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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





(Mark one)

|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2007.
|- | ----------------------------------------------------------------------------------------------------------------------------------



| ̈ | 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 0-24020





SYPRIS SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 61-1321992                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                             |  |                                                     
|------------------------------------------------------------ |  | ----------------------------------------------------
|101 Bullitt Lane, Suite 450 Louisville, Kentucky 40222       |  | (502) 329-2000                                      
|(Address of principal executive offices, including zip code) |  | (Registrants telephone number, including area code)





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

Common Stock, $.01 par value

(Title of Class)

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

None





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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.    x  Yes     ̈  No

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

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

 ̈  Large accelerated filer    x  Accelerated filer     ̈  Non-accelerated filer

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

The aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrants most recently completed second fiscal
quarter (June 29, 2007) was $79,382,931.

There were 19,347,675 shares of the registrants common stock outstanding as of
March 5, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Stockholders to be held April 22, 2008 are incorporated by reference into
Part III to the extent described therein.









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Table of Contents



|                                                |  |          |  |                                                                                                                  |  |     
|----------------------------------------------- |  | -------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|                                                |  |          |  |                                                                                                                  |  | Page
|Part I                                          |  |         
|                                                |  |          | 
|                                                |  | Item 1.  |  | Business                                                                                                         |  | 1   
|                                                |  |          | 
|                                                |  | Item 1A. |  | Risk Factors                                                                                                     |  | 10  
|                                                |  |          | 
|                                                |  | Item 1B. |  | Unresolved Staff Comments                                                                                        |  | 16  
|                                                |  |          | 
|                                                |  | Item 2.  |  | Properties                                                                                                       |  | 17  
|                                                |  |          | 
|                                                |  | Item 3.  |  | Legal Proceedings                                                                                                |  | 19  
|                                                |  |          | 
|                                                |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 20  
|                                                | 
|Part II                                         |  |         
|                                                |  |          | 
|                                                |  | Item 5.  |  | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 21  
|                                                |  |          | 
|                                                |  | Item 6.  |  | Selected Financial Data                                                                                          |  | 23  
|                                                |  |          | 
|                                                |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 24  
|                                                |  |          | 
|                                                |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 35  
|                                                |  |          | 
|                                                |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                      |  | 36  
|                                                |  |          | 
|                                                |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 67  
|                                                |  |          | 
|                                                |  | Item 9A. |  | Controls and Procedures                                                                                          |  | 67  
|                                                |  |          | 
|                                                |  | Item 9B. |  | Other Information                                                                                                |  | 67  
|                                                | 
|Part III                                        |  |         
|                                                |  |          | 
|                                                |  | Item 10. |  | Directors, Executive Officers and Corporate Governance                                                           |  | 68  
|                                                |  |          | 
|                                                |  | Item 11. |  | Executive Compensation                                                                                           |  | 68  
|                                                |  |          | 
|                                                |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 68  
|                                                |  |          | 
|                                                |  | Item 13. |  | Certain Relationships and Related Transactions and Director Independence                                         |  | 69  
|                                                |  |          | 
|                                                |  | Item 14. |  | Principal Accountant Fees and Services                                                                           |  | 69  
|                                                | 
|Part IV                                         |  |         
|                                                |  | Item 15. |  | Exhibits and Financial Statement Schedules                                                                       |  | 70  
|                                                | 
|Signature Page                                  |  | 76      
|                                                | 
|Schedule II  Valuation and Qualifying Accounts |  | 77      

In this Form 10-K, Sypris, SYPR, the Company, we,
us and our refer to Sypris Solutions, Inc. and its subsidiaries and predecessors, collectively. Sypris Solutions and Sypris are our trademarks. All other trademarks, servicemarks or trade names
referred to in this Form 10-K are the property of their respective owners.



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PART I



|Item 1. | Business
|------- | --------

General

We are a diversified provider of outsourced services and specialty products. We perform a wide range of manufacturing, engineering,
design, testing and other technical services, typically under multi-year, sole-source contracts with corporations and government agencies in the markets for aerospace & defense electronics, truck components & assemblies, and for
users of test & measurement equipment.

We focus on those markets where we have the expertise, qualifications and
leadership position to sustain a competitive advantage. We target our resources to support the needs of industry leaders that embrace multi-year contractual relationships as a strategic component of their supply chain management. These contracts,
many of which are sole-source by part number and are for terms of up to seven years, enable us to invest in leading-edge technologies to help our customers remain competitive. The productivity, flexibility and economies of scale that result become
an important means for differentiating ourselves from the competition when it comes to cost, quality, reliability and customer service.

Truck Components & Assemblies. We are a significant supplier of forged and machined drive train components for medium and heavy-duty trucks in North America. We produce drive axle shafts, gear sets,
differential cases, steer axle forgings, and other components under multi-year, sole-source contracts with ArvinMeritor, Inc. (ArvinMeritor) and Dana Holding Corporation (Dana or DAN), the two primary providers of drive train assemblies for use by
the leading truck manufacturers, including Ford Motor Company (Ford), Freightliner LLC (Freightliner), Mack Trucks, Inc. (Mack), Navistar International Corporation (Navistar), PACCAR, Inc. (PACCAR) and Volvo Truck Corporation (Volvo). We also supply
ArvinMeritor with trailer axle beams for use by the leading trailer manufacturers, including Great Dane Limited Partnership (Great Dane), Hyundai Motor Company (Hyundai), Stoughton Trailers, LLC (Stoughton), Trailmobile Corporation
(Trailmobile), Utility Trailer Manufacturing Company (Utility) and Wabash National Corporation (Wabash). Additionally within the light vehicle market, we supply Dana with full float tubes and we currently supply Ford with axle shafts for the F150,
F250, F350 and Ranger series pickup trucks, the Expedition, Lincoln Navigator and the Mustang GT. We continue to support our customers strategies to outsource non-core operations by supplying additional components and providing additional
value added operations for drive train assemblies. Our truck components & assemblies business accounted for approximately 60% of net revenue in 2007.

Aerospace & Defense Electronics. We are an established supplier of manufacturing services for the production of complex circuit cards, high-level assemblies and subsystems. We
have historically had long-term relationships with many of the leading aerospace & defense contractors, including Boeing Company (Boeing), General Dynamics Corporation (General Dynamics), Honeywell International, Inc. (Honeywell), Lockheed
Martin Corporation (Lockheed), Northrop Grumman Corporation (Northrop Grumman) and Raytheon Company (Raytheon). We currently manufacture complex circuit card assemblies under multi-year contracts with Raytheon for programs involving a missile
guidance system and an air defense network, and under a multi-year contract with Honeywell for main color display systems in the cockpit of a military aircraft. We also have a long-term relationship with the United States (U.S.) Government to design
and build secure communications equipment and encryption devices. The defense budget for fiscal 2008 contains provisions to increase spending for space, smart weapons, surveillance, intelligence and secure communications, areas for which we have
long provided essential services and products; however, funds were diverted in 2006 and 2007 to finance the armed forces and related equipment and expendable supplies for the war in Iraq, and we expect this to continue throughout 2008. Our
aerospace & defense electronics business accounted for approximately 24% of net revenue in 2007.

Test & Measurement Services.We provide technical services for the calibration, certification and repair of test & measurement equipment in and outside the U.S. We are the incumbent supplier for a multi-year
contract with the Federal Aviation Administration (FAA) to calibrate and certify the equipment that is used to maintain the radar systems and directional beacons at over 490 sites in the U.S., the Caribbean and the South Pacific. The Company
anticipates that this contract will be awarded for another five year term in April, 2008. We also have a



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contract with the National Weather Service (NWS) to calibrate the equipment that is used to maintain the NEXRAD Doppler radar systems at over 135 advanced
warning weather service radar stations in 46 states, the Caribbean and Guam. We also have a multi-year contract with AT&T Corporation (AT&T) to provide calibration and certification services at over 260 of its central and field switching
locations. We are seeing continued interest by large companies, such as Eastman Kodak Company (Kodak), Motorola and Delphi Automotive, in awarding multi-year contracts for calibration services in order to accelerate vendor reduction programs and
reduce costs. Our test & measurement services business accounted for approximately 11% of net revenue in 2007.

Recent Developments

On March 3, 2006 (Filing Date), the Companys largest customer, Dana, and 40 of its U.S. subsidiaries, filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Danas European, South American, Asia-Pacific, Canadian and Mexican subsidiaries were
excluded from the Chapter 11 filing.

On December 6, 2006, an independent arbitrator initially held that Dana had
breached certain of its agreements with Sypris by failing to transfer certain volumes of business and by failing to pay the appropriate prices for the volumes that were transferred. As a result, the arbitrator awarded payments to Sypris totaling
$1.8 million plus $0.1 million per month on an ongoing basis. On January 29, 2007, this award became final; and accordingly, net revenue in the consolidated statements of operations for the year ended December 31, 2007 includes $2.9
million pertaining to the arbitration award. On July 24, 2007, the Company announced that its wholly-owned subsidiary, Sypris Technologies, Inc., entered into a comprehensive settlement agreement with Dana to resolve all outstanding disputes
between the parties, terminate any further arbitration payments and enter into a new long-term supply contract running through 2014. This settlement was approved by the bankruptcy court on August 7, 2007.

Pursuant to the settlement agreement, Dana and the Company have (i) entered into a new, long-term master supply agreement in lieu of
the three prior supply contracts, (ii) exchanged production of certain non-core components, (iii) rebalanced production among Company plants to reduce costs for both parties, and (iv) ceased all litigation with regard to prior
contract disputes, including the release of Dana from certain committed but undelivered production volumes and termination of the arbitration payments. In addition, Dana provided the Company with an allowed general unsecured non-priority claim in
the amount of $89.9 million, which was recorded by the Company at its estimated fair value of $76.5 million.

At
December 31, 2007, the Company had deferred $55.8 million associated with the settlement, of which $12.6 million is carried in accrued liabilities and $43.2 million is carried in other liabilities in the consolidated balance sheets. The
deferred revenue will be recognized over the term of the new master supply agreement. Approximately $8.9 million related to the settlement agreement was recognized into revenue, of which $7.6 million was reflected in gross profit during the year
ended December 31, 2007. Approximately $11.8 million of the settlement recognized as a non-recurring gain was offset by settlement related charges and professional fees.

On December 12, 2007 the bankruptcy court approved Danas plan of reorganization. Pursuant to the terms included therein, the Company became entitled to receive an initial distribution
of approximately 3.1 million shares of common stock in Dana Holding Corporation (DAN), the right to participate in additional distributions of reserved shares of common stock of DAN if certain disputed matters are ultimately resolved for less
than DANs current reserves for those matters (presently estimated by the Company to be 300,000 to 500,000 shares to be received by the Company in 2008 and 2009) and the right to receive cash of approximately $6.3 million by mid-March, 2008,
depending on various factors in the administration of Danas bankruptcy estate. Dana emerged from bankruptcy on January 31, 2008, and on February 1, 2008, the newly issued shares of Dana Holding Corporation began trading on the
New York Stock Exchange under the ticker symbol DAN. See Note 2 and Note 20 to the consolidated financial statements for additional information.

Industry Overview

We believe the trend toward outsourcing is continuing across a wide range of industries
and markets as outsourcing specialists assume a strategic role in the supply chain of companies of all types and sizes. We expect the growth in outsourcing expenditures to continue increasing at a rate far higher than the expansion in the overall
economy.



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We believe the trend toward outsourcing is continuing because outsourcing frequently
represents a more efficient, lower cost means for manufacturing a product or delivering a service when compared to more vertically integrated alternatives. While the rate of acceptance of the outsourcing model may vary by industry, we believe the
following benefits of outsourcing are driving this general trend.

Reduced Total Operating Costs and Invested
Capital. Outsourcing specialists are frequently able to produce products and/or deliver services at a reduced total cost relative to that of their customers because of the ability to allocate the expense for a given set of fixed capacity,
including assets, people and support systems, across multiple customers with diversified needs. In turn, these outsourcing specialists can achieve higher utilization of their resources and achieve greater productivity, flexibility and economies of
scale.

Access to Advanced Manufacturing Capabilities and Processes and Increased Productivity. The ability to use a
fixed set of production assets for a number of customers enables outsourcing specialists to invest in the latest technology as a means to further improve productivity, quality and cycle times. The magnitude of these investments can be prohibitive
absent the volume and reliability of future orders associated with having a broad array of customers for the use of those assets.

Focus on Core Competencies. Companies are under intense competitive pressure to constantly rationalize their operations, invest in and strengthen areas in which they can add the greatest value to their customers and divest or
outsource areas in which they add lesser value. By utilizing the services of outsourcing specialists, these companies can react more quickly to changing market conditions and allocate valuable capital and other resources to core activities, such as
research and development, sales and marketing or product integration.

Improved Supply Chain Management. We believe
that the trend in outsourcing favors specialists that have the financial, managerial and capital resources to assume an increasingly greater role in the management of the supply chain for the customer. By utilizing fewer and more capable suppliers,
companies are able to greatly simplify the infrastructure required to manage these suppliers, thereby reducing their costs, risks and logistical complexity, while improving margins, supply chain reliability, flexibility and long-term strategic
planning.

Our Markets

Truck Components & Assemblies. The truck components & assemblies market consists of the original equipment manufacturers, or OEMs, including DaimlerChrysler Corporation, Ford, Freightliner, General Motors
Corporation, Mack, Navistar, PACCAR and Volvo, and a deep and extensive supply chain of companies of all types and sizes that are classified into different levels or tiers. The trailer market consists of OEMs including Dorsey, Great Dane, Hyundai,
Stoughton, Trailmobile, Utility and Wabash. Tier I companies represent the primary suppliers to the OEMs and include ArvinMeritor, Dana, Delphi Automotive Systems Corporation, Eaton Corporation, and Visteon Corporation (Visteon), among others. Many
of the Tier I companies are confronted with excess capacity, high hourly wage rates, costly benefit packages and aging capital equipment. Below this group of companies reside numerous suppliers that either supply the OEMs directly or supply the Tier
I companies. In all segments of the truck components & assemblies and the trailer markets, however, suppliers are under intense competitive pressure to improve product quality and to reduce capital expenditures, production costs and
inventory levels.

In an attempt to gain a competitive advantage, many OEMs have been reducing the number of suppliers they
utilize. These manufacturers are choosing stronger relationships with fewer suppliers that are capable of investing to support their operations. In response to this trend, many suppliers have combined with others to gain the critical mass required
to support these needs. As a result, the number of Tier I suppliers is being reduced, but in many cases, the aggregate production capacity of these companies has yet to be addressed. We believe that as Tier I suppliers seek to eliminate excess
capacity, they will increasingly choose outsourcing as a means to enhance their financial performance, and as a result, companies such as Sypris will be presented with new business and acquisition opportunities.

Aerospace & Defense Electronics. The consolidation of defense contractors over the past decade has added to the increased
demand for outsourcing specialists. The consolidated companies, some of which have developed highly leveraged balance sheets as a result of mergers and acquisitions, have been motivated to seek new ways to raise margins, increase profitability and
enhance cash flow. Accordingly, outsourcing specialists, including Sypris, have been successful in building new relationships with companies that previously relied more on internal



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resources. We believe this trend will continue, and that our extensive experience, clearances, certifications and qualifications in the manufacturing of
aerospace & defense electronics will serve to differentiate us from many of the more traditional outsource suppliers. We also believe that we are well positioned to take advantage of additional outsourcing activity that may flow from the
prime contractors that are awarded contracts related to increased defense appropriations and expenditures as a result of increased focus on national defense and homeland security.

The nature of providing outsourced manufacturing services to the aerospace & defense electronics industry differs substantially
from the traditional commercial outsourced manufacturing services industry. The cost of failure can be extremely high, the manufacturing requirements are typically complex and products are produced in relatively small quantities. Companies that
provide these manufacturing services are required to maintain and adhere to a number of strict and comprehensive certifications, security clearances and traceability standards.

Test & Measurement Services. The widespread adoption of the International Organization for Standardization (ISO) and Quality Standards (QS), among others, has been underway for
many years. A critical component of basic manufacturing discipline and these quality programs is the periodic calibration and certification of the test and measurement equipment that is used to measure process performance. The investment in this
equipment and the skills required to support the calibration and certification process has historically been performed offsite by the manufacturers of the equipment, or onsite by internal operations.

We believe that test & measurement services will be increasingly outsourced to independent specialists who can use the manpower
and equipment more efficiently across a diversified base of customers, reduce investment requirements and improve profitability on a national scale.

Our Business Strategy

Our objective is to improve our leadership position in each of our core markets by
increasing the number of multi-year contracts with customers and investing in highly automated production capacity to remain competitive on a global scale. We intend to serve our customers and achieve this objective by continuing to:

Concentrate on our Core Markets. We are the principal supplier of medium and heavy-duty truck axle shafts in North America. We have
been an established supplier of manufacturing and technical services to major aerospace & defense companies and agencies of the U.S. Government for over 40 years. We are also the sole provider of calibration, certification and repair
services for equipment used by the FAA and the sole provider of similar services under a multi-year agreement with the NWS of the U.S. Department of Commerces National Oceanic & Atmospheric Administration (NOAA). We will continue to
focus on those markets where we have the expertise, qualifications and leadership position to sustain a competitive advantage.

Dedicate our Resources to Support Strategic Partnerships. We will continue to dedicate our resources to support the needs of industry leaders that embrace multi-year contractual relationships as a strategic component of their supply
chain management and have the potential for long-term growth. We prefer contracts that are sole-source by part number so we can work closely with the customer to the mutual benefit of both parties. ArvinMeritor and Dana have awarded us with
sole-source supply agreements for certain parts that run as long as through 2013 and 2014, respectively. Historically, we entered into multi-year manufacturing services agreements with Boeing, Honeywell, Lockheed Martin, Northrop Grumman and
Raytheon. Our success in establishing outsourcing partnerships with key customers has historically led to additional contracts, and we believe that if we continue to successfully perform on current contracts, we will have additional growth
opportunities with these and other customers.

Pursue the Strategic Acquisition of Assets. We will continue to
pursue the strategic acquisition of assets that serve to consolidate our position of leadership in our core markets, expand our presence outside North America, create or strengthen our relationships with leading companies and expand our range of
value-added services in return for multi-year supply agreements. Since these assets are integrated with our core businesses, we generally are able to use these assets to support other customers, thereby improving asset utilization and achieving
greater productivity, flexibility and economies of scale.

Grow Through the Addition of New Value-Added Services. We
will continue to grow through the addition of new value-added manufacturing capabilities and the introduction of additional components in the supply chain



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that enable us to provide a more complete solution by improving quality and reducing product cost, inventory levels and cycle times for our customers. In
many instances, we offer a variety of state-of-the-art machining capabilities to our customers in the truck components & assemblies market that enable us to reduce labor and shipping costs and minimize cycle times for our customers over the
long-term, providing us with significant additional growth opportunities in the future. Migrating from design and manufacturing of complex circuit card assemblies to box builds will increase product content with our customers and allow us to be a
more significant player in the aerospace & defense segment.

Invest to Increase our Competitiveness. We
will continue to invest in advanced manufacturing and process technologies to reduce the cost of the services we provide for our customers on an ongoing basis. We continue to expand and automate the services we provide to our customers in the truck
components & assemblies market, with approximately $142 million invested from 2000 to 2007. We believe our ability to leverage this capability across a number of customers in the future will further improve our capacity utilization,
absorption of overhead and reduce our manufacturing costs.

We believe that the number and duration of our strategic
relationships enable us to invest in our business with greater certainty and with less risk than others that do not benefit from the type of longer term contractual commitments we receive from many of our major customers. The investments we make in
support of these contracts provide us with the productivity, flexibility, technological edge and economies of scale that we believe will help to differentiate us from the competition in the future when it comes to cost, quality, reliability and
customer service.

Our Services and Products

We are a diversified provider of outsourced services and specialty products. Our services consist of manufacturing, technical and other services and products that are delivered as part of our customers overall
supply chain management. We provide our customers with services that exceed the scope of many manufacturing service companies, including software development, design services, prototype development, product re-engineering, feature enhancement,
product ruggedization, cost reduction, product miniaturization, and electro-magnetic interference and shielding. We also apply our core technologies toward the development and production of our own product line of high assurance security components,
including cryptographic key management programs and data encryption products for our U.S. Government and defense customers. The information below is representative of the types of products we manufacture, services we provide and the customers and
industries for which we provide such products or services.

Truck Components & Assemblies:



|                                 |  |                                                                                                                                                                          
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ArvinMeritor                     |  | Axle shafts and drive train components for medium and heavy-duty trucks as well as axle beams for trailers.                                                              
|Axle Alliance                    |  | Axle shafts for heavy-duty trucks.                                                                                                                                       
|Dana                             |  | Drive train components (including axle shafts, differential cases, gear sets, full float tubes) and steer axle components for use in light, medium and heavy-duty trucks.
|Ford                             |  | Axle shafts for Mustangs, light-duty trucks and super-duty trucks.                                                                                                       
|Traxle                           |  | Axle shafts for heavy-duty trucks.                                                                                                                                       
|                                
|Aerospace & Defense Electronics:
|                                 | 
|Honeywell                        |  | Complex circuit cards for the color display systems used in military aircraft.                                                                                           
|U.S. Government                  |  | Encryption devices, secure communications equipment and recording systems.                                                                                               
|Raytheon                         |  | Complex circuit cards for use in a missile guidance system and an integrated air defense network.                                                                        



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|                                |  |                                                                                    
|------------------------------- |  | -----------------------------------------------------------------------------------
|                               
|Test & Measurement Services:   
|                                | 
|AT&T                            |  | Calibration and certification at over 260 central and field switching locations.   
|Federal Aviation Administration |  | Calibration and certification at over 490 airports or airways facilities.          
|Lockheed Martin                 |  | Testing of electronic components for space and defense applications.               
|National Weather Service        |  | Calibration and certification for over 135 advanced warning weather radar stations.

Manufacturing Services

Our manufacturing services typically involve the fabrication or assembly of a product or subassembly according to specifications provided by our customers. We purchase raw materials or components
from our customers and independent suppliers in connection with performing our manufacturing services. We strive to enhance our manufacturing capabilities by advanced quality and manufacturing techniques, lean manufacturing, just-in-time procurement
and continuous flow manufacturing, statistical process control, total quality management, stringent and real-time engineering change control routines and total cycle time reduction techniques.

Industrial Manufacturing Services. We provide our customers with a wide range of capabilities, including automated forging,
extruding, machining, induction hardening, heat-treating and testing services to meet the exacting requirements of our customers. We also design and fabricate production tooling, manufacture prototype products and provide other value-added services
for our customers. Our manufacturing services contracts for the truck components & assemblies markets are generally sole-source by part number. Part numbers may be specified for inclusion in a single model or a range of models. Where we are
the sole-source provider by part number, we are the exclusive provider to our customer of the specific parts and for any replacements for these parts that may result from a design or model change for the duration of the manufacturing contract.

Electronics Manufacturing Services. We provide our customers with a broad variety of solutions, from low-volume
prototype assembly to high-volume turnkey manufacturing. We employ a multi-disciplined engineering team that provides comprehensive manufacturing and design support to customers. The manufacturing solutions we offer include design conversion and
enhancement, materials procurement, system assembly, testing and final system configuration. Our manufacturing services contracts for the aerospace & defense electronics market are generally sole-source by part number.

Technical Services

Test & Measurement Services. We calibrate, repair and certify the test and measurement equipment that is used to maintain wireless communication equipment, control tower radar and direction beacons, NEXRAD Doppler advanced
warning weather service radar systems, digital oscilloscopes, microwave equipment and fiber optic measuring equipment, among others. The applications cover the maintenance of cellular communications systems, air traffic control systems, broadband
telecommunication systems and quality certification programs in manufacturing operations. We also perform a wide-range of testing services on a contract basis, including radio frequency, microwave and mixed signal component testing, environmental
testing, dynamics testing and failure analysis, among others.

Products

In addition to our outsourced services, we provide some of our customers with specialized products including digital and analog data systems and encryption devices used in military applications,
magnetic meters and sensors used in commercial and laboratory environments and high-pressure closures and joints used in pipeline and chemical systems. As we look to grow our business, emphasis will be placed on funding of new products to broaden
our portfolio and meet the needs of our customers.

Our Customers

Our customers include large, established companies and agencies of the federal government. We provide some customers with a combination of outsourced services and products, while other customers
may be in a single category of our service or product offering. Our five largest customers in 2007 were Dana, ArvinMeritor, Ford,



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Honeywell and Raytheon, which accounted for 61% of net revenue in 2007. Our five largest customers in 2006 and 2005 were Dana, ArvinMeritor, Ford, Traxle and
Raytheon. These five customers accounted for 70% and 67% of net revenue in 2006 and 2005, respectively. More specifically, for the year ended December 31, 2007, Dana and ArvinMeritor represented approximately 34% and 15% of our net revenue,
respectively. Similar amounts for the 2006 and 2005 years ended for Dana were 41% and 39%, respectively, while ArvinMeritor was 19% in 2006 and 15% for 2005. In addition, U.S. governmental agencies accounted for 12%, 8% and 9% of net revenue in
2007, 2006 and 2005, respectively.

Geographic Areas

Our operations are domiciled in the U.S. and Mexico. Our Mexican subsidiaries and affiliates are primarily a part of our Industrial Group and manufacture and sell a number of products similar to those the Industrial
Group produces in the U.S. In addition to normal business risks, operations outside the U.S. may be subject to a greater risk of changing political, economic and social environments, changing governmental laws and regulations, currency revaluations
and market fluctuations.

Consolidated non-U.S. net revenues were $53.6 million, or 12%, and $86.2 million, or 17%, of our
consolidated net revenues in 2007 and 2006, respectively. Similar amounts for 2005 were $68.7 million, or 13% of our consolidated net revenue. In 2007, 2006, and 2005, our non-U.S. net income was $1.7 million, $5.8 million and $4.9 million,
respectively, as compared to a consolidated net loss of $2.1 million and $1.4 million in 2007 and 2006, respectively, and net income of $5.3 million in 2005. You can find more information about our regional operating results in Note 18 Segment
Information in Item 8 of this Form 10-K.

Sales and Business Development

Our principal sources of new business originate from the expansion of existing relationships, referrals and direct sales through senior
management, direct sales personnel, domestic and international sales representatives, distributors and market specialists. We supplement these selling efforts with a variety of sales literature, advertising in numerous trade media and participation
in trade shows. We also utilize engineering specialists extensively to facilitate the sales process by working with potential customers to reduce the cost of the service they need. Our specialists achieve this objective by working with the customer
to improve their products design for ease of manufacturing, reducing the amount of set-up time or material that may be required to produce the product, or by developing software that can automate the test and/or certification process. The
award of contracts or programs can be a lengthy process, which in some circumstances can extend well beyond 12 months.

Our
objective is to increase the value of the services we provide to the customer on an annual basis beyond the contractual terms that may be contained in a supply agreement. To achieve this objective, we commit to the customer that we will continuously
look for ways to reduce the cost, improve the quality, reduce the cycle time and improve the life span of the products and/or services we supply the customer. Our ability to deliver on this commitment over time is expected to have a significant
impact on customer satisfaction, loyalty and follow-on business.

