time enter into interest rate swap agreements and other financial instruments.

Cross-Currency Interest Rate Swap Agreement

In 2003, we entered into a cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007.  We entered into this agreement to effectively hedge interest and principal payments relating to an inter-company loan denominated in Euros.  The balance of the loan at June 30, 2007, after scheduled amortization, was 4.5 million Euros.  The fair value and carrying amount of this swap agreement was a liability of $1.3 million at June 30, 2007.  During the quarters and six-months ended June 30, 2007 and 2006, hedge ineffectiveness was immaterial.  An immaterial net decrease for the quarter and six-months ended June 30, 2007 was recognized as a component of “accumulated comprehensive loss.”  Over the next twelve months, unrealized losses of $0.2 million recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

In September 2006, we entered into a cross-currency interest rate swap agreement to hedge a portion of our net Euro investment in Hexcel France SA.  To the extent it is effective, gains and losses are recorded as an offset in the cumulative translation account, the same account in which translation gains and losses on the investment in Hexcel France SA are recorded.  All other changes, including any difference in current interest, are excluded from the assessment of effectiveness and are thereby included in operating income as a component of interest expense.  The impact to interest expense for the quarter and six-months ended June 30, 2007 was a reduction of $0.2 million and $0.4 million, respectively.  This agreement has a notional value of $63.4 million, a term of five years, and is scheduled to mature on September 20, 2011.  We receive interest in U.S. dollars quarterly and pay interest in Euros on the same day.  U.S. interest is based on the three month LIBOR rate.  Euro interest is based on the three month EURIBOR.  The fair value of the swap at June 30, 2007 and December 31, 2006 was a liability of 4.4 million and $2.7 million, respectively.

Foreign Currency Exchange Risks

We have significant business activities in Europe.  We operate seven manufacturing facilities in Europe, which generated approximately 49% of our 2006 consolidated net sales.  Our European business activities primarily involve three major currencies – the U.S. dollar, the British pound, and the Euro.  We also conduct business or have joint venture investments in Japan, China and Malaysia, and sell products to customers throughout the world.  A significant portion of our transactions with customers and joint venture affiliates outside of Europe are denominated in U.S. dollars, thereby limiting the our exposure to short-term currency fluctuations involving these countries.  However, the value of our investments in these countries could be impacted by changes in currency exchange rates over time, as could our ability to profitably compete in international markets.

We attempt to net individual currency positions at our various European operations, to take advantage of natural offsets and reduce the need to employ foreign currency forward exchange contracts.  We also enter into short-term foreign currency forward exchange contracts, usually with a term of ninety days or less, to hedge net currency exposures resulting from specifically identified transactions.  Consistent with the nature of the economic hedge provided by such contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying transaction being hedged.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the

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subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  We entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through June 2009.  The aggregate notional amount of these contracts was $66.6 million at June 30, 2007. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the quarters  and six-months ended June 30, 2007 and 2006, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six-months ended June 30, 2007 and 2006 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2007			2006			2007			2006
Unrealized gains (losses) at beginning of period	$	3.4		$	(0.5	)	$	3.9		$	(2.3	)
(Gains) Losses reclassified to net sales	(0.9		)	0.1			(1.7		)	0.7
Increase in fair value	0.8			2.6			1.1			3.8
Unrealized gains at end of period	$	3.3		$	2.2		$	3.3		$	2.2

Unrealized gains of $3.3 million recorded in “accumulated other comprehensive income,” net of tax, as of June 30, 2007 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

For further information regarding market risks, refer to our 2006 Annual Report on Form 10-K.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2007, our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures (as defined in Rule 13a-14 and Rule 15d-14 under the Securities Exchange Act of 1934).  Based on their evaluation, they have concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company, including our consolidated subsidiaries, would be made known to them, so as to be reflected in periodic reports that we file or submit under the Securities and Exchange Act of 1934.  The evaluation did not result in the identification of any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Changes in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any material weaknesses in our internal controls.  As a result, no corrective actions were required or undertaken.

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PART II.  OTHER INFORMATION

ITEM 1.  Legal Proceedings

Indemnity Claim

Hercules Incorporated (“Hercules”) was one of our co-defendants in certain previously disclosed antitrust lawsuits relating to carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg.  As previously disclosed, Hercules filed an action against us in New York seeking a declaratory judgment that, pursuant to a 1996 Sale and Purchase Agreement (whereby we acquired the carbon fiber and prepreg assets of Hercules), we were required to indemnify Hercules  for its settlements in the antitrust lawsuits and for any liability claims that may be asserted by any of the opt-outs from those suits.  On April 30, 2007, the New York court, on summary judgment, dismissed the indemnity counts in Hercules’ complaint.  Hercules has filed a notice of appeal. Hercules also claims that Hexcel failed to cooperate with Hercules’ defense in the antitrust cases; this claim remains in the case as it was not part of the motion for summary judgment.

Hercules also has notified the Company of two other antitrust liabilities for which it seeks indemnification under the 1996 Sale and Purchase Agreement: (i) Hercules has been sued by Cytec Industries Inc for an unspecified amount of antitrust damages in connection with Cytec’s purchases of carbon fiber products from Hercules and other defendants in the antitrust lawsuits (Cytec was a co-defendant in these lawsuits); and (ii) Hercules has entered into an “amicable” settlement with The Boeing Company and Hitco Inc (both of which were opt-outs) to settle similar antitrust claims for $3.8 million.  These additional claims were not in front of the New York court, but if the judgment is affirmed they should be invalid. The Company is not in a position to predict the outcome of the lawsuit with Hercules, but intends to defend it vigorously.

Zylon Matter

As previously disclosed,  we have been cooperating with the U.S. Department of Justice (“DOJ”) in its investigation  into the use of allegedly defective Zylon fiber in ballistic vests designed and produced by our customers and purchased under U.S. government funded programs. During the first quarter of 2007 the DOJ asserted its belief that it had sufficient grounds to file civil claims under the False Claims Act, other federal statutes, and common law, against us and two of our employees, arising from our sales of Zylon fabric to vest manufacturers. The DOJ has instituted litigation based on similar grounds against the sole manufacturer of the Zylon fiber and against our largest customer for Zylon fabric that was incorporated into government funded vests (the customer is currently in bankruptcy).  While we deny any liability regarding the DOJ’s assertions, in order to avoid the distraction, cost and uncertainties of litigation, we entered into settlement discussions with the DOJ.  Based on these discussions, but subject to final DOJ approval, we anticipate a settlement of the United States’ claims for defective Zylon vests it funded, for $15 million without any admission of wrongdoing on the part of the Company or any employee.  We would agree to continue cooperating with the DOJ in its investigation and would seek a determination from an appropriate U.S. agency that we would not be suspended or debarred from obtaining government contracts as a result of settling this matter.

Austrian Exotherm Claim

On August 4, 2006, at our Neumarkt, Austria, manufacturing facility, resin being mixed exothermed, releasing gases and smoke into and outside of the facility.  Our internal investigation revealed that the cause of the exotherm was a failure of the mixing mechanism.  Three employees of our Austrian subsidiary, Hexcel Composites GmbH, have been charged under Section 180 of the Austrian Criminal Code; the charge is that they deliberately caused a violation of an environmental law or regulation when the gases and smoke were released.  Hexcel Composites GmbH has not been charged, although it could be charged under the same Section.  We have offered independent counsel to the employees at our expense.  We are not in a position to predict the outcome of the case against the employees or whether a charge will be filed against Hexcel Composites GmbH, but we will defend any charges vigorously.

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ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. In addition, future uncertainties may increase the magnitude of these adverse affects or give rise to additional material risks not now contemplated.

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(c)

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or  Programs
April 1 – April 30, 2007	3,676	$	19.90	0	0
May 1 – May 31, 2007	0	N/A		0	0
June 1 – June 30, 2007	0	N/A		0	0
Total(1)	3,676	$	19.90	0	0

(1) All shares were delivered by employees in payment of the exercise price of non-qualified stock options.

