NN, Inc. manufactureshas three operating segments, the Metal Bearing Components Segment, the Plastic and suppliesRubber Components Segment, and the Precision Metal Components Segment.  Within the Metal Bearing Components Segment, we manufacture and supply high precision bearing components, consisting of balls, cylindrical rollers, tapered rollers, seals, and plastic and metal retainers, for leading bearing manufacturers on a global basis.  We are a leading independent manufacturer of precision steel bearing balls and rollers for the North American, European and EuropeanAsian markets.  Our core business is the manufacture and saleIn 2007, Metal Bearing Components accounted for 72% of high quality, precision ball and roller bearing components including steel balls and rollers.  In 2006, salestotal NN, Inc. sales.  Sales of balls and rollers accounted for approximately 78%66% of the Company’sour total net sales with 58% and 20%48% of sales from balls and rollers, respectively.18% of sales from rollers.  Sales of metal bearing retainers accounted for 6% of net sales and sales of precision molded plastic and rubber parts accounted for the remaining 16%.sales.  See Note 13 of the Notes to Consolidated Financial Statements.  In 1998, we began implementing a strategic plan designed to position us as a worldwide manufacturer and supplier of a broad line of bearing components and other precision plastic components.  Through a series of acquisitions executed as part of that plan, we have built upon our strong core ball business and expanded our bearing component product offering.  Today, we offer among the industry’s most complete line of commercially available bearing components.  We emphasize engineered products that take advantage of our competencies in product design and tight tolerance manufacturing processes.  Our bearing customers use our components in fully assembled ball and roller bearings, which serve a wide variety of industrial applications in the transportation, electrical, agricultural, construction, machinery, mining and aerospace markets.  As used in this Annual Report on Form 10-K, the terms “NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its subsidiaries.

Within the Plastic and Rubber Components Segment, we manufacture high precision rubber seals and plastic retainers for leading bearing manufacturers on a global basis.  In the fourth quarteraddition, we manufacture specialized plastic products including automotive components, electronic instrument cases and precision electronic connectors.  We also manufacture rubber seals for use in various industrial applications.  In 2007, plastics products accounted for 7% of 2005,net sales and rubber seals accounted for 5% of net sales.

In 2006, we developed a new five-year strategic business plan driven by perceived slower growth in the metal bearing components market and a need to create diversification in served customers and end markets.  NN began to execute on this strategya new five year strategic business plan to leverage our competencies in 2006.precision metal products by creating an adjacent platform to bearing components which would broaden our reach into attractive end markets.  As part of this new strategy, on November 30, 2006, we added a precision metal components product linePrecision Metal Components Segment through the acquisition of Whirlaway Corporation (“Whirlaway”) (see(See Note 2 of the Notes to Consolidated Financial Statements).Statements.)  Whirlaway is a high precision metal components and assemblies manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration and diesel engine industries.  ThisOur entry into the precision metal components market is part of our new strategy to serve markets and customers we view as adjacent to bearing components that utilize our core manufacturing competencies.  Management views this new product line as a new segment entitled "Precision Metal Components" and has retained Whirlaway management to run the segment.These products accounted for 16% of net sales in 2007.

For managerial and financial analysis purposes, management viewsThe three business segments are composed of the Company’s operation in three reporting segments: thefollowing manufacturing operations of Erwin, Tennessee and Mountain City, Tennessee, our plant in China, the European facilities of Kilkenny, Ireland; Eltmann, Germany; Pinerolo, Italy; Veenendaal, The Netherlands and Kysucke Nove Mesto, Slovakia (“operations:

Financial information about the segments is set forth in Note 13 of the Notes to Consolidated Financial Statements.

On November 30, 2006, we purchased 100% of the stock of Whirlaway Corporation from its sole shareholder for approximately $45.6$43.0 million.  Whirlaway manufactures precision metal components for the automotive and industrial end markets.  Whirlaway operates three manufacturing plants in Ohio and one in Arizona.

In January 2007, we entered into a two year suppliersupply agreement with Schaeffler Group, (INA)our second largest customer, effective as of July 1, 2006 that replaced the agreement that expired on June 30, 2006.

In February 2006, we reached an informal agreement in principle to extend our supply agreementMay 2007, a new multi-year contract was signed with AB SKF, (“SKF”) until the end of 2006. The agreement would have expired on July 31, 2006. SKF is a global bearing manufacturer and our largest customer. We are currentlycustomer, to supply precision balls in discussionsEurope with SKFterms retroactive to formally extend the agreement through the end of 2009January 1, 2007 and expect conclusion during the first half of 2007.effective until December 31, 2009.

On October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to purchase SNR’s entire internal precision ball producing equipment for approximately 5.2 million Euros ($6.2 million).  SNR a division of Renault SA, France, is a global bearing manufacturer and supplier to the automotive, industrial and aerospace industries. As part of the transaction, we received a three -yearthree-year supply agreement for the present business existing at the time of the acquisition (approximately $8.0 million)million in annual revenue) and a five-year supply agreement to provide SNR with its annual ball requirements of theits former in-house production of approximately(approximately $9.0 million. The product will be supplied from our European existing precision ball operations.million in annual revenue).

NN, originally organized in October 1980, is incorporated in Delaware.  Our principal executive offices are located at 2000 Waters Edge Drive, Johnson City, Tennessee, and our telephone number is (423) 743-9151.  Our web site address is www.nnbr.com.  Information contained on our web site is not part of this Annual Report.  Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and related amendments thereto are available via a link to “SEC.gov” on our web site under “Investor Relations.”

Our bearing component products are supplied primarily to bearing manufacturers for use in a broad range of industrial applications, including transportation, electrical, agricultural, construction, machinery, mining and aerospace.  Additionally, we supply precision metal, rubber, and plastic components to automotive and industrial companies that are not used in bearing assemblies.  We supply over 400approximately 500 customers; however, our top 10 customers account for approximately 81%75% of our revenue.  Only twoone of these customers, SKF, and Schaeffler Group (INA), had sales levels that were 10% or greater of total net sales. In 2006, 30%2007, 33% of our products were sold to customers in North America, 59%51% to customers in Europe, and the remaining 11%16% to customers located throughout the rest of the world, primarily Asia.Asia and Latin America.  Sales to various U.S. and foreign divisions of SKF accounted for approximately 46%40% of net sales in 2006 and sales to Schaeffler Group (INA) accounted for approximately 11% of net sales in 2006. None of our other customers accounted for more than 10% of our net sales in 2006.2007.

Certain customers have contracted to purchase all or a majority of their bearing component requirements from us, although only a few are contractually obligated to purchase any specific amounts.  Certain agreements are in effect with some of our largest customers, which provide for targeted, annual price adjustmentsprices that may be offset by material cost fluctuations.  We ordinarily ship our products directly to customers within 60 days, and in some cases, during the same calendar month, of the date on which a sales order is placed.  Accordingly, we generally have an insignificant amount of open (backlog) orders from customers at month end.  At the U.S. operations of our Metal Bearings Component Segment, we maintain a computerized, bar coded inventory management system with many of our major customers that enables us to determine on a day-to-day basis the amount of these components remaining in a customer’s inventory.  When such inventories fall below certain levels, shipment of additional product is automatically triggered.shipped.

In 2006, the original six-year supply agreements for precision steel balls with SKF and Schaeffler Group (INA) expired. Prior to 2006, Schaeffler Group (INA) decided to in-source approximately one third of annual volume to its internal ball manufacturing facility in Germany, which during 2005 and 2006 resulted in a $9.0 million reduction in sales to Schaeffler Group (INA), or about 20% of our business with Schaeffler Group (INA). In January 2007, we entered into a new two-year agreement with Schaeffler Group (INA) effective as of July 1, 2006 providing for sales levels consistent with the indicated reduction in sales. A2006.   In May 2007, a new multi-year formal agreementcontract was signed with SKF has not yet been signed. Into supply precision balls in Europe we continue to sell to SKF under an informal agreement matching thewith terms of the expired agreement. A new contract is still being negotiated and expected to be finalized in the first half of 2007, the terms of which will be retroactiveretroactively applied to January 1, 2007.2007 and effective until December 31, 2009.