Backlog

Our order backlog at December 31, 2007 was $106.9 million as compared to order backlog at December 31, 2006 of $99.5 million. Backlog for the Aerospace & Defense segment
and the Test & Measurement segment at December 31, 2007 was $99.1 million and $7.8 million, respectively. Backlog for the Aerospace & Defense segment and the Test & Measurement segment at December 31, 2006
was $94.0 million and $5.5 million, respectively. Backlog consists of purchase orders with scheduled delivery dates and quantities. Total backlog at December 31, 2007 included $86.1 million for orders that are expected to be
filled within 12 months. Our backlog has varied from quarter to quarter and may vary significantly in the future as a result of the timing of significant new orders and/or shipments, order cancellations, material availability and other factors.

Competition

The
outsourced manufacturing services markets that we serve are highly competitive, and we compete against numerous domestic companies in addition to the internal capabilities of some of our customers. In the truck



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components & assemblies market, we compete primarily against companies including Mid-West Forge, Inc., Spencer Forge and Machine, Inc. and Traxle,
that serve as suppliers to many Tier I and smaller companies. In the aerospace & defense electronics market, we compete primarily against companies including Jabil Circuit, Inc., LaBarge, Inc., Primus Technologies Corporation, Sparton
Corporation and Teledyne Technologies Incorporated. In the test & measurement services market, we compete primarily against companies including SIMCO Electronics, Transcat, Inc., Davis Inotek Instruments, and a variety of small, local,
independent laboratories. We may face new competitors in the future as the outsourcing industry evolves and existing or start-up companies develop capabilities similar to ours.

We believe that the principal competitive factors in our markets include the availability of capacity, technological capability, flexibility, financial strength and timeliness in responding to
design and schedule changes, price, quality and delivery. Although we believe that we generally compete favorably with respect to each of these factors, some of our competitors are larger and have greater financial and operating resources than we
do. Some of our competitors have greater geographic breadth and range of services than we do. We also face competition from manufacturing operations of our current and potential customers that continually evaluate the relative benefits of internal
manufacturing compared to outsourcing. We believe our competitive position to be good, and the barriers to entry to be high in a significant portion of the markets we serve.

Suppliers

For the majority of our business, we purchase raw materials and component
parts from our customers or from suppliers chosen by our customers, at prices negotiated by our customers. When these suppliers increase their prices, cause delays in production schedules or fail to meet our customers quality standards, our
customers have contractually agreed to reimburse us for the costs associated with such price increases and not to charge us for costs caused by such delays or quality issues. Accordingly, our risks are primarily limited to accurate inspections of
such materials, timely communications, and the collection of such reimbursements or charges, along with any additional costs incurred by us due to delays in, interruptions of, or non-optimal scheduling of, production schedules. For a smaller portion
of our business, we arrange our own suppliers and assume the additional risks of price increases, quality concerns and production delays.

Raw steel and fabricated steel parts are a major component of our cost of sales and net revenue for the truck components & assemblies business. We purchase the majority of our steel for use in this business
at the direction of our customers, with any periodic changes in the price of steel being reflected in the prices we are paid for our services. Increases in the costs of steel or other supplies can increase our working capital requirements, scrap
expenses and borrowing costs.

There can be no assurance that supply interruptions or price increases will not slow
production, delay shipments to our customers or increase costs in the future, any of which could adversely affect our financial results. Delays, interruptions, or non-optimal scheduling of production related to interruptions in raw materials
supplies can be expected to increase our costs.

Research and Development

Our research and development activities are mainly related to our product lines that serve the aerospace & defense electronics market. Process improvement expenditures related to our
outsourced services are not reflected in research and development expense. Accordingly, our research and development expense represents a relatively small percentage of our net revenue. We invested $2.8 million, $2.0 million and
$2.8 million in research and development in 2007, 2006 and 2005, respectively.

Patents, Trademarks and Licenses

We own and are licensed under a number of patents and trademarks that we believe are sufficient for our operations. Our business as a
whole is not materially dependent upon any one patent, trademark, license or technologically related group of patents or licenses.

We regard our manufacturing processes and certain designs as proprietary trade secrets and confidential information. We rely largely upon a combination of trade secret laws, non-disclosure agreements with customers,



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suppliers and consultants, and our internal security systems, confidentiality procedures and employee confidentiality agreements to maintain the trade
secrecy of our designs and manufacturing processes.

Government Regulation

Our operations are subject to compliance with regulatory requirements of federal, state and local authorities, both in the U.S. and in Mexico, including regulations concerning financial reporting
and controls, labor relations, export and import matters, health and safety matters and protection of the environment. While compliance with applicable regulations has not adversely affected our operations in the past, there can be no assurance that
we will continue to be in compliance in the future or that these regulations will not change or that the costs of compliance will not be material to us.

We must comply with detailed government procurement and contracting regulations and with U.S. Government security regulations, certain of which carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Our failure to comply with our government procurement, contracting or security obligations could result in penalties or our suspension or debarment from government contracting, which would have a
material adverse effect on our consolidated results of operations.

We are required to maintain U.S. Government security
clearances at several of our locations. These clearances could be suspended or revoked if we were found not to be in compliance with applicable security regulations. Any such revocation or suspension would delay our delivery of products to
customers. Although we have adopted policies directed at ensuring our compliance with applicable regulations, and there have been no suspensions or revocations at any of our facilities, there can be no assurance that the approved status of our
facilities will continue without interruption.

We are also subject to comprehensive and changing federal, state and local
environmental requirements, both in the U.S. and in Mexico, including those governing discharges to air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with releases of hazardous
substances. We use hazardous substances in our operations and, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties, we may be held liable and may be required to pay the cost of
remedying the condition. The amount of any resulting liability could be material.

Employees

As of December 31, 2007, we had a total of approximately 2,149 employees, 1,773 engaged in manufacturing and providing our technical
services, 46 engaged in sales and marketing, 132 engaged in engineering and 198 engaged in administration. Approximately 883 of our employees are covered by collective bargaining agreements with various unions that expire on various dates through
2009. Excluding certain Mexico employees covered under an annually ratified agreement, collective bargaining agreements covering 240 employees are subject to renewal in the next 12 months. Although we believe overall that our relations with our
labor unions are positive, there can be no assurance that present and future issues with our unions will be resolved favorably, that negotiations will be successful or that we will not experience a work stoppage, which could adversely affect our
consolidated results of operations.

Internet Access

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available free of charge through our website (www.sypris.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.



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|Item 1A. | Risk Factors
|-------- | ------------

Risks Related to Our Business and Forward-Looking
Statements

This annual report, and our other oral or written communications, may contain forward-looking
statements. These statements may include our expectations or projections about the future of our industries, business strategies, potential acquisitions or financial results and our views about developments beyond our control including domestic or
global economic conditions, trends and market forces. These statements are based on managements views and assumptions at the time originally made and we undertake no obligation to update these statements, even if, for example, they remain
available on our website after our outlook has changed. There can be no assurance that our expectations, projections or views will come to pass, and you should not place undue reliance on these forward-looking statements.

A number of significant risk factors could materially affect our specific business operations, and cause our performance to differ
materially from any future results projected or implied by our prior statements, including those described below. Many of these risk factors are also identified in connection with the more specific descriptions contained throughout this report.

Customers

Customer contracts could be less
profitable than expected.

We generally bear the risk that our contracts could be unprofitable or less profitable than
planned, despite our estimates of revenues and future costs to complete such contracts. For contracts to which we apply the percentage of completion accounting method, revisions to our cost estimates could reduce our operating results in
later periods.

A material portion of our business is conducted under multi-year contracts, which generally include fixed
prices or periodic price reductions without minimum purchase requirements. Our financial results are at greater risk when we must accept contractual responsibility for raw material or component prices, when we cannot offset price reductions and cost
increases with operating efficiencies or other savings, when we must submit contract bid prices before all key design elements are finalized or when we are subjected to other competitive pressures which erode our margins. The profitability of our
contracts also can be adversely affected by unexpected start-up costs on new programs, operating inefficiencies, ineffective capital investments, inflationary pressures or inaccurate forecasts of future unit costs.

In the past few years, we have signed long-term supply agreements with Dana and ArvinMeritor and acquired their facilities in Morganton,
North Carolina, Kenton, Ohio and Toluca, Mexico, among other manufacturing assets. Although most of these acquired facilities have well-established product markets, these customers or their products may not continue to be successful, product
enhancements may not be made in a timely fashion, our long-term pricing agreements could generate lower margins than anticipated and there can be no assurance that we will successfully integrate these operations. In addition, our failure to identify
potential liabilities with respect to certain indemnified environmental and other conditions, or our assertion of related claims, could adversely affect our operating results or our customer relationships. Our efforts to restructure, relocate and
consolidate a significant number of the operations in these plants could cause certain of these facilities to operate at underutilized levels which could materially adversely affect our business, results of operations and financial condition.

If customers seek bankruptcy protection, as Dana did on March 3, 2006, they could act to terminate all or a portion
of their business with us, originate new business with our competitors and terminate or assign our long-term supply agreements. Any loss of revenue from our major customers, including the non-payment or late payment of our invoices, could materially
adversely affect our business, results of operations and financial condition.

Unexpected changes in our customers
demand levels have harmed our operating results in the past and could do so in the future. Many of our customers will not commit to firm production or delivery schedules. Disagreements over pricing, quality, delivery, capacity, exclusivity, or trade
credit terms could disrupt order



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schedules. Orders also fluctuate due to changing global capacity and demand, new products, changes in market share, reorganizations or bankruptcies, material
shortages, labor disputes or other factors that discourage outsourcing. These forces could increase, decrease, accelerate, delay or cancel our delivery schedules.

Inaccurate forecasting of our customers requirements can disrupt the efficient utilization of our manufacturing capacity, inventories or workforce. If we lose anticipated revenues, we might
not succeed in redeploying our substantial capital investment and other fixed costs. If we receive unanticipated orders, these incremental volumes could be unprofitable due to the higher costs of operating above our optimal capacity.

We depend on a few key customers in challenging industries for most of our revenues.

Our five largest customers in 2007 were Dana, ArvinMeritor, Ford, Honeywell and Raytheon, collectively accounting for 61% of net revenue. Our five largest customers in 2006 and 2005 were Dana,
ArvinMeritor, Ford, Traxle and Raytheon, collectively accounting for 70% and 67% of net revenue in 2006 and 2005, respectively. The truck components & assemblies industry has experienced credit risk, highly cyclical market demand, labor
unrest, rising steel costs, bankruptcy and other obstacles, while the aerospace & defense electronics industry has seen consolidation, increased competition and uncertain funding.

We depend on the continued growth and financial stability of these customers and our core markets, as well as general economic
conditions. Adverse changes affecting these customers, markets or general conditions could harm our operating results. The truck components & assemblies market is highly cyclical, due in part to regulatory deadlines and is expected to
remain flat at historically low levels in 2008.

Rising costs of steel or component parts have increased our inventory and
working capital levels and presented challenges to our automotive customers who seek to pass those costs on to their customers. Many of our customers labor disputes, financial difficulties and restructuring needs have created rising
uncertainty and risk, which could increase our costs or impair our business model. The aerospace & defense industry is pressured by cyclicality, technological change, shortening product life cycles, decreasing margins, unpredictable funding
levels and government procurement processes. Any of these factors, particularly in our secured electronic communications or missile programs, could impair our business model.

As of March 3, 2008, we had provided approximately $15.3 million, net of payables, in combined trade credit exposure to ArvinMeritor, Dana and Ford, each of which currently carries at least
one non-investment grade credit rating on its unsecured debt, indicating a high potential risk of default. There can be no assurance that any of our customers will not default on, delay or dispute payment of, or seek to reject our
outstanding invoices in bankruptcy or otherwise.

Congressional budgetary constraints or reallocations can reduce our government sales.

We sell manufacturing services and products to a number of U.S. government agencies, which in the aggregate represented approximately
12%, 8%, and 9% of our net revenue in 2007, 2006 and 2005, respectively. We also serve as a contractor for large aerospace & defense companies such as Boeing, Honeywell, Lockheed Martin, Northrop Grumman and Raytheon, typically under
federally funded programs, which represented approximately 8%, 7% and 9% of net revenue during 2007, 2006 and 2005, respectively.

Our government contracts have many inherent risks that could adversely impact our financial results. These contracts depend upon the continuing availability of Congressional appropriations. Future levels of governmental spending, including
delays, declines or reallocations in the funding of certain programs could adversely affect our financial results, if we are unable to offset these changes with new business or cost reductions.

Suppliers

Interruptions in the supply of key components
could disrupt production.

Some of our manufacturing services or products require one or more components that are
available from a limited number of providers or from sole-source providers. In the past, some of the materials we use, including steel, certain forgings or castings, capacitors and memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available quantities among their customers, and we have not been



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able to obtain all of the materials desired. Our inability to reliably obtain these or any other materials when and as needed could slow production or
assembly, delay shipments to our customers, impair the recovery of our fixed costs and increase the costs of recovering to customers schedules, including overtime, expedited freight, equipment maintenance, operating inefficiencies, higher
working capital and the obsolescence risks associated with larger buffer inventories. Each of these factors could reduce operating results.

Shortages
or increased costs of utilities could harm our business and our customers.

We and our customers depend on a constant
supply of electricity and natural gas from utility providers for the operation of our respective businesses and facilities. In the past, we have experienced power outages which reduced our ability to deliver products and meet our customers
demand for those products. If we or our customers experience future interruptions in service from these providers, our production and/or delivery of products could be negatively affected. Additionally, due to the heavy consumption of energy in our
production process and the businesses of our customers, if the cost of energy significantly increases, our results of operations, and those of our customers, could be negatively impacted.

Execution

We must operate more efficiently, or our results
could decline.

If we are unable to improve the cost, efficiency and yield of our operations, our costs could increase
and our financial results could decline. A number of major obstacles could include: inflationary pressures; changes in anticipated product mix and the associated variances in our profit margins; efforts to increase our manufacturing capacity and
launch new programs; efforts to migrate, restructure or move business operations from one location to another; the need to identify and eliminate our root causes of scrap; our ability to achieve expected annual savings or other synergies from past
and future business combinations; inventory risks due to shifts in market demand; obsolescence; price erosion of raw material or component parts; shrinkage, or other factors affecting our inventory valuations; or inability to successfully manage
growth, contraction or competitive pressures in our primary markets.

Our management or systems could be inadequate to
support our existing or future operations. Growth in our business could require us to invest in additional equipment to improve our efficiency. We may have limited experience or expertise in installing or operating such equipment, which could
negatively impact our ability to deliver products on time or with acceptable costs. In addition, a material portion of our manufacturing equipment requires significant maintenance to operate effectively and we may experience maintenance and repair
issues. Our efforts to restructure, relocate and consolidate a significant number of the operations, especially in our truck component manufacturing plants, could cause certain of these facilities to operate at underutilized levels, which could
materially adversely affect our business, results of operations and financial condition.

Our growth strategies could be ineffective due to the risks of
further acquisitions.

Our growth strategy includes acquiring complementary businesses. We could fail to identify,
finance or complete suitable acquisitions on acceptable terms and prices. Acquisition efforts could increase a number of risks, including: diversion of managements attention; difficulties in integrating systems, operations and cultures;
potential loss of key employees and customers of the acquired companies; lack of experience operating in the geographic market of the acquired business; an increase in our expenses and working capital requirements; risks of entering into markets or
producing products where we have limited or no experience, including difficulties in integrating purchased technologies and products with our technologies and products; our ability to improve productivity and implement cost reductions; our ability
to secure collective bargaining agreements with employees; and exposure to unanticipated liabilities.

Our discovery of, or
failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or, after closing with regard to the timely discovery of breaches of
representations or warranties, or of certain indemnified environmental conditions, could seriously harm our business.



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Competition

Increasing competition could limit or reduce our market share.

We operate in highly competitive
environments that include our customers internal capabilities. We believe that the principal competitive factors in our markets include the availability of manufacturing capacity, technological strength, speed and flexibility in responding to
design or schedule changes, price, quality, delivery, cost management and financial strength. Our earnings could decline if our competitors or customers can provide comparable speed and quality at a lower cost, or if we fail to adequately invest in
the range and quality of manufacturing services and products our customers require.

Some of our competitors have greater
financial and organizational resources, customer bases and brand recognition than we do. As a result, our competitors may respond more quickly to technological changes or customer needs, consume lower fixed and variable unit costs, negotiate reduced
component prices, and obtain better terms for financing growth. If we fail to compete in any of these areas, we may lose market share and our business could be seriously harmed. There can be no assurance that we will not experience increased
competition or that we will be able to maintain our profitability if our competitive environment changes.

Our technologies could become obsolete,
reducing our revenues and profitability.

The markets for our products and services are characterized by changing
technology and continuing process development. The future of our business will depend in large part upon the continuing relevance of our technological capabilities. We could fail to make required capital investments, develop or successfully market
services and products that meet changing customer needs, and anticipate or respond to technological changes in a cost-effective and timely manner. We could encounter competition from new or revised technologies that render our technologies and
equipment less profitable or obsolete in our chosen markets, and our operating results may suffer.

Access to Capital

An inability to obtain favorable financing could impair our growth.

Our future liquidity and capital requirements are difficult to predict because they depend on numerous factors, including the pace at which we grow our business and acquire new facilities. One method we have used to
obtain multi-year supply agreements is to buy a customers non-core manufacturing assets and produce products for them. We may need to raise substantial additional funds in order to grow this business. We cannot be certain that we will be able
to obtain additional financing on favorable terms or at all. Additional equity financing could result in dilution to existing holders. If additional financing is obtained in the form of debt, the terms of the debt could place restrictions on our
ability to operate or increase the financial risk of our capital structure. Our ability to borrow under our current credit facility is conditioned upon our compliance with various financial covenants. We could lose our access to such financing if we
experience adverse changes in our operations, poor financial results, increased risk profiles of our businesses, declines in our credit ratings, any actual or alleged breach of our debt covenants, insurance conditions or similar agreements, or any
adverse regulatory developments.

Any inability to raise additional funds as needed could impair our ability to operate and
grow our business. Such financing could be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing
unattractive for us.



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A permanent decline in the value of Dana Holding Corporation could adversely affect our business.

The approval of Danas reorganization plan by the U.S. bankruptcy court in the Southern District of New York on December 12,
2007 finalized our right to receive certain distributions, including distributions of common stock in DAN. We have recorded the aggregate value of such distributions at $76.5 million. A substantial portion of the current owners of DAN common stock
are contractually restricted from trading those shares for at least six months after the confirmation date, and many equity mutual funds are restricted from purchasing stock in businesses that have recently emerged from bankruptcy. Due to such
factors, among others, we believe that the trading value of DAN common stock on the New York Stock Exchange is likely not to reflect the longer-term value of DAN for a number of months. However, if the trading value of DAN common stock remains below
our aggregate recorded valuation of such stock, our business, results of operations and financial condition could be materially adversely impacted. See Notes 2 and 20 to the financial statements in Item 8 of this Form 10-K for additional
information.

Contract Terminations

Contract
terminations or delays could harm our business.

We often provide manufacturing services and products under contracts
that contain detailed specifications, quality standards and other terms. If we are unable to perform in accordance with such terms, our customers might seek to terminate such contracts, or downgrade our past performance rating, an increasingly
critical factor in federal procurement competitions. Moreover, many of our contracts are subject to termination for convenience or upon default. These provisions could provide only limited recoveries of certain incurred costs or profits on completed
work, and could impose liability for our customers costs in procuring undelivered items from another source. If any of our significant contracts were to be terminated or not renewed, we would lose substantial revenues and our operating results
as well as prospects for future business opportunities could be adversely affected.

We are subject to various audits,
reviews and investigations, including private party whistleblower lawsuits, relating to our compliance with federal and state laws. Should our business be charged with wrongdoing, or determined not to be a presently responsible
contractor, we could be temporarily suspended or debarred for up to three or more years from receiving new government contracts or government-approved subcontracts.

Labor Relations

We must attract and retain qualified employees while successfully managing related costs.

Our future success in a changing business environment, including during rapid changes in the size, complexity or skills
required of our workforce, will depend to a large extent upon the efforts and abilities of our executive, managerial and technical employees. The loss of key employees could have a material adverse effect on our operations. Our future success will
also require an ability to attract and retain qualified employees. Labor disputes or changes in the cost of providing pension and other employee benefits, including changes in health care costs, investment returns on plan assets, and discount rates
used to calculate pension and related liabilities, could lead to increased costs or disruptions of operations in any of our business units.

Disputes
with labor unions could disrupt our business plans.

We currently have collective bargaining agreements covering
approximately 883 employees, or approximately 41% of total employees, of which agreements covering 240 employees are subject to renewal in the next 12 months. Although we believe that our overall relations with our labor unions are positive, we
could experience a work stoppage or other disputes which could disrupt our operations or the operations of our customers and could harm our operating results.

Deferred Tax Assets

Our lack of profitability in the U.S. or other factors could adversely affect our financial results.

Our operations in the U.S., considered apart from our other operations in Mexico, have generated net operating losses in
recent years. If these losses were to continue or if permanent or temporary differences occur between the recognition of revenues or expenses for tax purposes in comparison to GAAP financial reporting purposes, then our balance sheet, revenues,
profitability and cash flows could be adversely impacted.



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Regulatory

Environmental, health and safety risks could expose us to potential liability.

We are subject to a variety
of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals and substances used in our operations. If we fail to comply with present or future regulations, we could be forced to alter, suspend or
discontinue our manufacturing processes, and pay substantial fines or penalties.

Groundwater and other contamination has
occurred at certain of our current and former facilities during the operation of those facilities by their former owners, and this contamination may occur at future facilities we operate or acquire. Although we typically receive environmental
indemnification agreements from previous owners of these facilities, there is no assurance that the indemnifications of former owners will be adequate to protect us from liability.

Our Marion, Ohio facility is subject to soil and groundwater contamination involving petroleum compounds, semi-volatile and volatile
organic compounds, certain metals, PCBs and other contaminants, some of which exceed the state voluntary action program standards applicable to the site. We continue to test and assess this site to determine the extent of this contamination by the
prior owners of the facility. Under our purchase agreement for this facility, Dana has agreed to indemnify us for, among other things, certain environmental conditions that existed on the site as of closing and as to which we notified Dana prior to
December 31, 2002, subject to certain other conditions involving Danas release of, or continuing right to seek indemnity from, Eaton Corporation, from which Dana acquired the property.

A leased facility we formerly occupied in Tampa, Florida is subject to remediation activities related to groundwater contamination
involving methyl chloride and other volatile organic compounds, which occurred prior to our use of the facility, and such contamination extends beyond the boundaries of the facility. The prior operator of the facility has entered into a consent
order with the State of Florida and agreed to remediate the contamination, the full scope of which has not yet been determined. In addition, certain claims which have been made against the Company and the former owners or operators of the facility
have been fully indemnified by such former owners and operators, who have assumed the defense of such claims.

We
previously acquired certain business assets formerly located at a leased facility in Littleton, Colorado, where chlorinated solvents had been disposed of on site by a prior owner of the business at the site, contaminating the groundwater at and
around the site. The seller of the assets to us is operating a remediation system on the site approved by the State of Colorado and has entered into a consent order with the EPA providing for additional investigation at the site. In addition, Sypris
has been contractually indemnified by the prior owners of the facility.

Our Morganton, North Carolina facility is subject
to soil and groundwater contamination involving petroleum compounds, certain metals, and other contaminants, some of which may exceed the State of North Carolina standards applicable to the site. Under our purchase agreement for this facility, Dana
had agreed to indemnify us for, among other things, environmental conditions that existed on the site as of closing and as to which we notified Dana prior to December 31, 2005. However, such amounts due from Dana have been released in
conjunction with Danas Chapter 11 filing and the Companys comprehensive settlement with Dana. The Company is aware of no current litigation, material remediation claims or other proceedings with respect to this facility.

Our Toluca, Mexico facility is subject to soil and groundwater contamination involving petroleum compounds and volatile organic
compounds, among other concerns. We continue to test and assess this site to determine the extent of any contamination by the prior owners of the facility. Under our purchase agreement for this facility, Dana has agreed to indemnify us for, among
other things, environmental conditions that existed on the site as of closing and as to which we notified Dana prior to June 30, 2006, subject to certain other conditions involving Danas release of, or continuing right to seek indemnity
from, Eaton Corporation, from which Dana acquired the property.

Our Kenton, Ohio facility is subject to soil and
groundwater contamination involving petroleum compounds, volatile organic compounds, certain metals, PCBs and other contaminants. Under our purchase agreement for this facility, Meritor Heavy Vehicle Systems agreed to indemnify us for, among other
things,



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environmental conditions that existed on the site as of closing and as to which we notified ArvinMeritor prior to May 2, 2006.

Adverse regulatory developments or litigation could harm our business.

Our businesses operate in heavily regulated environments. We must successfully manage the risk of changes in or adverse actions under applicable law or in our regulatory authorizations, licenses
and permits, governmental security clearances or other legal rights to operate our businesses, to manage our work force or to import and export goods and services as needed. Our business activities expose us to the risks of litigation with respect
to our customers, suppliers, creditors, stockholders or from product liability, environmental or asbestos-related matters. We also face the risk of other adverse regulatory actions, compliance costs or governmental sanctions, as well as the costs
and risks related to our ongoing efforts to design and implement effective internal controls.

Other Risks

We face other factors which could seriously disrupt our operations.

Many other risk factors beyond our control could seriously disrupt our operations, including: risks relating to war, future terrorist activities, political uncertainties or natural disasters which could shut down our
domestic or foreign facilities, disrupt transportation of products or supplies, increase the costs under our self insurance program, or change the timing and availability of funding in our aerospace & defense electronics markets; risks
inherent in operating abroad, including foreign currency exchange rates, adverse regulatory developments, and miscommunications or errors due to inaccurate foreign language translations or currency exchange rates; risks relating to natural disasters
or other casualties; or our failure to anticipate or to adequately insure against other risks and uncertainties present in our businesses including unknown or unidentified risks.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



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|Item 2. | Properties
|------- | ----------

Our principal
manufacturing services operations are engaged in electronics manufacturing services for our aerospace & defense customers and industrial manufacturing services for our truck components & assemblies customers. The following chart
indicates the significant facilities that we own or lease, the location and size of each such facility and the manufacturing certifications that each facility possesses. The facilities listed below (other than the corporate office) are used
principally as manufacturing facilities.



|                                      |  |                                 |  |                           |  |                         |  |                                                                                               
|------------------------------------- |  | ------------------------------- |  | ------------------------- |  | ----------------------- |  | ----------------------------------------------------------------------------------------------
|Location                              |  | Market Served                   |  | Own or Lease (Expiration) |  | Approximate Square Feet |  | Certifications                                                                                
|Corporate Office:                    
|                                      |  |                                 |  |                          
|Louisville, Kentucky                  |  |                                 |  | Lease (2014)              |  | 21,600                  |  |                                                                                               
|                                      |  |                                 | 
|Manufacturing and Service Facilities: |  |                                 |  |                           |  |                        
|                                      |  |                                 |  |                          
|Kenton, Ohio                          |  | Truck Components & Assemblies   |  | Own                       |  | 550,000                 |  | TS 16949                                                                                      
|                                      |  |                                 |  |                          
|Louisville, Kentucky                  |  | Truck Components & Assemblies   |  | Own                       |  | 450,000                 |  | QS 9000                                                                                       
|                                      |  |                                 |  |                          
|Marion, Ohio                          |  | Truck Components & Assemblies   |  | Own                       |  | 255,000                 |  | TS 16949                                                                                      
|                                      |  |                                 |  |                          
|Morganton, North Carolina             |  | Truck Components & Assemblies   |  | Own                       |  | 360,000                 |  | TS 16949 ISO 14001                                                                            
|                                      |  |                                 |  |                          
|Orlando, Florida                      |  | Test & Measurement Services     |  | Own                       |  | 62,000                  |  | ANSI/NCSL Z540 AS 9100 DSCC FCC ISO 9001 ISO
17025/Guide 25 MIL-STD 750, 883, 202 and 810 VCCI
|                                      |  |                                 |  |                          
|San Dimas, California                 |  | Aerospace & Defense Electronics |  | Lease (2015)              |  | 26,300                  |  | ISO 9001                                                                                      
|                                      |  |                                 |  |                          
|Tampa, Florida                        |  | Aerospace & Defense Electronics |  | Lease (2016)              |  | 318,000                 |  | ISO 9001 AS
9100 NASA-STD-8739 IPC-A-610, Rev
D, Class 3 J-STD-001,
Rev D, Class 3            
|                                      |  |                                 |  |                          
|Toluca, Mexico                        |  | Truck Components & Assemblies   |  | Own                       |  | 217,000                 |  | TS 16949                                                                                      

In addition, we lease space in 20 other facilities primarily utilized to provide
technical services, all of which are located in the U.S. We also own 12 ISO-certified mobile calibration units and five ISO-certified transportable field calibration units that are utilized to provide test & measurement services at customer
locations throughout the U.S., the Caribbean and the South Pacific.