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

The Annual Meeting of Stockholders of the Company was held on May 10, 2007 (the “Meeting”) in Stamford, Connecticut. Stockholders holding 85,623,887 shares of Hexcel common stock were present at the Meeting, either in person or by proxy, constituting a quorum.  The following matters were submitted to the Company’s stockholders for a vote at the Meeting, with the results of the vote indicated:

1)  Each of the eight nominees to the Board of Directors was elected by the stockholders to serve as directors until the next annual meeting of stockholders and until their successors are duly elected and qualified, or until their earlier resignation or removal:

DIRECTOR	FOR	WITHHELD
Joel S. Beckman	81,948,891	3,674,996
H. Arthur Bellows, Jr.	82,006,898	3,616,989
David E. Berges	78,437,381	7,186,506
Lynn Brubaker	82,005,869	3,618,018
Jeffrey C. Campbell	81,955,006	3,668,881
Sandra L. Derickson	82,024,656	3,559,231
David C. Hurley	82,008,091	3,615,796
W. Kim Foster	77,028,452	8,595,435
David L. Pugh	81,772,349	3,848,538

2) The proposal to ratify PricewaterhouseCoopers LLP as Independent Registered Public Accounting Firm for the Company for 2007:

Votes For	Votes Against	Abstentions
81,236,861	4,329,921	57,103

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ITEM 6.  Exhibits

Exhibit No.	Description
2	Asset Purchase Agreement, dated as of June 21, 2007 by and among JPS Industries, Inc., Hexcel Corporation and Hexcel Reinforcements Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated June 26, 2007).
3	Bylaws of Hexcel Corporation, amended and restated as of June 11, 2007 (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated June 15, 2007).
10.1	Executive Severance Agreement, made as of the 27th day of April, 2007, between Wayne C. Pensky and Hexcel Corporation.
10.2	Executive Deferred Compensation and Consulting Agreement, dated as June 7, 1995, between Hexcel Corporation and Wayne C. Pensky.
10.3	Form of Restricted Stock Unit Agreement for Non-Employee Directors (2006).
10.4	Form of Restricted Stock Unit Agreement for Non-Employee Directors (2007).
10.5	Director Compensation Program, as of May 10, 2007.
10.6	Letter agreement between Hexcel Corporation and Stephen C. Forsyth, dated April 27, 2007 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 1, 2007).
31.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Hexcel Corporation
August 3, 2007	/s/ Wayne Pensky
(Date)	Wayne Pensky
	Senior Vice President and
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
2	Asset Purchase Agreement, dated as of June 21, 2007 by and among JPS Industries, Inc., Hexcel Corporation and Hexcel Reinforcements Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated June 26, 2007).
3	Bylaws of Hexcel Corporation, amended and restated as of June 11, 2007 (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated June 15, 2007).
10.1	Executive Severance Agreement, made as of the 27th day of April, 2007, between Wayne C. Pensky and Hexcel Corporation.
10.2	Executive Deferred Compensation and Consulting Agreement, dated as June 7, 1995, between Hexcel Corporation and Wayne C. Pensky.
10.3	Form of Restricted Stock Unit Agreement for Non-Employee Directors (2006).
10.4	Form of Restricted Stock Unit Agreement for Non-Employee Directors (2007).
10.5	Director Compensation Program, as of May 10, 2007.
10.6	Letter agreement between Hexcel Corporation and Stephen C. Forsyth, dated April 27, 2007 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 1, 2007).
31.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

EXECUTIVE  SEVERANCE  AGREEMENT

AGREEMENT made as of the 27th day of April, 2007, between HEXCEL CORPORATION, a Delaware corporation with offices at Stamford, Connecticut (the “Company”), and Wayne C. Pensky (the “Executive”).

WHEREAS, the Company is engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, high-performance composite materials and parts therefrom for the commercial aerospace, space and defense, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively,  the “Business”);

WHEREAS, the Executive, as a result of training, expertise and personal application over the years, has acquired and will continue to acquire considerable and unique expertise and knowledge which are of substantial value to the Company in the conduct, management and operation of the  Business;

WHEREAS, the Company is willing to provide the Executive with certain benefits in the event of the termination of the Executive’s employment with the Company, including in the event of a Change in Control (as hereinafter defined); and

WHEREAS, the Executive, in consideration of receiving such benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities.

NOW, THEREFORE, in consideration of the mutual covenants of the Executive and the Company and of the Executive’s continued employment with the Company, the parties agree as follows:

1.     Position and Duties. The Executive shall initially serve as Senior Vice President and Chief Financial Officer of the Company and shall have such duties, responsibilities, and authority as he may have as of the date hereof (or any position to which he may be promoted after the date hereof). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company.

2.     Place of Performance.  In connection with the Executive’s employment by the Company, the Executive shall be based at the principal executive offices of the Company in Stamford, Connecticut, except for required travel on the Company’s business.

3.     Termination.  The Executive’s employment hereunder may be terminated under the following circumstances:

(a)   Death. The Executive’s employment hereunder shall automatically terminate upon his death.

(b)   Disability. The Company may terminate the Executive’s employment hereunder due to the Executive’s inability to perform the customary duties of his employment by reason of any medical or psychological illness or condition that is expected to be permanent or of indefinite duration.

(c)   Cause. The Company may terminate the Executive’s employment hereunder for Cause.  The following shall constitute Cause:

(i)        the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive’s incapability due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or

(ii)       the willful engaging by the Executive in misconduct that is demonstrably and materially injurious to the Company, monetarily or otherwise including, but not limited to, conduct that violates the covenant not to compete in Section 6 hereof.  No act, or failure to act, on the Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company.  Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (i) reasonable notice from the Board to the Executive setting forth the reasons for the Company’s intention to terminate for Cause, (ii) delivery to the Executive of a resolution duly adopted by the affirmative vote of two-thirds or more of the Board then in office (excluding the Executive if he is then a member of the Board) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board, the Executive was guilty of the conduct herein set forth and specifying the particulars thereof in detail, (iii) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (iv) delivery to the Executive of a Notice of Termination from the Board specifying the particulars thereof in detail.

(d)   Good Reason. The Executive may terminate his employment hereunder for Good Reason. The following shall constitute Good Reason:

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(i)        A diminution in the Executive’s position, duties, responsibilities or authority (except during periods when the Executive is unable to perform all or substantially all of his duties or responsibilities on account of illness (either physical or mental) or other incapacity);

(ii)       A reduction in the Executive’s annual rate of base salary as in effect on the date hereof or as the same may be increased from time to time;

(iii)      Failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive’s total compensation, unless an equitable arrangement (embodied in an ongoing substitute plan) has been made with respect to such plan, or failure by the Company to continue the Executive’s participation therein (or in such substitute plan) on a basis not materially less favorable to the Executive;

(iv)      Failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s retirement, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating (except for across-the-board changes similarly affecting all senior executives of  the Company and all senior executives of any Person in control of the Company), or failure by the Company to continue to provide the Executive with the number of paid vacation days per year equal to the greater of (i) 20 and (ii) the number to which the Executive is entitled in accordance with the Company’s vacation policy;

(v)       Failure to provide facilities or services which are suitable to the Executive’s position;

(vi)      Failure of any successor (whether direct or indirect, by purchase of stock or assets, merger, consolidation or otherwise) to the Company to assume the Company’s obligations hereunder or failure by the Company to remain liable to the Executive hereunder after such assumption;

(vii)     Any  termination by the Company of the Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements  of a Notice of Termination contained in this Agreement;

(viii)    The relocation of the Executive’s principal place of employment to a location more than fifty (50) miles from the Executive’s principal place of employment as at the date hereof; or

(ix)       Failure to pay the Executive any portion of current or deferred compensation within seven (7) days of the date such compensation is due.

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The Executive’s continued employment shall not constitute consent to, or waiver of rights with respect to, any circumstance constituting Good Reason hereunder; provided, however, that the Executive shall be deemed to have waived his rights pursuant to circumstances constituting Good Reason hereunder if he shall not have provided the Company a Notice of Termination within ninety (90) days following his knowledge of the occurrence of circumstances constituting Good Reason.

(e)   Other Than Death, Disability, Cause or Good Reason. (i) The Company may terminate the Executive’s employment, other than as provided in Sections (3)(a), (b) or (c) hereof, upon written notice to the Executive and (ii) the Executive may terminate his employment with the Company, other than as provided in Section 3(d) hereof,  upon written notice to the Company.

(f)    Notice of Termination; Date of Termination.  Any termin-ation of the Executive’s employment by the Company or by the Executive (other than a termination pursuant to Section 3(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10.  For purposes of this Agreement,

(i)  “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and

(ii)       “Date of Termination” shall mean (A) if the Executive’s employment is terminated pursuant to Section 3(a), the date of his death, (B) if the Executive’s employment is terminated pursuant to Section 3(b), thirty days after Notice of Termination is given (provided that the Executive shall not have returned substantially to  full-time performance of the Executive’s duties during such thirty day period), (C) if the Executive’s employment is terminated pursuant to Sections 3(c), (d) or (e), the date specified in the Notice of Termination (provided that such date shall not be more than thirty days from the date Notice of Termination is given and, in the case of a termination for Cause, shall not be less than fifteen days from the date Notice of Termination is given), or (D) if the Executive terminates his employment and fails to provide written notice to the Company of such termination, the date of such termination.