In 2003, Veenendaalwe entered into a five-year supply agreement with SKF providing for the purchase of steel rollers and metal retainers manufactured at our Veenendaal facilityPlant in amounts and at prices that are subject to adjustment on an annual basis.  The agreement contains provisions obligating Veenendaalus to maintain specified quality standards and comply with various ordering and delivery procedures, as well as other customary provisions.  This agreement expires during 2008.2008 and we are in the process of negotiating a new multi-year agreement with SKF covering tapered rollers and metal retainers.

During 2006,2007, the Metal Bearing Components Segment sold products to more than 350approximately 400 customers located in 33 different countries.  Approximately 88%89% of the net sales in 20062007 were to customers outside the United States.  Approximately 71% of net sales in 20062007 were to customers within Europe.   Sales to the top ten customers accounted for approximately 88%82% of the net sales in 2006.2007.  Sales to SKF and Schaeffler Group (INA) accounted for approximately 55% and 13% of net sales of the segment in 2006, respectively. Sales to SKF and Schaeffler Group (INA) in Europe are made pursuant to the terms of supply agreements.2007.

During 2006,2007, the Plastic and Rubber Components Segment sold its products to over 70 customers located principally in 10 different countries.North America.  Approximately 23%22% of the Plastic and Rubber Components SegmentSegment’s net sales were to customers outside the United States, almost all to customers in Mexico and Canada.  Sales to the Segment’s top ten customers accounted for approximately 74% of the Segment’s net sales in 2007.

During 2007, the Precision Metal Components Segment sold its products to 16 customers located in 7 countries.  Approximately 95% of all sales were to customers located within the United States.  Sales to the segment’s top ten customers accounted for approximately 76%88% of the segment’s net sales in 2006.2007.

In both the foreign and domestic markets, the Companywe principally sells itssell our products directly to manufacturers and doesdo not sell significant amounts through distributors or dealers.

See Note 13 of the Notes to Consolidated Financial Statements and “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations”Operations" for additional segmentSegment financial information.

The following table presents a breakdown of our net sales for fiscal years 2007, 2006 2005 and 2004:2005:

The Precision Metal Components Segment contains only one month of revenue in 2006.  Based on pro-forma results, 2006 revenues would have been $77,713 or 19% of the total pro-forma sales. (See Note 2 of the Notes to Consolidated Financial Statements)

A primary emphasis of our marketing strategy is to expand key customer relationships by offering high quality, high precision products with the value of a single supply chain partner for a wide variety of components. As a result, we have progressed toward integrating our sales organization on a global basis across all of our product lines. Within the Metal BearingsBearing Components Segment, our global sales organization includes eleven11 direct sales and fourteen15 customer service representatives.  Due to the technical nature of many of our products, our engineers and manufacturing management personnel also provide technical sales support functions, while internal sales employees handle customer orders and other general sales support activities.   For the Precision Metal Components Segment, the current sales structure consists of utilizing manufacturers’ representatives at key accounts supported by senior segment management and engineering involvement.

Our arrangements with our domestic customers typically provide that payments are due within 30 days following the date of shipment of goods.  With respect to foreign customers of our domestic business, payments generally are due within 90 to 120 days following the date of shipment in order to allow for additional freight time and customs clearance.  For some customers that participate in our inventory management program, sales are recorded when the customer uses the product.  See “Business"Business -- Customers”Customers" and “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.”"

We have become a leading independent bearing component manufacturer through exceptional service and high quality manufacturing processes and are recognized throughout the industry as a low-cost producer.  Because our ball and roller manufacturing processes incorporate the use of standardized tooling, load sizes, and process technology, we are able to produce large volumes of products while maintaining high quality standards.

The key to our low-cost, high quality production of seals and retainers is the incorporation of customized engineering into our manufacturing processes, metal to rubber bonding competency and experience with a broad range of engineered resins.  This design process includes the testing and quality assessment of each product.

TheWithin the precision metal components industry continues to be challenged by rapid globalization.  Our company iswe are well positioned in the marketplacemarket place by virtue of our focus on critical components and assemblies for highly engineered mechanical systems used in various durable goods.

As of December 31, 2006,2007, we employed a total of 2,2492,223 full-time employees.  Our Metal Bearing Components Segment employed 282 workers283 in the U.S., 951 workers975 in Europe, and 54 workers80 in China, our Plastic and Rubber Components Segment employed 381 workers, and343, all in the U.S., our Precision Metal Components Segment employed 534, all in the U.S.  In addition, there were 98 employees at the Company’sour corporate headquarters. Additionally on November 30, 2006, we added 572 full-time employees with the acquisition of Whirlaway.  Of our total employment, 16%17% are management/staff employees and 84%83% are production employees.  We believe we are able to attract and retain high quality employees because of our quality reputation, technical expertise, history of financial and operating stability, attractive employee benefit programs, and our progressive, employee-friendly working environment.  The employees in the Eltmann Germany,Plant, Pinerolo Italy,Plant and Veenendaal The Netherlands plantsPlant are unionized.  We have stronggood labor relations, and the Company haswe have never experienced any significant involuntary work stoppages.  We consider our relations with our employees worldwide to be excellent.

We are currently in negotiationssigned a new agreement with the union representatives of our workers at our Eltmann Germany facilityPlant for significant contract revisions including loweringnew wage rates and increasingincreased working hours worked per week.  We expect the negotiations to be complete in 2007.during February 2008.

The precision ball and roller and metal retainer industryMetal Bearing Components Segment of our business is intensely competitive.  Our primary domestic competitor is Hoover Precision Products, Inc., a wholly owned USU.S. subsidiary of Tsubakimoto Precision Products Co. Ltd. Our primary foreign competitors are Amatsuji Steel Ball Manufacturing Company, Ltd. (Japan), a wholly owed division of NSK, and Tsubakimoto Precision Products Co. Ltd (Japan) and Jingsu General Ball and Roller (China.)(China).

We believe that competition within the precision ball, roller and metal retainer marketsMetal Bearing Components Segment is based principally on quality, price and the ability to consistently meet customer delivery requirements.  Management believes that our competitive strengths are our precision manufacturing capabilities, our wide product assortment, offering capabilities, our reputation for consistent quality and reliability, and the productivity of our workforce.

The markets for the Plastic and Rubber Components Segment’s products are also intensely competitive.  Since the plastic injection molding industry is currently very fragmented, IMCwe must compete with numerous companies in each of its marketing segments.  Many of these companies have substantially greater financial resources than we do and many currently offer competing products nationally and internationally. IMC’sOur primary competitor in the plastic bearing retainer segment is Nakanishi Manufacturing Corporation.  Domestically, Nypro, Inc. and Key Plastics are among the main competitors in the automotive market.

We believe that competition within the plastic injection molding industry is based principally on quality, price, design capabilities and speed of responsiveness and delivery.  Management believes that IMC’sour competitive strengths are product development, tool design, fabrication, and tight tolerance molding processes.  With these strengths, IMC haswe have built itsour reputation in the marketplace as a quality producer of technically difficult products.

While intensely competitive, the markets for Delta’sour rubber seal products are less fragmented than IMC’s.its plastic injection molding products.  The bearing seal market is comprised of approximately six major competitors that range from small privately held companies to Fortune 500large global enterprises.  Bearing seal manufacturers compete on design, service, quality and price.  Delta’sOur primary competitors in the United StatesU.S. bearing seal market are Freudenburg-NOK, Chicago Rawhide Industries (an SKF subsidiary), Trostel, and Uchiyama.