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Below is a listing and description of the various manufacturing certifications or
specifications that we utilize at our facilities.



|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|--------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Certification/Specification |  | Description                                                                                                                                                                                                                                                                                                                                                                                           
|                            | 
|ANSI/NCSL Z540              |  | A certification which sets out general provisions that a laboratory must address to carry out specific calibrations or tests and provides laboratories with direction for the
development of a fundamental quality management system.                                                                                                                                                                 
|                            | 
|AS 9100                     |  | A quality management system developed by the aerospace industry to measure supplier conformance with basic common acceptable aerospace quality
requirements.                                                                                                                                                                                                                                          
|                            | 
|DSCC                        |  | A certification that specifies specific functions or processes that are conducted in compliance with military specifications, such as a quality program, high-reliability
soldering, component testing, and environmental testing.                                                                                                                                                                    
|                            | 
|FCC                         |  | A certification process by the Federal Communications Commission, which sets out general provisions that a laboratory must conform to in carrying out EMI/EMC testing and
provides laboratories with direction for the development of a fundamental quality management system.                                                                                                                        
|                            | 
|IPC-A-610                   |  | A certification process for electronics assembly manufacturing which describes materials, methods and verification criteria for producing high quality electronic products.
Class 3 specifically includes high performance or performance-on-demand products where equipment downtime cannot be tolerated, end-use environment may be uncommonly harsh, and the equipment must function when required.
|                            | 
|J-STD-001                   |  | A family of voluntary standards of industry-accepted workmanship criteria for electronics assemblies.                                                                                                                                                                                                                                                                                                 
|                            | 
|ISO 9001                    |  | A certification process comprised of quality system requirements to ensure quality in the areas of design, development, production, installation and servicing of products.                                                                                                                                                                                                                           
|                            | 
|ISO 14001                   |  | A family of voluntary standards and guidance documents defining specific requirements for an Environmental Management System.                                                                                                                                                                                                                                                                         
|                            | 
|ISO 17025/Guide 25          |  | A certification process commonly referred to as A2LA, which sets out general provisions that a laboratory must address to carry out specific calibrations or tests and
provides laboratories with direction for the development of a fundamental quality management system.                                                                                                                           
|                            | 
|MIL                         |  | A specification that signifies specific functions or processes that are conducted in compliance with military specifications, such as a quality program, high-reliability
soldering, calibration and metrology, and environmental testing.                                                                                                                                                            
|                            | 
|NASA-STD-8739               |  | A specification for space programs designated by the National Aeronautics and Space Administration.                                                                                                                                                                                                                                                                                                   
|                            | 
|QS 9000                     |  | A certification process developed by the nations major automakers that focuses on continuous improvement, defect reduction, variation reduction and elimination of
waste.                                                                                                                                                                                                                            



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|         |  |                                                                                                                                                                                                                                                                                                                                         
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|TS 16949 |  | A quality certification system developed within the automotive sector. Using ISO 9001:2000 as its foundation, ISO/TS 16949:2002 specifies the quality management system (QMS)
requirements for the design, development, production, installation and servicing of automotive related products.                                          
|         | 
|VCCI     |  | An internationally recognized and accepted Japanese certification by the Voluntary Control Council for Interference, which established regulations to control interference
with licensed radio communication services in accordance with CISP 22 emission standards in carrying out EMI/EMC testing and is similar to FCC certification.



|Item 3. | Legal Proceedings
|------- | -----------------

We are involved
from time to time in routine litigation and other legal or environmental proceedings incidental to our business. There are currently no material pending legal proceedings to which we are a party. Ongoing environmental matters include the following:



| |  |  | Our Marion, Ohio facility is subject to soil and groundwater contamination involving petroleum compounds, semi-volatile and volatile organic compounds, certain
metals, PCBs and other contaminants, some of which exceed the State of Ohio voluntary action program standards applicable to the site. Under our purchase agreement for this facility, Dana has agreed to indemnify us for, among other things,
environmental conditions that existed on the site as of closing and as to which we notified Dana prior to December 31, 2002, to the extent of any indemnification owed to Dana by Eaton Corporation or any other matters for which Dana has released
Eaton.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A leased facility we formerly occupied in Tampa, Florida is currently subject to remediation activities related to groundwater contamination involving methylene
chloride and other volatile organic compounds which occurred prior to our use of the facility. The contamination extends beyond the boundaries of the facility. In December 1986, Honeywell, a prior operator of the facility, entered into a consent
order with the Florida Department of Environmental Regulation under which Honeywell agreed to remediate the contamination, the full scope of which has not yet been determined. We purchased the assets of a business formerly located on this leased
site and operated that business from 1993 until December 1994. Philips Electronics, the seller of those assets, has agreed to indemnify us with respect to environmental matters arising from groundwater contamination at the site prior to our use of
the facility. On November 3, 2004, Sypris Electronics was served as a co-defendant with Honeywell International, Inc. and Phillips Electronics America Corporation in an environmental lawsuit filed in the Circuit Court of the Thirteenth Judicial
Circuit Hillsborough County, Florida by Helen Jones and other surrounding landowners, alleging various damages caused by such contamination. Philips Electronics has agreed to pay for our defense costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 1992, we acquired certain business assets formerly located at a leased facility in Littleton, Colorado. Certain chlorinated solvents disposed of on
the site by Honeywell, a previous owner of the business, have contaminated the groundwater at and around the site. Alliant Techsystems, from which we acquired the business assets, operates a remediation system approved by the State of Colorado and
has also entered into a consent order with the EPA providing for additional investigation at the site. Alliant Techsystems has agreed to indemnify us with respect to these matters.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Morganton, North Carolina facility is subject to soil and groundwater contamination involving petroleum compounds, certain metals, and other contaminants,
some of which exceed the State of North Carolina notification standards applicable to the site. No litigation or other proceedings are underway with respect to this site.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Toluca, Mexico facility is subject to soil and groundwater contamination involving petroleum compounds and volatile organic compounds, among other concerns.
Under our purchase agreement for this facility, Dana has agreed to indemnify us for, among other things, environmental conditions that existed on the site as of closing and as to which we notified Dana prior to June 30, 2006, to the extent
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | of any indemnification owed to Dana by Eaton Corporation or any other matters for which Dana has released Eaton.
| | ----------------------------------------------------------------------------------------------------------------



| |  |  | Our Kenton, Ohio facility is subject to soil and groundwater contamination involving petroleum compounds, volatile organic compounds, certain metals, PCBs and
other contaminants. Under our purchase agreement for this facility, Meritor Heavy Vehicle Systems has agreed to indemnify us for, among other things, environmental conditions that existed on the site as of closing and as to which we notified
ArvinMeritor prior to May 2, 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2007.



20



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##### Table of Contents

PART II



|Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ----------------------------------------------------------------------------------------------------------------

Our common stock is traded on the Nasdaq National Market under the symbol SYPR. The following table sets forth, for the
periods indicated, the high and low closing sale prices per share of our common stock as reported by the Nasdaq National Market.



|                              |  |      |       |     |   |     
|----------------------------- |  | ---- | ----- | --- | - | ----
|                              |  | High |       | Low
|Year ended December 31, 2006: |  |      |       |     |   |     
|First Quarter                 |  | $    | 11.26 |     | $ | 9.04
|Second Quarter                |  |      | 10.10 |     |   | 7.83
|Third Quarter                 |  |      | 9.99  |     |   | 6.94
|Fourth Quarter                |  |      | 8.35  |     |   | 6.77
|                              |  |     
|Year ended December 31, 2007: |  |      |       |     |   |     
|First Quarter                 |  | $    | 7.14  |     | $ | 6.03
|Second Quarter                |  |      | 8.87  |     |   | 6.46
|Third Quarter                 |  |      | 9.05  |     |   | 7.90
|Fourth Quarter                |  |      | 9.91  |     |   | 5.53

LOGO

The graph above shows a comparison of cumulative total stockholder returns for Sypris,
calculated on a dividend reinvestment basis, from December 31, 2002 through December 31, 2007. In the performance graph, the cumulative total stockholder return of the Company is compared to the Russell 2000 Index and the S&P SmallCap
600 Index. The S&P SmallCap 600 Index has been selected as a basis of comparison since Sypris believes the S&P



21



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##### Table of Contents

SmallCap 600 Index more appropriately tracks the performance of multi-industry businesses at its level of market capitalization, than any identifiable peer
group.

As of March 5, 2008, there were 911 holders of record of our common stock. On September 22, 2002, our
Board of Directors declared an initial quarterly cash dividend of $0.03 per common share outstanding. Cash dividends of $0.03 per common share have been paid quarterly since the initial dividend was declared in 2002. Dividends may be paid on common
stock only when, as and if declared by our Board of Directors in its sole discretion. We did not repurchase any of our common stock during the fourth quarter of the fiscal year ended December 31, 2007.



22



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------

The
following selected financial data should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes included in Item 8 of
this Form 10-K. The selected financial data set forth below as of December 31, 2007 and 2006, and for the three years included in the period ended December 31, 2007 are derived from our audited consolidated financial statements
included elsewhere in this Form 10-K, and the data below are qualified by reference to those consolidated financial statements and related notes. The financial statement data at December 31, 2005, 2004 and 2003 and for the years ended
December 31, 2004 and 2003 are derived from our audited consolidated financial statements not included in this Form 10-K.



|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|------------------------------------------- |  | ------------------------------------- | ------- | - | ------- | - | ------- | ---- |  | - | ------- | - |  | ------- | ------- | - |  | - | -------
|                                            |  | Years Ended December 31,             
|                                            |  | 2007                                  |         |   | 2006(1) |   |         | 2005 |  |   | 2004(2) |   |  | 2003(3)
|                                            |  | (in thousands, except per share data)
|Consolidated Statement of Operations Data:  |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Net revenue                                 |  | $                                     | 435,915 |   |         | $ | 497,664 |      |  | $ | 522,766 |   |  | $       | 425,402 |   |  | $ | 276,605
|Cost of sales                               |  |                                       | 396,119 |   |         |   | 456,574 |      |  |   | 471,428 |   |  |         | 371,963 |   |  |   | 230,660
|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Gross profit                                |  |                                       | 39,796  |   |         |   | 41,090  |      |  |   | 51,338  |   |  |         | 53,439  |   |  |   | 45,945 
|Selling, general and administrative         |  |                                       | 40,517  |   |         |   | 37,107  |      |  |   | 35,669  |   |  |         | 35,248  |   |  |   | 26,711 
|Research and development                    |  |                                       | 2,821   |   |         |   | 1,988   |      |  |   | 2,833   |   |  |         | 3,697   |   |  |   | 4,166  
|Amortization of intangible assets           |  |                                       | 527     |   |         |   | 645     |      |  |   | 614     |   |  |         | 596     |   |  |   | 194    
|Nonrecurring (income) expense, net          |  |                                       | (3,246  | ) |         |   | 1,485   |      |  |   |        |   |  |         |        |   |  |   |       
|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Operating (loss) income                     |  |                                       | (823    | ) |         |   | (135    | )    |  |   | 12,222  |   |  |         | 13,898  |   |  |   | 14,874 
|Interest expense, net                       |  |                                       | 3,685   |   |         |   | 3,708   |      |  |   | 5,979   |   |  |         | 2,100   |   |  |   | 1,693  
|Other expense (income), net                 |  |                                       | 31      |   |         |   | (387    | )    |  |   | (1,325  | ) |  |         | (138    | ) |  |   | 230    
|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|(Loss) income before income taxes           |  |                                       | (4,539  | ) |         |   | (3,456  | )    |  |   | 7,568   |   |  |         | 11,936  |   |  |   | 12,951 
|Income tax (benefit) expense                |  |                                       | (2,400  | ) |         |   | (2,094  | )    |  |   | 2,247   |   |  |         | 3,637   |   |  |   | 4,860  
|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Net (loss) income                           |  | $                                     | (2,139  | ) |         | $ | (1,362  | )    |  | $ | 5,321   |   |  | $       | 8,299   |   |  | $ | 8,091  
|                                            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|(Loss) earnings per common share:           |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Basic                                       |  | $                                     | (0.12   | ) |         | $ | (0.08   | )    |  | $ | 0.30    |   |  | $       | 0.48    |   |  | $ | 0.57   
|Diluted                                     |  | $                                     | (0.12   | ) |         | $ | (0.08   | )    |  | $ | 0.29    |   |  | $       | 0.47    |   |  | $ | 0.56   
|Cash dividends per common share             |  | $                                     | 0.12    |   |         | $ | 0.12    |      |  | $ | 0.12    |   |  | $       | 0.12    |   |  | $ | 0.12   
|Shares used in computing per share amounts: |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Basic                                       |  |                                       | 18,231  |   |         |   | 18,079  |      |  |   | 18,016  |   |  |         | 17,119  |   |  |   | 14,237 
|Diluted                                     |  |                                       | 18,231  |   |         |   | 18,079  |      |  |   | 18,323  |   |  |         | 17,745  |   |  |   | 14,653 
|                                            | 
|                                            |  | December 31,                         
|                                            |  | 2007                                  |         |   | 2006(1) |   |         | 2005 |  |   | 2004(2) |   |  | 2003(3)
|                                            |  | (in thousands)                       
|Consolidated Balance Sheet Data:            |  |                                       |         |   |         |   |         |      |  |   |         |   |  |         |         |   |  |   |        
|Cash and cash equivalents                   |  | $                                     | 14,622  |   |         | $ | 32,400  |      |  | $ | 12,060  |   |  | $       | 14,060  |   |  | $ | 12,019 
|Working capital                             |  |                                       | 152,441 |   |         |   | 100,717 |      |  |   | 111,765 |   |  |         | 143,123 |   |  |   | 81,456 
|Total assets                                |  |                                       | 422,060 |   |         |   | 379,033 |      |  |   | 417,624 |   |  |         | 431,178 |   |  |   | 264,435
|Current portion of long-term debt           |  |                                       | 5,000   |   |         |   | 5,000   |      |  |   |        |   |  |         | 7,000   |   |  |   | 3,200  
|Long-term debt, net of current portion      |  |                                       | 60,000  |   |         |   | 55,000  |      |  |   | 80,000  |   |  |         | 110,000 |   |  |   | 53,000 
|Total stockholders equity                  |  |                                       | 207,479 |   |         |   | 209,886 |      |  |   | 213,734 |   |  |         | 208,939 |   |  |   | 145,392



|(1) | Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment under the modified prospective
method. We also adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) as of December 31, 2006. See Note 1
of our consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On May 3, 2004 and June 30, 2004, respectively, we completed the acquisition of the net assets of ArvinMeritors Kenton, Ohio facility and
Danas Toluca, Mexico facility and their results of operations and related purchased assets are included from those dates forward.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On December 31, 2003, we completed the acquisition of the net assets of Danas Morganton, North Carolina facility and its results of operations and
related purchased assets are included from that date forward.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion of our consolidated results of operations and financial condition should be read together with the other
financial information and consolidated financial statements included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated
in the forward-looking statements as a result of a variety of factors, including those discussed in Risk Factors and elsewhere in this Form 10-K.

Overview

We are a diversified provider of outsourced services and specialty products. We perform a wide
range of manufacturing, engineering, design, testing and other technical services, typically under multi-year, sole-source contracts with major companies and government agencies in the markets for aerospace & defense electronics, truck
components & assemblies, and test & measurement services. Revenue from our three core markets accounted for approximately 95% of our revenue for the year ended December 31, 2007, while revenue from our outsourced services
accounted for approximately 81% of our revenue.

We are organized into two business groups, the Industrial Group and the
Electronics Group. The Industrial Group is one reportable business segment, while the Electronics Group includes two reportable business segments, Aerospace & Defense and Test & Measurement. The Industrial Group is comprised of
Sypris Technologies, Inc. and its subsidiaries, which generates revenue primarily from the sale of manufacturing services to customers in the market for truck components & assemblies and from the sale of products to the energy and chemical
markets. The Aerospace & Defense reportable segment is comprised of Sypris Data Systems, Inc. and Sypris Electronics, LLC. Revenue for this group is derived primarily from the sale of manufacturing services, technical services and products
to customers in the market for aerospace & defense electronics. The Test & Measurement reportable segment consists solely of Sypris Test & Measurement, Inc., which generates revenue primarily from providing technical
services for the calibration, certification and repair of test and measurement equipment in the U.S.

Our objective is to
become the leading outsourcing specialist in each of our core markets for aerospace & defense electronics, truck components & assemblies, and test & measurement services. We have focused our efforts on establishing
long-term relationships with industry leaders who embrace multi-year contractual relationships as a strategic component of their supply chain management.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements and
accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting
estimated amounts included in our consolidated financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates. We also have other policies that we consider to be key accounting policies,
such as our policies for revenue recognition in the Industrial Group, including cost of sales; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or
judgments that are difficult or subjective.

Allowance for Doubtful Accounts. We establish reserves for
uncollectible accounts receivable based on overall receivable aging levels, a specific evaluation of accounts for customers with known financial difficulties and evaluation of customer chargebacks, if any. These reserves and corresponding write-offs
could significantly increase if our customers experience deteriorating financial results or in the event we receive a significant chargeback, which is deemed uncollectible.

Impairments. Goodwill is tested at least annually for impairment by calculating the estimated fair value of each business with which goodwill is associated. The estimated fair value is
based on a discounted cash flow analysis that requires judgment in our evaluation of the business and establishing an appropriate discount rate and terminal value to apply in the calculations. In selecting these and other assumptions for each
business, we consider historical performance, forecasted operating results, general market conditions and industry considerations specific to the business. It is possible that the assumptions underlying the impairment analysis will change in such a
manner



24



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that impairment charges may occur. We likely would compute a materially different fair value for a business if different assumptions were used or if
circumstances were to change.

At December 31, 2007, net assets of our Test & Measurement segment were $13.4
million, including goodwill of $6.9 million, and our Aerospace & Defense segment had net assets of $41.5 million, including goodwill of $6.9 million. If continued improvements in operations are not achieved and profitability deteriorates,
we may be required to record an impairment charge to goodwill for the Test & Measurement and/or the Aerospace & Defense segments.

Long-term Contracts.A large part of our Aerospace & Defense segment business is derived from long-term contracts for development, production and service activities, which we account for consistent
with the American Institute of Certified Public Accountants (AICPA) audit and accounting guide, Audits of Federal Government Contractors, the AICPAs Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, and other relevant revenue recognition accounting literature, as applicable. We consider the nature of these contracts and the types of products and services provided when we determine the proper accounting for
a particular contract.

Primarily, we record long-term, fixed-price contracts on a percentage of completion basis using
units-of-delivery to measure progress toward completing the contract and recognizing net revenue. Revenue is recognized on these contracts when units are shipped or delivered to the customer, as applicable, with unit revenue based upon unit prices
as set forth in the applicable contracts. The costs attributed to contract revenue are based upon the estimated average costs of all units to be shipped. For example, we use this method of revenue recognition on our encryption programs. In less
frequent circumstances, we enter into milestone specific, fixed-price contracts for which revenue is recorded when we achieve performance milestones. Revenue recognized under such milestones is limited to net revenue that we would recognize under
the cost-to-cost method. Under the cost-to-cost method of accounting, revenue is recognized based on the ratio of costs incurred to our estimate of total costs at completion. For example, we use this methodology for our CEC, Common Card and KI-17
programs. As we incur costs under cost-reimbursement-type contracts, we record net revenue. Cost-reimbursement-type contracts include time and materials and other level-of-effort-type contracts. An example of this type of revenue recognition
includes the Information Assurance Engineering Services program.

As a general rule, we recognize net revenue and profits
earlier in a production cycle when we use the cost-to-cost and milestone methods of percentage of completion accounting than when we use the units-of-delivery method. In addition, our profits and margins may vary materially depending on the types of
long-term government contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives, and the stage of performance at which the right to receive fees is finally determined.

Contract accounting requires judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for
schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs,
as well as an allocation of indirect costs. Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. For contract change orders, claims or
similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable.

The majority of our Aerospace & Defense segment net revenue is driven by pricing based on costs incurred to produce products or
perform services under contracts with the U.S. Government, and therefore not necessarily on market-based factors. Cost-based pricing is determined under the Federal Acquisition Regulations (FAR). The FAR provides guidance on the types of costs that
are allowable in establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to charitable contributions, advertising, public relations and interest expense are unallowable, and therefore, not
recoverable through net revenue.

Approximately 19%, 12% and 16% of total net revenue was recognized under the percentage
of completion method based on units of delivery during 2007, 2006 and 2005, respectively. Approximately 2%, 3% and 2% of total net revenue was recognized under the percentage of completion method based on milestones or cost-to-cost during 2007, 2006
and 2005, respectively. Therefore, the amounts we record in our consolidated financial statements



25



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using contract accounting methods and cost accounting standards are material. Because of the significance of the judgments and estimation processes, it is
likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates
are generally included in earnings in the current period. We closely monitor compliance with and the consistent application of our critical accounting policies related to contract accounting. In addition to less formal monthly reviews, management in
the Aerospace & Defense segment formally assesses the status of contracts on a quarterly basis through extensive estimate at completion reviews, which include multiple levels of program personnel. Costs incurred and allocated to contracts
with the U.S. Government are reviewed for compliance with regulatory standards by our personnel and are subject to audit by the Defense Contract Audit Agency.

Pension Plan Funded Status. The calculation of pension assets and liabilities involve complex estimation processes based on third party actuarially determined estimates, which rely on
management estimates of the discount rate and rate of return on plan assets. Changes in these rates could significantly impact the actuarially determined amounts recorded in the statements of financial position.

Reserve for Excess, Obsolete and Scrap Inventory. We record inventory at the lower of cost, determined under the first-in,
first-out method, or market and we reserve for excess, obsolete or scrap inventory. These reserves are primarily based upon managements assessment of the salability of the inventory, historical usage of raw materials, historical demand for
finished goods and estimated future usage and demand. An improper assessment of salability or improper estimate of future usage or demand, or significant changes in usage or demand could result in significant changes in the reserves and a positive
or a negative impact on our consolidated results of operations in the period the change occurs.

Stock-based
Compensation.We account for stock-based compensation in accordance with the fair value recognition provisions using the Black-Scholes option-pricing method, which requires the input of several subjective assumptions. These assumptions include
estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not
complete their vesting requirements (forfeitures). Changes in the subjective assumptions can materially affect the fair value estimate of stock-based compensation and consequently, the related expense recognized in the consolidated statements of
operations.

Income Taxes.The Company accounts for income taxes as required by the provisions of Statement of
Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes (SFAS No. 109), under which deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities measured using enacted tax rates.

As referenced in Note 16 to the consolidated
financial statements, the Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), as of January 1, 2007. Management judgment is required in
determining income tax expense and the related balance sheet amounts. In addition, under FIN 48 judgments are required concerning the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending
upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company believes that its recorded tax
liabilities adequately provide for the probable outcome of these assessments.

Deferred tax assets are also recorded for
operating losses and tax credit carryforwards. However, SFAS No. 109 requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment is
largely dependent upon projected near-term profitability including the effects of tax planning. Deferred tax assets and liabilities are determined separately for each tax jurisdiction in which the Company conducts its operations or otherwise incurs
taxable income or losses. In the U.S., the Company had a net deferred tax liability at December 31, 2007. U.S. operations have not been profitable in recent years, however. If unprofitable results continue, we may be required to record a
valuation allowance on the resulting deferred tax assets. The Companys foreign operation had a net deferred tax asset at December 31, 2007. The Company has been profitable in its foreign operations and anticipates continuing profitability
in the future. No valuation allowances were recorded during 2007, 2006 or 2005.