4.         Compensation Upon Death, Disability or Termination.

(a)   If the Executive’s employment is terminated by his death, the Company shall pay the Executive’s legal representative (i) at the time such payments are due, the Executive’s full base salary through the Date of Termination at the rate in effect at the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan), and (ii) within ten days following the

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date of the Executive’s death, a lump sum payment in an amount by which (A) the total amount received by the beneficiary or estate of the Executive as payment under the basic insurance provided by and at the expense of the Company on the Executive’s life is less than  (B) twice the sum of (I) the Executive’s annual base salary in effect as of the Date of Termination and (II) the Executive’s Average Annual Bonus (the term “Average Annual Bonus” shall mean the average of the last three annual bonus amounts awarded to the Executive under the Company’s Management Incentive Compensation Plan, or any successor, alternate or supplemental plan (the “Bonus Plan”) or, if the Executive has not participated in the Bonus Plan for three completed annual award periods, the average of the annual bonus amounts awarded, provided that any award made in respect of an annual award period in which the Executive did not participate for the full period (the “Pro-Rata Award”) shall be annualized for purposes of computing the Average Bonus Amount by multiplying the Pro-Rata Award by a fraction, of which the numerator is 365 and the denominator is the number of days during which the Executive participated in such annual award period).

(b)   During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness the Executive shall continue to receive his full base salary at the rate then in effect for such period (offset by any payments to the Executive received pursuant to disability benefit plans maintained by the Company) until his employment is terminated pursuant to Section 3(b) hereof; and, within ten days following such termination, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan).

(c)   If the Executive’s employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall at the time such payments are due pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan), and the Company shall, thereafter, have no further obligations to the Executive under this Agreement.

(d)   If (1) the Company shall terminate the Executive’s employment other than for Disability and other than for Cause or (2) the Executive shall terminate his employment for Good Reason, then

(i)        the Company shall pay the Execu­tive on the Date of Termination, by wire transfer to the bank account designated by the Executive, the Executive’s full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (disregarding any reduction in salary rate

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which would constitute a Good Reason) and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan);

(ii)       in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive on the Date of Termination, by wire transfer to the bank account designated by the Execu­tive, an amount equal to the product of (A) the sum of (1) the Executive’s annual base salary in effect at the time the Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and (2) the Executive’s Average Annual Bonus, and (B) (x) if the Executive terminates his employment or the Company terminates the Executive’s employment, in either case within two years after the occurrence of a Change in Control,  the number three or (y) in any other case, the number one; and

(iii)  the Company shall continue the participation of the Executive for a period of one year (except, if the Executive terminates his employment or the Company terminates the Executive’s employment, in either case within two years after the occurrence of a Change in Control, such period shall be three years), in all medical, health, life and other employee “welfare” plans and programs in which the Executive participated imme­diately prior to the Date of Termination, provided that the Executive’s continued participation is possible under the general terms and provisions of such plans and pro­grams.  In the event that the Executive’s participation in any such plan or program is barred, the Company shall by other means provide the Executive with benefits equivalent to those which the Executive would other­wise have been entitled to receive under such plans and programs from which his continued participation is barred.

(e)   If the Company shall terminate the Executive’s employment other than for Cause, or the Executive shall terminate his employment for Good Reason, during the period of a Potential Change in Control or at the request of a person who, directly or indirectly, takes any action designed to cause a Change in Control, then the Company shall make payments and provide benefits to the Executive under this Agreement as though a Change in Control had occurred immediately prior to such termination.  A “Potential Change in Control” shall exist during the period commencing at the time the Company enters into any agreement or arrangement which, if consummated, would result in a Change in Control and ending at the time such agreement or arrangement either (i) results in a Change in Control or (ii) terminates, expires or otherwise becomes of no further force or effect.

(f)    For purposes of this Agreement, a “Change in Control” shall mean the first to occur of the following events:

(1)   Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as modified

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and used in Sections 13(d) and 14(d) of the Exchange Act) (a “Person”) is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 40% or more of either (A) the then outstanding common stock of the Company (the “Outstanding Common Stock”) or (B) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the “Total Voting Power”); excluding, however, the following:  (x) any acquisition by the Company or any of its Controlled Affiliates (an “Affiliate” of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person; the term “Control” shall have the meaning specified in Rule 12b-2 under the Exchange Act); (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Controlled Affiliates; and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or

(2)   A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company’s stockholders, was made or approved by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board;

(3)   There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company or a sale or other disposition of all or substantially all of the assets of the Company (“Corporate Transaction”); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of

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the Outstanding Common Stock and Total Voting Power, as the case may be, and (2) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries); or

(4)   The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

(g)                       Excise Tax.

(1)                       Modified Gross-Up.  It shall be determined whether this Section 4(g)(1) applies prior to any determination pursuant to Section 4(g)(2) hereof.  This Section 4(g)(1) shall apply if “Total Payments” (as defined in Section 4(g)(1)(i)) are equal to or exceed one-hundred-and-ten percent (110%) of the “Safe Harbor Amount”.  The “Safe Harbor Amount” is the amount to which the Total Payments would hypothetically have to be reduced so that no portion of the Total Payments would be subject to the Excise Tax (as defined in Section 4(g)(1)(i)).

(i)            If any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive’s termination of employment in respect of a Change in Control, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the “Total Payments”) will be subject to the excise tax (the “Excise Tax”) imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

(ii)           For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole

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or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by applicable law or regulation from performing the duties assigned to it hereunder, then a different auditor, acceptable to both the Company and the Executive, shall be selected. The fees and expenses of Tax Counsel and the Auditor shall be paid by the Company. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iii)          In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code.  In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined.  The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

(2)           Valley.  This Section 4(g)(2) shall apply only if it has been previously determined that Section 4(g)(1) hereof does not apply.  This Section 4(g)(2) shall then apply if the “Total Payments” (as defined in Section 4(g)(2)(i)) would be subject (in whole or part) to the “Excise Tax” (as defined in

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Section 4(g)(2)(i)) and the Total Payments are less than one-hundred-and-ten percent (110%) of the “Safe Harbor Amount” (as defined in Section 4(g)(1)).

(i)            Notwithstanding any other provisions of this Agreement, in the event that any payment, benefit, property or right received or to be received by the Executive in connection with a Change in Control or the Executive’s termination of employment in respect of a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments, benefits, properties and rights being hereinafter referred to as the “Total Payments”) would be subject (in whole or part) to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision (the “Code”), then the payments and benefits provided under Section 4(d) or 4(e) hereof (“Severance Payments”) which are cash shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payment without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); provided, however, that the Executive may elect (by waiving the receipt or enjoyment of all or any portion of the noncash Severance Payments at such time and in such manner that the Severance Payments so waived shall not constitute a “payment” within the meaning of Section 280G(b) of the Code) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.

(ii)           For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax (A) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Section 280G(b) of the Code shall be taken into account, (B) no portion of the Total Payments shall be taken into account which, in the written opinion of tax counsel (“Tax Counsel”) reasonably acceptable to the Executive and selected by the accounting firm (the “Auditor”) which was, immediately prior to the Change in Control, the Company’s Independent auditor, does not constitute a “parachute payment” within the meaning of Section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the written opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (C) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the

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Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by applicable law or regulation from performing the duties assigned to it hereunder, then a different auditor, acceptable to both the Company and the Executive, shall be selected.  The fees and expenses of Tax Counsel and the Auditor shall be paid by the Company.

(3)           Other Terms.  At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions, or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that the Executive may rely thereon).  If the Executive objects to the Company’s calculations, the Company shall pay to the Executive such portion of the payments as the Executive determines is necessary to result in the proper application of Section 4(g)(1)(i) or 4(g)(2)(i) above. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceeding concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

5.     No Mitigation.  The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

6.     Non-Competition; Non-Solicitation; Non-Disparagement.

(a)           The Executive acknowledges that, as a senior  management employee, the Executive will be involved, on a high level, in the development, implementation and management of the Company’s global business plans, including those which involve the Company’s finances, research, marketing, planning, operations, and acquisition strategies. By virtue of the Executive’s position and knowledge of the Company, the Executive acknowledges that his employment by a competitor of the Company represents a serious competitive danger to the Company, and that the use of the Executive’s experience and knowledge about the Company’s business, strategies and plans by a competitor can and would constitute a valuable competitive advantage over the Company.  In view of the foregoing, and in consideration of the payments made to the Executive under this Agreement, the Executive covenants and agrees that, if the Executive’s employment is terminated and the Company has fulfilled its obligations under this Agreement, for a period of one year (or three years if the Executive receives payments under clause (B)(x) of Section 4(d)(ii) hereof) after the Date of Termination the Executive will not (A) engage, in any capacity, directly or indirectly, including but not limited as employee,

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agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 5% equity interest in any enterprise) in any business entity engaged in competition with the Business conducted by the Company on the Date of Termination anywhere in the world, or (B) solicit a customer of the Business in violation of clause (A); provided, that the Executive may be employed by a competitor of the Company so long as the Executive’s duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially competitive with the Business.

(b)           The Company (for itself and its officers and directors) and the Executive mutually agree and covenant not to disparage the reputation or character of the other.

7.     Assignment of Inventions. The Executive agrees that all processes, technologies, designs and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not (collectively “Inventions”), conceived, developed, invented or made by the Executive prior to the Date of Termination shall belong to the Company, provided that such Inventions grew out of the Executive’s work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company’s time or with the use of the Company’s facilities or materials.  At the request of the Company, the Executive shall (i) promptly disclose such Inventions to the Company, (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries, (iii) sign all papers necessary to carry out the foregoing, and (iv) give testimony or otherwise take action in support of the Executive’s status as the inventor of such Inventions, in each case at the Company’s expense.