In the Precision Metal Components Segment market, internal production of components by our customers can impact our business as the customers weigh the risk of outsourcing strategically critical components or producing them in-house. Our primary competitors are Linamar (Canada), Stanadyne, A. Berger, C&A Tool, American Turned Products Autocam and FCMP.Autocam.  We generally win new business on the basis of our technical competence and our proven track record of successful product development.

The primary raw material used in our core ball and roller business of the Metal Bearing Components Segment is 52100 Steel, which is high quality chromium steel.  During 2006,2007, approximately 90% of the steel used by the segment was 52100 Steel in rod and wire form.  Our other steel requirements include metal strips,strip, chrome rod and wire, and type S2 rock bit steel.

The Metal Bearing Components Segment locations purchase substantially all of their 52100 Steel requirements from mills in Europe and Japan and all of their metal stripsstrip requirements from European mills and traders.  The principal suppliers of 52100 Steel in the U.S. are Daido Steel Inc. (America), Kobe Steel, America, Lucchini USA Inc. (affiliate of Ascometal France) and Ohio Star Forge Co.  The principal supplier of 52100 Steel in Europe is Ascometal France (See Note 16 of the Notes to Consolidated Financial Statements), while the principal supplier of metal stripsstrip is Thyssen.  Our other steel requirements are purchased principally from foreign steel manufacturers. There are a limited number of suppliers of the 52100 Steel that we use.  We believe that if any of our current suppliers were unable to supply 52100 Steel to us, we would be able to obtain our 52100 Steel requirements from alternate sources.  We are unable, however, to provide assurances that we would not face higher costs or production interruptions as a result of obtaining 52100 Steel from alternate sources.

Because 52100 Steel is principally produced by foreign manufacturers, the Company’sour operating results would be negatively affected in the event that the U.S. or European governments impose any significant quotas, tariffs or other duties or restrictions on the import of such steel, if the U.S. dollarDollar decreases in value relative to foreign currencies or if supplies available to us would significantly decrease.  The relatively weak USU.S. Dollar is a factor for steel price increases since the suppliers’suppliers' base currencies are the Euro and Japanese Yen.

The price of steel stabilized during 2006. Previously our business wasMetal Bearing Components Segment is affected by upward price pressure on steel principally due to general increases in global demand and, more recently, due to China’s increased consumption of steel.  This had thehas an impact of increasing steel prices we paidpay in procuring our steel in the form of higher unit prices and scrap surcharges.  Our contracts with key customers allow us to pass a majority of thealong steel price increases on to those customers. However, for our European locations, material price changes are typically passed along with price adjustments in January of the following year. Starting in 2007, scrap surcharge inflation, a component of raw material cost, can be passed through quarterly. Until increases can be passed through to our customers, income from operations, net income and cash flow from operations can be adversely affected.as incurred.

For the Plastic and Rubber Components Segment, we base purchase decisions on price, quality and service.  Generally, we do not enter into written supply contracts with our suppliers or commit to maintain minimum monthly purchases of resins.resins or rubber compounds.  The pricing arrangements with our suppliers typically can be adjusted at anytime.

The primary raw materials used by IMCthe Plastic and Rubber Components Segment are engineering resins.  Injectionengineered resins, injection grade nylon is utilized in bearing retainers, gears, automotive and other industrial products.proprietary rubber compounds.  We purchase substantially all of our resin requirements from domestic manufacturers and suppliers.  The majority of these suppliers are international companies with resin manufacutringmanufacturing facilities located throughout the world.

The Precision Metal Components Segment produces products from a wide variety of metals in various forms from various sources.  Basic types include HRS, CRS,hot rolled steel, cold rolled steel, (both carbon and alloy) Stainless, Extruded Aluminum, Diecast Aluminum, Graystainless, extruded aluminum, diecast aluminum, gray and Ductile Iron Castings,ductile iron castings, and mechanical tubing. Some material is purchased directly under customer global contracts, some is consigned by the customer, and some is purchased directly from a mill.

We do not own any U.S. or foreign patents, trademarks or licenses that are material to our business.  We do rely on certain data and processes, including trade secrets and know-how, and the success of our business depends, to some extent, on such information remaining confidential.  Each executive officer is subject to a non-competition and confidentiality agreement that seeks to protect this information.

Historically, due to a substantial portion of sales to European customers, seasonality has been a factor for our business in that some European customers typically reduce their production activities during the month of August.

Our operations and products are subject to extensive federal, state and local regulatory requirements both domestically and abroad relating to pollution control and protection of the environment.  We maintain a compliance program to assist in preventing and, if necessary, correcting environmental problems. TheIn the Metal Bearing Components Segment plants inthe Eltmann Germany;Plant, Kilkenny Ireland;Plant, and Pinerolo ItalyPlant are ISO 14000 certified and received the EPD (Environmental Product Declaration.)  The Veenendaal The Netherlands plantPlant is also ISO 14000 certified.  Based on information compiled to date, management believes that our current operations are in substantial compliance with applicable environmental laws and regulations, the violation of which would have a material adverse effect on our business and financial condition.  The Company hasWe have assessed conditional asset retirement obligations and have found them to be immaterial to the consolidated financial statements. There can be no assurance,We cannot assure you, however, that currently unknown matters, new laws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future.  More specifically, although we believe that we dispose of wastes in material compliance with applicable environmental laws and regulations, there can be no assurancewe cannot assure you that we will not incur significant liabilities in the future in connection with the clean-up of waste disposal sites.  The Company maintainsWe maintain long-term environmental insurance covering the four manufacturing locations purchased with the Whirlaway acquisition.

Our executive officers are:

Set forth below is certain additional information with respect to each of our executive officers.

Roderick R. Baty was elected Chairman of the Board in September 2001 and continues to serve as Chief Executive Officer and President.  He has served as President and Chief Executive Officer since July 1997.  He joined NN in July 1995 as Vice President and Chief Financial Officer and was elected to the Board of Directors in 1995.  Prior to joining NN, Mr. Baty served as President and Chief Operating Officer of Hoover Precision Products from 1990 until January 1995, and as Vice President and General Manager of Hoover Group from 1985 to 1990.

Frank T. Gentry, III, was appointed Vice President -– General Manager U.S. Ball and Roller Division in August 1995.  Mr. Gentry joined NN in 1981 and held various manufacturing management positions within NN from 1981 to August 1995.

Robert R. Sams joined NN in 1996 as Plant Manager of the Mountain City, Tennessee facility.  In 1997, Mr. Sams served as Managing Director of the Kilkenny facility and in 1999 was elected to the position of Vice President -– Sales.  Prior to joining NN, Mr. Sams held various positions with Hoover Precision Products from 1980 to 1994 and as Vice President of Production for Blum, Inc. from 1994 to 1996.

James H. Dorton joined NN as Vice President of Corporate Development and Chief Financial Officer in June 2005.  Prior to joining NN, Mr. Dorton served as Executive Vice President and Chief Financial Officer of Specialty Foods Group, Inc. from 2003 to 2004, Vice President Corporate Development and Strategy and Vice President -– Treasurer of Bowater Incorporated from 1996 to 2002 and as Treasurer of Intergraph Corporation from 1989 to 1996.  Mr. Dorton is a Certified Public Accountant.

William C. Kelly, Jr. was named Vice President and Chief Administrative Officer in June 2005.  In March 2003, Mr. Kelly was elected to serve as Chief Administrative Officer.  In March 1999, he was elected Secretary of NN and still serves in that capacity as well as that of Treasurer.  In February 1995, Mr. Kelly was elected Treasurer and Assistant Secretary.  He joined NN in 1993 as Assistant Treasurer and Manager of Investor Relations.  In July 1994, Mr. Kelly was elected to serve as NN’s Chief Accounting Officer, and served in that capacity through March 2003.  Prior to joining NN, Mr. Kelly served from 1988 to 1993 as a Staff Accountant and as a Senior Auditor with the accounting firm of Price Waterhouse, LLP.