26



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##### Table of Contents

Results of Operations

The tables presented below, which compare our consolidated results of operations from one year to another, present the results for each year, the change in those results from one year to another
in both dollars and percentage change and the results for each year as a percentage of net revenue. The first two data columns in each table show the absolute results for each year presented. The columns entitled Year Over Year Change
and Year Over Year Percentage Change show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net revenue increases from
one year to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one year to the next, that change is shown as a negative number in both columns. The last two columns in each table show the
results for each period as a percentage of net revenue. In these two columns, the cost of sales and gross profit for each are given as a percentage of that segments net revenue. These amounts are shown in italics. In addition, as used in these
tables, NM means not meaningful.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006



|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|----------------------------------- |  | -------------------------------------- | ------- | - | ------------------- | - | ------- | ----------------------------- |  | - | ---------------------------------------------------------------- | - |  | ------ | -- |  | ----- | -- |  | ----- | --
|                                    |  | Year EndedDecember 31,                 |         |   | Year OverYearChange |   |         | Year OverYearPercentageChange |  |   | Result as Percentage ofNet Revenue for theYear EndedDecember 31, |  
|                                    |  | 2007                                   |         |   | 2006                |   |         | Favorable(Unfavorable)        |  |   | Favorable(Unfavorable)                                           |   |  | 2007   |    |  | 2006  |   
|                                    |  | (in thousands, except percentage data) |        
|Net revenue:                        |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Industrial Group                    |  | $                                      | 279,082 |   |                     | $ | 364,570 |                               |  | $ | (85,488                                                          | ) |  | (23.4  | )% |  | 64.0  | %  |  | 73.2  | % 
|Aerospace & Defense                 |  |                                        | 104,505 |   |                     |   | 87,491  |                               |  |   | 17,014                                                           |   |  | 19.4   |    |  | 24.0  |    |  | 17.6  |   
|Test & Measurement                  |  |                                        | 52,328  |   |                     |   | 45,603  |                               |  |   | 6,725                                                            |   |  | 14.7   |    |  | 12.0  |    |  | 9.2   |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Electronics Group                   |  |                                        | 156,833 |   |                     |   | 133,094 |                               |  |   | 23,739                                                           |   |  | 17.8   |    |  | 36.0  |    |  | 26.8  |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Total net revenue                   |  |                                        | 435,915 |   |                     |   | 497,664 |                               |  |   | (61,749                                                          | ) |  | (12.4  | )  |  | 100.0 |    |  | 100.0 |   
|Cost of sales:                      |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Industrial Group                    |  |                                        | 261,492 |   |                     |   | 346,894 |                               |  |   | 85,402                                                           |   |  | 24.6   |    |  | 93.7  |    |  | 95.2  |   
|Aerospace & Defense                 |  |                                        | 95,496  |   |                     |   | 73,832  |                               |  |   | (21,664                                                          | ) |  | (29.3  | )  |  | 91.4  |    |  | 84.4  |   
|Test & Measurement                  |  |                                        | 39,131  |   |                     |   | 35,848  |                               |  |   | (3,283                                                           | ) |  | (9.2   | )  |  | 74.8  |    |  | 78.6  |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Electronics Group                   |  |                                        | 134,627 |   |                     |   | 109,680 |                               |  |   | (24,947                                                          | ) |  | (22.7  | )  |  | 85.8  |    |  | 82.4  |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Total cost of sales                 |  |                                        | 396,119 |   |                     |   | 456,574 |                               |  |   | 60,455                                                           |   |  | 13.2   |    |  | 90.9  |    |  | 91.7  |   
|Gross profit:                       |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Industrial Group                    |  |                                        | 17,590  |   |                     |   | 17,676  |                               |  |   | (86                                                              | ) |  | (0.5   | )  |  | 6.3   |    |  | 4.8   |   
|Aerospace & Defense                 |  |                                        | 9,009   |   |                     |   | 13,659  |                               |  |   | (4,650                                                           | ) |  | (34.0  | )  |  | 8.6   |    |  | 15.6  |   
|Test & Measurement                  |  |                                        | 13,197  |   |                     |   | 9,755   |                               |  |   | 3,442                                                            |   |  | 35.3   |    |  | 25.2  |    |  | 21.4  |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Electronics Group                   |  |                                        | 22,206  |   |                     |   | 23,414  |                               |  |   | (1,208                                                           | ) |  | (5.2   | )  |  | 14.2  |    |  | 17.6  |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Total gross profit                  |  |                                        | 39,796  |   |                     |   | 41,090  |                               |  |   | (1,294                                                           | ) |  | (3.1   | )  |  | 9.1   |    |  | 8.3   |   
|Selling, general and administrative |  |                                        | 40,517  |   |                     |   | 37,107  |                               |  |   | (3,410                                                           | ) |  | (9.2   | )  |  | 9.3   |    |  | 7.5   |   
|Research and development            |  |                                        | 2,821   |   |                     |   | 1,988   |                               |  |   | (833                                                             | ) |  | (41.9  | )  |  | 0.6   |    |  | 0.4   |   
|Amortization of intangible assets   |  |                                        | 527     |   |                     |   | 645     |                               |  |   | 118                                                              |   |  | 18.3   |    |  | 0.1   |    |  | 0.1   |   
|Nonrecurring (income) expense, net  |  |                                        | (3,246  | ) |                     |   | 1,485   |                               |  |   | 4,731                                                            |   |  | NM     |    |  | (0.7  | )  |  | 0.3   |   
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Operating loss                      |  |                                        | (823    | ) |                     |   | (135    | )                             |  |   | (688                                                             | ) |  | (509.6 | )  |  | (0.2  | )  |  | 0.0   |   
|Interest expense, net               |  |                                        | 3,685   |   |                     |   | 3,708   |                               |  |   | 23                                                               |   |  | 0.6    |    |  | 0.8   |    |  | 0.8   |   
|Other expense (income), net         |  |                                        | 31      |   |                     |   | (387    | )                             |  |   | (418                                                             | ) |  | NM     |    |  | (0.0  | )  |  | (0.1  | ) 
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Loss before income taxes            |  |                                        | (4,539  | ) |                     |   | (3,456  | )                             |  |   | (1,083                                                           | ) |  | (31.3  | )  |  | (1.0  | )  |  | (0.7  | ) 
|Income taxes                        |  |                                        | (2,400  | ) |                     |   | (2,094  | )                             |  |   | 306                                                              |   |  | 14.6   |    |  | (0.5  | )  |  | (0.4  | ) 
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   
|Net loss                            |  | $                                      | (2,139  | ) |                     | $ | (1,362  | )                             |  | $ | (777                                                             | ) |  | (57.0  | )% |  | (0.5  | )% |  | (0.3  | )%
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                  |   |  |        |    |  |       |    |  |       |   



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##### Table of Contents

Backlog. Our backlog increased $7.4 million to $106.9 million at December 31,
2007, on $164.2 million in net orders in 2007 compared to $131.3 million in 2006. We expect to convert approximately 80% of the backlog at December 31, 2007 to revenue during 2008.

Backlog for our Aerospace & Defense segment increased $5.1 million to $99.1 million at December 31, 2007, on
$109.6 million in net orders in 2007 compared to $83.5 million in 2006. Backlog for our Test & Measurement segment increased $2.3 million to $7.8 million at December 31, 2007 on $54.6 million in net orders in 2007 compared to
$47.7 million in 2006. We expect to convert approximately 79% of the Aerospace & Defense backlog and approximately 100% of the Test & Measurement backlog at December 31, 2007 to revenue during 2008.

Net Revenue. The Industrial Group derives its revenue from manufacturing services and product sales. Net revenue in the Industrial
Group decreased $85.5 million to $279.1 million in 2007. Lower sales volume attributable to reduced demand from customers in the heavy truck and trailer markets accounted for decreased revenue of approximately $84.5 million and
$9.9 million, respectively. Revenue also declined approximately $12.6 million from the discontinued sale of housings components to a customer in the heavy truck market. The volume declines were partially offset by increased pricing of
approximately $8.6 million on certain light truck components and additional revenue of approximately $11.8 million attributable to arbitration payments and the settlement agreement with Dana for certain components supplied during 2007.

The Aerospace & Defense segment derives its revenue from product sales and technical outsourced services.
Aerospace & Defense segment net revenue increased $17.0 million to $104.5 million primarily due to increased product sales driven by the ramp-up of a new classified program during 2007. Technical outsourced services comprised $5.8 million
of the increase primarily as a result of the launch of several new programs.

The Test & Measurement segment
derives its revenue from technical services including calibration and component screening, and product sales. Technical services revenue accounted for approximately 88% and 87% of total Test & Measurement revenue in 2007 and 2006,
respectively. Test & Measurement segment net revenue increased $6.7 million primarily due to increased demand for technical services.

Gross Profit. The Industrial Groups gross profit decreased $0.1 million to $17.6 million in 2007. The counteracting factors impacting gross profit in 2007 were the sales volume declines in the
heavy truck and trailer markets offset by the pricing increase and the Dana settlement revenues. The significant decrease in sales volume and related loss of fixed overhead absorption combined with increased fringe benefit costs and higher
contractual labor rates resulted in a reduction in gross profit of approximately $19.2 million. The volume related decrease in gross profit was offset by approximately $8.6 million for the light truck market pricing increase and
approximately $10.5 million for the revenue from arbitration payments and the settlement agreement with Dana.

The
Aerospace & Defense segments gross profit decreased $4.7 million to $9.0 million in 2007. Gross profit as a percentage of revenue for 2007 decreased to 8.6% from 15.6% in 2006. The increase in revenue for the segment in 2007
was comprised of a higher mix of lower-margin services and product sales as compared to the prior year. The unfavorable product mix and related gross margin impact was further affected by the delay in a new government contract award with shipments
on the new program expected to begin in the first quarter of 2008. Additionally, contract support costs and delayed cost reduction efforts on a government program contributed to the decline in gross profit in 2007.

The Test & Measurement segments gross profit increased $3.4 million in 2007 primarily due to increased revenues, which
also contributed to an increase in gross profit as a percentage of revenue to 25.2% in 2007 from 21.4% in 2006.

Selling, General and Administrative. Selling, general and administrative expense increased $3.4 million in 2007 and increased as a percentage of net revenue to 9.3% in 2007 from 7.5% in 2006 primarily due to compensation-related
expenses, recruiting costs and higher employee benefit costs.

Research and Development. Research and development
costs increased $0.8 million in 2007 primarily due to new product development efforts within our Aerospace & Defense segment.



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##### Table of Contents

Nonrecurring (Income) Expense, Net.Nonrecurring items include the gain recognized
as part of the Dana settlement agreement offset by the write-off of certain accounts receivable and other assets, legal and professional fees incurred as a result of the Dana bankruptcy filing and other transaction related costs.

Interest Expense, Net. Interest expense in 2007 was consistent with 2006. Our weighted average debt outstanding decreased to $53.1
million during 2007 from $65.1 million during 2006, resulting primarily from multiple working capital management initiatives. The weighted average interest rate increased to 6.7% in 2007 from 5.5% in 2006 primarily as a result of the April 2007
modification of our Revolving Credit Agreement and Senior Notes.

Income Taxes. Our effective income tax rate was
52.9% in 2007 as compared to 60.6% for 2006. The change primarily relates to the mix of foreign earnings and domestic losses. In 2006, income tax expense was reduced $0.4 million as a result of the resolution of various domestic federal and state
tax liabilities which proved to be less than original estimates.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005



|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|----------------------------------- |  | -------------------------------------- | ------- | - | ------------------- | - | ------- | ----------------------------- |  | - | ------------------------------------------------------------------ | - |  | ----- | - |  | ----- | -- |  | ----- | -
|                                    |  | Years EndedDecember 31,                |         |   | Year OverYearChange |   |         | Year OverYearPercentageChange |  |   | Results as Percentage ofNet Revenue for theYears EndedDecember 31, |  
|                                    |  | 2006                                   |         |   | 2005                |   |         | Favorable(Unfavorable)        |  |   | Favorable(Unfavorable)                                             |   |  | 2006  |   |  | 2005  |   
|                                    |  | (in thousands, except percentage data) |        
|Net revenue:                        |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Industrial Group                    |  | $                                      | 364,570 |   |                     | $ | 359,602 |                               |  | $ | 4,968                                                              |   |  | 1.4   | % |  | 73.2  | %  |  | 68.8  | %
|Aerospace & Defense                 |  |                                        | 87,491  |   |                     |   | 115,863 |                               |  |   | (28,372                                                            | ) |  | (24.5 | ) |  | 17.6  |    |  | 22.2  |  
|Test & Measurement                  |  |                                        | 45,603  |   |                     |   | 47,301  |                               |  |   | (1,698                                                             | ) |  | (3.6  | ) |  | 9.2   |    |  | 9.0   |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Electronics Group                   |  |                                        | 133,094 |   |                     |   | 163,164 |                               |  |   | (30,070                                                            | ) |  | (18.4 | ) |  | 26.8  |    |  | 31.2  |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Total net revenue                   |  |                                        | 497,664 |   |                     |   | 522,766 |                               |  |   | (25,102                                                            | ) |  | (4.8  | ) |  | 100.0 |    |  | 100.0 |  
|Cost of sales:                      |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Industrial Group                    |  |                                        | 346,894 |   |                     |   | 336,686 |                               |  |   | (10,208                                                            | ) |  | (3.0  | ) |  | 95.2  |    |  | 93.6  |  
|Aerospace & Defense                 |  |                                        | 73,832  |   |                     |   | 98,367  |                               |  |   | 24,535                                                             |   |  | 24.9  |   |  | 84.4  |    |  | 84.9  |  
|Test & Measurement                  |  |                                        | 35,848  |   |                     |   | 36,375  |                               |  |   | 527                                                                |   |  | 1.4   |   |  | 78.6  |    |  | 76.9  |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Electronics Group                   |  |                                        | 109,680 |   |                     |   | 134,742 |                               |  |   | 25,062                                                             |   |  | 18.6  |   |  | 82.4  |    |  | 82.6  |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Total cost of sales                 |  |                                        | 456,574 |   |                     |   | 471,428 |                               |  |   | 14,854                                                             |   |  | 3.2   |   |  | 91.7  |    |  | 90.2  |  
|Gross profit:                       |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Industrial Group                    |  |                                        | 17,676  |   |                     |   | 22,916  |                               |  |   | (5,240                                                             | ) |  | (22.9 | ) |  | 4.8   |    |  | 6.4   |  
|Aerospace & Defense                 |  |                                        | 13,659  |   |                     |   | 17,496  |                               |  |   | (3,837                                                             | ) |  | (21.9 | ) |  | 15.6  |    |  | 15.1  |  
|Test & Measurement                  |  |                                        | 9,755   |   |                     |   | 10,926  |                               |  |   | (1,171                                                             | ) |  | (10.7 | ) |  | 21.4  |    |  | 23.1  |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Electronics Group                   |  |                                        | 23,414  |   |                     |   | 28,422  |                               |  |   | (5,008                                                             | ) |  | (17.6 | ) |  | 17.6  |    |  | 17.4  |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Total gross profit                  |  |                                        | 41,090  |   |                     |   | 51,338  |                               |  |   | (10,248                                                            | ) |  | (20.0 | ) |  | 8.3   |    |  | 9.8   |  
|Selling, general and administrative |  |                                        | 37,107  |   |                     |   | 35,669  |                               |  |   | (1,438                                                             | ) |  | (4.0  | ) |  | 7.5   |    |  | 6.8   |  
|Research and development            |  |                                        | 1,988   |   |                     |   | 2,833   |                               |  |   | 845                                                                |   |  | 29.8  |   |  | 0.4   |    |  | 0.6   |  
|Amortization of intangible assets   |  |                                        | 645     |   |                     |   | 614     |                               |  |   | (31                                                                | ) |  | (5.0  | ) |  | 0.1   |    |  | 0.1   |  
|Nonrecurring expense                |  |                                        | 1,485   |   |                     |   |        |                               |  |   | (1,485                                                             | ) |  | NM    |   |  | 0.3   |    |  | 0.0   |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Operating (loss) income             |  |                                        | (135    | ) |                     |   | 12,222  |                               |  |   | (12,357                                                            | ) |  | NM    |   |  | 0.0   |    |  | 2.3   |  
|Interest expense, net               |  |                                        | 3,708   |   |                     |   | 5,979   |                               |  |   | 2,271                                                              |   |  | 38.0  |   |  | 0.8   |    |  | 1.1   |  
|Other income, net                   |  |                                        | (387    | ) |                     |   | (1,325  | )                             |  |   | (938                                                               | ) |  | (70.8 | ) |  | (0.1  | )  |  | (0.2  | )
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|(Loss) income before income taxes   |  |                                        | (3,456  | ) |                     |   | 7,568   |                               |  |   | (11,024                                                            | ) |  | NM    |   |  | (0.7  | )  |  | 1.4   |  
|Income taxes                        |  |                                        | (2,094  | ) |                     |   | 2,247   |                               |  |   | 4,341                                                              |   |  | NM    |   |  | (0.4  | )  |  | 0.4   |  
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  
|Net (loss) income                   |  | $                                      | (1,362  | ) |                     | $ | 5,321   |                               |  | $ | (6,683                                                             | ) |  | NM    | % |  | (0.3  | )% |  | 1.0   | %
|                                    |  |                                        |         |   |                     |   |         |                               |  |   |                                                                    |   |  |       |   |  |       |    |  |       |  



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##### Table of Contents

Backlog. Excluding the backlog from our Industrial Group, which ceased to be
tracked starting January 1, 2006, our backlog decreased $2.4 million to $99.5 million at December 31, 2006, on $131.3 million in net orders in 2006 compared to $146.4 million in 2005.

Backlog for our Aerospace & Defense segment decreased $4.2 million to $94.0 million at December 31, 2006, on
$83.5 million in net orders in 2006 compared to $99.9 million in 2005. Backlog for our Test & Measurement segment increased $1.8 million to $5.5 million at December 31, 2006 on $47.7 million in net orders in 2006 compared to
$46.5 million in 2005.

Net Revenue. The Industrial Group derives its revenue from manufacturing services and
product sales. Net revenue in the Industrial Group for the year increased $5.0 million to $364.6 million primarily due to $12.2 million in additional volume, $7.7 million of material pricing pass-through and $0.5 million of price increases which
were offset by the cessation of two business lines.

The Aerospace & Defense segment derives its revenue from
product sales and technical outsourced services. Aerospace & Defense segment net revenue decreased $28.4 million to $87.5 million due to a $32.6 million decline in volume as a result of one encryption product completing its life cycle
during 2006, while the launch of the next generation product was delayed into 2008, as well as maturing manufacturing service programs and declines in data storage product sales. All such decreases were partially offset by $4.1 million of pricing
increases over the prior year, primarily driven by a manufacturing service program.

The Test & Measurement
segment derives its revenue from technical services including calibration and component screening, and product sales. Technical services revenue accounted for approximately 87% and 84% of total Test & Measurement revenue in 2006 and 2005,
respectively. Test & Measurement segment net revenue decreased $1.7 million due to a $1.5 million sales decline in a military program product, with the remainder due to decreased technical services sales.

Gross Profit. The Industrial Groups gross profit decreased $5.2 million in 2006 primarily due to $2.6 million of
production inefficiencies which combined with inflationary increases in salary and fringe benefits, utility costs, supplies expenses and material revaluation impacts on scrap expense of $2.4 million, $1.4 million, $0.3 million and $0.2 million,
respectively, which were partially offset by increased volume associated with higher revenue. Gross profit as a percentage of revenue decreased to 4.8% for 2006 from 6.4% in 2005 as a result of the aforementioned production inefficiencies, higher
energy costs and salary and fringe benefits along with the impact of declining overhead absorption rates resulting from inventory reduction initiatives.

The Aerospace & Defense segments gross profit decreased $3.8 million in 2006 primarily due to the decline in volume of one encryption product which completed its life cycle during 2006, while the
launch of the next generation product was delayed until 2008. Gross margin for the Aerospace & Defense segment was 15.6% in 2006 as compared to 15.1% in 2005. The increase in gross margin percentage resulted primarily from a more favorable
mix of product sales with higher gross margins versus manufacturing services.

The Test & Measurement
segments gross profit decreased $1.2 million in 2006 primarily due to an unfavorable shift in sales mix from product sales and component screening services with higher margins for technical services sales.

Selling, General and Administrative. Selling, general and administrative expense increased $1.4 million in 2006 and increased
as a percentage of net revenue to 7.5% in 2006 from 6.8% in 2005. The increase was primarily driven by a $0.8 million increase in stock compensation expense as required under SFAS No. 123R, a $0.6 million increase in administrative costs in the
Industrial Group related to a full year of additional infrastructure to support the new contracts in the Industrial Group, and a $0.5 million increase in allowances for bad debts for the Aerospace & Defense segment, all of which were
partially offset by a decrease for the Test & Measurement segment primarily resulting from reduced headcount and severance costs in the prior period which did not recur.

Research and Development. Research and development costs decreased $0.8 million in 2006 due to a $1.4 million reduction in
two of our data systems product development projects, which was partially offset by new intellectual property investments under a manufacturing service program and initial investments in a new product offering within our Aerospace & Defense
segment.



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Amortization of Intangible Assets. Amortization of intangible assets remained
consistent with the prior year period.

Nonrecurring Expense.Nonrecurring items include legal and professional fees
incurred as a result of the Dana bankruptcy filing and other transaction related costs.

Interest Expense, Net.
Interest expense decreased in 2006 due to a decrease in our weighted average debt outstanding. Our weighted average debt outstanding decreased to $65.1 million during 2006 from $115.9 million during 2005, resulting primarily from multiple working
capital management initiatives. The weighted average interest rate increased to 5.5% in 2006 from 5.2% in 2005.

Other
Income, Net.Other income, net decreased $0.9 million in 2006 due primarily to lower foreign currency remeasurement gains of U.S. Dollar denominated accounts of our foreign subsidiaries.

Income Taxes. Our effective income tax rate was 60.6% in 2006 as compared to 29.7% for 2005. The change primarily relates to the
mix of foreign earnings and domestic losses. The change from prior year also reflects the impact of a change in the Mexican statutory tax rate to 29% for 2006 from 30% in 2005. In 2006 and 2005, tax expense was reduced $0.4 million and $0.2 million,
respectively as a result of the resolution of various domestic federal and state tax liabilities which proved to be less than original estimates.



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Quarterly Results

The following table presents our unaudited condensed consolidated statements of operations data for each of the eight quarters in the two-year period ended December 31, 2007. Beginning January 1, 2007, we
began to report quarterly results on a 4-4-5 fiscal quarter basis. We have prepared this data on the same basis as our audited consolidated financial statements and, in our opinion, have included all normal recurring adjustments necessary for a fair
presentation of this information. You should read these unaudited quarterly results in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. The consolidated results of operations for any
quarter are not necessarily indicative of the results to be expected for any subsequent period.



|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------ | - | ------- | ----- |  | - | ------- | - |  | ----- | ------- | - | ------ | - | ------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                           |  | 2007                                  |         |   | 2006   |  
|                                                           |  | First                                 |         |   | Second |   |         | Third |  |   | Fourth  |   |  | First |         |   | Second |   |         | Third |  |   | Fourth  |  
|                                                           |  | (in thousands, except per share data) |        
|Net revenue:                                               |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Industrial Group                                           |  | $                                     | 79,119  |   |        | $ | 73,472  |       |  | $ | 67,595  |   |  | $     | 58,896  |   |        | $ | 92,499  |       |  | $ | 98,454  |   |  | $ | 93,021  |   |  | $ | 80,596  |  
|Aerospace & Defense                                        |  |                                       | 19,671  |   |        |   | 29,380  |       |  |   | 23,604  |   |  |       | 31,850  |   |        |   | 26,011  |       |  |   | 21,917  |   |  |   | 21,166  |   |  |   | 18,397  |  
|Test & Measurement                                         |  |                                       | 12,649  |   |        |   | 13,395  |       |  |   | 13,321  |   |  |       | 12,963  |   |        |   | 11,487  |       |  |   | 11,862  |   |  |   | 11,768  |   |  |   | 10,486  |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Electronics Group                                          |  |                                       | 32,320  |   |        |   | 42,775  |       |  |   | 36,925  |   |  |       | 44,813  |   |        |   | 37,498  |       |  |   | 33,779  |   |  |   | 32,934  |   |  |   | 28,883  |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total net revenue                                          |  |                                       | 111,439 |   |        |   | 116,247 |       |  |   | 104,520 |   |  |       | 103,709 |   |        |   | 129,997 |       |  |   | 132,233 |   |  |   | 125,955 |   |  |   | 109,479 |  
|Cost of sales:                                             |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Industrial Group                                           |  |                                       | 73,799  |   |        |   | 69,723  |       |  |   | 62,882  |   |  |       | 55,088  |   |        |   | 86,550  |       |  |   | 93,963  |   |  |   | 87,871  |   |  |   | 78,510  |  
|Aerospace & Defense                                        |  |                                       | 16,516  |   |        |   | 28,603  |       |  |   | 21,133  |   |  |       | 29,244  |   |        |   | 22,056  |       |  |   | 18,570  |   |  |   | 18,559  |   |  |   | 14,647  |  
|Test & Measurement                                         |  |                                       | 9,117   |   |        |   | 10,220  |       |  |   | 10,033  |   |  |       | 9,761   |   |        |   | 8,772   |       |  |   | 9,266   |   |  |   | 9,289   |   |  |   | 8,521   |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Electronics Group                                          |  |                                       | 25,633  |   |        |   | 38,823  |       |  |   | 31,166  |   |  |       | 39,005  |   |        |   | 30,828  |       |  |   | 27,836  |   |  |   | 27,848  |   |  |   | 23,168  |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total cost of sales                                        |  |                                       | 99,432  |   |        |   | 108,546 |       |  |   | 94,048  |   |  |       | 94,093  |   |        |   | 117,378 |       |  |   | 121,799 |   |  |   | 115,719 |   |  |   | 101,678 |  
|Gross profit:                                              |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Industrial Group                                           |  |                                       | 5,320   |   |        |   | 3,749   |       |  |   | 4,713   |   |  |       | 3,808   |   |        |   | 5,949   |       |  |   | 4,491   |   |  |   | 5,150   |   |  |   | 2,086   |  
|Aerospace & Defense                                        |  |                                       | 3,155   |   |        |   | 777     |       |  |   | 2,471   |   |  |       | 2,606   |   |        |   | 3,955   |       |  |   | 3,347   |   |  |   | 2,607   |   |  |   | 3,750   |  
|Test & Measurement                                         |  |                                       | 3,532   |   |        |   | 3,175   |       |  |   | 3,288   |   |  |       | 3,202   |   |        |   | 2,715   |       |  |   | 2,596   |   |  |   | 2,479   |   |  |   | 1,965   |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Electronics Group                                          |  |                                       | 6,687   |   |        |   | 3,952   |       |  |   | 5,759   |   |  |       | 5,808   |   |        |   | 6,670   |       |  |   | 5,943   |   |  |   | 5,086   |   |  |   | 5,715   |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total gross profit                                         |  |                                       | 12,007  |   |        |   | 7,701   |       |  |   | 10,472  |   |  |       | 9,616   |   |        |   | 12,619  |       |  |   | 10,434  |   |  |   | 10,236  |   |  |   | 7,801   |  
|Selling, general and administrative                        |  |                                       | 10,596  |   |        |   | 8,775   |       |  |   | 10,369  |   |  |       | 10,777  |   |        |   | 9,498   |       |  |   | 9,376   |   |  |   | 9,600   |   |  |   | 8,633   |  
|Research and development                                   |  |                                       | 679     |   |        |   | 714     |       |  |   | 608     |   |  |       | 820     |   |        |   | 334     |       |  |   | 371     |   |  |   | 427     |   |  |   | 856     |  
|Amortization of intangible assets                          |  |                                       | 164     |   |        |   | 164     |       |  |   | 129     |   |  |       | 70      |   |        |   | 159     |       |  |   | 158     |   |  |   | 163     |   |  |   | 165     |  
|Nonrecurring expense (income), net                         |  |                                       | 306     |   |        |   | 1,248   |       |  |   | (4,835  | ) |  |       | 35      |   |        |   | 421     |       |  |   | 256     |   |  |   | 575     |   |  |   | 233     |  
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Operating income (loss)                                    |  |                                       | 262     |   |        |   | (3,200  | )     |  |   | 4,201   |   |  |       | (2,086  | ) |        |   | 2,207   |       |  |   | 273     |   |  |   | (529    | ) |  |   | (2,086  | )
|Interest expense, net                                      |  |                                       | 719     |   |        |   | 914     |       |  |   | 991     |   |  |       | 1,061   |   |        |   | 1,159   |       |  |   | 1,083   |   |  |   | 820     |   |  |   | 646     |  
|Other (income) expense, net                                |  |                                       | (20     | ) |        |   | 61      |       |  |   | (26     | ) |  |       | 16      |   |        |   | (250    | )     |  |   | (8      | ) |  |   | 12      |   |  |   | (141    | )
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Loss (income) before income taxes                          |  |                                       | (437    | ) |        |   | (4,175  | )     |  |   | 3,236   |   |  |       | (3,163  | ) |        |   | 1,298   |       |  |   | (802    | ) |  |   | (1,361  | ) |  |   | (2,591  | )
|Income tax (benefit) expense                               |  |                                       | (192    | ) |        |   | (1,874  | )     |  |   | 599     |   |  |       | (933    | ) |        |   | 441     |       |  |   | (358    | ) |  |   | (559    | ) |  |   | (1,618  | )
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Net (loss) income                                          |  | $                                     | (245    | ) |        | $ | (2,301  | )     |  | $ | 2,637   |   |  | $     | (2,230  | ) |        | $ | 857     |       |  | $ | (444    | ) |  | $ | (802    | ) |  | $ | (973    | )
|                                                           |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|(Loss) earnings per common share:                          |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Basic                                                      |  | $                                     | (0.01   | ) |        | $ | (0.13   | )     |  | $ | 0.14    |   |  | $     | (0.12   | ) |        | $ | 0.05    |       |  | $ | (0.02   | ) |  | $ | (0.04   | ) |  | $ | (0.05   | )
|Diluted                                                    |  | $                                     | (0.01   | ) |        | $ | (0.13   | )     |  | $ | 0.14    |   |  | $     | (0.12   | ) |        | $ | 0.05    |       |  | $ | (0.02   | ) |  | $ | (0.04   | ) |  | $ | (0.05   | )
|Cash dividends per common share                            |  | $                                     | 0.03    |   |        | $ | 0.03    |       |  | $ | 0.03    |   |  | $     | 0.03    |   |        | $ | 0.03    |       |  | $ | 0.03    |   |  | $ | 0.03    |   |  | $ | 0.03    |  
|Shares used in computing (loss) earnings per common share: |  |                                       |         |   |        |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Basic                                                      |  |                                       | 18,107  |   |        |   | 18,169  |       |  |   | 18,314  |   |  |       | 18,332  |   |        |   | 18,042  |       |  |   | 18,065  |   |  |   | 18,094  |   |  |   | 18,084  |  
|Diluted                                                    |  |                                       | 18,107  |   |        |   | 18,169  |       |  |   | 18,548  |   |  |       | 18,332  |   |        |   | 18,289  |       |  |   | 18,065  |   |  |   | 18,094  |   |  |   | 18,084  |  



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Liquidity, Capital Resources and Financial Condition

Net cash used in operating activities was $10.5 million in 2007, as compared to net cash provided of $52.8 million in 2006, primarily due
to the timing of working capital improvements in 2006, which were not repeated in 2007 and the return to pre-Chapter 11 payment terms under the settlement agreement with Dana. Additionally, net cash used in operating activities is due to the timing
of collections and includes increases in inventory to support the ramp-up of new product programs in the Aerospace & Defense segment. In 2007, accounts receivable increased $6.1 million primarily due to the timing of collections from
governmental agencies, and accounts payable decreased $16.8 million driven by lower volumes in the Industrial Group. Inventory decreased $6.0 million primarily to adjust for lower sales volumes in the Industrial Group and due to an emphasis on
reducing inventory days. Other current assets increased $2.7 million primarily as a result of an increase in deferred contract costs. Accrued liabilities increased $10.8 million primarily as a result of foreign income taxes payable resulting from
the Dana settlement agreement and a customer payment received in advance.