8.     Confidentiality. In addition to any obligation regarding Inventions, the Executive acknowledges that the  trade secrets and confidential and proprietary information of the Company, its subsidiaries and affiliates, including without limitation:

(a)   unpublished information concerning:

(i)        research activities and plans,

(ii)       marketing or sales plans,

(iii)      pricing or pricing strategies,

(iv)      operational techniques, and

(v)       strategic plans;

(b)   unpublished financial information, including information concerning revenues, profits and profit margins;

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(c)   internal confidential manuals; and

(d)   any “material inside information” as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; all constitute valuable, special and unique information of the Company, its subsidiaries and affiliates.  In recognition of this fact, the Executive agrees that the Executive will not disclose any such trade secrets or confidential or proprietary information (except (i) information which becomes publicly available without violation of this Agreement, (ii) information of which the Executive, prior to disclosure by the Executive, did not know and should not have known was disclosed to the Executive by a third party in violation of any other person’s confidentiality or fiduciary obligation, (iii) disclosure required in connection with any legal process (provided the Executive promptly gives the Company written notice of any legal process seeking to compel such disclosure and reasonably cooperates in the Company’s attempt to eliminate or limit the scope of such disclosure) and (iv) disclosure while employed by the Company which the Executive reasonably and in good faith believes to be in or not opposed to the interests of the Company) to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, nor shall the Executive make use of any such information for the benefit of any person, firm, corporation or other entity except on behalf of the Company, its subsidiaries and affiliates.

9.     Binding Agreement.  This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided in this Agreement, shall be paid to the Executive’s devisee, legatee, or other designee or, if there be no such designee, to the Executive’s estate.

10.   Notice.  Notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered, if delivered personally, or mailed by United States certified or registered mail, return receipt requested, postage prepaid, and when received if delivered otherwise, addressed as follows:

If to the Executive:

11319 Bay Laurel St

Dublin, CA 94568

If to the Company:

Hexcel Corporation

281 Tresser Blvd.

Stamford, CT  06901-3238

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Attn:  General Counsel

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

11.   General Provisions.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive (or, if applicable, his legal representative)  and the Company.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  No representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut without regard to its conflicts of law principles.

12.   Validity and Enforceability.  The invalidity or unenforceabi­lity of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. It is the desire and intent of the parties that the provisions of Sections 6, 7 and 8 hereof shall be enforceable to the fullest extent permitted by applicable law or public policy.  If any such provision or the application thereof to any person or circumstance shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such provision shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by applicable law or public policy.  In any case, the remaining provisions or the application thereof to any person or circumstance other than those to which they have been held invalid or unenforceable, shall remain in full force and effect.

13.   Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

14.   Arbitration.  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of Connecticut, in accordance with the rules of the American Arbitration Association then in effect.  Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Sections 6, 7 or 8 hereof.

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15.   Entire Agreement.  This Agreement is the entire agreement or understanding between the Company and the Executive regarding the subject matter hereof.  In particular, the Executive Severance Agreement dated February 3, 1999 by and between the Company and the Executive shall be void and of no further force or effect.

16.   Remedies.  The Executive agrees that in addition to any other remedy provided at law or in equity or in this Agreement, the Company shall be entitled to a temporary restraining order and both preliminary and permanent injunctions restraining Executive from violating any provision of Sections 6, 7 and 8 hereof.  In the event the Company fails to make any payment to the Executive when due, the Executive, in addition to any other remedy available at law or in equity, shall be entitled to interest on such unpaid amounts from the date such payment was due to the date actual payment is received by the Executive, at the legal rate applicable to unpaid judgments.  The Company shall pay to the Executive all legal, audit, and actuarial fees and expenses as a result of the termination of employment, including all such fees and expenses incurred in contesting, arbitrating or disputing any action or failure to act by the Company or in seeking to obtain or enforce any right under this Agreement or any other plan, arrangement or agreement with the Company, provided that the Executive has obtained a final determination supporting at least part of his claim and there has been no determination that the balance of his claim was made in bad faith.

17.   Consent to Jurisdiction and Forum. The Executive hereby expressly and irrevocably agrees that any action, whether at law or in equity, permitted to be brought by the Company under this Agreement may be brought in the State of Connecticut or in any federal court therein. The Executive hereby irrevocably consents to personal jurisdiction in such court and to accept service of process in accordance with the provisions of the laws of the State of Connecticut. In the event the Company commences any such action in the State of Connecticut or in any Federal court therein, the Company shall reimburse the Executive for the reasonable expenses incurred by the Executive in his appearance in such forum which are in addition to the expenses the Executive would have incurred by appearing in the forum of the Executive’s residence at that time, including but not limited to additional legal fees.

18.   Term of Agreement.     The term of this Agreement (the “Term”) shall begin on April 27, 2007 (the “Effective Date”) and shall end on the third anniversary thereof; provided however that, commencing on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date (each such anniversary, a “Renewal Date”), the Term shall automatically be extended for one additional year unless, not later than the date which is one year prior to such Renewal Date, the Company shall have given notice to the Executive not to extend the Term for such one additional year.

19.   Section 409A

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(a)           It is intended that this Executive Severance Agreement comply in all respects with the requirements of Sections 409A(a)(2) through (4) of the Code and applicable Treasury Regulations and other generally applicable guidance issued thereunder (collectively, the “Applicable Regulations”), and this Executive Severance Agreement shall be interpreted for all purposes in accordance with this intent.

(b)           Notwithstanding any term or provision of this Executive Severance Agreement, the parties hereto agree that, from time to time, the Company may, without prior notice to or consent of the Executive, amend this Executive Severance Agreement to the extent determined by the Company, in the exercise of its discretion in good faith, to be necessary or advisable to prevent the inclusion in the Executive’s gross income pursuant to the Applicable Regulations of any compensation intended to be deferred hereunder. The Company shall notify the Executive as soon as reasonably practicable of any such amendment affecting the Executive.

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HEXCEL CORPORATION
By:	/s/ Ira J. Krakower
	Name: Ira J. Krakower
	Title: Senior Vice President
	/s/ Wayne C. Pensky
	Executive

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EX-10.2

Exhibit 10.2

Executive Deferred Compensation Agreement

The Executive Deferred Compensation and Consulting Agreement, better known as EDCA, is a non-qualified, unfunded, supplemental pension plan for key executives.

Each year benefits are accrued at one and one-half percent at that year’s base salary plus bonus payment and added to the prior year accrual balance.  That accumulated benefit is then given a present value based on group annuity mortality tables and the current PBGC immediate interest rate.  At retirement the monthly accrued present value benefit is payable as a 10-year certain and life annuity.  The Plan also provides for the continuation of life, medical and dental benefits at retirement based on certain criteria as outlined in the Agreement.

EXECUTIVE DEFERRED COMPENSATION AND CONSULTING AGREEMENT

THIS AGREEMENT is entered into as of June 7, 1995, at Pleasanton, California, between HEXCEL CORPORATION, a Delaware corporation (“HEXCEL”), and Wayne C. Pensky (“Employee”), on the basis of the following facts and understandings:

R E C I T A L S  :

A.            Employee is a key executive of Hexcel and has made substantial contributions to its success.

B.            Hexcel wishes to provide certain retirement, death and similar benefits for Employee in the expectation that such benefits will serve as an incentive to Employee to continue in the employ of Hexcel until his retirement or death.  Hexcel also wishes to receive the benefits of Employee’s advice and consultation following retirement, which will be compensated for by the payments to be made hereunder.

C.            Hexcel’s Executive Compensation Committee of the Board of Directors has authorized it to enter into this Executive Deferred Compensation Agreement with Employee.

AGREEMENT

NOW, THEREFORE, in consideration of the services rendered in the past and to be rendered in the future by Employee, the parties hereto agree as follows:

1.RETIREMENT AND CONSULTING INCOME.

1.1           Normal Retirement.  If Employee retires or otherwise ceases to be employed by Hexcel on or after his 65th birthday, Employee shall receive a monthly amount of consulting and retirement income payments, without any specification as to

the amount allocated to either, computed pursuant to Exhibit “A” which has been initialed by the parties and attached hereto.  Such payments shall commence the calendar month following Employee’s retirement or termination of employment and shall continue for one hundred twenty (120) such payments or until payment for the month in which Employee dies, whichever is the last to occur.

1.2           Retirement Before Age 65.  If Employee retires or otherwise ceases to be employed by Hexcel after his 40th birthday but prior to his 65th birthday, his consulting and retirement income payments, without any specification as to the amount allocated to either, computed pursuant to said Exhibit “A”, shall commence the calendar month following his 65th birthday and shall continue for one hundred twenty (120) such payments or until payment for the month in which Employee dies, whichever is the last to occur.  Should the Employee request that such payments commence at an earlier date and Hexcel, in its sole and absolute discretion, consents thereto in writing, the monthly amounts payable shall be the amount reflected on Exhibit “B”, which has been initialed by the parties and attached hereto.