Nicola Trombetti was elected NN Europe Managing Director in June 2004 and was elected a Corporate Vice President in June 2005. Prior to being named NN Europe Managing Director he was Vice President and Director of Operations, NN Europe. He joined NN in September 2000 as Pinerolo Italy Plant Manager. Prior to joining NN Europe, Mr. Trombetti was Plant Director for Tekfor - Neumaier GmbH Group, a European-based steel component manufacturer for the auto industry. From 1996 to 1999 he was Manufacturing Manager and Plant Manager for SKF Group. He also spent seven years as a manufacturing manager for Pininfarina, an Italian-based car design, engineering, development and manufacturing company.

The Company wishesWe wish to caution readers that this report contains, and our future filings, by the Company, press releases and oral statements made by the Company’sour authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties.  Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. The Company’sOur actual results could differ materially from those expressed in such forward-looking statements due to important factors bearing on the Company’sour business, many of which already have been discussed in this filing and in the Company’sour prior filings. The differences could be caused by a number of factors or combination of factors including, but not limited to, the risk factors described below.

The end markets for fully assembled bearings and other industrial and automotive components are cyclical and tend to decline in response to overall declines in industrial and automotive production.  As a result, the market for bearing components and precision metal, plastic, and rubber products is also cyclical and impacted by overall levels of industrial and automotive production.  Our sales in the past have been negatively affected, and in the future will be negatively affected, by adverse conditions in the industrial and/or automotive production sectors of the economy or by adverse global or national economic conditions generally.

The steel that we use to manufacture precision balls and rollersour metal bearing components is of an extremely high quality and is available from a limited number of producers on a global basis.  Due to quality constraints in the U.S. steel industry, we obtain substantially all of the steel used in our U.S. operations from overseas suppliers.  In addition, we obtain most of the steel used in our European operations from a single European source.  If we had to obtain steel from sources other than our current suppliers we could face higher prices and transportation costs, increased duties or taxes, and shortages of steel.  Problems in obtaining steel, and particularly 52100 chrome steel, in the quantities that we require and on commercially reasonable terms, could increase our costs, adversely impacting our ability to operate our business efficiently and have a material adverse effect on our revenues and operating and financial results.

Increases in the market demand for steel can have the impact of increasing scrap surcharges we pay in procuring our steel in the form of higher unit prices and could adversely impact the availability of steel.  Our contracts with key customers allow us to pass a majority of thealong steel price increases on to those customers. However, by contract, material price changes in any given year at our European operations are typically passed along with price adjustments in January of the following year. Until the current increases can be passed through to our customers, income from operations, net income and cash flow from operations can be adversely affected.as incurred.

Sales to various U.S. and foreign divisions of SKF, which is one of the largest bearing manufacturers in the world, accounted for approximately 46%40% of consolidated net sales in 2006, and sales to Schaeffler Group (INA) accounted for approximately 11% of consolidated net sales in 2006. During 2006, our ten largest customers accounted for approximately 81% of our consolidated net sales.2007.  No other customers accounted for more than 10% of sales.  During 2007, our ten largest customers accounted for approximately 75% of our consolidated net sales.  The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and would lower our operating profit margin and cash flows from operations.

Because we obtain a majority of our raw materials from overseas suppliers, actively participate in overseas manufacturing operations and sell to a large number of international customers, we face risks associated with the following:

We do not have a hedging program in place associated with consolidating the operating results of our foreign businesses into U.S. dollars.Dollars.  An increase in the value of the U.S. dollarDollar and/or the Euro relative to other currencies may adversely affect our ability to compete with our foreign-based competitors for international, as well as domestic, sales.  Also, a decline in the value of the Euro relative to the U.S. dollarDollar will negatively impact our consolidated financial results, which are denominated in U.S. dollars.Dollars.

In addition, due to the typical slower summer manufacturing season in Europe, we expect that revenues in the third fiscal quarter of each year will reflect lower sales than in the other quarters of the year.

We cannot assure you that any future acquisition will enhance our financial performance.  Acquiring companies involves inherent risk in the areas of environmental and legal issues, information technology, cultural and regulatory matters, product/supplier issues, and financial risk.  Our ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operating efficiencies and sales goals.  The integration of any acquired businesses might cause us to incur unforeseen costs, which would lower our profit margin and future earnings and would prevent us from realizing the expected benefits of these acquisitions.

Acquiring businesses that complement or expand our operations has been and continues to be an important element of our business strategy.  This strategy calls for growth through acquisitions constituting the majority of our future growth objectives, with the remainder resulting from internal growth and increased market penetration.  For recent acquisitions see Note 2 of the Notes to Consolidated Financial Statements.  We cannot assure you that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms in the future.  In addition, we may borrow funds to acquire other businesses, increasing our interest expense and debt levels.  Our inability to acquire businesses, or to operate them profitably once acquired, could have a material adverse effect on our business, financial position, results of operations and cash flows.

Our growth strategy depends in part on major bearing manufacturers continuing to outsource components, and expanding the number of components being outsourced.  This requires manufacturers to depart significantly from their traditional methods of operations.  If major bearing manufacturers do not continue to expand outsourcing efforts or determine to reduce their use of outsourcing, our ability to grow our business could be materially adversely affected.

The global markets for bearing components, precision metal and precision plastic parts are highly competitive, with a majority of production represented by the captive production operations of certain large bearing manufacturers and the balance represented by independent manufacturers.  Captive manufacturers make components for internal use and for sale to third parties.  All of the captive manufacturers, and many independent manufacturers, are significantly larger and have greater resources than do we. Our competitors are continuously exploring and implementing improvements in technology and manufacturing processes in order to improve product quality, and our ability to remain competitive will depend, among other things, on whether we are able to keep pace with such quality improvements in a cost effective manner.

We have expanded our metal bearing components production facilities and capacity over the last several years.  Our metal bearing component production facilities have not always operated at full capacity, and from time to time our results of operations have been adversely affected by the under-utilization of our production facilities.  Under-utilization or inefficient utilization of our production facilities could be a risk in the future.  We have recently undertaken steps to address a portion of the capacity risk.  See Note 3 of the Notes to the Consolidated Financial Statements.

The market price of our common stock could be subject to significant fluctuations and may decline.  Among the factors that could affect our stock price are:

Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable and may prevent you from receiving a takeover premium for your shares.  These provisions include, for example, a classified board of directors and the authorization of our board of directors to issue up to 5,000,000 preferred shares without a stockholder vote.  In addition, our restated certificate of incorporation provides that stockholders may not call a special meeting.

We are a Delaware corporation subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law.  Generally, this statute prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which such person became an interested stockholder, unless the business combination is approved in a prescribed manner.  A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder.  We anticipate that the provisions of Section 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder.

These provisions apply even if the offer may be considered beneficial by some of our stockholders.  If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

None

The Metal Bearing Components Segment has eight manufacturing locations aroundplants for each of the world.  The segment has two manufacturing facilities locatedcompany's segments are listed below.  In addition, the company leases a portion of a small office building in Erwin,Johnson City, Tennessee and Mountain City, Tennessee. The Erwin and Mountain City plants currently have approximately 125,000 and 86,500 square feet of manufacturing space, respectively.  The Erwin plant is located on a 12 acre tract of land owned by the Company and the Mountain City plant is located on an eight acre tract of land owned by the Company.which serves as our corporate headquarters.

The Metal Bearing Components Segment has five manufacturing facilities in Europe.  These are located in Kilkenny, Ireland; Eltmann Germany; Pinerolo, Italy and Kysucke Nove Mesto, Slovakia and Veenendaal, The Netherlands. The facilities currently have approximately 125,000, 175,000, 330,000, 135,000, and 159,000 square feet of manufacturing space, respectively.   All of the facilities are owned by the Company, except for the Eltmann facility whichPlant is leased from the Schaeffler Group, (INA).