Net cash used in investing activities was $9.4
million in 2007 as compared to $10.3 million in 2006. Capital expenditures decreased slightly to $10.2 million in 2007 from $10.3 million in 2006.

Net cash provided by financing activities was $2.1 million in 2007 as compared to cash used of $22.1 million in 2006. In 2006, we made net repayments totaling $20.0 million on our
revolving credit facility as a result of cash flow from operations under our various working capital management initiatives. Additionally, we also paid $0.9 million in financing fees in conjunction with modifications of our debt in 2007.

We had total borrowings under our revolving credit facility of $35.0 million at December 31, 2007, and an unrestricted cash
balance of $14.6 million. Approximately $2.5 million of the unrestricted cash balance relates to our Mexican subsidiaries. In April 2007, our Revolving Credit Agreement was amended and restated to limit total borrowings at $50.0 million, with
$50.0 million of additional borrowings available upon lead bank approval, and to extend the credit agreement through October 2009. We also amended the Senior Notes in April 2007, repaid $25.0 million of principal and modified the June 30, 2014
principal payment to June 30, 2012. The amendments for the Senior Notes and Revolving Credit Agreement also increased our interest rates, revised certain financial covenants and added a security interest in our accounts receivable, inventory
and equipment. Other terms of the Revolving Credit Agreement and Senior Notes remain substantially unchanged. Standby letters of credit up to a maximum of $15.0 million may be issued under the Credit Agreement of which $1.9 million were issued at
December 31, 2007.

Our principal commitments at December 31, 2007 consisted of repayments of borrowings under
the Revolving Credit Agreement and Senior Notes, pension obligations and obligations under operating leases for certain of our real property and equipment. Estimated pension contributions for 2008 are expected to range from $0.1 million to $0.5
million. We also had purchase commitments totaling approximately $38.4 million at December 31, 2007, primarily for inventory and manufacturing equipment. The following table provides the payment dates of our debt and contractual lease
obligations at December 31, 2007, excluding current liabilities except for the current portion of long-term debt (amounts in thousands):



|                          |  |      |        |      |   |        |  |      |       |      |   |                  |  |   |        |  |   |      
|------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | ---------------- |  | - | ------ |  | - | -----
|                          |  | 2008 |        | 2009 |   | 2010   |  | 2011 |       | 2012 |   | 2013 &Thereafter
|Revolving credit facility |  | $    | 5,000  |      | $ | 30,000 |  | $    |      |      | $ |                 |  | $ |       |  | $ |     
|Senior notes              |  |      |       |      |   | 4,100  |  |      |      |      |   | 15,000           |  |   | 10,900 |  |   |     
|Operating leases          |  |      | 7,323  |      |   | 5,981  |  |      | 3,053 |      |   | 2,700            |  |   | 2,560  |  |   | 7,253
|                          |  |      |        |      |   |        |  |      |       |      |   |                  |  |   |        |  |   |      
|Total                     |  | $    | 12,323 |      | $ | 40,081 |  | $    | 3,053 |      | $ | 17,700           |  | $ | 13,460 |  | $ | 7,253
|                          |  |      |        |      |   |        |  |      |       |      |   |                  |  |   |        |  |   |      

Due to the uncertainty with the respect to the timing of future cash flows
associated with the Companys unrecognized tax benefits at December 31, 2007, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $0.9 million of
unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 16 to the consolidated financial statements for a discussion on income taxes.



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At December 31, 2007 we also had approximately $9.5 million of federal net operating
loss carryforwards available to offset future federal taxable income, which will expire on December 31, 2026.

We
believe that sufficient resources will be available to satisfy our cash requirements for at least the next twelve months. Our assessment of the availability of funds for the next twelve months is based in part on our intent and ability to continue
to own the shares of common stock of DAN received through the settlement agreement reached in August 2007. We will continue to monitor the market price and the factors impacting the market price of the DAN common stock. We expect to own our shares
of the DAN common stock until the value indicated by the market price approximates the estimated recoverable amount we recognized at the time of the settlement agreement.

Cash requirements for periods beyond the next twelve months depend on our profitability, our ability to manage working capital requirements and our rate of growth. If we make significant
acquisitions, if our largest customers experience financial difficulty, or if working capital and capital expenditure requirements exceed expected levels during the next twelve months or in subsequent periods, we may require additional external
sources of capital. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financings or otherwise, or that if such financing is available, it will be available on terms acceptable
to us. If adequate funds are not available on acceptable terms, our business, consolidated results of operations and financial condition could be adversely affected.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. The objective of SFAS No. 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. On
February 12, 2008, the FASB issued FASB Staff Position SFAS No. 157-2, Effective Date of FASB Measurement No. 157.SFAS No. 157-2 amends SFAS No. 157 to delay the effective date of this Statement for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). For items within its scope, SFAS No. 157-2 defers the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company will adopt this standard on January 1, 2009 but does not currently believe it will have a material impact on
its financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilitiesincluding an amendment to FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other
items at fair value that are currently not required to be measured at fair value. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair
value option may be elected on an instrument-by instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. The statement
establishes presentation and disclosure requirements to help financial statement users understand the effect of the entitys election on its earnings. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after
November 15, 2007. The Company is currently analyzing the potential adoption and impact, if any, of SFAS No. 159 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141revised 2007 (SFAS No. 141R),Business Combinations. SFAS 141R establishes principles and requirements for how an acquirer in
a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest; recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and determines what information to disclose to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies to business combinations for which the
acquisition date is on or after December 15, 2008. Early adoption is prohibited. SFAS No. 141R will be applied to acquisitions in the future.



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In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements  an amendment to ARB No. 51 (SFAS No. 160). SFAS No. 160 requires all entities to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements, but
separate from the equity of the parent company. The statement further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest, rather than expensing the income attributable to the
minority interest holder. This statement also requires that companies provide sufficient disclosures to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a
disclosure on the face of the consolidated statements for income attributable to the noncontrolling interest holder. This statement is effective for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The
adoption of this statement is not expected to have a significant impact on the Companys consolidated financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. All additional borrowings under our credit agreement bear interest at a variable rate based on the
prime rate, the London Interbank Offered Rate (LIBOR), or certain alternative short-term rates, plus a margin (1.75% at December 31, 2007) based upon our leverage ratio. A change in interest rates of 100 basis points would result in additional
interest expense of less than $0.4 million on an annualized basis, based upon our debt outstanding at December 31, 2007. A change in fixed interest rates of 100 basis points would change the fair value of our Senior Notes by $1.0 million.
Fluctuations in foreign currency exchange rates have historically impacted our earnings only to the extent of remeasurement gains related to U.S. Dollar denominated accounts of our foreign subsidiary, because the vast majority of our
transactions are denominated in U.S. Dollars. A one percent change in foreign currency exchange rates would result in remeasurement gain or loss of approximately $0.4 million on an annualized basis, based upon the U.S. Dollar denominated
accounts of our foreign subsidiary at December 31, 2007. Inflation has not been a significant factor in our operations in any of the periods presented; however, there can be no assurances that the costs of steel will not adversely affect our
working capital requirements and our associated interest costs, which could also increase the sensitivity of our results to changes in interest rates.

With respect to our ownership of common stock in DAN, we are also subject to equity price risk. On January 31, 2008, the Company received approximately 3.1 million shares of DAN common stock in its initial
distribution from the bankrupt estate. Subsequent distributions are anticipated following the resolution of disputed matters within the estate. The Company anticipates receiving approximately 0.4 million additional shares following the
resolution of these matters. Based on these assumptions, a permanent change of $1.00 per share in the value of DAN stock would change the fair value of our holdings by approximately $3.5 million.



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

SYPRIS SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                 |  |   
|---------------------------------------------------------------- |  | --
|Managements Report on Internal Control Over Financial Reporting |  | 37
|                                                                 | 
|Report of Independent Registered Public Accounting Firm          |  | 38
|                                                                 | 
|Report of Independent Registered Public Accounting Firm          |  | 39
|                                                                 | 
|Consolidated Statements of Operations                            |  | 40
|                                                                 | 
|Consolidated Balance Sheets                                      |  | 41
|                                                                 | 
|Consolidated Statements of Cash Flows                            |  | 42
|                                                                 | 
|Consolidated Statements of Stockholders Equity                  |  | 43
|                                                                 | 
|Notes to Consolidated Financial Statements                       |  | 44



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Sypris
Solutions, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable
assurance to Sypris management and its Board of Directors regarding the preparation and fair presentation of published consolidated financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to the accuracy of
consolidated financial statement preparation and presentation.

Under the supervision and with participation of our
management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of Sypris Solutions, Inc.s internal control over financial reporting as of December 31, 2007. In making our assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control  Integrated Framework. Based on our assessment, we concluded that as of December 31, 2007, Sypris internal control
over financial reporting is effective based on these criteria.

Ernst & Young LLP, our independent auditors and a
registered public accounting firm, has audited and reported on the consolidated financial statements of Sypris Solutions, Inc. and on the effectiveness of our internal controls over financial reporting. The reports of Ernst & Young LLP are
contained in this Annual Report.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Sypris Solutions, Inc.

We
have audited Sypris Solutions, Inc.s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Sypris Solutions, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Sypris Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Sypris Solutions, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2007,
and our report dated March 6, 2008 expressed an unqualified opinion thereon.

/s/ ERNST &
YOUNG LLP

Louisville, Kentucky

March 6, 2008



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Sypris Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2007. Our audits also included the financial statements schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Sypris Solutions, Inc. at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company changed its
method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payments. As further discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) as of
December 31, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Sypris Solutions, Inc.s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 6, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Louisville, Kentucky

March 6, 2008



39



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SYPRIS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share data)



|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                           |  | Years ended December 31, |        
|                                                           |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Net revenue:                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Outsourced services                                        |  | $                        | 354,215 |   |      | $ | 429,977 |      |  | $ | 446,232 |  
|Products                                                   |  |                          | 81,700  |   |      |   | 67,687  |      |  |   | 76,534  |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Total net revenue                                          |  |                          | 435,915 |   |      |   | 497,664 |      |  |   | 522,766 |  
|Cost of sales:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Outsourced services                                        |  |                          | 327,089 |   |      |   | 407,483 |      |  |   | 418,148 |  
|Products                                                   |  |                          | 69,030  |   |      |   | 49,091  |      |  |   | 53,280  |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Total cost of sales                                        |  |                          | 396,119 |   |      |   | 456,574 |      |  |   | 471,428 |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Gross profit                                               |  |                          | 39,796  |   |      |   | 41,090  |      |  |   | 51,338  |  
|Selling, general and administrative                        |  |                          | 40,517  |   |      |   | 37,107  |      |  |   | 35,669  |  
|Research and development                                   |  |                          | 2,821   |   |      |   | 1,988   |      |  |   | 2,833   |  
|Amortization of intangible assets                          |  |                          | 527     |   |      |   | 645     |      |  |   | 614     |  
|Nonrecurring (income) expense, net                         |  |                          | (3,246  | ) |      |   | 1,485   |      |  |   |        |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating (loss) income                                    |  |                          | (823    | ) |      |   | (135    | )    |  |   | 12,222  |  
|Interest expense, net                                      |  |                          | 3,685   |   |      |   | 3,708   |      |  |   | 5,979   |  
|Other (income) expense, net                                |  |                          | 31      |   |      |   | (387    | )    |  |   | (1,325  | )
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|(Loss) income before income taxes                          |  |                          | (4,539  | ) |      |   | (3,456  | )    |  |   | 7,568   |  
|Income tax (benefit) expense                               |  |                          | (2,400  | ) |      |   | (2,094  | )    |  |   | 2,247   |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                          |  | $                        | (2,139  | ) |      | $ | (1,362  | )    |  | $ | 5,321   |  
|                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|(Loss) earnings per common share:                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                      |  | $                        | (0.12   | ) |      | $ | (0.08   | )    |  | $ | 0.30    |  
|Diluted                                                    |  | $                        | (0.12   | ) |      | $ | (0.08   | )    |  | $ | 0.29    |  
|Cash dividends per common share                            |  | $                        | 0.12    |   |      | $ | 0.12    |      |  | $ | 0.12    |  
|Shares used in computing (loss) earnings per common share: |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                      |  |                          | 18,231  |   |      |   | 18,079  |      |  |   | 18,016  |  
|Diluted                                                    |  |                          | 18,231  |   |      |   | 18,079  |      |  |   | 18,323  |  

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



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SYPRIS SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)



|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                   |  | December 31, |        
|                                                                                                                                                                                                   |  | 2007         |         |   | 2006 |  
|ASSETS                                                                                                                                                                                             | 
|Current assets:                                                                                                                                                                                    |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                          |  | $            | 14,622  |   |      | $ | 32,400  |  
|Restricted cash                                                                                                                                                                                    |  |              | 883     |   |      |   | 1,002   |  
|Accounts receivable, net                                                                                                                                                                           |  |              | 59,067  |   |      |   | 59,876  |  
|Inventory, net                                                                                                                                                                                     |  |              | 71,789  |   |      |   | 74,146  |  
|Other current assets                                                                                                                                                                               |  |              | 107,132 |   |      |   | 34,014  |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                                               |  |              | 253,493 |   |      |   | 201,438 |  
|Property, plant and equipment, net                                                                                                                                                                 |  |              | 137,104 |   |      |   | 155,341 |  
|Goodwill                                                                                                                                                                                           |  |              | 14,277  |   |      |   | 14,277  |  
|Other assets                                                                                                                                                                                       |  |              | 17,186  |   |      |   | 7,977   |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                       |  | $            | 422,060 |   |      | $ | 379,033 |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                               | 
|Current liabilities:                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                                                                   |  | $            | 54,119  |   |      | $ | 76,291  |  
|Accrued liabilities                                                                                                                                                                                |  |              | 41,933  |   |      |   | 19,430  |  
|Current portion of long-term debt                                                                                                                                                                  |  |              | 5,000   |   |      |   | 5,000   |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                          |  |              | 101,052 |   |      |   | 100,721 |  
|Long-term debt                                                                                                                                                                                     |  |              | 60,000  |   |      |   | 55,000  |  
|Other liabilities                                                                                                                                                                                  |  |              | 53,529  |   |      |   | 13,426  |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                                  |  |              | 214,581 |   |      |   | 169,147 |  
|Commitments and contingencies                                                                                                                                                                      |  |              |         |   |      |   |         |  
|Stockholders equity:                                                                                                                                                                              |  |              |         |   |      |   |         |  
|Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares issued                                                                                                            |  |              |        |   |      |   |        |  
|Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; no shares issued                                                                                                    |  |              |        |   |      |   |        |  
|Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized; no shares issued                                                                                                |  |              |        |   |      |   |        |  
|Common stock, par value $0.01 per share, 30,000,000 shares authorized; 19,205,247 shares issued and 19,078,440 outstanding in 2007 and
18,342,243 shares issued and 18,338,484 outstanding in 2006 |  |              | 192     |   |      |   | 183     |  
|Additional paid-in capital                                                                                                                                                                         |  |              | 146,025 |   |      |   | 143,537 |  
|Retained earnings                                                                                                                                                                                  |  |              | 65,402  |   |      |   | 69,816  |  
|Accumulated other comprehensive loss                                                                                                                                                               |  |              | (3,943  | ) |      |   | (3,634  | )
|Treasury stock, 126,807 and 3,759 shares in 2007 and 2006, respectively                                                                                                                            |  |              | (197    | ) |      |   | (16     | )
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                                                         |  |              | 207,479 |   |      |   | 209,886 |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                         |  | $            | 422,060 |   |      | $ | 379,033 |  
|                                                                                                                                                                                                   |  |              |         |   |      |   |         |  

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



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SYPRIS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                   |  | Years ended December 31, |        
|                                                                                                   |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Cash flows from operating activities:                                                              |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                                  |  | $                        | (2,139  | ) |      | $ | (1,362  | )    |  | $ | 5,321   |  
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                      |  |                          | 29,386  |   |      |   | 28,782  |      |  |   | 25,909  |  
|Deferred income taxes                                                                              |  |                          | (15,373 | ) |      |   | (5,079  | )    |  |   | (1,091  | )
|Provision for excess and obsolete inventory                                                        |  |                          | 1,322   |   |      |   | 836     |      |  |   | 739     |  
|Provision for doubtful accounts                                                                    |  |                          | (132    | ) |      |   | 437     |      |  |   | 607     |  
|Noncash compensation                                                                               |  |                          | 1,363   |   |      |   | 1,034   |      |  |   | 219     |  
|Other noncash (gains) charges, net                                                                 |  |                          | (15,758 | ) |      |   | 142     |      |  |   | 123     |  
|Contributions to pension plans                                                                     |  |                          | (392    | ) |      |   | (1,122  | )    |  |   | (79     | )
|Changes in operating assets and liabilities, net of acquisitions:                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                                |  |                          | (6,059  | ) |      |   | 35,112  |      |  |   | 8,595   |  
|Inventory                                                                                          |  |                          | 5,964   |   |      |   | 5,123   |      |  |   | 11,555  |  
|Other current assets                                                                               |  |                          | (2,684  | ) |      |   | (7,113  | )    |  |   | 3,363   |  
|Accounts payable                                                                                   |  |                          | (16,769 | ) |      |   | 35      |      |  |   | 15,119  |  
|Accrued and other liabilities                                                                      |  |                          | 10,767  |   |      |   | (4,019  | )    |  |   | 2,208   |  
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                                |  |                          | (10,504 | ) |      |   | 52,806  |      |  |   | 72,588  |  
|                                                                                                   |  |                          |        
|Cash flows from investing activities:                                                              |  |                          |         |   |      |   |         |      |  |   |         |  
|Capital expenditures                                                                               |  |                          | (10,155 | ) |      |   | (10,326 | )    |  |   | (36,264 | )
|Proceeds from sale of assets                                                                       |  |                          | 224     |   |      |   | 92      |      |  |   | 649     |  
|Changes in nonoperating assets and liabilities                                                     |  |                          | 542     |   |      |   | (87     | )    |  |   | (28     | )
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                              |  |                          | (9,389  | ) |      |   | (10,321 | )    |  |   | (35,643 | )
|                                                                                                   |  |                          |        
|Cash flows from financing activities:                                                              |  |                          |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in debt under revolving credit agreements                                  |  |                          | 30,000  |   |      |   | (20,000 | )    |  |   | (37,000 | )
|Payments on Senior Notes                                                                           |  |                          | (25,000 | ) |      |   |        |      |  |   |        |  
|Debt modification costs                                                                            |  |                          | (885    | ) |      |   | (248    | )    |  |   | (597    | )
|Cash dividends paid                                                                                |  |                          | (2,264  | ) |      |   | (2,193  | )    |  |   | (2,164  | )
|Proceeds from issuance of common stock, net                                                        |  |                          | 264     |   |      |   | 296     |      |  |   | 816     |  
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                          | 2,115   |   |      |   | (22,145 | )    |  |   | (38,945 | )
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                          | (17,778 | ) |      |   | 20,340  |      |  |   | (2,000  | )
|Cash and cash equivalents at beginning of year                                                     |  |                          | 32,400  |   |      |   | 12,060  |      |  |   | 14,060  |  
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                           |  | $                        | 14,622  |   |      | $ | 32,400  |      |  | $ | 12,060  |  
|                                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  

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



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SYPRIS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except for share data)



|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|----------------------------------------------------------- |  | ------------ | - | ------------------ | ------ | --- | -------- | - | ------- | -------------------------------------- |  | - | -------- | - |  | ----- | ------ | - |  | - | ---- | -
|                                                            |  | Common Stock |   | Additional Paid-In |        |     | Retained |   |         | Accumulated Other Comprehensive Income |  |   | Treasury |  
|                                                            |  | Shares       |   |                    | Amount |     | Capital  |   |         | Earnings                               |  |   | (Loss)   |   |  | Stock |       
|January 1, 2005 balance                                     |  | 17,920,500   |   |                    | $      | 179 |          | $ | 140,898 |                                        |  | $ | 70,227   |   |  | $     | (2,365 | ) |  | $ |     |  
|                                                            |  |              |   |                    |        |    
|Net income                                                  |  |             |   |                    |        |    |          |   |        |                                        |  |   | 5,321    |   |  |       |       |   |  |   |     |  
|Adjustment in minimum pension liability, net of tax of $132 |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | (208   | ) |  |   |     |  
|Foreign currency translation gain                           |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | 639    |   |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|Comprehensive income                                        |  |             |   |                    |        |    |          |   |        |                                        |  |   | 5,321    |   |  |       | 431    |   |  |   |     |  
|                                                            |  |              |   |                    |        |    
|Cash dividends, $0.12 per common share                      |  |             |   |                    |        |    |          |   |        |                                        |  |   | (2,173   | ) |  |       |       |   |  |   |     |  
|Restricted common stock grant                               |  | 127,500      |   |                    |        | 2   |          |   | (2      | )                                      |  |   |         |   |  |       |       |   |  |   |     |  
|Noncash compensation                                        |  |             |   |                    |        |    |          |   | 219     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Issuance of shares under Employee Stock Purchase Plan       |  | 36,177       |   |                    |        |    |          |   | 350     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Exercise of stock options                                   |  | 81,481       |   |                    |        | 1   |          |   | 465     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Stock option tax benefit                                    |  |             |   |                    |        |    |          |   | 181     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|December 31, 2005 balance                                   |  | 18,165,658   |   |                    |        | 182 |          |   | 142,111 |                                        |  |   | 73,375   |   |  |       | (1,934 | ) |  |   |     |  
|                                                            |  |              |   |                    |        |    
|Net loss                                                    |  |             |   |                    |        |    |          |   |        |                                        |  |   | (1,362   | ) |  |       |       |   |  |   |     |  
|Adjustment in minimum pension liability, net of tax of $578 |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | 823    |   |  |   |     |  
|Foreign currency translation loss                           |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | (549   | ) |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|Comprehensive (loss) income                                 |  |             |   |                    |        |    |          |   |        |                                        |  |   | (1,362   | ) |  |       | 274    |   |  |   |     |  
|                                                            |  |              |   |                    |        |    
|Adoption of SFAS No. 158, net of $1,386 of tax              |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | (1,974 | ) |  |   |     |  
|Cash dividends, $0.12 per common share                      |  |             |   |                    |        |    |          |   |        |                                        |  |   | (2,197   | ) |  |       |       |   |  |   |     |  
|Restricted common stock grant                               |  | 112,000      |   |                    |        | 1   |          |   |        |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Noncash compensation                                        |  |             |   |                    |        |    |          |   | 1,034   |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Exercise of stock options                                   |  | 64,585       |   |                    |        |    |          |   | 311     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Treasury stock                                              |  | (3,759       | ) |                    |        |    |          |   |        |                                        |  |   |         |   |  |       |       |   |  |   | (16  | )
|Stock option tax benefit                                    |  |             |   |                    |        |    |          |   | 81      |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|December 31, 2006 balance                                   |  | 18,338,484   |   |                    |        | 183 |          |   | 143,537 |                                        |  |   | 69,816   |   |  |       | (3,634 | ) |  |   | (16  | )
|                                                            |  |              |   |                    |        |    
|Net loss                                                    |  |             |   |                    |        |    |          |   |        |                                        |  |   | (2,139   | ) |  |       |       |   |  |   |     |  
|Employee benefit related, net of tax of $241                |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | (128   | ) |  |   |     |  
|Foreign currency translation loss                           |  |             |   |                    |        |    |          |   |        |                                        |  |   |         |   |  |       | (181   | ) |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|Comprehensive loss                                          |  |             |   |                    |        |    |          |   |        |                                        |  |   | (2,139   | ) |  |       | (309   | ) |  |   |     |  
|                                                            |  |              |   |                    |        |    
|Cash dividends, $0.12 per common share                      |  |             |   |                    |        |    |          |   |        |                                        |  |   | (2,287   | ) |  |       |       |   |  |   |     |  
|Restricted common stock grant                               |  | 613,290      |   |                    |        | 6   |          |   | (6      | )                                      |  |   |         |   |  |       |       |   |  |   |     |  
|Noncash compensation                                        |  | 18,097       |   |                    |        |    |          |   | 1,363   |                                        |  |   | 12       |   |  |       |       |   |  |   |     |  
|Exercise of stock options                                   |  | 71,643       |   |                    |        | 1   |          |   | 445     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Treasury stock                                              |  | (123,048     | ) |                    |        |    |          |   |        |                                        |  |   |         |   |  |       |       |   |  |   | (181 | )
|Stock option exchange                                       |  | 159,974      |   |                    |        | 2   |          |   | 638     |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|Stock option tax benefit                                    |  |             |   |                    |        |    |          |   | 48      |                                        |  |   |         |   |  |       |       |   |  |   |     |  
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  
|December 31, 2007 balance                                   |  | 19,078,440   |   |                    | $      | 192 |          | $ | 146,025 |                                        |  | $ | 65,402   |   |  | $     | (3,943 | ) |  | $ | (197 | )
|                                                            |  |              |   |                    |        |     |          |   |         |                                        |  |   |          |   |  |       |        |   |  |   |      |  

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



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|(1) | Organization and Significant Accounting Policies
|--- | ------------------------------------------------

Consolidation Policy

The accompanying consolidated financial statements include the
accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively, Sypris or the Company) and have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange
Commission. The Companys operations are domiciled in the United States (U.S.) and Mexico and serve a wide variety of domestic and international customers. All significant intercompany accounts and transactions have been eliminated.