If Employee retires or otherwise ceases to be employed by Hexcel after his 40th birthday but prior to his 58th birthday, his consulting and retirement income payments shall be the same as under Section 1.2 except that until Employee attains the age of 58, the obligation of Hexcel under Section 6.2 (i.e., medical and dental insurance) shall be in effect only if Employee promptly reimburses Hexcel on its written demand for its costs of such medical and dental insurance under the group plan.

Employee shall not be entitled to any benefits under this Agreement if Employee ceases to be employed by Hexcel prior to attaining his 40th birthday.

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1.3           Possible Lump Sum, Etc. Benefits.  In lieu of the payments described in Sections 1.1 and 1.2, and provided that Hexcel, in its sole and absolute discretion, consents thereto in writing, Employee may elect either (a) the applicable lump sum benefit reflected on Exhibit “B”, or (b) any other form of retirement benefit actuarially equivalent thereto.  Employee’s election of benefits under this Section 1.3 shall not relieve Employee of his obligations under Paragraph 3.

2.             DEATH BENEFITS.  If Employee dies after his 40th birthday but prior to commencement of payments to him pursuant to Sections 1.1 or 1.2, there will be payable to his designated beneficiary in lieu of any amount specified in Paragraph 1, a monthly pension for the balance of such beneficiary’s lifetime which is actuarially equivalent to the lump sum death benefit reflected in Exhibit “B”.  In lieu of said monthly pension, on the condition that Hexcel, in its sole discretion, consents thereto in writing, such beneficiary may elect either (a) the applicable lump sum death benefit reflected on Exhibit “B” or (b) any other form of pension benefit actuarially equivalent thereto, based on the actuarial assumptions used in constructing Exhibit “B”, such election to be made by written notice to Hexcel, in form satisfactory to Hexcel, within sixty (60) days following the Employee’s death.

If Employee dies after commencement of payments to him pursuant to Sections 1.1 or 1.2, but prior to the receipt of 120 such payments or, should Employee retire after this 65th birthday but has not as yet received the first payment under Section 1.1, his designated beneficiaries shall receive such payments until the aggregate number of payments to Employee and his beneficiary totals 120.

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3.             AGREEMENTS OF EMPLOYEE.  As a material part of the consideration for this Agreement and as a condition precedent to Hexcel’s obligation to make payments to Employee or Employee’s successors hereunder, Employee agrees as follows:

3.1           Consultation Services.  For a period of ten years following the effective date of retirement or termination of employment, Employee shall render consultation services to Hexcel from time to time upon request of Hexcel, in all areas of Hexcel’s business; provided, however, that Hexcel shall only make such requests at reasonable times and locations in light of Employee’s other commitments, and upon reasonable prior notice; and provided further that the extent of said consultation services shall be limited to not more than ten (10) man days (on the basis of seven-hour work days) per year unless agreed to by Employee.  The parties acknowledge that Employee, while providing consultation services hereunder, will be acting in the capacity of an independent contractor and not an employee, and Hexcel shall not have the power to direct or control the manner in which Employee performs his duties as consultant.  Hexcel shall reimburse Employee for any expenses incurred by Employee in carrying out his obligations, provided such expenses were approved in advance by Hexcel in writing.

3.2           Competitive Activity.  In order to protect Hexcel’s benefits under Section 3.1 and its trade secrets in the field of engineered materials (e.g., high technology, lightweight structural materials and specialty chemicals and resins) and other products being manufactured or marketed by Hexcel or developed for manufacture or marketing at the time of Employee’s retirement or termination of employment, or the trade secrets of any business acquired by Hexcel within six months after retirement or termination of such employment if said acquisition was in the process of negotiation at

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the time of such retirement or termination (herein-after collectively designated “Hexcel’s Business”), Employee agrees that at all times prior to his retirement or termination of employment and during so much of the ten-year period following such retirement or termination that Hexcel, or any of its successors, assigns or affiliated companies carries on any portion of Hexcel’s business, Employee shall not directly or indirectly, as a partner, substantial owner, employee, associate, consultant, agent or otherwise, engage in any activity related to or competitive with Hexcel’s business in any county in the State of California, or in any other state, territory or foreign country within which Hexcel carries on Hexcel’s Business or in which any of its products are sold either prior or subsequent to the date hereof.

4.CONDITIONS TO PAYMENT OF COMPENSATION.

4.1           No Vested Benefit.  The parties acknowledge that the sums payable to Employee hereunder increase pursuant to the formula set forth in Exhibit “A” based upon the length of Employee’s employment with Hexcel — i.e., Employee receives credit in such formulas over the period of his employment.  Hexcel may at any time upon thirty (30) days’ prior written notice to Employee, terminate Employee’s right to receive such credit for future employment with Hexcel, which shall not, however, affect such credit accrued up to the effective date of such termination.  Notwithstanding such employment credit, the amounts computed in accordance with such formulas are only payable to Employee on the terms and subject to the conditions contained in this Agreement, including, without limitation, the conditions specified in Sections 4.2 and 4.3.

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4.2           Termination of Employment, Causes.  Hexcel’s obligation to make payments to Employee hereunder is subject to the condition precedent that Hexcel has not terminated Employee’s employment by reason of Employee’s theft, fraud, embezzlement or felony, provided that the foregoing is directly connected with his employment and Hexcel determines, in its sole and absolute discretion, that such act in inimical to its best interests, or by reason of violation of Section 3.2 hereof, or for wrongfully disclosing any secret process or imparting any confidential information, or intentionally doing any other act materially inimical to the best interests of Hexcel.  In case of any such termination of Employee’s employment by Hexcel, all of Employees rights and benefits hereunder shall terminate.

4.3           Breaches of Agreement.  Hexcel’s obligation to make payments to Employee hereunder is subject to the further conditions precedent (a) that Employee has not breached or violated any term, covenant or provision of this Agreement, including, without limitation, those set forth in Section 3.2, and (b) Employee has not engaged in any of the acts mentioned in Section 4.2 while an employee of Hexcel, which acts are discovered subsequent to Employee’s retirement or termination of Employment.  In case of any such breach or violation under Clause (a) or if Employee has engaged in the acts referred to in clause (b) all of Employee’s rights and benefits hereunder shall terminate.

4.4           Preservation of Remedies.  In addition to the conditions precedent to Hexcel’s obligations hereunder for any payments or benefits, Hexcel shall also be entitled to all of its legal and equitable remedies and resulting from any breach or violation of this Agreement by Employee, including, without limitation, recovery from Employee of all damages resulting from such breach or violation.

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5.             MININUM PAYMENT.

5.1           Prior Agreement.  If Employee was a party to a prior agreement with Hexcel concerning executive deferred compensation and consulting payments, and Employee becomes entitled to receive payments hereunder, Employee shall be entitled to receive, at a minimum, the amount payable to him as of December 31, 1981 under the terms of such prior agreement, which amounts are set forth in Exhibit “C” which has been initialed by the parties and attached hereto.

5.2           Change in Control.  If there is a change in control of Hexcel and Employee becomes entitled to receive payments hereunder, Employee shall be entitled to receive at a minimum, the amounts payable to him as of December 31, 1981, under the terms of such prior agreement, which amounts are set forth in Exhibit “C”.

For purposes of this Section 5.2, a “change in control of Hexcel” shall mean a change in control of a nature that would be required to be reported in response to Item     5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (“Exchange Act”); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act is or becomes the beneficial owner, directly or indirectly, of securities of Hexcel representing thirty percent (30%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Hexcel cease for any reason to constitute at least a majority thereof unless the election of each director, who was not a director at the beginning of the period, was approved by a vote of at least two-thirds of the directors

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then still in office who were directors at the beginning of the period.

6.             INSURANCE BENEFITS.

6.1           Life Insurance.  Hexcel shall keep in force and pay for life insurance for Employee shall Employee retire or otherwise cease to be employee Hexcel (“termination”) in the following amounts so long as (subject to Section 6.3) Employee has not received all the payments to which Employee is entitled under this Agreement:

(a)           For the period prior to the time Employee has received any payments under this Agreement and prior to the Employee’s 65th birthday, an amount equal to two (2) times the present value of Employee’s potential payments hereunder (in accordance with Exhibits “A”, “B” and “C”) at the time of termination, provided such insurance shall not exceed the amount of life insurance on Employee in effect at the time of termination.

Example:

Salary    $80,000

Employee Insurance    $240,000

Present Value of Potential Payments     $200,000

Then lesser of:

2 x $200,000 = $400,000

Insurance at term = $240,000

Therefore, $240,000 life insurance.

(b)           After Employee’s 65th birthday, but only while Employee is receiving payments under this Agreement, an amount equal to one (1) times the present value of Employee’s potential payments hereunder (in accordance with Exhibits “A”, “B”

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and “C”) at the time of termination, provided such insurance shall not exceed the amount of the life insurance on Employee in effect at the time of termination.