On March 20, 2006, we, as well as numerous other parties, received correspondence from the Environmental Protection Agency (“EPA”) requesting information regarding a former waste recycling vendor which we previously used by us.used.  The vendor has since ceased operations and the EPA is investigating the clean up of the site or sites used by the vendor.  We have contributed to an escrow fund along with 42 other potentially responsible parties for the purpose of investigating and addressing the environmental issues at the facility.  Our contribution to the account was twenty-three thousand dollars.  A Remedial Investigation and Risk Assessment report funded by the escrow fund was submitted to the EPA in December 2007.  As of the date of this report, we do not know whether we have any liability beyond the contribution to the escrow account mentioned earlier, related to this vendor’s actions, or estimatable range for any potential liability.  We believe our contribution to the remediation of the site, if any, would be approximately 1.083% or less of the volume of waste sent to the facility and we assert that our waste was non-hazardous.

All other legal matters are of an ordinary and routine nature and are incidental to the operations of the Company.our operations.  Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company’sour business or financial condition or on the results of operations.

See Item 1A. “Risk Factors” for a discussion of risk factors that could materially impact the Company’sour actual results.

Since our formation in 1980, we have grown primarily through the acquisition of in-house component manufacturing operations of domestic and international bearing manufacturers resulting in increased sales of high precision balls and rollers for bearing applications.  Management believes that our core business sales growth since our formation has been due to our ability to capitalize on opportunities in global markets and provide precision products at competitive prices, as well as our emphasis on product quality and customer service.

In 1998, we recognized changing dynamics in the marketplace, and as a result, began implementing an extensive long-term growth strategy building upon our core business and leveraging our inherent strengths to better serve our global customer base.  As part of this strategy, we sought to augment our intrinsic growth with complementary acquisitions that fit specific criteria.

On July 4, 1999, we acquired substantially all of the assets of Earsley Capital Corporation, formerly known as Industrial Molding Corporation for consideration of approximately $30.0 million.  Formed in 1947, IMC provides full-service design and manufacture of plastic injection molded components to the bearing, automotive, electronic, leisure and consumer markets with an emphasis on value-added products that take advantage of its capabilities in product development, tool design and tight tolerance molding processes.  IMC operates twoone manufacturing facilitiesfacility in Lubbock, Texas.Texas and is part of the Plastic and Rubber Components Segment.

On July 31, 2000, we formed a majority owned stand-alone company in Europe, NN Europe ApS (“NN Europe”), for the manufacture and sale of chrome steel balls used for ball bearings and other products.  As a result of this transaction, we owned 54% of NN Europe.  SKF and INA respectively each owned 23% of NN Europe.  As part of the transaction, NN Europe acquired the ball factories located in Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by INA), and Kilkenny, Ireland (previously owned by the Company).  Acquisition financing of approximately 31.5 million Euros (approximately $29.7 million) was drawn at closing, and the credit facility provided for additional working capital expenditure financing. In connection with this transaction, total equity, specifically additional paid in capital, increased by 10.0 million Euros ($9.3 million) to reflect the increase in our proportionate interest in NN Europe as related to our 54%. We have always consolidated NN Europe due to our majority ownership and have accounted for the acquisitions of the Pinerolo, Italy and Eltmann, Germany ball factories in a manner similar to the purchase method of accounting. On December 20, 2002 we completed the purchase of the 23% interest held by INA.  We paid approximately 13.4 million Euros ($13.8 million) for INA/FAG’s interest in NN Europe.  The excess of the purchase price paid to INA for its 23% interest over fair value of INA’s 23% interest in the net assets of NN Europe of approximately $1.5 million has been allocated to goodwill. On May 2, 2003 we acquired the 23% interest in NN Europe held by SKF.  We paid approximately 13.8 million Euros ($15.6 million) for SKF’s interest in NN Europe.  The excessNN Europe is a part of the purchase price paid to SKF for its 23% interest over the fair value of SKF’s 23% interest in the net assets of NN Europe of approximately $2.1 million was allocated to goodwill.Metal Bearing Components Segment.

On February 16, 2001, we completed the acquisition of all of the outstanding stock of The Delta Rubber Company, a Connecticut corporation (“Delta”), for $22.5 million in cash.  Delta provides high quality engineered bearing seals and other precision-molded rubber products to original equipment manufacturers.  Delta operates twoone manufacturing facilitiesfacility in Danielson, Connecticut.Connecticut and is part of the Plastic and Rubber Components Segment.

On September 11, 2001, we announced the closing of our Walterboro, South Carolina ball manufacturing facility effective December 2001.  The closing was made as part of our strategy to redistribute our global production in order to better utilize capacity and serve the needs of our worldwide customers.  The precision ball production of the Walterboro facility has been fully absorbed by our remaining U.S. Metal Bearing Components Segment manufacturing facilities located in Erwin and Mountain City, Tennessee. In 2002 and 2001 we recorded before tax charges associated with the closing of $1.3 million and $1.9 million, respectively. In 2001, this amount includes a $1.1 million before-tax charge for the recording of impairment on our manufacturing facility located in Walterboro, South Carolina and $0.8 million related to employee severance costs. In 2002, this amount includes a $0.6 million before-tax charge for the recording of an additional impairment on the facility, a $0.6 million before-tax charge for the recording of impairment on the machinery and equipment and a $0.1 million charge related to employee severance costs. There were no impairment charges related to these assets recorded in 2003. The land and building assets were sold during the fourth quarter of 2004. As a result, we recorded a loss on disposal of assets of approximately $0.8 million which has been recorded as a loss on disposal of assets, a component of income from operations. Additionally, during the fourth quarter of 2004, we recorded an impairment charge of approximately $0.1 million related to certain remaining machinery and equipment assets of this facility. This amount was recorded as a component of restructuring and impairment costs. The financial results of this operation have been reflected in the Metal Bearing Components in the years ended December 31, 2004 and 2003. See Note 12 of the Notes to Consolidated Financial Statements.

Effective December 21, 2001, we sold our minority interest in Jiangsu General Ball & Roller Company, LTD, a Chinese ball and roller manufacturer located in Rugao City, Jiangsu Province, China.  To effect the transaction, we sold our 50% ownership in NN General, LLC, which owns a 60% interest in the Jiangsu joint venture to our partner, General Bearing Corporation for cash of $0.6 million and notes of $3.3 million.

On October 9, 2003, we acquired certain assets comprised of land, building and machinery and equipment of the precision ball operations of KLF -– Gulickaren (“KLF”), based in Kysucke Nove Mesto, Slovakia.  We paid consideration of approximately 1.7 million Euros ($2.0 million).  The assets are being utilized by our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia, which began production in 2004.   The financial results of the operationsoperation are included in our Metal Bearing Components Segment.

During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products Company, Ltd.Ltd (the Kunshan Plant).  This subsidiary began production of precision balls during the fourth quarter of 2005, and is located in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China and is a component of our strategy to globally expand our manufacturing base.

In the fourth quarter of 2005,2006, we developedbegan to execute on a new five year strategic business plan drivento leverage our competencies in precision metal products by perceived slower growth in the metalcreating an adjacent platform to bearing components market and a need to create diversification in served customers andwhich would broaden our reach into attractive end markets.

Consistent with our new strategy, on November 30, 2006, we purchased 100% of the shares of Whirlaway Corporation (“Whirlaway”) from the sole shareholder for $45.6$43.0 million.  Whirlaway is a high precision metal component and fluid control assembly manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries.  Whirlaway produces highly engineered fluid control components and assemblies, shafts, and prismatic machined parts.  Whirlaway has three locations in Ohio and through its wholly-owned subsidiary, Triumph, LLC,  one location in Tempe, Arizona.