Nature of Business

Sypris is a diversified provider of outsourced services and specialty products. The Company performs a wide range of manufacturing, engineering, design, testing, and other technical services, typically under multi-year, sole-source
contracts with corporations and government agencies in the markets for truck components & assemblies, aerospace & defense electronics, and test & measurement services. The Company provides such services through its
Industrial and Electronics Groups (Note 18).

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Specifically, due to the size and nature of the Companys aerospace & defense related
programs, the estimation of total contract related revenues and cost at completion is subject to a wide range of variables. As contracts may require performance over several accounting periods, formal detailed cost-to-complete estimates are
performed and updated monthly. Managements estimates of costs-to-complete change due to internal and external factors, such as labor rate and efficiency variances, revised estimates of warranty costs, estimated future material prices and
customer specification and testing requirement changes. Actual results could differ from those estimates.

Cash Equivalents and
Restricted Cash

Cash equivalents include all highly liquid investments with a maturity of three months or less when
purchased, while restricted cash consists of amounts funded to the Company by a Landlord under a new lease agreement signed in 2006. Under the terms of the lease, the funds are required to be expended on leasehold improvements.

Inventory

Inventory
is stated at the lower of cost or estimated net realizable value. Costs for raw materials, work in process and finished goods, excluding contract inventory included in the Electronics Group, is determined under the first-in, first-out method.
Indirect inventories, which include perishable tooling, repair parts and other materials consumed in the manufacturing process but not incorporated into finished products are classified as raw materials.

Costs on long-term contracts and programs in progress represent recoverable costs incurred for production or contract-specific materials
and equipment, allocable operating overhead, advances to suppliers and where appropriate, pre-contract engineering and design expenses. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a
security interest in, inventories related to such contracts as a result of advances, performance based payments and progress payments. Such advances and payments are reflected as an offset against the related inventory balances. General
administrative expenses related to commercial products and services provided essentially under commercial terms and conditions are expensed as incurred.



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



The Companys reserve for excess and obsolete inventory is primarily based upon
forecasted demand for its product sales, and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the revision is made.

Property, Plant and Equipment

Property, plant and equipment is stated at cost.
Depreciation of property, plant and equipment is generally computed using the straight-line method over their estimated economic lives. For land improvements, buildings and building improvements, the estimated economic life is generally 40 years.
Estimated economic lives range from three to fifteen years for machinery, equipment, furniture and fixtures. Leasehold improvements are amortized over the shorter of their economic life or the respective lease term using the straight-line method.
Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major rebuilds and improvements are capitalized.

Interest cost is capitalized for qualifying assets during the period in which the asset is being installed and prepared for its intended use. Capitalized interest cost is amortized on the same basis as the related
depreciation.

Long-lived Assets

When indicators of impairment exist, the Company evaluates long-lived assets for impairment and assesses their recoverability based upon anticipated undiscounted future cash flows. If facts and circumstances indicate
that the carrying value of an asset or groups of assets, as applicable, is impaired, the long-lived asset or groups of long-lived assets are written down to their estimated fair value.

Goodwill

Goodwill is
tested at least annually for impairment by calculating the estimated fair value of each business with which goodwill is associated. The estimated fair value is determined based on a discounted cash flow basis, which is compared to the carrying value
of each applicable business. The Company tested goodwill of $14,277,000 for impairment as of December 31, 2007 and 2006, determining that no impairment loss was necessary. As of December 31, 2007 and 2006, the carrying value of goodwill
for the Industrial Group, Aerospace & Defense and the Test & Measurement segments was $440,000, $6,900,000 and $6,937,000, respectively.

Deferred Revenue

Deferred revenue for the Electronics Group is recorded when
payments are received in advance of achieving project milestones and is amortized into revenue based on the ratio of costs incurred to our estimate of total costs at completion. Deferred revenue for the Industrial Group is generally associated with
the Dana settlement (Note 2) and will be amortized into income on a units-of-production basis over the term of the new supply agreement.

Income Taxes

In the ordinary course of business there is inherent uncertainty in quantifying our income tax
positions. The Company assesses our income tax positions and records tax benefits for all years subject to examination based upon managements evaluation of the facts, circumstances, and information available at the reporting dates. For those
tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has
full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated
interest has also been recognized.

The Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48) on



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



January 1, 2007. The impact of the Companys tax positions reassessment in accordance with the requirements of FIN 48 was not significant. We
recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

Net Revenue and Cost of Sales

Net revenue of products and services provided
essentially under commercial terms and conditions are recorded upon delivery and passage of title, or when services are rendered. Related shipping and handling costs, if any, are included in costs of sales. Net revenue under service-type contracts
is recorded as costs are incurred. Applicable estimated profits are included in earnings in the proportion that incurred costs bear to total estimated costs.

Net revenue under long-term, fixed-price contracts with aerospace & defense companies and agencies of the U.S. Government is recognized using the percentage of completion method,
primarily using units-of-delivery as the basis to measure progress toward completing the contract and recognizing revenue. Estimated contract profits are taken into earnings in proportion to recorded sales. Sales under certain long-term fixed-price
contracts that specifically provide for milestones are recorded as revenue upon achievement of performance milestones, limited to revenue recognized using the cost-to-cost method of accounting where sales and profits are recorded based on the ratio
of costs incurred to estimated total costs at completion. Amounts representing contract change orders or claims are included in revenue when such costs are reliably estimated and realization is probable. When adjustments in contract value or
estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. Anticipated losses on contracts are charged to earnings when determined to be probable. Gross profit for the years ended
December 31, 2007, 2006 and 2005 included charges of $3,674,000, $1,025,000 and $3,878,000, respectively, for costs in excess of expected future contract value.

Revenue recognized under the percentage of completion method of accounting totaled approximately $89,777,000, $72,815,000 and $94,419,000 for the years ended December 31, 2007, 2006 and
2005, respectively. In 2007, 2006 and 2005, approximately 90%, 80% and 91%, respectively, of such amount was accounted for based on units of delivery and approximately 10%, 20% and 9%, respectively, was accounted for based on milestones or
cost-to-cost.

Product Warranty Costs

The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Companys warranty liability, which is included in accrued liabilities in the
accompanying balance sheets, as of December 31, 2007 and 2006 was $523,000 and $235,000, respectively. The Companys warranty expense was immaterial in each of the periods presented.

Concentrations of Credit Risk

Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable. The Companys customer base consists of a number of customers in diverse industries across geographic areas,
primarily in North America and Mexico, various departments or agencies of the U.S. Government, and aerospace & defense companies under contract with the U.S. Government. The Company performs periodic credit evaluations of its
customers financial condition and does not require collateral on its commercial accounts receivable. Credit losses are provided for in the consolidated financial statements and consistently have been within managements expectations.
Approximately 52% and 67% of accounts receivable outstanding at December 31, 2007 and 2006, respectively are due from the Companys four largest customers. More specifically, Dana Corporation (Dana) and ArvinMeritor, Inc. (Arvin Meritor)
comprise 21% and 16%, respectively of December 31, 2007 outstanding accounts receivables. Similar amounts at December 31, 2006 were 29% and 30%, respectively.

The Industrial Groups largest customers for the year ended December 31, 2007 were Dana and ArvinMeritor, which represented approximately 34% and 15%, respectively, of the
Companys total net revenue.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



Dana and ArvinMeritor were the Companys largest customers for the year ended December 31, 2006 which represented approximately 41% and 19%,
respectively, of the Companys total net revenue. Dana and ArvinMeritor were the Companys largest customers for the year ended December 31, 2005, which represented approximately 39% and 15%, respectively, of the Companys total
net revenue. The Company recognized revenue from contracts with the U.S. Government and its agencies approximating 12%, 8% and 9% of net revenue for the years ended December 31, 2007, 2006 and 2005, respectively. No other single customer
accounted for more than 10% of the Companys total net revenue for the years ended December 31, 2007, 2006 or 2005.

Foreign
Currency Translation

The functional currency for the Companys Mexican subsidiary is the Mexican peso. Assets and
liabilities are translated at the period end exchange rate, and income and expense items are translated at the period end weighted average exchange rate. The resulting translation adjustments are recorded in comprehensive income (loss) as a separate
component of stockholders equity. Remeasurement gains or losses for U.S. dollar denominated accounts of the Companys Mexican subsidiary are included in other income, net.

Collective Bargaining Agreements

Approximately 883 or 41% of the Companys employees, all of which are in the Industrial Group, are covered by collective bargaining agreements. Excluding certain Mexico employees covered under an annually
ratified agreement, collective bargaining agreements covering 240 employees, or 11% of the Companys workforce, are subject to renewal in the next 12 months. Certain Mexico employees are covered by an annually ratified collective bargaining
agreement and represent approximately 151 employees, or 7% of the Companys workforce.

Adoption of Recently Issued Accounting
Standards

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. Specifically, FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. The impact of the Companys tax positions reassessment in
accordance with the requirements of FIN 48 was not significant.

On September 29, 2006, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). On
December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, which required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected
benefit obligations) of its pension plan in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income
at adoption represented the net unrecognized actuarial losses and unrecognized prior service costs, all of which were previously netted against the plans funded status in the Companys statement of financial position pursuant to the
provisions of SFAS No. 87. These amounts, noted below, will be subsequently recognized as net periodic pension cost pursuant to the Companys historical accounting policy for amortizing such amounts. Further, actuarial gains and losses
that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic
pension cost pursuant to the Companys historical accounting policy for amortizing such amounts.

The incremental
effects of adopting the provisions of SFAS No. 158 on the Companys statement of financial position at December 31, 2006 are presented in the following table. The adoption of SFAS No. 158 had no



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



effect on the Companys consolidated statement of operations for the year ended December 31, 2006, or for any prior period presented, and it will
not effect the Companys operating results in future periods. Had the Company not been required to adopt SFAS No. 158 at December 31, 2006, it would have recognized an additional minimum liability pursuant to the provisions of SFAS
No. 87. The effect of recognizing the additional minimum liability is included in the table below in the column labeled Prior to Adopting of SFAS No. 158.



|                                              |  |                             |        |   |                              |   |        |                 |  |   |        |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ---------------------------- | - | ------ | --------------- |  | - | ------ | -
|                                              |  | December 31, 2006           |       
|                                              |  | Prior toAdoptingSFAS No.158 |        |   | Effect ofAdoptingSFAS No.158 |   |        | ReportedBalance | 
|                                              |  | (in thousands)              |       
|Other assets (pension)                        |  | $                           | 5,071  |   |                              | $ | (3,212 | )               |  | $ | 1,859  |  
|Other liabilities (pension)                   |  |                             | (3,989 | ) |                              |   | (148   | )               |  |   | (4,137 | )
|Other liabilities (deferred taxes)            |  |                             | 1,446  |   |                              |   | 1,307  |                 |  |   | 2,753  |  
|Accumulated other comprehensive income (loss) |  |                             | (3,735 | ) |                              |   | (3,360 | )               |  |   | (7,095 | )

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees(APB No. 25), and amends FASB Statement No. 95, Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense based on their fair values. Pro forma disclosure is no longer an alternative. The Company adopted SFAS No. 123(R) on
January 1, 2006, using the modified prospective method and, accordingly, the financial statements for prior periods do not reflect any restated amounts. In accordance with SFAS No. 123(R), the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

As a result, selling general and administrative expense, net loss, basic loss per common share and diluted loss per common share for the year ended December 31, 2006 includes $1,034,000,
$646,000, $0.04 and $0.04, respectively related to non-cash compensation expense. Non-cash compensation expense included in selling general and administrative expense, net loss, basic earnings per common share and diluted earnings per common share
for 2005 were $219,000, $134,000, $0.01 and $0.01, respectively. No stock-based compensation was capitalized into inventory, or property plant and equipment during 2007, 2006 or 2005. In conjunction with the adoption of SFAS No. 123(R), the
Company selected the straight-line amortization method for graded vesting options granted subsequent to January 1, 2006. Prior to that date, the Company used an accelerated method previously required for graded vesting awards.

As permitted by SFAS No. 123, the Company historically accounted for stock option grants in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Had the Company adopted SFAS No. 123(R) in prior periods, the impact would have approximated the impact of SFAS No. 123 pro forma disclosure below, excluding
the impact of the underwater option accelerations in 2005. The Companys pro forma information is as follows (in thousands except per share data):



|                                                       |  |                            |      
|------------------------------------------------------ |  | -------------------------- | -----
|                                                       |  | Year endedDecember 31,2005
|Net income                                             |  | $                          | 5,321
|Pro forma stock-based compensation expense, net of tax |  |                            | 2,597
|                                                       |  |                            |      
|Pro forma net income                                   |  | $                          | 2,724
|                                                       |  |                            |      
|Pro forma earnings per common share:                   |  |                            |      
|Basic                                                  |  | $                          | 0.15 
|Diluted                                                |  | $                          | 0.15 



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



On March 1, 2005, April 25, 2005 and December 28, 2005, the Board
of Directors approved resolutions to accelerate the vesting for underwater options as of March 11, 2005, April 25, 2005 and December 30, 2005, respectively in order to reduce future compensation expense related to
outstanding options. Substantially all other options terms remained unchanged. After amendment of the underlying option agreements, compensation expense to be recognized in the statement of operations, subsequent to the adoption of SFAS
No. 123(R) was reduced by approximately $1,573,000, net of tax.

Reclassifications

Certain amounts in the Companys 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation.



|(2) | Dana Bankruptcy
|--- | ---------------

On March 3, 2006 (Filing Date), the Companys largest customer, Dana, and 40 of its U.S. subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York. Danas European, South American, Asia-Pacific, Canadian and Mexican subsidiaries were excluded from the Chapter 11 filing.

On December 6, 2006, an independent arbitrator initially held that Dana had breached certain of its agreements with Sypris by failing to transfer certain volumes of business and by failing
to pay the appropriate prices for the volumes that were transferred. As a result, the arbitrator awarded payments to Sypris totaling $1,812,212 plus $146,258 per month on an ongoing basis. On January 29, 2007, this award became final; and
accordingly, net revenue in the consolidated statements of operations for the year ended December 31, 2007 includes $2,875,000 pertaining to the arbitration award. On July 24, 2007, the Company announced that its wholly-owned subsidiary,
Sypris Technologies, Inc., entered into a comprehensive settlement agreement with Dana to resolve all outstanding disputes between the parties, terminate any further arbitration payments and enter into a new long-term supply contract running through
2014. This settlement was approved by the bankruptcy court on August 7, 2007.

Pursuant to the settlement agreement,
Dana and the Company have (i) entered into a new, long-term master supply agreement in lieu of the three prior supply contracts, (ii) exchanged production of certain non-core components, (iii) rebalanced production among Company
plants to reduce costs for both parties, and (iv) ceased all litigation with regard to prior contract disputes, including the release of Dana from certain committed but undelivered production volumes and termination of the arbitration payments.
In addition, Dana provided the Company with an allowed general unsecured non-priority claim in the amount of $89,900,000, which was recorded by the Company at its estimated fair value of $76,483,000 as of the August 7, 2007 settlement date. At
December 31, 2007, this amount is included in other current assets given the Companys intention, as of that date, to dispose of the investment during the ensuing year.

At December 31, 2007, the Company had deferred $55,772,000 associated with the settlement, of which $12,576,000 is carried in
accrued liabilities and $43,196,000 is carried in other liabilities in the consolidated balance sheets. The deferred revenue will be recognized over the term of the new master supply agreement. Approximately $8,911,000 related to the settlement
agreement was recognized into revenue, of which $7,634,000 was reflected in gross profit during the year ended December 31, 2007. Approximately $11,798,000 million of the settlement recognized as a non-recurring gain was offset by settlement
related charges and professional fees. See Note 20, Subsequent Events, for additional information.



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



|(3) | Accounts Receivable
|--- | -------------------

Accounts receivable consists of the following:



|                                |  |                |        |   |      |   |        |  
|------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                |  | December 31,   |       
|                                |  | 2007           |        |   | 2006 |  
|                                |  | (in thousands) |       
|Commercial                      |  | $              | 48,494 |   |      | $ | 60,529 |  
|U.S. Government                 |  |                | 11,168 |   |      |   | 849    |  
|                                |  |                |        |   |      |   |        |  
|                                |  |                | 59,662 |   |      |   | 61,378 |  
|Allowance for doubtful accounts |  |                | (595   | ) |      |   | (1,502 | )
|                                |  |                |        |   |      |   |        |  
|                                |  | $              | 59,067 |   |      | $ | 59,876 |  
|                                |  |                |        |   |      |   |        |  

Accounts receivable from the U.S. Government includes amounts due under long-term
contracts, all of which are billed at December 31, 2007 and 2006, of $9,680,000 and $746,000 respectively.



|(4) | Inventory
|--- | ---------

Inventory consists of the following:



|                                                                                                            |  |                |        |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | -
|                                                                                                            |  | December 31,   |       
|                                                                                                            |  | 2007           |        |   | 2006 |  
|                                                                                                            |  | (in thousands) |       
|Raw materials, including perishable tooling of $1,129 and $1,276 in 2007 and 2006, respectively             |  | $              | 21,140 |   |      | $ | 28,885  |  
|Work in process                                                                                             |  |                | 12,815 |   |      |   | 12,576  |  
|Finished goods                                                                                              |  |                | 7,439  |   |      |   | 10,129  |  
|Costs relating to long-term contracts and programs, net of amounts attributed to revenue recognized to date |  |                | 39,936 |   |      |   | 40,451  |  
|Progress payments related to long-term contracts and programs                                               |  |                | (2,565 | ) |      |   | (11,107 | )
|Reserve for excess and obsolete inventory                                                                   |  |                | (6,976 | ) |      |   | (6,788  | )
|                                                                                                            |  |                |        |   |      |   |         |  
|                                                                                                            |  | $              | 71,789 |   |      | $ | 74,146  |  
|                                                                                                            |  |                |        |   |      |   |         |  



|(5) | Other Current Assets
|--- | --------------------

Other current assets consist of the following:



|                        |  |                |         |      |   |       
|----------------------- |  | -------------- | ------- | ---- | - | ------
|                        |  | December 31,  
|                        |  | 2007           |         | 2006
|                        |  | (in thousands)
|Dana claim              |  | $              | 76,483  |      | $ |      
|Deferred contract costs |  |                | 19,341  |      |   | 18,813
|Other                   |  |                | 11,308  |      |   | 15,201
|                        |  |                |         |      |   |       
|                        |  | $              | 107,132 |      | $ | 34,014
|                        |  |                |         |      |   |       

Included in other current assets are prepaid expenses, income taxes refundable,
and other items, none of which exceed 5% of total current assets.



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



|(6) | Property, Plant and Equipment
|--- | -----------------------------

Property, plant and equipment consist of the following:



|                                             |  |                |          |   |      |   |          |  
|-------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                             |  | December 31,   |         
|                                             |  | 2007           |          |   | 2006 |  
|                                             |  | (in thousands) |         
|Land and land improvements                   |  | $              | 5,420    |   |      | $ | 5,408    |  
|Buildings and building improvements          |  |                | 38,498   |   |      |   | 37,304   |  
|Machinery, equipment, furniture and fixtures |  |                | 259,614  |   |      |   | 252,174  |  
|Construction in progress                     |  |                | 3,661    |   |      |   | 4,408    |  
|                                             |  |                |          |   |      |   |          |  
|                                             |  |                | 307,193  |   |      |   | 299,294  |  
|Accumulated depreciation                     |  |                | (170,089 | ) |      |   | (143,953 | )
|                                             |  |                |          |   |      |   |          |  
|                                             |  | $              | 137,104  |   |      | $ | 155,341  |  
|                                             |  |                |          |   |      |   |          |  

Depreciation expense totaled approximately $28,384,000, $27,819,000 and
$25,295,000 for the years ended December 31, 2007, 2006 and 2005, respectively. In addition, there were capital expenditures of approximately $976,000 and $334,000 included in accounts payable at December 31, 2007 and 2006, respectively.



|(7) | Other Assets
|--- | ------------

Other assets consist of the following:



|                               |  |                |        |   |      |   |        |  
|------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | -
|                               |  | December 31,   |       
|                               |  | 2007           |        |   | 2006 |  
|                               |  | (in thousands) |       
|Intangible assets:             |  |                |        |   |      |   |        |  
|Gross carrying value:          |  |                |        |   |      |   |        |  
|Industrial Group               |  | $              | 800    |   |      | $ | 3,407  |  
|Aerospace & Defense            |  |                | 920    |   |      |   | 920    |  
|Test & Measurement             |  |                | 872    |   |      |   | 720    |  
|                               |  |                |        |   |      |   |        |  
|Electronics Group              |  |                | 1,792  |   |      |   | 1,640  |  
|                               |  |                |        |   |      |   |        |  
|Total gross carrying value     |  |                | 2,592  |   |      |   | 5,047  |  
|Accumulated amortization:      |  |                |        |   |      |   |        |  
|Industrial Group               |  |                | (326   | ) |      |   | (1,398 | )
|Aerospace & Defense            |  |                | (502   | ) |      |   | (424   | )
|Test & Measurement             |  |                | (872   | ) |      |   | (699   | )
|                               |  |                |        |   |      |   |        |  
|Electronics Group              |  |                | (1,373 | ) |      |   | (1,123 | )
|                               |  |                |        |   |      |   |        |  
|Total accumulated amortization |  |                | (1,700 | ) |      |   | (2,521 | )
|                               |  |                |        |   |      |   |        |  
|Intangible assets, net         |  |                | 892    |   |      |   | 2,526  |  
|Prepaid benefit cost           |  |                | 2,351  |   |      |   | 2,015  |  
|Other                          |  |                | 13,943 |   |      |   | 3,436  |  
|                               |  |                |        |   |      |   |        |  
|                               |  | $              | 17,186 |   |      | $ | 7,977  |  
|                               |  |                |        |   |      |   |        |  

Intangible assets consist primarily of long-term supply agreements in the
Industrial Group and non-compete and royalty agreements in both segments of the Electronics Group. The weighted average amortization period for intangible assets was 9 years and 8 years at December 31, 2007 and 2006, respectively. Other
includes deferred tax assets of $10,285,000 resulting primarily from the Dana settlement agreement and unamortized loan costs for the Revolving Credit Agreement and Senior Notes of approximately $542,000 and $813,000, respectively, at
December 31, 2007. Unamortized loan costs at December 31, 2006 were $512,000 and $451,000, respectively. Amortization



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



expense for intangible assets and loan costs is expected to be $713,000, $599,000, $345,000, $314,000, and $282,000 in each of the five fiscal years
subsequent to December 31, 2007, respectively.



|(8) | Accrued Liabilities
|--- | -------------------

Accrued liabilities consist of the following:



|                                                   |  |                |        |      |   |       
|-------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                   |  | December 31,  
|                                                   |  | 2007           |        | 2006
|                                                   |  | (in thousands)
|Salaries, wages, employment taxes and withholdings |  | $              | 2,562  |      | $ | 2,248 
|Employee benefit plans                             |  |                | 4,179  |      |   | 3,827 
|Income, property and other taxes                   |  |                | 11,595 |      |   | 2,437 
|Deferred revenue                                   |  |                | 17,476 |      |   | 4,386 
|Other                                              |  |                | 6,121  |      |   | 6,532 
|                                                   |  |                |        |      |   |       
|                                                   |  | $              | 41,933 |      | $ | 19,430
|                                                   |  |                |        |      |   |       

Included in other accrued liabilities are accrued operating expenses, accrued
warranty expenses, accrued interest and other items, none of which exceed 5% of total current liabilities. Deferred revenue at December 31, 2007 includes $10,878,000 related to the Dana settlement agreement.



|(9) | Other Liabilities
|--- | -----------------

Other liabilities consist of the following:



|                       |  |                |        |      |   |       
|---------------------- |  | -------------- | ------ | ---- | - | ------
|                       |  | December 31,  
|                       |  | 2007           |        | 2006
|                       |  | (in thousands)
|Deferred revenue       |  | $              | 43,196 |      | $ |      
|Deferred tax liability |  |                | 6,195  |      |   | 8,330 
|Other                  |  |                | 4,138  |      |   | 5,096 
|                       |  |                |        |      |   |       
|                       |  | $              | 53,529 |      | $ | 13,426
|                       |  |                |        |      |   |       

Included in other liabilities are pension liabilities and other items, none of
which exceed 5% of total liabilities. The balance of deferred revenue at December 31, 2007 relates to components of the Dana settlement agreement, which will be amortized through 2014.



|(10) | Long-Term Debt
|---- | --------------

Long-term debt consists of the following:



|                           |  |                |        |   |      |   |        |  
|-------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                           |  | December 31,   |       
|                           |  | 2007           |        |   | 2006 |  
|                           |  | (in thousands) |       
|Revolving Credit Agreement |  | $              | 35,000 |   |      | $ | 5,000  |  
|Senior notes               |  |                | 30,000 |   |      |   | 55,000 |  
|                           |  |                |        |   |      |   |        |  
|                           |  |                | 65,000 |   |      |   | 60,000 |  
|Less current portion       |  |                | (5,000 | ) |      |   | (5,000 | )
|                           |  |                |        |   |      |   |        |  
|                           |  | $              | 60,000 |   |      | $ | 55,000 |  
|                           |  |                |        |   |      |   |        |  

In April 2007, the Companys Revolving Credit Agreement was amended and
restated to: i) limit total borrowings at $50,000,000, with $50,000,000 of additional borrowings available upon lead bank approval, ii) extend



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



the Credit Agreement through October 2009, iii) revise certain financial covenants, iv) increase the Companys interest rate structure, and v) add a
security interest in the Companys accounts receivable, inventory and equipment. Other terms of the Revolving Credit Agreement remained substantially unchanged.

The Company also amended the Senior Notes in April 2007 to enable a portion of their repayment, revise certain financial covenants, modify the June 30, 2014 principal payment to
June 30, 2012, increase the Companys fixed interest rates and among other things, add a security interest in the Companys accounts receivable, inventory and equipment. Other terms of the Senior Notes remained substantially
unchanged. The Company paid $25,000,000 on the Senior Notes in April 2007.

After the aforementioned modifications, the
Companys principal commitment under the Revolving Credit Agreement is due in 2009, while the Companys principal commitment under the Senior Notes consist of $4,100,000 of notes due in 2009 bearing interest at 7.25%, $15,000,000 of notes
due in 2011 bearing interest at 7.45% and $10,900,000 due in 2012 bearing interest at 7.55%. Current maturities of long-term debt represent amounts due under a short-term borrowing arrangement included in the Revolving Credit Agreement.