Example:

Salary $80,000

Employee Insurance $240,000

Present Value of Potential Payments $200,000

Then lesser of:

1 x $200,000 = $200,000

Employee Insurance = $240,000

Therefore, $200,000 life insurance.

6.2           Medical and Dental Insurance.  Hexcel, at its expenses, shall continue to cover Employee in its   group medical and dental insurance plan during those periods life insurance is maintained for Employee pursuant to Section 6.1.

6.3           Termination of Benefits. Notwithstanding anything set forth herein, Employee shall not be entitled to any benefits under Sections 6.1 and 6.2 should Employee receive a lump sum benefit hereunder or after Employee’s 75th birthday.

7.             RIGHT OF PARITES.

7.1           Change of Beneficiary.  Employee shall have the right at any time to change the person or persons designated as beneficiary or contingent beneficiary on Exhibit “D” attached hereto, by written notice to Hexcel in form satisfactory to Hexcel.  Such change of beneficiary shall become effective upon receipt and approval by Hexcel.

7.2           No Employment Agreement.  Nothing contained in this Agreement shall be construed as giving to Employee the right to continued employment with Hexcel.

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7.3           Other Retirement Plans.  Nothing in this Agreement shall affect any right the Employee may otherwise have to participate in or under any retirement plan of Hexcel or other entity.

8.             NOTICES.  Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by prepaid certified or registered mail to his last known residence in the case of Employee, or its principal office in the case of Hexcel.

9.             TRANSFER OF INTEREST.  Except as otherwise expressly provided herein, Employee agrees, on behalf of his heirs, legatees, personal representatives and designated beneficiaries, that this Agreement and the rights, interests and benefits hereunder shall not be sold, assigned, conveyed, hypothecated, or otherwise transferred, and no such interest shall be subject to any liabilities or obligations of any bankruptcy proceedings, claims or creditors, attachment, garnishment, execution, levy or other legal process against any such person or his property; provided, however, that if Employee is indebted to Hexcel for any reason whatsoever at the time of any distribution or distributions, Hexcel shall have the right to apply so much of such distribution as may be necessary to satisfy Employee’s indebtedness to Hexcel.

10.           MISCELLANEOUS. This Agreement replaces any former agreements between Employee and Hexcel relating to executive deferred compensations and consulting.  All payments received pursuant to this Agreement shall be subject to applicable payroll taxes and taxes withholding.  This agreement shall inure to the benefit

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of and be binding upon the successors and assigns of Hexcel and the heirs, legatees, personal representatives and designated beneficiaries of Employee.

Notwithstanding anything to the contrary contained in this Agreement, if any provisions hereof, or the application thereof to any circumstance, is held invalid for any reason whatsoever, such invalid provision shall be severable and shall not affect any other provision hereof or the application thereof to any other circumstances which can be given effect without such invalid provisions or application.  This Agreement is entered into in contemplation of and shall be interpreted and enforced in accordance with California law applicable to contracts made and to be performed within the State of California.  For convenience, references to the Employee herein are masculine, but shall be deemed to include the feminine gender if Employee is female.  Paragraph and section headings have been inserted for convenience only, and in no way shall be used to interpret or otherwise affect the terms of this Agreement.

TO EVIDENCE THEIR AGREEMENT to the foregoing, the parties have executed this Agreement the day and year first above written.

	HEXCEL CORPORATION
	a Delaware corporation
/s/ Wayne C. Pensky	By	/s/ Rodney P. Jenks, Jr.
Employee’s Signature		Vice President,
		General Counsel &
		Secretary

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AMENDMENT TO

EXECUTIVE DEFERRED COMPENSATION AND CONSULTING AGREEMENT

This Agreement is entered into as of June 7, 1995, between HEXCEL CORPORATION (“Hexcel”) and Wayne C. Pensky (“Employee”).

WHEREAS, Employee and Hexcel have entered into an Executive Deferred Compensation and Consulting Agreement dated June 7, 1995; and

WHEREAS Employee and Hexcel wish to amend said Agreement relating to Change in Control; excluding the CIBA Composites Transaction;

NOW THEREFORE, it is agreed to amend Section 5.2 “Change in Control” as follows:

5.2           Change in Control.  If there is a change in control of Hexcel and Employee becomes entitled to receive payments hereunder, Employee shall be entitled to receive, at a minimum, the amounts payable to him as of December 31, 1981, under the terms of such prior agreement, which amounts are set forth in Exhibit “C”.

For purposes of this Section 5.2, a “change in control of Hexcel” shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (“Exchange Act”); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of Hexcel representing thirty percent (30%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) during any

period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Hexcel cease for any reason to constitute at least a majority thereof unless the election of each director, who was not a director at the beginning of the period, was approved by a vote of at least two-thirds of the directors then still in office who are directors at the beginning of the period.

HEXCEL CORPORATION

/s/ Wayne C. Pensky

Employee’s Signature

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EX-10.3

Exhibit 10.3

RESTRICTED STOCK UNIT AGREEMENT

for

Non-Employee Directors

RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”), dated as of the Grant Date, by and between the Grantee and Hexcel Corpo­ra­tion (the “Corpo­ration”).

W I T N E S S E T H:

WHEREAS, the Corporation has adopted the Hexcel Corporation 2003 Incentive Stock Plan (the “Plan”); and

WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined that it is desirable and in the best interests of the Corporation to grant to the Grantee restricted stock units (“RSUs”) as an incentive for the Grantee to advance the interests of the Corporation.

NOW, THEREFORE, the parties agree as follows:

1.       Notice of Grant; Incorporation of Plan.  Pursuant to the Plan and subject to the terms and conditions set forth herein and therein, the Corporation hereby grants to the Grantee the number of RSUs indicated on the Notice of Grant attached hereto as Annex A, which Notice of Grant is incorporated by reference herein.  Unless otherwise provided herein, capitalized terms used herein and set forth in such Notice of Grant shall have the meanings ascribed to them in the Notice of Grant and capitalized terms used herein and set forth in the Plan shall have the meanings ascribed to them in the Plan. The Plan is incorporated by reference and made a part of this Agreement, and this Agreement shall be subject to the terms of the Plan, as the Plan may be amended from time to time, provided that any such amendment of the Plan must be made in accordance with Section IX of the Plan. The RSUs granted herein constitute an Award within the meaning of the Plan.

2.       Terms of Restricted Stock Units.  The grant of RSUs provided in Section 1 hereof shall be subject to the following terms, conditions and restrictions:

(a)       No Ownership.             The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in shares of the Common Stock in respect of the RSUs until such RSUs have vested and been distributed to the Grantee in the form of shares of Common Stock.

(b)       Transfer of RSUs.        Except as provided in this Section 2(b), the RSUs and any interest therein may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution and subject to the conditions set forth in the Plan and this Agreement. Any attempt to transfer RSUs in contravention of this Section is void ab initio. RSUs shall not be subject to execution, attachment or other process. Notwithstanding the foregoing, the Grantee shall be permitted to transfer RSUs to members of his or her immediate family (i.e., children, grandchildren or spouse), trusts for the benefit of such family members, and partnerships or other entities whose only partners or equity owners are such family

members; provided, however, that no consideration can be paid for the transfer of the RSUs and the transferee of the RSUs must agree to be subject to all conditions applicable to the RSUs (including all of the terms and conditions of this Agreement) prior to transfer.

(c)       Vesting and Conversion of RSUs.  Subject to Sections 2(d) and 2(e), the RSUs shall vest at the rate of 33-1/3% of the RSUs on each of the Grant Date and the first and second anniversaries of the Grant Date, and shall be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee on the second anniversary of the Grant Date; provided that if the Grantee has delivered to the Corporation, on or prior to the Required Date, an irrevocable written election to defer conversion of the RSUs until such time as the Grantee’s service with the Corporation terminates, then the RSUs will be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee on the date that Grantee’s service with the Corporation terminates. Upon distribution of the shares of Common Stock in respect of the RSUs, the Corporation shall issue to the Grantee or the Grantee’s personal representative a stock certificate representing such shares of Common Stock, free of any restrictions.  “Required Date” shall mean (i) if this grant of RSUs is issued in connection with the Grantee’s initial election to the Board of Directors, the Date of Grant; and (ii) otherwise, December 31 of the calendar year prior to the calendar year in which this grant is issued.

(d)       Termination of Service as Director.

(i)            If the Grantee ceases to perform services for the Corporation for any reason other than death, disability or Cause, then (A) all RSUs that have vested on or prior to the date the Grantee ceased to perform services for the Corporation shall be converted into an equivalent number of shares of Common Stock and immediately distributed to the Grantee, and (B) the Grantee shall forfeit all RSUs which have not yet become vested as of the date the Grantee ceased to perform services for the Corporation.