The implementation and successful execution of this acquisition strategy to date has allowed the Companyus to expand itsour global presence and positions the Companyus for continued global growth and expansion into core served markets.

Our significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements.  These policies have been consistently applied in all material respects and address such matters as revenue recognition, inventory valuation, asset impairment recognition, business combination accounting and pension and post-retirement benefits.  Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the Company’sour business operations, financial condition and results of operations.  There can be no assuranceWe cannot assure you that actual results will not significantly differ from the estimates used in these critical accounting policies.

The following table sets forth for the periods indicated selected financial data and the percentage of the Company’sour net sales represented by each income statement line item presented.

We have operating lease commitments for machinery, office equipment, vehicles, manufacturing and office space which expire on varying dates.  The following is a schedule by year of future minimum lease payments as of December 31, 20062007 under operating leases that have initial or remaining non-cancelable lease terms in excess of one year (in thousands).

Sales to various U.S. and foreign divisions of SKF, which is one of the largest bearing manufacturers in the world, accounted for approximately 46%40% of consolidated net sales in 2006, and sales to Schaeffler Group (INA) accounted for approximately 11% of consolidated net sales in 2006.2007.  During 2006,2007, our ten largest customers accounted for approximately 81%75% of our consolidated net sales.  None of our other customers individually accounted for more than 10% of our consolidated net sales for 2006.2007.  The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and would lowerhave a corresponding negative impact on our operating profit margin anddue to operation leverage these customers provide. This could lead to sales volumes not being high enough to cover our current cost structure or provide adequate operating cash flows from operations.flows.  Due to a limit on the amount of excess bearing component capacity it would be difficult for any of our top ten customers to move a substantial portion of the product we supply in a short period of time.

Prior to 2006, Schaeffler Group (INA) decided to in-source approximately one-third of annual volume to its internal ball manufacturing facility in Germany, which in 2005 and 2006 resulted in a $9.0 million or 20% reduction in sales. This represented approximately 30% of the existing Schaeffler Group (INA) business at that time. We negotiated a two-year supply agreement effective July 1, 2006 with Schaeffler Group (INA) for the remaining business.that expires June 30, 2008.  In addition, we are in process of negotiatingMay 2007, a new long term agreement with SKF to replace the onemulti-year contract for precision balls that expired July 31, 2006 andin Europe was informally extended to December 2006. A new multi-year contract is expected to be signed with SKF with terms being retroactive to January 1, 2007 and effective until December 31, 2009.

The major negative factors affecting the segment net income, excluding restructuring and impairment charges, net of tax, a non-GAAP accounting measure, were price decreases given to certain customers under contractual terms in 2007 ($2.4 million, net of tax) and unfavorable customer, currency, and product mix, ($1.0 million, net of tax).  Additionally, there was a gain on the sale of land, net of loss on disposal of machinery, at our Pinerolo Plant in the first quarter of 2006 ($0.8 million, net of tax) and gains on favorable foreign exchange impacts from the appreciation of the Slovakian Koruna during 2006 ($0.7 million, net of tax) that did not repeat in 2007.

Offsetting the negative impacts stated above were cost reduction projects that more than offset utility and labor inflation ($1.4 million, net of tax).   Raw material cost inflation was offset by price increases under contractual terms to certain customers, resulting in little impact on segment profit. Additionally, Euro denominated profits were favorably impacted by the appreciation in the value of the Euro against the U.S. Dollar ($1.5 million, net of tax). The effect from higher sales volumes in Europe increased 2007 segment net income ($1.4 million, net of tax).  Finally, the favorable impact of reducing deferred tax liabilities of our Italian operation of this segment due to the 5.9% reduction in the Italian statutory tax rates increased segment net income in 2007 ($1.0 million).

The second and be effectivethird quarters of 2007 were suppressed due to low demand for customers that serve U.S. heavy truck and HVAC equipment markets. The demand in the heavy truck and HVAC markets was low during this period due to large amounts of purchases made in the fourth quarter of 2006 ahead of required environmental changes to these products on January 1, 2007.

The table above includes the results of the traditional segments of NN, Inc., Metal Bearing Components Segment and Plastic and Rubber Components Segment, plus one month of operations of Whirlaway Corporation.Whirlaway.  Whirlaway was acquired November 30, 2006 and operations from December 1 to December 31, 2006 are included in the consolidation of NN, Inc.

The month of December 2006 results of Whirlaway are not indicative of normalized annual operations.  December is normally a low volume month as many of Whirlaway’s customers shut down over the holidays.  Additionally, the cost of products sold includes the elimination of the required step-up valuation of inventory to sales value recorded as part of purchase accounting under SFAS 141 of $0.6 million.  When recorded in the opening balance sheet as of November 30, 2006, this step-up valuation represented the profit to be earned on the inventory purchased.

As for the traditionaltwo existing segments of NN, overall net income was unchanged from the prior year at $15.0 million.  Sales increases from passing on raw material inflation were offset by raw material inflation having little impact on net income.  Increases in selling, general and administrative cost and depreciation and amortization were offset by foreign exchange gains from the appreciation of Slovakia Koruna, the gain on sale of excess land at our Pinerolo plant, and an overall lower effective tax rate.

Sales were up due to price increases from passing through to customers the impact of raw material inflation. Sales were also up to a lesser extent from positive currency translation of Euro-denominated sales.  These increases were partially offset by volume losses to two long-term customers and the unfavorable effect of product mix.  In one case, the volume loss was due to the customer’s strategic decision to begin to manufacturer certain products for themselves.  In the other case, the volume loss was due to a downturn in the USU.S. automotive market.  These volume losses were partially offset by volume gains at newer customers.

Cost of products sold increased primarily due to inflation in material cost, labor, and energy.  In addition, cost of products sold increased due to the ongoingon going start-up of our China and Slovakian manufacturing facilities.  Both of these facilities are not yet operating at optimum capacity as expansion is ongoing and should be complete at both locations in 2007.  Offsetting a majority of these increases are savings from our Level 3 program and other cost reduction initiatives.  As mentioned above, a majority of the raw material inflation is offset by raw material pass-through to customers.  These sales increases offset material inflation and do not improve net income.

The revenue increase in the Metal Bearing Components Segment was primarily due to price increases related to raw material inflation pass-through to customers ($8.9 million), and to a lesser extent, the positive impact of a stronger Euro ($1.6 million). Planned reductions in sales from existing customers were more than offset by increased sales to new customers resulting in a net volume increase ($2.6 million).  Price decreases to existing customers and a less favorable mix of bearing products sold had a negative impact ($4.3 million).

The negative impacts to segment profit after tax were from the price decreases and unfavorable product mix ($2.2 million).  In addition, both our China and Slovakia operations continue to have operational inefficiencies due to transitioning in production and product lines, and each location not running at optimal capacity ($2.1 million).  Finally, depreciation and amortization expense was higher due to depreciation and amortization of machinery in China and Slovakia and contract intangibles from the SNR machinery purchase ($0.7 million).

Mostly offsetting these negative impacts were the sales price increases from passing through raw material cost inflation to customers and cost reduction initiatives more than offsetting material, labor, and utility inflation ($2.8 million).  In addition, the net volume increases added $0.7 million to segment profit.  The gain from the sale of land at Pinerolo, net of machinery disposals, added $0.5 million.  Finally, favorable foreign exchange impacts from the appreciation of the Slovakia Koruna and Euro favorably impacted segment profit by $0.7 million.

The Precision Metal Components Segment was added on November 30, 2006 with the purchase of Whirlaway.   Therefore the segment'ssegment’s results are only for one month ending December 31, 2006.

The month of December 2006 results of Whirlaway are not indicative of normalized annual operations.  December is normally a low volume month as many of Whirlaway'sWhirlaway’s customers shut down over the holidays.  Additionally, the cost of products sold includes the elimination of the step-up of inventory to sales value recorded as part of purchase accounting under SFAS 141.  When recorded in the opening balance sheet as of December 1, 2006, this step-up represented the profit to be earned on the inventory purchased.