At December 31, 2007, the Company had total availability for borrowings and letters of credit under the Revolving Credit
Agreement of $15,000,000 along with an unrestricted cash balance of $14,622,000, which provides for total cash and borrowing capacity of $29,622,000. Approximately $2,523,000 of the unrestricted cash balance relates to our Mexican subsidiaries. On
September 13, 2005, the Company signed a collateral sharing agreement which pledged 65% of the stock in our Mexico subsidiary as collateral under the Credit Agreement. Standby letters of credit up to a maximum of $15,000,000 may be issued under
the Revolving Credit Agreement of which $1,913,000 and $1,720,000 were issued at December 31, 2007 and 2006, respectively.

Under the terms of the amended Revolving Credit Agreement, interest rates are determined at the time of borrowing and are based on the London Interbank Offered Rate plus a margin of 1.25% to 3.50%; or the greater of the prime rate or the
federal funds rate plus 0.50%, plus a margin up to 1.00%. The Company also pays a fee of 0.20% to 0.50% on the unused portion of the aggregate commitment. The margins applied to the respective interest rates and the commitment fee are adjusted
quarterly and are based on the Companys ratio of net funded debt to earnings before interest, taxes, depreciation and amortization.

The Revolving Credit Agreement and Senior Notes contain customary affirmative and negative covenants, including financial covenants requiring the maintenance of interest coverage and leverage ratios and minimum levels
of net worth. As of December 31, 2007, the Company was in compliance with all covenants.

The weighted average
interest rate for outstanding borrowings at December 31, 2007 was 7.2%. The weighted average interest rates for borrowings during the years ended December 31, 2007, 2006 and 2005 were 6.7%, 5.5% and 5.2% respectively. Interest incurred,
net of amounts capitalized, during the years ended December 31, 2007, 2006 and 2005 totaled approximately $4,240,000, $4,275,000 and $6,279,000, respectively. The Company had no capitalized interest in 2007 or 2006. Capitalized interest for the
year ended December 31, 2005 approximated $328,000. Interest paid during the years ended December 31, 2007, 2006 and 2005 totaled approximately $5,718,000, $3,843,000 and $$6,541,000, respectively.



|(11) | Fair Value of Financial Instruments
|---- | -----------------------------------

Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of
those instruments. The fair value for the Senior Notes exceeded the carrying value by approximately $1,274,000 at December 31, 2007. The carrying amount of debt outstanding at December 31, 2007 and 2006 under the Credit Agreement
approximates fair value because borrowings are for terms of less than six months and have rates that reflect currently available terms and conditions for similar debt.



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



As discussed in Note 2, the Companys allowed general unsecured non-priority
claim of $89,900,000 provided by Dana in connection with the August 7, 2007 settlement was recorded at its estimated fair value of $76,483,000 at that date. The Companys estimate of fair value for this asset at December 31, 2007 had
not changed. See Note 20, Subsequent Events, for further information regarding Danas emergence from bankruptcy in 2008 and the Companys receipt of Dana common stock.



|(12) | Employee Benefit Plans
|---- | ----------------------

The Industrial Group sponsors noncontributory defined benefit pension plans (the Pension Plans) covering certain of its employees. The Pension Plans covering salaried and management employees provide pension benefits
that are based on the employees highest five-year average compensation within ten years before retirement. The Pension Plans covering hourly employees and union members generally provide benefits at stated amounts for each year of service. All
of the Companys pension plans are frozen to new participants and certain plans are frozen to additional benefit accruals. The Companys funding policy is to make the minimum annual contributions required by the applicable regulations. The
Pension Plans assets are primarily invested in equity securities and fixed income securities. The following table details the components of pension (income) expense:



|                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | Years ended December 31, |       
|                                              |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|                                              |  | (in thousands)           |       
|Service cost                                  |  | $                        | 93     |   |      | $ | 98     |      |  | $ | 105    |  
|Interest cost on projected benefit obligation |  |                          | 2,161  |   |      |   | 2,152  |      |  |   | 2,202  |  
|Net amortizations and deferrals               |  |                          | 168    |   |      |   | 439    |      |  |   | 503    |  
|Expected return on plan assets                |  |                          | (3,103 | ) |      |   | (2,791 | )    |  |   | (2,722 | )
|                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|                                              |  | $                        | (681   | ) |      | $ | (102   | )    |  | $ | 88     |  
|                                              |  |                          |        |   |      |   |        |      |  |   |        |  

The following are summaries of the changes in the benefit obligations and plan
assets and of the funded status of the Pension Plans:



|                                               |  |                |        |   |      |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                               |  | December 31,   |       
|                                               |  | 2007           |        |   | 2006 |  
|                                               |  | (in thousands) |       
|Change in benefit obligation:                  |  |                |        |   |      |   |        |  
|Benefit obligation at beginning of year        |  | $              | 41,111 |   |      | $ | 40,407 |  
|Service cost                                   |  |                | 93     |   |      |   | 98     |  
|Interest cost                                  |  |                | 2,161  |   |      |   | 2,152  |  
|Actuarial loss                                 |  |                | 41     |   |      |   | 546    |  
|Benefits paid                                  |  |                | (2,199 | ) |      |   | (2,092 | )
|                                               |  |                |        |   |      |   |        |  
|Benefit obligation at end of year              |  | $              | 41,207 |   |      | $ | 41,111 |  
|                                               |  |                |        |   |      |   |        |  
|                                               |  |               
|Change in plan assets:                         |  |                |        |   |      |   |        |  
|Fair value of plan assets at beginning of year |  | $              | 38,833 |   |      | $ | 34,383 |  
|Actual return on plan assets                   |  |                | 3,612  |   |      |   | 5,420  |  
|Company contributions                          |  |                | 391    |   |      |   | 1,122  |  
|Benefits paid                                  |  |                | (2,199 | ) |      |   | (2,092 | )
|                                               |  |                |        |   |      |   |        |  
|Fair value of plan assets at end of year       |  | $              | 40,637 |   |      | $ | 38,833 |  
|                                               |  |                |        |   |      |   |        |  
|Underfunded status of the plans                |  | $              | (570   | ) |      | $ | (2,278 | )
|                                               |  |                |        |   |      |   |        |  



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



|                                                                            |  |                |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | December 31,   |       
|                                                                            |  | 2007           |        |   | 2006 |  
|                                                                            |  | (in thousands) |       
|Balance sheet assets (liabilities):                                         |  |                |        |   |      |   |        |  
|Other assets                                                                |  | $              | 2,351  |   |      | $ | 1,859  |  
|Other liabilities                                                           |  |                | (2,920 | ) |      |   | (4,137 | )
|Accumulated other comprehensive loss                                        |  |                | 6,458  |   |      |   | 7,095  |  
|                                                                            |  |                |        |   |      |   |        |  
|Net amount recognized                                                       |  | $              | 5,889  |   |      | $ | 4,817  |  
|                                                                            |  |                |        |   |      |   |        |  
|                                                                            |  |               
|Pension plans with accumulated benefit obligation in excess of plan assets: |  |                |        |   |      |   |        |  
|Projected benefit obligation                                                |  | $              | 25,738 |   |      | $ | 25,599 |  
|Accumulated benefit obligation                                              |  |                | 25,583 |   |      |   | 25,452 |  
|Fair value of plan assets                                                   |  |                | 22,818 |   |      |   | 21,462 |  
|                                                                            |  |               
|Projected benefit obligation and net periodic pension cost assumptions:     |  |                |        |   |      |   |        |  
|Discount rate                                                               |  |                | 5.80   | % |      |   | 5.50   | %
|Rate of compensation increase                                               |  |                | 4.00   |   |      |   | 4.00   |  
|Expected long-term rate of return on plan assets                            |  |                | 8.25   |   |      |   | 8.25   |  
|                                                                            |  |               
|Weighted average asset allocation:                                          |  |                |        |   |      |   |        |  
|Equity securities                                                           |  |                | 60     | % |      |   | 65     | %
|Debt securities                                                             |  |                | 40     |   |      |   | 35     |  
|                                                                            |  |                |        |   |      |   |        |  
|Total                                                                       |  |                | 100    | % |      |   | 100    | %
|                                                                            |  |                |        |   |      |   |        |  

The Company uses November 30 as the measurement date for the Pension Plans.
Total estimated contributions expected to be paid to the plans during 2008 ranges from $100,000 to $500,000. The expected long-term rates of return on plan assets for determining net periodic pension cost for 2007 and 2006 were chosen by the Company
from a best estimate range determined by applying anticipated long-term returns and long-term volatility for various assets categories to the target asset allocation of the plan. The target asset allocation of plan assets is equity securities
ranging 55-65% and fixed income securities ranging 35-45% of total investments.

Accumulated other comprehensive loss at
December 31, 2007 includes the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service credits of $392,000 and unrecognized actuarial losses $6,850,000. The prior service credit and actuarial
loss included in accumulated other comprehensive loss and expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2008 is $78,000 and $188,000, respectively.

At December 31, 2007, the benefits expected to be paid in each of the next five fiscal years, and in aggregate for the five fiscal
years thereafter are as follows (in thousands):



|          |  |   |       
|--------- |  | - | ------
|2008      |  | $ | 2,677 
|2009      |  |   | 2,809 
|2010      |  |   | 2,916 
|2011      |  |   | 3,012 
|2012      |  |   | 3,145 
|2013-2017 |  |   | 16,108
|          |  |   |       
|          |  | $ | 30,667
|          |  |   |       

The Company sponsors a defined contribution plan (the Defined Contribution Plan)
for substantially all employees of the Company. The Defined Contribution Plan is intended to meet the requirements of Section 401(k) of the Internal Revenue Code. The Defined Contribution Plan allows the Company to match participant
contributions and provide discretionary contributions. Contributions to the Defined Contribution Plan in 2007, 2006 and 2005 totaled approximately $2,332,000, $2,142,000 and $2,543,000, respectively.



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



The Company has self-insured medical plans (the Medical Plans) covering substantially
all domestic employees. The number of employees participating in the Medical Plans was approximately 1,522, 1,700 and 1,853 at December 31, 2007, 2006 and 2005, respectively. The Medical Plans limit the Companys annual obligations to fund
claims to specified amounts per participant. The Company is adequately insured for amounts in excess of these limits. Employees are responsible for payment of a portion of the premiums. During 2007, 2006 and 2005, the Company charged approximately
$14,424,000, $14,245,000 and $10,694,000, respectively, to operations related to medical claims incurred and estimated, reinsurance premiums, and administrative costs for the Medical Plans.

In addition, certain of the Companys non-U.S. employees are covered by various defined benefit and defined contribution plans.
The Companys expenses for these plans related to continuing operations totaled approximately $160,000, $177,000 and $160,000 in 2007, 2006 and 2005, respectively. The aggregate benefit plan assets and accumulated benefit obligation of these
plans are not significant.



|(13) | Commitments and Contingencies
|---- | -----------------------------

The Company leases certain of its real property and certain equipment, vehicles and computer hardware under operating leases with terms ranging from month-to-month to ten years and which contain various renewal and
rent escalation clauses. Future minimum annual lease commitments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2007 are as follows (in thousands):



|                    |  |   |       
|------------------- |  | - | ------
|2008                |  | $ | 7,323 
|2009                |  |   | 5,981 
|2010                |  |   | 3,053 
|2011                |  |   | 2,700 
|2012                |  |   | 2,560 
|2013 and thereafter |  |   | 7,253 
|                    |  |   |       
|                    |  | $ | 28,870
|                    |  |   |       

Rent expense for the years ended December 31, 2007, 2006 and 2005 totaled
approximately $9,083,000 $8,362,000 and $8,377,000, respectively.

As of December 31, 2007, the Company had
outstanding purchase commitments of approximately $38,425,000 primarily for the acquisition of inventory and manufacturing equipment.

The Company bears insurance risk as a member of a group captive insurance entity for certain general liability, automobile and workers compensation insurance programs, a self insured workers compensation
program and a self-insured employee health program. The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, expected costs of claims
incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities on a quarterly basis. As facts change, it may become necessary to make adjustments that could be material to the
Companys consolidated results of operations and financial condition. The Company believes that its present insurance coverage and level of accrued liabilities are adequate.

The Company is involved in certain litigation and contract issues arising in the normal course of business. While the outcome of these
matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the
Company. For example, the Company has purchased certain plants with various potential environmental issues under purchase agreements which include indemnification provisions for, among other things, environmental conditions that existed on the sites
at closing.



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SYPRIS SOLUTIONS, INC.

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|(14) | Stock Option and Purchase Plans
|---- | -------------------------------

The Companys stock compensation program provides for the grant of performance-based stock options (Target Options), restricted shares, and stock options. A total of 3,000,000 shares of common stock were reserved
for issuance under the 2004 equity plan. The aggregate number of shares available for future grant as of December 31, 2007 and 2006 was 1,479,043 and 2,033,271, respectively.

The terms and conditions of the Target Options grants provide for the determination of the exercise price and the beginning of the
vesting period to occur when the fair market value of the Companys common stock achieves certain targeted price levels. The Company has not granted Target Options since the first quarter of 2003.

On August 1, 2005, the Company first issued restricted shares under the 2004 Equity Plan, including certain shares subject to
performance requirements (Performance Restricted Stock). The 2004 Equity Plan provides for restrictions which lapse after one, two, three or four years for certain grants or for certain other shares, one-third of the restriction is removed after
three, five and seven years, respectively. During the restricted period, which is commensurate with each vesting period, the recipients receive dividends and voting rights for the shares. Generally, if a recipient leaves the Company before the end
of the restricted period or if performance requirements, if any, are not met, the shares will be forfeited.

The Company
has certain stock compensation plans under which options to purchase common stock may be granted to officers, key employees and non-employee directors. Options may be granted at not less than the market price on the date of grant. Stock option
grants under the 2004 Equity Plan include both six and ten year lives along with graded vesting over three, four and five years of service.

Fair value for restricted shares is equal to the stock price on the date of grant. The fair values of Target Options were determined by a third party valuation firm using a Monte-Carlo Simulation Model, while the fair
value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing method. The Company uses historical Company and industry data to estimate the expected price volatility, the expected option life, the expected
forfeiture rate and the expected dividend yield. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following weighted average assumptions were used to estimate the
fair value of options granted using the Black-Scholes option-pricing model:



|                         |  |                          |   |  |      |   |  |      |  
|------------------------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                         |  | Years ended December 31, |  
|                         |  | 2007                     |   |  | 2006 |   |  | 2005 |  
|Expected life (years)    |  | 3.1                      |   |  | 5.3  |   |  | 5.8  |  
|Expected volatility      |  | 48.5                     | % |  | 48.0 | % |  | 53.0 | %
|Risk-free interest rates |  | 4.58                     | % |  | 4.81 | % |  | 4.12 | %
|Expected dividend yield  |  | 1.77                     | % |  | 1.26 | % |  | 1.06 | %

On May 14, 2007 the Company offered eligible participants, including
executive officers and directors of the Company, the opportunity to surrender certain vested outstanding, unexercised stock options which have exercise prices greater than $7.90 per share in exchange for shares of common stock or new options to
acquire common stock with an exercise price of $7.90 per share, pursuant to the 2004 Equity Plan. Participants could participate in the offer if they remained employed through June 13, 2007, the date on which the Company canceled eligible
options under the offer. At the participants election, the participant could exchange all of the eligible options owned by such participant for either (i) shares of common stock having a fair value equivalent to the fair value of each
such eligible option, or (ii) new options to purchase shares of Sypris common stock having a fair value equivalent to the fair value of each such eligible option.

The ratio of shares subject to eligible options cancelled to common stock and new options issued was calculated using the Black-Scholes Merton Valuation Model. If a participant elected to
exchange any eligible options, he or she also surrendered any Target Options granted under any Sypris equity plan. Each share of common



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stock and new option granted with respect to an exchanged option was fully vested. All new options are exercisable through May 14, 2011 unless earlier
forfeited.

Pursuant to the Exchange Offer and in exchange for the options surrendered, the Company issued 159,974 shares
of common stock and 374,529 options to purchase common stock. Additionally, participants surrendered 150,500 Target Options under the program, which represented all remaining Target Options outstanding at the date of exchange.

On January 12, 2007, the Company granted 258,000 restricted stock awards under a key employee retention program which vest over two
or four years, as applicable. On March 1, 2007, the Company also granted 305,290 restricted stock awards under a long-term incentive program. Twenty-five percent of the restricted stock awards will vest in one-third increments on each of the
third, fifth and seventh anniversaries of the grant date. Seventy-five percent of the restricted stock awards will vest in one-quarter increments on each of the first, second, third and fourth anniversaries of the achievement of the Vesting Trigger
Date. This Vesting Trigger Date is the first business day following the Companys achievement of a specified target for aggregate net income as measured over the previous four fiscal quarters. If no Vesting Trigger Date occurs before
March 1, 2010, this portion of the restricted stock awards will be immediately forfeited.

A summary of the restricted
stock activity is as follows (excluding performance restricted stock):



|                                      |  |                 |   |  |                                     |      
|------------------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                                      |  | Number ofShares |   |  | WeightedAverageGrant DateFair Value
|Nonvested shares at January 1, 2007   |  | 192,000         |   |  | $                                   | 11.72
|Granted                               |  | 370,243         |   |  |                                     | 6.87 
|Forfeited                             |  | (68,438         | ) |  |                                     | 8.24 
|                                      |  |                 |   |  |                                     |      
|Nonvested shares at December 31, 2007 |  | 493,805         |   |  | $                                   | 8.57 
|                                      |  |                 |   |  |                                     |      

The total fair value of shares vested during 2006 was $42,000. No shares vested
during 2007 or 2005. In conjunction with the vesting of restricted shares and payment of taxes thereon, the Company received into treasury 2,259 restricted shares at $7.06 per share, the closing market price on the date the restricted stock vested.
Such repurchased shares are presented as treasury stock in the stockholders equity section of the consolidated balance sheet.

A summary of the performance restricted stock activity is as follows:



|                                      |  |                 |   |  |                                     |      
|------------------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                                      |  | Number ofShares |   |  | WeightedAverageGrant DateFair Value
|Nonvested shares at January 1, 2007   |  | 40,000          |   |  | $                                   | 11.83
|Granted                               |  | 243,047         |   |  |                                     | 6.11 
|Forfeited                             |  | (32,820         | ) |  |                                     | 6.11 
|                                      |  |                 |   |  |                                     |      
|Nonvested shares at December 31, 2007 |  | 250,227         |   |  | $                                   | 7.02 
|                                      |  |                 |   |  |                                     |      



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The following table summarizes option activity for the year ended December 31,
2007:



|                                 |  |                 |   |  |                                         |       |                               |      |                         |   |       
|-------------------------------- |  | --------------- | - |  | --------------------------------------- | ----- | ----------------------------- | ---- | ----------------------- | - | ------
|                                 |  | Number ofShares |   |  | Weighted-averageExercise PricePer Share |       | Weighted-averageRemainingTerm |      | AggregateIntrinsicValue
|Outstanding at January 1, 2007   |  | 2,303,317       |   |  | $                                       | 10.08 |                               |      |                         |   |       
|Granted                          |  | 403,529         |   |  |                                         | 7.85  |                               |      |                         |   |       
|Exchanged                        |  | (1,101,655      | ) |  |                                         | 11.93 |                               |      |                         |   |       
|Forfeited                        |  | (111,811        | ) |  |                                         | 9.32  |                               |      |                         |   |       
|Expired                          |  | (136,192        | ) |  |                                         | 7.74  |                               |      |                         |   |       
|Exercised                        |  | (75,748         | ) |  |                                         | 6.29  |                               |      |                         |   |       
|                                 |  |                 |   |  |                                         |       |                               |      |                         |   |       
|Outstanding at December 31, 2007 |  | 1,281,440       |   |  | $                                       | 8.33  |                               | 3.09 |                         | $ | 81,716
|                                 |  |                 |   |  |                                         |       |                               |      |                         |   |       
|Exercisable at December 31, 2007 |  | 1,000,690       |   |  | $                                       | 8.11  |                               | 2.83 |                         | $ | 81,166
|                                 |  |                 |   |  |                                         |       |                               |      |                         |   |       

The weighted average grant date fair value based on the Black-Scholes option
pricing model for options granted in the year ended December 31, 2007, 2006 and 2005 was $2.66, $4.13 and $5.65 per share, respectively. The total intrinsic value of options exercised was $145,000, $284,000 and $476,000 during the years ended
December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2007, there was $2,853,000 of total
unrecognized compensation cost, after estimated forfeitures, related to unvested share-based compensation granted under our plans. That cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of
option shares vested was $1,556,000, $1,020,000 and $7,958,000 during the years ended December 31, 2007, 2006 and 2005, respectively.



|(15) | Stockholders Equity
|---- | --------------------

The Company has a stockholder rights plan, under which each stockholder owns one right for each outstanding share of common stock owned. Each right entitles the holder to purchase one one-thousandth of a share of a
new series of preferred stock at an exercise price of $63.00. The rights trade along with, and not separately from, the shares of common stock unless they become exercisable. If any person or group acquires or makes a tender offer for 15% or more of
the common stock of the Company (except in transactions approved by the Companys Board of Directors in advance) the rights become exercisable, and they will separate, become tradable, and entitle stockholders, other than such person or group,
to acquire, at the exercise price, preferred stock with a market value equal to twice the exercise price. If the Company is acquired in a merger or other business combination with such person or group, or if 50% of its earning power or assets are
sold to such person or group, each right will entitle its holder, other than such person or group, to acquire, at the exercise price, shares of the acquiring companys common stock with a market value of twice the exercise price. The rights
will expire on October 23, 2011, unless redeemed or exchanged earlier by the Company, and will be represented by existing common stock certificates until they become exercisable.

As of December 31, 2007, 24,850 shares of the Companys preferred stock were designated as Series A Preferred Stock in
connection with the adoption of the stockholder rights plan. There are no shares of Series A Preferred Stock currently outstanding. The holders of Series A Preferred Stock will have voting rights, be entitled to receive dividends based on a defined
formula and have certain rights in the event of the Companys dissolution. The shares of Series A Preferred Stock shall not be redeemable. However, the Company may purchase shares of Series A Preferred Stock in the open market or pursuant to an
offer to a holder or holders.

Cumulative losses recorded in other comprehensive loss for adjustments in the minimum
pension liability, net of tax, totaled $4,470,000, $4,342,000 and $3,191,000 at December 31, 2007, 2006 and 2005, respectively. Other comprehensive loss also included cumulative foreign currency translation gains of $527,000, $708,000 and
$1,257,000 at December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007, 2006 and



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2005, other income, net includes foreign currency remeasurement gains of $106,000, $102,000 and $871,000, respectively.



|(16) | Income Taxes
|---- | ------------

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Accordingly, deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses
for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

The components of (loss) income before taxes are as follows:



|         |  |                          |        |   |      |   |         |      |  |   |      
|-------- |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | -----
|         |  | Years ended December 31,
|         |  | 2007                     |        |   | 2006 |   |         | 2005
|         |  | (in thousands)          
|Domestic |  | $                        | (6,960 | ) |      | $ | (11,560 | )    |  | $ | 579  
|Foreign  |  |                          | 2,421  |   |      |   | 8,104   |      |  |   | 6,989
|         |  |                          |        |   |      |   |         |      |  |   |      
|         |  | $                        | (4,539 | ) |      | $ | (3,456  | )    |  | $ | 7,568
|         |  |                          |        |   |      |   |         |      |  |   |      

The components of income tax (benefit) expense are as follows:



|                                  |  |                          |         |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | Years ended December 31, |        
|                                  |  | 2007                     |         |   | 2006 |   |        | 2005 | 
|                                  |  | (in thousands)           |        
|Current:                          |  |                          |         |   |      |   |        |      |  |   |        |  
|Federal                           |  | $                        | 601     |   |      | $ | (214   | )    |  | $ | 661    |  
|State                             |  |                          | 175     |   |      |   | 320    |      |  |   | 23     |  
|Foreign                           |  |                          | 12,197  |   |      |   | 2,879  |      |  |   | 2,654  |  
|                                  |  |                          |         |   |      |   |        |      |  |   |        |  
|Total current income tax expense  |  |                          | 12,973  |   |      |   | 2,985  |      |  |   | 3,338  |  
|                                  |  |                          |        
|Deferred:                         |  |                          |         |   |      |   |        |      |  |   |        |  
|Federal                           |  |                          | (3,202  | ) |      |   | (3,830 | )    |  |   | (519   | )
|State                             |  |                          | (734    | ) |      |   | (720   | )    |  |   | 6      |  
|Foreign                           |  |                          | (11,437 | ) |      |   | (529   | )    |  |   | (578   | )
|                                  |  |                          |         |   |      |   |        |      |  |   |        |  
|Total deferred income tax benefit |  |                          | (15,373 | ) |      |   | (5,079 | )    |  |   | (1,091 | )
|                                  |  |                          |         |   |      |   |        |      |  |   |        |  
|                                  |  | $                        | (2,400  | ) |      | $ | (2,094 | )    |  | $ | 2,247  |  
|                                  |  |                          |         |   |      |   |        |      |  |   |        |  



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The Company files a consolidated federal income tax return which includes all
domestic subsidiaries. Federal and state income taxes paid in the U.S. during 2007, 2006 and 2005 totaled approximately $123,000, $546,000 and $465,000, respectively. Foreign income taxes paid during 2007, 2006 and 2005 totaled approximately
$2,542,000, $4,536,000 and $801,000, respectively. The Company received approximately $614,000, $1,365,000 and $4,266,000 in federal income tax refunds during 2007, 2006 and 2005, respectively. At December 31, 2007, the Company had
approximately $9,454,000 of federal net operating loss carryforwards available to offset federal taxable income, which will expire on December 31, 2026. At December 31, 2007, the Company had approximately $12,705,000 of state net operating
loss carryforwards available to offset future state taxable income. Such carryforwards reflect income tax losses incurred (in thousands) which will expire on December 31 of the following years:



|     |  |   |       
|---- |  | - | ------
|2009 |  | $ | 1,918 
|2010 |  |   | 560   
|2011 |  |   | 5,999 
|2018 |  |   | 464   
|2026 |  |   | 627   
|2027 |  |   | 3,137 
|     |  |   |       
|     |  | $ | 12,705
|     |  |   |       

The following is a reconciliation of income tax (benefit) expense to that computed
by applying the federal statutory rate to (loss) income before income taxes:



|                                               |  |                          |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                               |  | Years ended December 31, |       
|                                               |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|                                               |  | (in thousands)           |       
|Federal tax at the statutory rate              |  | $                        | (1,589 | ) |      | $ | (1,209 | )    |  | $ | 2,573 |  
|Current year permanent differences             |  |                          | 91     |   |      |   | 156    |      |  |   | 150   |  
|State income taxes, net of federal tax benefit |  |                          | (167   | ) |      |   | (137   | )    |  |   | 23    |  
|Change in estimate of tax contingencies        |  |                          | (104   | ) |      |   | (402   | )    |  |   | (200  | )
|Change in estimate of blended tax rate         |  |                          |       |   |      |   |       |      |  |   | 144   |  
|Research tax credits                           |  |                          |       |   |      |   | 100    |      |  |   | (100  | )
|Effect of tax rates of foreign subsidiaries    |  |                          | (88    | ) |      |   | (486   | )    |  |   | (300  | )
|Provision to return reconciliation and other   |  |                          | (543   | ) |      |   | (116   | )    |  |   | (43   | )
|                                               |  |                          |        |   |      |   |        |      |  |   |       |  
|                                               |  | $                        | (2,400 | ) |      | $ | (2,094 | )    |  | $ | 2,247 |  
|                                               |  |                          |        |   |      |   |        |      |  |   |       |  



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Deferred income tax assets and liabilities are as follows:



|                                                   |  |                |         |   |      |   |         |  
|-------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                   |  | December 31,   |        
|                                                   |  | 2007           |         |   | 2006 |  
|                                                   |  | (in thousands) |        
|Deferred tax assets:                               |  |                |         |   |      |   |         |  
|Compensation and benefit accruals                  |  | $              | 1,712   |   |      | $ | 1,094   |  
|Inventory valuation                                |  |                | 3,225   |   |      |   | 2,990   |  
|Federal and State net operating loss carryforwards |  |                | 4,535   |   |      |   | 6,835   |  
|Deferred revenue                                   |  |                | 4,428   |   |      |   |        |  
|Accounts receivable allowance                      |  |                | 231     |   |      |   | 584     |  
|Foreign deferred revenue and other provisions      |  |                | 11,360  |   |      |   | 339     |  
|AMT credits                                        |  |                | 395     |   |      |   | 232     |  
|Other                                              |  |                |        |   |      |   | 309     |  
|                                                   |  |                |         |   |      |   |         |  
|Total deferred tax assets                          |  |                | 25,886  |   |      |   | 12,383  |  
|                                                   |  |               
|Deferred tax liabilities:                          |  |                |         |   |      |   |         |  
|Depreciation                                       |  |                | (14,145 | ) |      |   | (15,544 | )
|Defined benefit pension plan                       |  |                | (348    | ) |      |   |        |  
|Contract provisions                                |  |                | (280    | ) |      |   | (525    | )
|Other                                              |  |                | (446    | ) |      |   | (209    | )
|                                                   |  |                |         |   |      |   |         |  
|Total deferred tax liabilities                     |  |                | (15,219 | ) |      |   | (16,278 | )
|                                                   |  |                |         |   |      |   |         |  
|Net deferred tax asset (liability)                 |  | $              | 10,667  |   |      | $ | (3,895  | )
|                                                   |  |                |         |   |      |   |         |  

The Companys net deferred tax asset is primarily attributable to Mexico. The
Company has been profitable in Mexico in the past and anticipates continuing profitability in the future.