(ii)           In the event the Grantee dies or the Grantee ceases to perform services for the Corporation because of disability, all RSUs shall vest, be converted into an equivalent number of shares of Common Stock and be immediately distributed to the Grantee.

(iii)          In the event the Grantee ceases to perform services for the Corporation for Cause, then the Grantee shall forfeit all RSUs, whether or not vested.

(e)       Change of Control.  In the event of a Change in Control (as defined below), all RSUs shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee.

3.         Equitable Adjustment.            The aggregate number of shares of Common Stock subject to the RSUs shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without the receipt of consideration by the Corporation, or other change in corporate or capital structure. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent

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reasonably necessary or desirable to preserve the intended benefits under this Agreement in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Corporation.

4.         Taxes.  The Grantee shall pay to the Corporation promptly upon request any taxes the Corporation reasonably determines it is required to withhold under applicable tax laws with respect to the RSUs.  Such payment shall be made as provided in Section VIII(f) of the Plan.

5.         No Right to Continued Service as Director.  Nothing contained herein shall be deemed to confer upon the Grantee any right to continue to serve as a member of the Board.

6.         Miscellaneous

(a)Governing Law/Jurisdiction.  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws.

(b)Resolution of Disputes.  Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in New York in accordance with the commercial rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each party shall bear such party’s own expenses incurred in connection with any arbitration; provided, however, that the cost of the arbitration, including without limitation, reasonable attorneys’ fees of the Grantee, shall be borne by the Corporation in the event the Grantee is the prevailing party in the arbitration. Anything to the contrary notwithstanding, each party hereto has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator.

(c)Notices.  Any notice required or permitted under this Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee at the last address specified in Grantee’s records with the Corporation, or such other address as the Grantee may designate in writing to the Corporation, or to the Corporation, Attention:  Corporate Secretary, or such other address as the Corporation may designate in writing to the Grantee.

(d)Failure to Enforce Not a Waiver.  The failure of either party hereto to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

(e)Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which together shall represent one and the same agreement.

(f)Modifications; Entire Agreement; Headings.  This Agreement cannot be changed or terminated orally. This Agreement and the Plan contain the entire agreement between the parties relating to the subject matter hereof.  The section headings herein are intended for reference only and shall not affect the interpretation hereof.

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7.         Section 409A.

(a)It is intended that this Restricted Stock Unit Agreement comply in all respects with the requirements of Sections 409A(a)(2) through (4) of the Code and applicable Treasury Regulations and other generally applicable guidance issued thereunder (collectively, the “Applicable Regulations”), and this Restricted Stock Unit Agreement shall be interpreted for all purposes in accordance with this intent.

(b)Notwithstanding any term or provision of this Restricted Stock Unit Agreement (including any term or provision of the Plan incorporated herein by reference), the parties hereto agree that, from time to time, the Corporation may, without prior notice to or consent of the Grantee, amend this Restricted Stock Unit Agreement to the extent determined by the Corporation, in the exercise of its discretion in good faith, to be necessary or advisable to prevent the inclusion in the Grantee’s gross income pursuant to the Applicable Regulations of any compensation intended to be deferred hereunder. The Corporation shall notify the Grantee as soon as reasonably practicable of any such amendment affecting the Grantee.

8.         Definitions.               For purposes of this Agreement:

(I)“Affiliate” of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person.  The term “Control” shall have the meaning specified in Rule 12b-2 under the Exchange Act.

(II)“Beneficial Owner” (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act.

(III)A director will be deemed to cease performing services for the Corporation for “Cause” if such cessation is due to his fraud, dishonesty or intentional misrepresentation in connection with his duties as a Director or his embezzlement, misappropriation or conversion of assets or opportunities of the Corporation or any Subsidiary.

(IV)     “Change in Control” shall mean any of the following events:

(1)  any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (a) the then outstanding Common Stock of the Corporation (the “Outstanding Common Stock”) or (b) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Corporation (the “Total Voting Power”); excluding, however, the following: (i) any acquisition by the Corporation or any of its Controlled Affiliates, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or

(2)  a change in the composition of the Board such that the individuals who, as of the effective date of this Restricted Stock Unit Agreement, constitute

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the Board (such individuals shall be hereinafter referred to as the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Corporation’s stockholders, was made or approved by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board; or

(3)  there is consummated a merger or consolidation of the Corporation or any direct or indirect Subsidiary of the Corporation or a sale or other disposition of all or substantially all of the assets of the Corporation (“Corporate Transaction”); excluding, however, such a Corporate Transaction (a) pursuant to which all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the  then outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Corporate Transaction of the Outstanding Common Stock and Total Voting Power, as the case may be, and (b) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries); or

(4)   the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation.

(IV)“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act.

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Annex A

NOTICE OF GRANT

RESTRICTED STOCK UNIT AGREEMENT

HEXCEL CORPORATION 2003 INCENTIVE STOCK PLAN

The following member of the Board of Directors of Hexcel Corporation, a Delaware corporation (“Hexcel”), has been granted Restricted Stock Units in accordance with the terms of this Notice of Grant and the Restricted Stock Unit Agreement to which this Notice of Grant is attached.

The terms below shall have the meanings ascribed to them below when used in the Restricted Stock Unit Agreement.

Grantee

Address of Grantee

Grant Date

Aggregate Number of RSUs Granted

IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Restricted Stock Unit Agreement to which this Notice of Grant is attached and execute this Notice of Grant and Restricted Stock Unit Agreement as of the Grant Date.

	HEXCEL CORPORATION
Grantee
	By:
	Ira J. Krakower
	Senior Vice President

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EX-10.4

Exhibit 10.4

RESTRICTED STOCK UNIT AGREEMENT

for

Non-Employee Directors

RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”), dated as of the Grant Date, by and between the Grantee and Hexcel Corpo­ra­tion (the “Corpo­ration”).

W I T N E S S E T H:

WHEREAS, the Corporation has adopted the Hexcel Corporation 2003 Incentive Stock Plan (the “Plan”); and

WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined that it is desirable and in the best interests of the Corporation to grant to the Grantee restricted stock units (“RSUs”) as an incentive for the Grantee to advance the interests of the Corporation.

NOW, THEREFORE, the parties agree as follows:

1.       Notice of Grant; Incorporation of Plan.  Pursuant to the Plan and subject to the terms and conditions set forth herein and therein, the Corporation hereby grants to the Grantee the number of RSUs indicated on the Notice of Grant attached hereto as Annex A, which Notice of Grant is incorporated by reference herein.  Unless otherwise provided herein, capitalized terms used herein and set forth in such Notice of Grant shall have the meanings ascribed to them in the Notice of Grant and capitalized terms used herein and set forth in the Plan shall have the meanings ascribed to them in the Plan. The Plan is incorporated by reference and made a part of this Agreement, and this Agreement shall be subject to the terms of the Plan, as the Plan may be amended from time to time, provided that any such amendment of the Plan must be made in accordance with Section IX of the Plan. The RSUs granted herein constitute an Award within the meaning of the Plan.

2.       Terms of Restricted Stock Units.  The grant of RSUs provided in Section 1 hereof shall be subject to the following terms, conditions and restrictions:

(a)       No Ownership.             The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in shares of the Common Stock in respect of the RSUs until such RSUs have vested and been distributed to the Grantee in the form of shares of Common Stock.

(b)       Transfer of RSUs.        Except as provided in this Section 2(b), the RSUs and any interest therein may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution and subject to the conditions set forth in the Plan and this Agreement. Any attempt to transfer RSUs in contravention of this Section is void ab initio. RSUs shall not be subject to execution, attachment or other process. Notwithstanding the foregoing, the Grantee shall be permitted to transfer RSUs to members of his or her immediate family (i.e., children, grandchildren or spouse), trusts for the benefit of such family members, and partnerships or other entities whose only partners or equity owners are such family

members; provided, however, that no consideration can be paid for the transfer of the RSUs and the transferee of the RSUs must agree to be subject to all conditions applicable to the RSUs (including all of the terms and conditions of this Agreement) prior to transfer.

(c)       Vesting and Conversion of RSUs.  Subject to Sections 2(d) and 2(e), the RSUs shall vest daily in proportion to the time elapsed between the Grant Date and the first anniversary of the Grant Date, and shall be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee on the first anniversary of the Grant Date; provided that if the Grantee has delivered to the Corporation, on or prior to the Required Date, an irrevocable written election to defer conversion of the RSUs until such time as the Grantee’s service with the Corporation terminates, then the RSUs will be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee on the date that Grantee’s service with the Corporation terminates. Upon distribution of the shares of Common Stock in respect of the RSUs, the Corporation shall issue to the Grantee or the Grantee’s personal representative a stock certificate representing such shares of Common Stock, free of any restrictions. “Required Date” shall mean (i) if this grant of RSUs is issued in connection with the Grantee’s initial election to the Board of Directors, the Date of Grant; and (ii) otherwise, December 31 of the calendar year prior to the calendar year in which this grant is issued.

(d)       Termination of Service as Director.