Based on pro-forma results, 2006 and 2005 revenues for the Precision Metal Components Segment would have been $77,713 andcompared with $71,862, respectively.

Sales at the Plastics and Rubber Components Segment were down $4.6 million primarily due to lower sales volume to one large customer resulting from the downturn in the U.S. automotive market ($6.2 million) partially offset by targeted price increases in the plastics portion of the segment ($1.7 million).

The increase in segment profit, after tax, at the Plastics and Rubber Components Segment was due to the price increases ($1.1 million) and to cost saving initiatives in the areas of material usage, labor efficiency, and overhead cost ($1.6 million).  These increases were partially offset by raw material and utilities inflation ($0.2 million) and the impact, net of cost of products sold, of reductions in sales volume ($1.5 million.)million).

On September 21, 2006, the Companywe entered into a five-year $90.0 million revolving credit facility maturing in September 2011 with KeyBankKey Bank as administrative agent.  This facility can bewas increased to a maximum availability of $120.0$135.0 million under certain conditions specified in the agreement.on May 30, 2007.  The credit facility provides the Companyus the ability to borrow in US dollarsU.S. Dollars at LIBOR plus an applicable margin of .60% to .925%..925% or Euros at EURIBOR plus an applicable margin of .60% to .925%..925%.  The facility has a $10.0 million swing line feature to meet short term cash flow needs.needs with an interest rate equal to the prime lending rate.  Any borrowings under this swing line are considered short term.   Costs associated with entering into the revolving credit facility werecapitalizedwere capitalized and will be amortized into interest expense over the life of the facility.  As of December 31, 2006, $5112007, $0.6 million of net capitalized loan origination cost was on the balance sheet within other assets and the gross costs were presented in the Financing Activities section of the Statement of Cash Flows. This credit facility replaced our prior $90.0 million credit facility with AmSouth Bank as administrative agent.  The loan agreement contains customary financial and non-financial covenants specifying that we must maintain certain liquidity measures.  The loan agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and merger, acquisition and other fundamental changes in the Company’sour business.  The credit agreement is collateralized by the pledge of stock of certain foreign and domestic subsidiaries and guarantees of certain domestic subsidiaries.  At December 31, 2006,2007, we have $50.5$64.5 million of availability under the $90.0$135.0 million facility.  Subsequent to year end, $18.6 million of the credit facility was used to pay off a note payable to a related party.

On April 26, 2004 we issued $40.0 million aggregate principal amount of senior notes in a private placement (the “$40 million notes”).placement.  These notes bear interest at a fixed rate of 4.89% and mature on April 26, 2014.  Interest is paid semi-annually.  As of December 31, 2006,2007, $40.0 million remained outstanding.  Annual principal payments of approximately $5.7 million begin on April 26, 2008 and extend through the date of maturity.  The agreement contains customary financial and non-financial covenants.  Such covenants specify that we must maintain certain liquidity measures.  The agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business.  The notes are collateralized by the pledge of stock of certain foreign subsidiaries.  We incurred $0.8As of December 31, 2007, we had recorded $0.5 million of related costsnet capitalized loan origination cost as a result of issuing these notes which have been recorded as a component of other non-current assets andwhich are being amortized over the term of the notes.

We were in compliance with all covenants related to the $90.0$135.0 million credit facility and the $40.0 million senior notes as of December 31, 2006.2007. See Note 8 of the Notes to Consolidated Financial Statements.

In December 2005, we generated approximately $0.8 million in proceeds from sale of excess land at our Veenendaal The Netherlands facility.Plant.  This transaction resulted in recording a gain of approximately $0.4 million.

In January 2006, we generated approximately $2.8 million in proceeds from sale of excess land at our Pinerolo, Italy facility.  The transaction resulted in a net after tax gain of $1.4 million.

To date, cash generated by foreign subsidiaries has been used mostlyprimarily for general purposes including investments in property, plant and equipment and prepayment of the former Euro term loan.  No dividends have beenIn 2007, a $5.0 million dividend, on earnings for which U.S. Federal tax was previously paid, was declared orand paid to us by thea foreign subsidiaries that may have beensubsidiary.  These funds were used by the Company to permanently pay down our domestic credit facilities.debt.  Remaining undistributed foreign earnings are deemed to be permanently reinvested.  During 2006, a European subsidiary repaid an $8.0 million loan with the parent company.  These funds were used to repay part of our domestic credit facilities.

The Company’sOur arrangements with itsour domestic customers typically provide that payments are due within 30 days following the date of the Company’sour shipment of goods, while arrangements with foreign customers of our domestic business (other than foreign customers that have entered into an inventory management program with the Company)us) generally provide that payments are due within 90 or 120 days following the date of shipment.  Under the Metal Bearing Components Segment’s inventory management program with certain European customers, payments typically are due within 30 days after the customer uses the product.   The Company’sOur arrangement with its European customers regarding due dates vary from 30 to 90 days following date of sale with an average of approximately 50 days outstanding.  The Company’sOur sales and receivables can be influenced by seasonality due to the Company’sour relative percentage of European business coupled with many foreign customers ceasing production during the month of August.  For information concerning the Company’sour quarterly results of operations for the years ended December 31, 20062007 and 2005,2006, see Note 17 of the Notes to Consolidated Financial Statements.

The Company billsWe invoice and receivesreceive payment from somemany of itsour customers in Euro as well as other currencies.  In 2006,2007, the fluctuation of the Euro against the U.S. dollarDollar positively impacted sales and income.  As a result of these sales, the Company’sour foreign exchange transaction and translation risk has increased.  Various strategies to manage this risk are available to management including producing and selling in local currencies and hedging programs.  As of December 31, 2006,2007, no currency hedges were in place.  In addition, a strengthening of the U.S. dollarDollar and/or Euro against foreign currencies could impair theour ability of the Company to compete with international competitors for foreign as well as domestic sales.

Working capital, which consists principally of accounts receivable and inventories offset by accounts payable, was $53.8 million at December 31, 2007 as compared to $51.0 million at December 31, 2006 as compared to $41.1 million at December 31, 2005.2006.  Working capital increased by $10.8 million due to the acquisition of Whirlaway on November 30, 2006. Additionally, working capital increased by $1.3$1.8 million due to Euro denominated assets and liabilities increasing in value relative to the dollar.U.S. Dollar.  The following comments have factored out the effects of foreign exchange.  Inventory was reducedincreased by $3.2 million in line with overall company goals and accounts receivable increased $0.8$6.1 million due to timing of purchases of raw steel and production of certain finished goods being made ahead of orders.  Accounts receivable decreased $1.0 million due to timing of certain customer payments and an increase in allowance for doubtful accounts reserves partially offset by higher sales volume in the fourth quarter of 20062007 versus the fourth quarter of 2005.   In addition,2006.  Additionally, the receipt of $2.5accounts payable balance decreased $5.0 million from pay-off2006, as the prior year balance included certain one-time payables that were not in the balance at 2007 and payments to certain vendors were made before year end in 2007 versus after year end in 2006.  Finally, the current portion of a note receivable reduced working capital.long term debt was $11.0 million higher in 2007 due to the higher usage of short terms borrowings and reclassification of the first annual installment of the private placement notes due in 2008.  The ratio of current assets to current liabilities increased from 1.63:decreased to 1.64:1 at December 31, 2005 to2007 from 1.68:1 at December 31, 2006.

Cash flow from operations totaled $21.6 million in 2007, $33.0 million in 2006 compared withand $30.0 million in 20052005.  The decrease in cash flow provided by operations is due to inventories having increased in 2007 and $31.6accounts payable having decreased in 2007, as discussed above.