(i)If the Grantee ceases to perform services for the Corporation for any reason other than death, disability or Cause, then (A) all RSUs that have vested on or prior to the date the Grantee ceased to perform services for the Corporation shall be converted into an equivalent number of shares of Common Stock and immediately distributed to the Grantee, and (B) the Grantee shall forfeit all RSUs which have not yet become vested as of the date the Grantee ceased to perform services for the Corporation.

(ii)In the event the Grantee dies or the Grantee ceases to perform services for the Corporation because of disability, all RSUs shall vest, be converted into an equivalent number of shares of Common Stock and be immediately distributed to the Grantee.

(iii)In the event the Grantee ceases to perform services for the Corporation for Cause, then the Grantee shall forfeit all RSUs, whether or not vested.

(e)       Change of Control.  In the event of a Change in Control (as defined below), all RSUs shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee.

3.         Equitable Adjustment.            The aggregate number of shares of Common Stock subject to the RSUs shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without the receipt of consideration by the Corporation, or other change in corporate or capital structure. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent

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reasonably necessary or desirable to preserve the intended benefits under this Agreement in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Corporation.

4.         Taxes.  The Grantee shall pay to the Corporation promptly upon request any taxes the Corporation reasonably determines it is required to withhold under applicable tax laws with respect to the RSUs.  Such payment shall be made as provided in Section VIII(f) of the Plan.

5.         No Right to Continued Service as Director.  Nothing contained herein shall be deemed to confer upon the Grantee any right to continue to serve as a member of the Board.

6.         Miscellaneous

(a)Governing Law/Jurisdiction.  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws.

(b)Resolution of Disputes.  Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in New York in accordance with the commercial rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each party shall bear such party’s own expenses incurred in connection with any arbitration; provided, however, that the cost of the arbitration, including without limitation, reasonable attorneys’ fees of the Grantee, shall be borne by the Corporation in the event the Grantee is the prevailing party in the arbitration. Anything to the contrary notwithstanding, each party hereto has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator.

(c)Notices.  Any notice required or permitted under this Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee at the last address specified in Grantee’s records with the Corporation, or such other address as the Grantee may designate in writing to the Corporation, or to the Corporation, Attention:  Corporate Secretary, or such other address as the Corporation may designate in writing to the Grantee.

(d)Failure to Enforce Not a Waiver.  The failure of either party hereto to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

(e)Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which together shall represent one and the same agreement.

(f)Modifications; Entire Agreement; Headings.  This Agreement cannot be changed or terminated orally. This Agreement and the Plan contain the entire agreement between the parties relating to the subject matter hereof.  The section headings herein are intended for reference only and shall not affect the interpretation hereof.

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7.Section 409A.

(a)It is intended that this Restricted Stock Unit Agreement comply in all respects with the requirements of Sections 409A(a)(2) through (4) of the Code and applicable Treasury Regulations and other generally applicable guidance issued thereunder (collectively, the “Applicable Regulations”), and this Restricted Stock Unit Agreement shall be interpreted for all purposes in accordance with this intent.

(b)Notwithstanding any term or provision of this Restricted Stock Unit Agreement (including any term or provision of the Plan incorporated herein by reference), the parties hereto agree that, from time to time, the Corporation may, without prior notice to or consent of the Grantee, amend this Restricted Stock Unit Agreement to the extent determined by the Corporation, in the exercise of its discretion in good faith, to be necessary or advisable to prevent the inclusion in the Grantee’s gross income pursuant to the Applicable Regulations of any compensation intended to be deferred hereunder. The Corporation shall notify the Grantee as soon as reasonably practicable of any such amendment affecting the Grantee.

8.         Definitions.               For purposes of this Agreement:

(I)“Affiliate” of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person.  The term “Control” shall have the meaning specified in Rule 12b-2 under the Exchange Act.

(II)“Beneficial Owner” (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act.

(III)A director will be deemed to cease performing services for the Corporation for “Cause” if such cessation is due to his fraud, dishonesty or intentional misrepresentation in connection with his duties as a Director or his embezzlement, misappropriation or conversion of assets or opportunities of the Corporation or any Subsidiary.

(IV)     “Change in Control” shall mean any of the following events:

(1)  any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (a) the then outstanding Common Stock of the Corporation (the “Outstanding Common Stock”) or (b) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Corporation (the “Total Voting Power”); excluding, however, the following: (i) any acquisition by the Corporation or any of its Controlled Affiliates, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or

(2)  a change in the composition of the Board such that the individuals who, as of the effective date of this Restricted Stock Unit Agreement, constitute

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the Board (such individuals shall be hereinafter referred to as the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Corporation’s stockholders, was made or approved by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board; or

(3)  there is consummated a merger or consolidation of the Corporation or any direct or indirect Subsidiary of the Corporation or a sale or other disposition of all or substantially all of the assets of the Corporation (“Corporate Transaction”); excluding, however, such a Corporate Transaction (a) pursuant to which all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the  then outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Corporate Transaction of the Outstanding Common Stock and Total Voting Power, as the case may be, and (b) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries); or

(4)   the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation.

(IV)“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act.

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Annex A

NOTICE OF GRANT

RESTRICTED STOCK UNIT AGREEMENT

HEXCEL CORPORATION 2003 INCENTIVE STOCK PLAN

The following member of the Board of Directors of Hexcel Corporation, a Delaware corporation (“Hexcel”), has been granted Restricted Stock Units in accordance with the terms of this Notice of Grant and the Restricted Stock Unit Agreement to which this Notice of Grant is attached.

The terms below shall have the meanings ascribed to them below when used in the Restricted Stock Unit Agreement.

Grantee

Address of Grantee

Grant Date

Aggregate Number of RSUs Granted

IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Restricted Stock Unit Agreement to which this Notice of Grant is attached and execute this Notice of Grant and Restricted Stock Unit Agreement as of the Grant Date.

	HEXCEL CORPORATION
Grantee
	By:
	Ira J. Krakower
	Senior Vice President

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EX-10.5

Exhibit 10.5

Hexcel Corporation

Director Compensation Program

(as of May 10, 2007)

Each member of the Board of Directors (the “Board”) of Hexcel Corporation (the “Company”) who is not an employee of the Company (each a “Non-employee Director”) shall receive compensation for such person’s services as a member of the Board as outlined in this Director Compensation Program.

Cash Compensation

Annual Retainer Fees

·Annual retainer fee in the amount of $30,000

·Additional annual retainer fee in the amount of $5,000 for the Chairman of each standing committee of the Board other than the Audit Committee

·Additional annual retainer fee in the amount of $10,000 for the Chairman of the Audit Committee

Meeting Fees

·Fee in the amount of $1,500 for attending any meeting of the Board in person

·Fee in the amount of $750 for attending any meeting of the Board by telephone

·Fee in the amount of $750 for attending any meeting of any committee of the Board, whether in person or by telephone

Equity Compensation

Upon (1) initial election to the Board and (2) upon re-election to the Board and effective as of the date of the Annual Meeting of Stockholders each year, each Non-employee Director shall be awarded a grant of Restricted Stock Units (RSUs) on the following basis:

·The aggregate value of each grant shall be set at $50,000, but shall be reviewed and is subject to change by the Compensation Committee from time to time based on the advice of its independent compensation consultant and other factors it deems relevant.

·Each RSU shall have a value equal to the closing price of a share of common stock on the date of grant.

·The RSUs shall vest ratably on a daily basis over the one year period beginning on the grant date, and will convert into an equal number of shares of common stock on the first anniversary of the date of grant.

·Each director will have the option to elect to defer conversion of the RSUs until such time as the director leaves the Board.  With respect to grants upon initial election to the Board, such election must be made prior to the date of grant.  With respect to grants upon re-election to the Board, such election must be made by December 31 of the year prior to the year in which the grant is awarded. This will defer conversion, but not vesting.

·The RSUs will be issued under a Restricted Stock Unit Agreement in a form approved by the Compensation Committee from time to time. The appropriate officers of the Company have the authority to make changes to the form of Restricted Stock Unit Agreement to preserve the tax deferred nature of any deferral election by a director in accordance with the requirements of the American Jobs Creation Act of 2004.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David E. Berges, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

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

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

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

August 3, 2007	/s/ David E. Berges
(Date)
	David E. Berges
	Chairman of the Board of Directors
	and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Wayne Pensky, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

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

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

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

August 3, 2007	/s/ Wayne Pensky
(Date)
	Wayne Pensky
	Senior Vice President and
	Chief Financial Officer

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EX-32

Exhibit 32

CERTIFICATIONS OF

CHIEF EXECUTIVE OFFICER

AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hexcel Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David E. Berges, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Wayne Pensky, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 3, 2007	/s/ David E. Berges
(Date)	David E. Berges
	Chairman of the Board of Directors
	and Chief Executive Officer
August 3, 2007	/s/ Wayne Pensky
(Date)	Wayne Pensky
	Senior Vice President and
	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Hexcel Corporation and will be retained by Hexcel Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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