Total assets and current assets increased approximately $17.9 million in 2004.and approximately $6.9 million, respectively, from the December 31, 2006 balance due to appreciation of Euro denominated assets relative to the U.S. Dollar.  Factoring out the foreign exchange effects, current assets were higher due to increased inventory balances as mentioned above and property, plant and equipment was lower due to certain fixed assets being impaired ($3.4 million) and from full year capital spending having been lower than depreciation ($1.8 million).

During 2006,the second quarter, we recorded approximately $13.4 million ($12.7 million after-tax) of non-cash impairment charges.  These charges included the write-down to estimated fair market value of certain excess production equipment and the full impairment of goodwill at one location to levels supported by projected cash flows after the restructuring.  These charges did not require the use of any of our existing cash flows from operations or available credit lines.

During 2007, we spent $19.3approximately $18.9 million on capital expenditures.  Of this amount, we spent $6.7approximately $7.2 million related to geographic expansion of our manufacuturingmanufacturing base $1.8 million to acquire the remaining machinery under the SNR agreement, and $10.8approximately $11.7 million related primarily to cost reduction, equipment andupgrades, process upgrades, andor replacements.  During 2007,2008, we plan to spend approximately $19.0$18.5 million on capital expenditures.  Of this amount, $11.3$3.5 million will be related primarily to equipment and process upgrades and replacements, and approximately $7.7$7.6 million will be principally related to geographic expansion of our manufacturing base.base and approximately $7.4 million will be related to cost improvement initiatives.  We intend to finance these activities with cash generated from operations and funds available under our credit facilities.  The Company believesWe believe that funds generated from operations and borrowings will be sufficient to finance the Company’sour working capital needs, projected capital expenditure requirements, common stock repurchase plan and dividend payments through December 2007.31, 2008.

The table below sets forth certainsome of the Company’sour contractual obligations and commercial commitments as of  December 31, 20062007 (in thousands):

(1) On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products Company Ltd, entered into a twenty year lease agreement with Kunshan Tian Li Steel Structure Co. LTD for the lease of land and building in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China.  The lease is cancelable by the Companyus in the fifth, ninth, and fourteenth year.  The building was newly constructed and we began usage ofusing  the leased property during the fourth quarter of 2005.  The agreement is accounted for as a capital lease.  The capitalCapital leases line in the table above reflects the undiscounted future minimum lease payments as of October 1, 2005, the date the Companywe began to use the property.  No other amounts are included in capitalCapital leases above.

(2) Other Long-Term Obligations consistconsists of steel purchase commitments at our European operations.operations (See Note 16 of the Notes to Consolidated Financial Statements.)

We currently have operations in Ireland, Germany, Italy and The Netherlands, all of which are Euro participating countries, and in Slovakia which joined the European Union in May 2004 and is expected to adopt the Euro as its functional currency within several years. Each of our European facilities sellssell product to customers in many of the Euro participating countries.  The Euro has been adopted as the functional currency at all locations in Europe, except Slovakia whose functional currency is the Slovak Koruna.  The functional currency of NN Asia is the Chinese Yuan.

Our net sales historically have been seasonal in nature, becausedue to a significant portion of our sales arebeing to European customers that cease or significantly slow production during the month of August.  For information concerning our quarterly results of operations for the years ended December 31, 20062007 and 2005,2006, see Note 17 of the Notes to Consolidated Financial Statements.

WhileThe cost base of our operations have nothas been materially affected by steel inflation during recent years, but due to the ability to pass on this steel inflation to our customers the overall financial impact has been minimized.  The prices for 52100 Steel, engineered resins and other raw materials purchased by uswhich we purchase are subject to material change.  Our typical pricing arrangements with steel suppliers are subject to adjustment every six months.  We typically reserve the right to increase product prices periodically in the event of increases in itsour raw material costs.  In the past, we have been able to minimize the impact on our operations resulting from the 52100 Steel price fluctuations by taking such measures. However, at our European operations, by contract, material price changes in any given year are passed along with price adjustments in January of the following year and beginning in 2007 scrap surcharges, a component of material cost, will be passed through quarterly.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance on how to measure assets and liabilities atthat use fair value.  SFAS 157 will apply whenever another USU.S. GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances.  This standard also will require additional disclosures in both annual and quarterly reports.  SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007.  However, on December 14, 2007, the FASB issued and will be adopted by us beginningon February 14, 2008, approved, FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) which would delay the effective date of SFAS No. 157 for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008.  Effective for first quarter of 2008.2008, the Company plans to adopt SFAS No. 157 except as it applies to those non financial assets and liabilities as noted in FSP FAS 157-2.  We are currently evaluating the potential impact this standard may have on our consolidated financial position and results of operations, but do not believe the impact of the adoption will be material.have a material effect.

In February, 2007, the FASB issued SFAS No. 159, “The"The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.”"  SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates.  Upon adoption, an entity mustshall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Most of the provisions apply only to entities that elect the fair value option.  However, the amendment to SFAS No. 115, “Accounting"Accounting for Certain Investments in Debt and Equity Securities,”" applies to all entities with available for sale and trading securities.  SFAS No. 159 will be effective as of the beginning of an entity’sentity's first fiscal year that begins after November 15, 2007.  The Company isWe are currently evaluating the effect SFAS No. 159 will have on its consolidated financial position, liquidity, or results of operations.

In 2006, we entered into negotiations with representatives of the Eltmann employeesemployees’ works council.  The negotiations seekWe signed an agreement with the union representatives of our workers at this facility for significant wage reductionscontract revisions including new wages rates and changes in work rules.  These negotiations are progressing as ofincreasing hours worked per week during February 2008.

In 2007, we began the date of this report and are expected to be concluded during 2007.  However, if a satisfactory agreement cannot be reached, we may beginprocess to shift production to lower cost faciltiies,facilities, thereby incurring costs for the production shifts and necessitating further restructuring at the Eltmann facility, which could includePlant, including actions leading to a significant downsizing or even closurethat location.  Due to the agreement reached with the workers in February 2008, we postponed the downsizing of the facility.  If this were to occur, we would experience significant cash restructuring costs and impariment charges for tangible and intangible assets.location.   In addition, such a restructuringin the second quarter of 2007, we incurred non-cash impairment charges related to restructuring.  See Note 3 of the Notes to Consolidated Financial Statements.

At this time, it is possible additional cash and non-cash charges might cause assetsbe incurred to reduce or eliminate the work force at other European plants to become impaired.  We do not believe that such action is probable at this time.the Eltmann plant in the future.

We are exposed to changes in financial market conditions in the normal course of our business due to our use of certain financial instruments as well as transacting in various foreign currencies.  To mitigate our exposure to these market risks, we have established policies, procedures and internal processes governing our management of financial market risks.  We are exposed to changes in interest rates primarily as a result of our borrowing activities.  At December 31, 2006,2007, these borrowings included $40.0 million aggregate principal amount of fixed rate senior notes and a new $90our $135 million revolving credit facility which was used to maintain liquidity, fund our business operations, and fund acquisitions.  At December 31, 2006,2007, we had $40.0 million of fixed rate senior notes outstanding and $39.5$70.5 million outstanding under the variable rate revolving credit facilities.  At December 31, 2006,2007, a one-percent increase in the interest rate charged on our outstanding variable rate borrowings would result in interest expense increasing annually by approximately $0.4$0.7 million.  The nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors.

Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates.  Our Metal Bearing Component Segment billsinvoices and receives payment in currencies other than the U.S. dollarDollar including the Euro.  In 2006,2007, the fluctuation of the Euro against the U.S. dollarDollar positively impacted assets, revenue and income.  To help reduce exposure to foreign currency fluctuation, management has incurred debt in Euros in the past and has, from time to time, used foreign currency hedges to hedge currency exposures when these exposures meet certain discretionary levels.  We did not use any significant currency hedges in 2006,2007, nor did we hold a position in any foreign currency hedging instruments as of December 31, 2006.2007.

Index to Financial Statements