In June 2006,
the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Specifically, FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48
on January 1, 2007. The impact of the Companys tax positions reassessment in accordance with the requirements of FIN 48 was not significant.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):



|                                               |  |   |       |  
|---------------------------------------------- |  | - | ----- | -
|Unrecognized tax benefits at January 1, 2007   |  | $ | 1,030 |  
|Increases based on tax positions prior to 2007 |  |   | 8     |  
|Decreases based on tax positions prior to 2007 |  |   | (91   | )
|Increases in tax positions related to 2007     |  |   | 4     |  
|Lapse in statute of limitations                |  |   | (86   | )
|                                               |  |   |       |  
|Unrecognized tax benefits at December 31, 2007 |  | $ | 865   |  
|                                               |  |   |       |  

If the Companys positions are sustained by the taxing authority in favor of
the Company, the entire balance at December 31, 2007 would reduce the Companys effective tax rate. The Company does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax
positions through December 2008. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2007 and 2006, the Company had accrued approximately $331,000 and



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$270,000, respectively, for the payment of tax-related interest and penalties. The liability for uncertain tax positions including interest and penalties is
carried in accrued liabilities in the consolidated balance sheets.

The Company files income tax returns in the U.S.
federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) is not currently examining the Companys U.S. income tax returns for 2004 through 2007, for which the statute has yet to expire. In addition,
open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material.

The American Jobs Creation Act of 2004 (the Act), which was signed into law on October 22, 2004, introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer
(Repatriation Provision), provided certain criteria are met. The FASB issued Staff Position No. FAS 109-2 in December 2004, which requires the recording of tax expense if and when an entity decides to repatriate foreign earnings subject to the Act.
The Company has considered the implications of the Act on the repatriation of certain foreign earnings, which reduces the Federal income tax rate on dividends from non-U.S. subsidiaries. The Company did not repatriate earnings under the Act in
fiscal 2007 or 2006 because it intends to indefinitely reinvest foreign earnings outside the U.S., and has not provided an estimate for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries ($14,841,000 at
December 31, 2007) that might be payable if these earnings were repatriated. However, the Company believes that U.S. foreign tax credits would, for the most part, eliminate any additional U.S. tax.



|(17) | (Loss) Earnings Per Common Share
|---- | --------------------------------

Basic (loss) earnings per common share is calculated by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted (loss) earnings
per common share is calculated by using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options.

The following table presents information necessary to calculate (loss) earnings per common share:



|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       
|-------------------------------------------------------------------- |  | ----------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                                                     |  | Years ended December 31,                 
|                                                                     |  | 2007                                      |        |   | 2006 |   |        | 2005
|                                                                     |  | (in thousands, except for per share data)
|Shares outstanding:                                                  |  |                                           |        |   |      |   |        |      |  |   |       
|Weighted average shares outstanding                                  |  |                                           | 18,231 |   |      |   | 18,079 |      |  |   | 18,016
|Effect of dilutive employee stock options                            |  |                                           |       |   |      |   |       |      |  |   | 307   
|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       
|Adjusted weighted average shares outstanding and assumed conversions |  |                                           | 18,231 |   |      |   | 18,079 |      |  |   | 18,323
|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       
|Net (loss) income applicable to common stock                         |  | $                                         | (2,139 | ) |      | $ | (1,362 | )    |  | $ | 5,321 
|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       
|(Loss) earnings per common share:                                    |  |                                           |        |   |      |   |        |      |  |   |       
|Basic                                                                |  | $                                         | (0.12  | ) |      | $ | (0.08  | )    |  | $ | 0.30  
|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       
|Diluted                                                              |  | $                                         | (0.12  | ) |      | $ | (0.08  | )    |  | $ | 0.29  
|                                                                     |  |                                           |        |   |      |   |        |      |  |   |       

Weighted average anti-dilutive options outstanding excluded from diluted earnings
per common share were 508,000 at December 31, 2005.



|(18) | Segment Information
|---- | -------------------

The Company is organized into two business groups, the Industrial Group and the Electronics Group. The Industrial Group is one reportable business segment, while the Electronics Group includes two reportable business segments,
Aerospace & Defense and Test & Measurement. The segments are each managed separately because of the distinctions between the products, services, markets, customers, technologies, and workforce skills of the



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segments. The Industrial Group provides manufacturing services for a variety of customers that outsource forged and finished steel components and
subassemblies. The Industrial Group also manufactures high-pressure closures and other fabricated products. The Aerospace & Defense reportable segment provides manufacturing and technical services as an outsourced service provider and
manufactures complex data storage systems. The Test & Measurement reportable segment provides a wide range of technical services for a diversified customer base as an outsourced service provider and manufactures magnetic instruments,
current sensors, and other electronic products. Revenue derived from outsourced services for the Industrial Group accounted for 60%, 70% and 67% of total net revenue in 2007, 2006 and 2005, respectively. Revenue derived from outsourced services for
the Aerospace & Defense reportable segment accounted for 11%, 8% and 11% of total net revenue in 2007, 2006 and 2005, respectively. Revenue derived from outsourced services for the Test & Measurement reportable segment accounted
for 11%, 8% and 8% of total net revenue in 2007, 2006 and 2005, respectively. There was no intersegment net revenue recognized for any year presented.

The following table presents financial information for the reportable segments of the Company:



|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | Years ended December 31, |        
|                                         |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|                                         |  | (in thousands)           |        
|Net revenue from unaffiliated customers: |  |                          |         |   |      |   |         |      |  |   |         |  
|Industrial Group                         |  | $                        | 279,082 |   |      | $ | 364,570 |      |  | $ | 359,602 |  
|Aerospace & Defense                      |  |                          | 104,505 |   |      |   | 87,491  |      |  |   | 115,863 |  
|Test & Measurement                       |  |                          | 52,328  |   |      |   | 45,603  |      |  |   | 47,301  |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Electronics Group                        |  |                          | 156,833 |   |      |   | 133,094 |      |  |   | 163,164 |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                        | 435,915 |   |      | $ | 497,664 |      |  | $ | 522,766 |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Gross profit:                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Industrial Group                         |  | $                        | 17,590  |   |      | $ | 17,676  |      |  | $ | 22,916  |  
|Aerospace & Defense                      |  |                          | 9,009   |   |      |   | 13,659  |      |  |   | 17,496  |  
|Test & Measurement                       |  |                          | 13,197  |   |      |   | 9,755   |      |  |   | 10,926  |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Electronics Group                        |  |                          | 22,206  |   |      |   | 23,414  |      |  |   | 28,422  |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                        | 39,796  |   |      | $ | 41,090  |      |  | $ | 51,338  |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Nonrecurring (income) expense, net:      |  |                          |         |   |      |   |         |      |  |   |         |  
|Industrial Group                         |  | $                        | (5,874  | ) |      | $ |        |      |  | $ |        |  
|General, corporate and other             |  |                          | 2,628   |   |      |   | 1,485   |      |  |   |        |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                        | (3,246  | ) |      | $ | 1,485   |      |  | $ |        |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating (loss) income:                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Industrial Group                         |  | $                        | 13,731  |   |      | $ | 7,849   |      |  | $ | 14,014  |  
|Aerospace & Defense                      |  |                          | (4,512  | ) |      |   | 489     |      |  |   | 4,305   |  
|Test & Measurement                       |  |                          | 2,014   |   |      |   | (94     | )    |  |   | 354     |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Electronics Group                        |  |                          | (2,498  | ) |      |   | 395     |      |  |   | 4,659   |  
|General, corporate and other             |  |                          | (12,056 | ) |      |   | (8,379  | )    |  |   | (6,451  | )
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                        | (823    | ) |      | $ | (135    | )    |  | $ | 12,222  |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



|                               |  |                          |         |      |   |         |  |   |        
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                               |  | Years ended December 31,
|                               |  | 2007                     |         | 2006 |   | 2005   
|                               |  | (in thousands)          
|Total assets:                  |  |                          |         |      |   |         |  |   |        
|Industrial Group               |  | $                        | 264,182 |      | $ | 227,358 |  | $ | 278,967
|Aerospace & Defense            |  |                          | 108,189 |      |   | 89,433  |  |   | 83,443 
|Test & Measurement             |  |                          | 30,337  |      |   | 30,772  |  |   | 33,631 
|                               |  |                          |         |      |   |         |  |   |        
|Electronics Group              |  |                          | 138,526 |      |   | 120,205 |  |   | 117,074
|General, corporate and other   |  |                          | 19,352  |      |   | 31,470  |  |   | 21,583 
|                               |  |                          |         |      |   |         |  |   |        
|                               |  | $                        | 422,060 |      | $ | 379,033 |  | $ | 417,624
|                               |  |                          |         |      |   |         |  |   |        
|Depreciation and amortization: |  |                          |         |      |   |         |  |   |        
|Industrial Group               |  | $                        | 20,139  |      | $ | 18,639  |  | $ | 16,045 
|Aerospace & Defense            |  |                          | 4,358   |      |   | 5,096   |  |   | 5,642  
|Test & Measurement             |  |                          | 4,132   |      |   | 4,422   |  |   | 3,963  
|                               |  |                          |         |      |   |         |  |   |        
|Electronics Group              |  |                          | 8,490   |      |   | 9,518   |  |   | 9,605  
|General, corporate and other   |  |                          | 757     |      |   | 625     |  |   | 259    
|                               |  |                          |         |      |   |         |  |   |        
|                               |  | $                        | 29,386  |      | $ | 28,782  |  | $ | 25,909 
|                               |  |                          |         |      |   |         |  |   |        
|Capital expenditures:          |  |                          |         |      |   |         |  |   |        
|Industrial Group               |  | $                        | 5,767   |      | $ | 5,167   |  | $ | 28,391 
|Aerospace & Defense            |  |                          | 1,354   |      |   | 2,233   |  |   | 2,889  
|Test & Measurement             |  |                          | 3,012   |      |   | 2,764   |  |   | 4,366  
|                               |  |                          |         |      |   |         |  |   |        
|Electronics Group              |  |                          | 4,366   |      |   | 4,997   |  |   | 7,255  
|General, corporate and other   |  |                          | 22      |      |   | 162     |  |   | 618    
|                               |  |                          |         |      |   |         |  |   |        
|                               |  | $                        | 10,155  |      | $ | 10,326  |  | $ | 36,264 
|                               |  |                          |         |      |   |         |  |   |        

The Companys export sales from the U.S. totaled $24,976,000, $44,963,000 and
$47,622,000 in 2007, 2006 and 2005, respectively. Approximately $53,552,000, $86,166,000 and $68,671,000 of net revenue in 2007, 2006 and 2005, respectively, and $29,027,000, $29,774,000 and $32,304,000 of long lived assets at December 31,
2007, 2006 and 2005, respectively, relate to the Companys international operations.



|(19) | Quarterly Financial Information (Unaudited)
|---- | -------------------------------------------

The following is an analysis of certain items in the consolidated statements of operations by quarter for the years ended December 31, 2007 and 2006:



|                                         |  |                                           |         |   |        |   |         |       |  |        |         |  |       |         |        |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ----------------------------------------- | ------- | - | ------ | - | ------- | ----- |  | ------ | ------- |  | ----- | ------- | ------ |  | - | ------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | 2007                                      |         |   | 2006   |  
|                                         |  | First                                     |         |   | Second |   |         | Third |  | Fourth |         |  | First |         | Second |  |   | Third   |  |   | Fourth  |  
|                                         |  | (in thousands, except for per share data) |        
|Net revenue                              |  | $                                         | 111,439 |   |        | $ | 116,247 |       |  | $      | 104,520 |  | $     | 103,709 |        |  | $ | 129,997 |  | $ | 132,233 |   |  | $ | 125,955 |   |  | $ | 109,479 |  
|Gross profit                             |  |                                           | 12,007  |   |        |   | 7,701   |       |  |        | 10,472  |  |       | 9,616   |        |  |   | 12,619  |  |   | 10,434  |   |  |   | 10,236  |   |  |   | 7,801   |  
|Operating income (loss)                  |  |                                           | 262     |   |        |   | (3,200  | )     |  |        | 4,201   |  |       | (2,086  | )      |  |   | 2,207   |  |   | 273     |   |  |   | (529    | ) |  |   | (2,086  | )
|Net (loss) income                        |  |                                           | (245    | ) |        |   | (2,301  | )     |  |        | 2,637   |  |       | (2,230  | )      |  |   | 857     |  |   | (444    | ) |  |   | (802    | ) |  |   | (973    | )
|(Loss) earnings per common share:        |  |                                           |         |   |        |   |         |       |  |        |         |  |       |         |        |  |   |         |  |   |         |   |  |   |         |   |  |   |         |  
|Basic                                    |  | $                                         | (0.01   | ) |        | $ | (0.13   | )     |  | $      | 0.14    |  | $     | (0.12   | )      |  | $ | 0.05    |  | $ | (0.02   | ) |  | $ | (0.04   | ) |  | $ | (0.05   | )
|Diluted                                  |  | $                                         | (0.01   | ) |        | $ | (0.13   | )     |  | $      | 0.14    |  | $     | (0.12   | )      |  | $ | 0.05    |  | $ | (0.02   | ) |  | $ | (0.04   | ) |  | $ | (0.05   | )
|Cash dividends declared per common share |  | $                                         | 0.03    |   |        | $ | 0.03    |       |  | $      | 0.03    |  | $     | 0.03    |        |  | $ | 0.03    |  | $ | 0.03    |   |  | $ | 0.03    |   |  | $ | 0.03    |  



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SYPRIS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED



|(20) | Subsequent Events
|---- | -----------------

On December 12, 2007 the bankruptcy court approved Danas plan of reorganization. Pursuant to the terms included therein, the Company became entitled to receive an initial distribution of 3,090,408 shares of common stock in Dana
Holding Corporation (DAN), the right to participate in additional distributions of reserved shares of common stock of DAN if certain disputed matters are ultimately resolved for less than DANs current reserves for those matters (presently
estimated by the Company to be 300,000 to 500,000 shares to be received by the Company in 2008 and 2009) and the right to receive cash of approximately $6,300,000 by mid-March, 2008, depending on various factors in the administration of Danas
bankruptcy estate. Dana emerged from bankruptcy on January 31, 2008, and on February 1, 2008, the newly issued shares of Dana Holding Corporation began trading on the New York Stock Exchange under the ticker symbol DAN.
The closing market price for DAN common stock on March 5, 2008 was $11.80 per share.

Upon receipt of the shares in
February 2008, the Company will account for its common stock in Dana in accordance with Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities(SFAS No. 115). The Company
will account for its shares in Dana as available-for-sale securities in accordance with SFAS No. 115 with associated unrealized holding gains or losses reported as a component of other comprehensive income/(loss), subject to an impairment
analysis. Any decline in value deemed to be other than temporary will result in a charge to earnings.

The Company believes
that the price for Danas common stock at March 5, 2008 is temporarily depressed. A number of market issues including sub-prime lending issues, tightening credit markets and recession concerns have driven market prices down in recent
months. A substantial portion of the current owners of DAN stock are contractually restricted from trading those shares for at least six months after the confirmation date and many equity mutual funds are restricted from purchasing stock in
businesses that have recently emerged from bankruptcy. The automotive sector has been under considerable scrutiny due to bankruptcies and significant losses recorded by major companies within the sector. The Company believes that these negative
factors will begin to improve during 2008 and it possesses the ability and intent to hold its shares of Dana common stock until a full recovery of the current carrying value occurs.



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

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

As of the
end of the period covered by this annual report, an evaluation was performed under the supervision and with the participation of the Companys management, including the President and Chief Executive Officer (the CEO) and the Chief Financial
Officer (the CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys management, including the CEO and CFO, concluded that the Companys
disclosure controls and procedures were effective.

Managements Report on Internal Control over Financial Reporting

The management of Sypris Solutions, Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Managements report on internal control over financial reporting is included in Part II, Item 8 of this Form 10-K. Additionally, Ernst & Young LLP,
our independent auditors and a registered public accounting firm, has issued a report on Sypris Solutions, Inc.s internal control over financial reporting, which is included in Part II, Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None.



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The information required herein is incorporated by reference from sections of the Companys Proxy Statement titled Section 16(a) Beneficial Ownership Reporting Compliance, Governance of the
Company  Committees of the Board of Directors, Governance of the Company  Audit and Finance Committee, Proposal One, Election of Directors, and Executive Officers, which Proxy Statement will be
filed with the Securities and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.

The Company has adopted a Code of Business Conduct that applies to all of its directors, officers (including its chief executive officer, chief financial officer, chief accounting officer and any person performing similar functions) and
employees. The Company has made the Code of Business Conduct available on its website at www.sypris.com.



|Item 11. | Executive Compensation
|-------- | ----------------------

The
information required herein is incorporated by reference from sections of the Companys Proxy Statement titled Governance of the Company  Compensation of Directors, Governance of the Company  Compensation Committee
Interlocks and Insider Participation, Summary Compensation Table, Grants of Plan-Based Awards in 2007, Outstanding Equity Awards at Fiscal Year-End 2007, Option Exercises and Stock Vested,
Pension Benefits, Director Compensation, Compensation Discussion and Analysis and Compensation Committee Report which Proxy Statement will be filed with the Securities and Exchange Commission pursuant
to instruction G(3) of the General Instructions to Form 10-K.



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

The information required herein is incorporated by reference from the section of the Companys Proxy Statement titled Stock
Ownership of Certain Beneficial Owners which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.

Equity Compensation Plan Information

The following table provides information as of December 31, 2007 with respect to shares of Sypris common stock that may be issued under our equity compensation plans.



|                                                       |  |                                                                        |     |  |                                                         |      |     |                                                                                                                                           |           |    
|------------------------------------------------------ |  | ---------------------------------------------------------------------- | --- |  | ------------------------------------------------------- | ---- | --- | ----------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                          |  | Number of SecuritiesTo be Issued UponExercise ofOutstanding Options(a) |     |  | Weighted AverageExercise Price ofOutstandingOptions (b) |      |     | Number of SecuritiesRemaining Available ForFuture Issuance UnderEquity CompensationPlans
(ExcludingSecurities Reflected inColumn (a)) (c) |          
|Equity Compensation Plans Approved by Stockholders     |  | 1,281,440                                                              | (1) |  | $                                                       | 8.33 | (2) |                                                                                                                                           | 1,479,043 | (2)
|Equity Compensation Plans Not Approved by Stockholders |  |                                                                       |     |  |                                                         |     |     |                                                                                                                                           |          |    
|Total                                                  |  | 1,281,440                                                              |     |  | $                                                       | 8.33 |     |                                                                                                                                           | 1,479,043 |    



|(1) | Consists of (a) 452,695 outstanding options under the 1994 Stock Option Plan for Key Employees (1994 Key Plan), which Plan expired on
October 27, 2004, (b) 238,642 outstanding options under the 1994 Independent Directors Stock Option Plan, which Plan expired on October 27, 2004, and (c) 590,103 outstanding options under the 2004 Equity Plan.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Shares remaining available for issuance under the 2004 Equity Plan.
|--- | -------------------------------------------------------------------



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|Item 13. | Certain Relationships and Related Transactions and Director Independence
|-------- | ------------------------------------------------------------------------

The information required herein is incorporated by reference from the sections of the Companys Proxy Statement titled Governance of the Company Transactions with Related
Persons, Governance of the Company  Certain Employees, and Governance of the Company  Independence which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to instruction G(3)
of the General Instructions to Form 10-K.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required herein is incorporated by reference from the section of the Companys Proxy Statement titled Relationship with Independent Public Accountants, which Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.



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PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



|(a) | The following documents are filed as part of this Report:
|--- | ---------------------------------------------------------



| | 1. | Financial Statements
| | -- | --------------------

The financial statements as set forth under Item 8 of this report on Form 10-K are included.



| | 2. | Financial Statement Schedules
| | -- | -----------------------------

Schedule II - Valuation and Qualifying Accounts

All other consolidated financial statement
schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable.



| | 3. | Exhibits
| | -- | --------



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                     
|3.1           |  | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys Form 10-Q for the quarterly period ended June 30, 2004 filed on
August 3, 2004 (Commission File No. 000-24020)).                                                                                                                                                                         
|              | 
|3.2           |  | Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-8 filed May 9, 2002 (No.
333-87880)).                                                                                                                                                                                                                                         
|              | 
|4.1           |  | Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Companys Form 10-K for the fiscal year ended December 31, 1998 filed on March 5, 1999
(Commission File No. 000-24020)).                                                                                                                                                                                     
|              | 
|4.2           |  | Rights Agreement dated as of October 23, 2001 between the Company and LaSalle Bank National Association, as Rights Agent, including as Exhibit A the Form of Certificate of
Designation and as Exhibit B the Form of Right Certificate (incorporated by reference to Exhibit 4.1 to the Companys Form 8-K filed on October 23, 2001 (Commission File No. 000-24020)).                          
|              | 
|10.1          |  | Purchase and Sale Agreement among Honeywell Inc., Defense Communications Products Corporation (prior name of Group Technologies Corporation) and Group Financial Partners,
Inc. dated May 21, 1989 (incorporated by reference to Exhibit 10.18 to the Companys Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).                                             
|              | 
|10.2          |  | Purchase and Sale Agreement among Alliant Techsystems Inc., MAC Acquisition I, Inc. and Group Technologies Corporation dated December 31, 1992 (incorporated by reference to
Exhibit 10.16 to the Companys Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).                                                                                                 
|              | 
|10.3          |  | Purchase and Sale Agreement among Philips Electronic North America Corporation and Group Technologies Corporation dated June 25, 1993 (incorporated by reference to Exhibit
10.17 to the Companys Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).                                                                                                          
|              | 
|10.4          |  | Asset Purchase Agreement dated April 6, 2001 by and between Tube Turns Technologies, Inc. and Dana Corporation as amended by a First Amendment dated May 4, 2001 and as
amended by a Second Amendment on May 15, 2001 (incorporated by reference to Exhibit 2.1 to the Companys Form 10-Q for the quarterly period ended June 30, 2001 filed on July 30, 2001 (Commission File No. 000-24020)).
|              | 
|10.5          |  | Asset Purchase Agreement between Sypris Technologies, Inc. and Dana Corporation dated December 8, 2003 (incorporated by reference to Exhibit 10.7 to the Companys Form
10-K for the fiscal year ended December 31, 2003 filed on February 12, 2004 (Commission File No. 000-24020)).                                                                                                           



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.6          |  | 1999 Amended and Restated Loan Agreement between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies
Corporation and Metrum-Datatape, Inc. dated October 27, 1999 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-K for the fiscal year ended December 31, 1999 filed on February 25, 2000 (Commission File No.
000-24020)).                                                            
|              | 
|10.6.1        |  | 2000A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies
Corporation and Metrum-Datatape, Inc. dated November 9, 2000 (incorporated by reference to Exhibit 10.6.1 to the Companys Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File No.
000-24020)).                                                                     
|              | 
|10.6.2        |  | 2001A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies
Corporation and Metrum-Datatape, Inc. dated February 15, 2001 (incorporated by reference to Exhibit 10.6.2 to the Companys Form 10-Q for the quarterly period ended April 1, 2001 filed on April 30, 2001 (Commission File No.
000-24020)).                                                                  
|              | 
|10.6.3        |  | 2002A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris Electronics,
LLC, Sypris Data Systems, Inc. and Sypris Technologies Marion, LLC dated December 21, 2001 (incorporated by reference to Exhibit 10.6.3 to the Companys Form 10-K for the fiscal year ended December 31, 2001 filed on January 31, 2002 (Commission
File No. 000-24020)).                               
|              | 
|10.6.4        |  | 2002B Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris Electronics,
LLC, Sypris Data Systems, Inc. and Sypris Technologies Marion, LLC dated July 3, 2002 (incorporated by reference to Exhibit 10.25 to the Companys Form 10-Q for the quarterly period ended June 30, 2002 filed on July 29, 2002 (Commission File
No. 000-24020)).                                       
|              | 
|10.6.5        |  | 2003A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris Electronics,
LLC, Sypris Data Systems, Inc. and Sypris Technologies Marion, LLC dated October 16, 2003 (incorporated by reference to Exhibit 99.1 to the Companys Form 10-Q for the quarterly period ended September 28, 2003 filed on October 29, 2003
(Commission File No. 000-24020)).                            
|              | 
|10.6.6        |  | 2005A Amendment to Loan Documents between JP Morgan Chase Bank, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC and Sypris Technologies Kenton, Inc. dated March 10, 2005 (incorporated by reference to Exhibit 10.6.6 to the Companys Form 10-K for the fiscal year ended December
31, 2004 filed on March 11, 2005 (Commission File No. 000-24020)).
|              | 
|10.6.7        |  | 2005B Amendment to Loan Documents between JP Morgan Chase Bank, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC and Sypris Technologies Kenton, Inc. dated May 10, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q filed on August 5, 2005 (Commission File
No. 000-24020)).                                                
|              | 
|10.6.8        |  | 2005C Amendment to Loan Documents between JP Morgan Chase Bank, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC and Sypris Technologies Kenton, Inc. dated August 3, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 10-Q filed on August 5, 2005 (Commission
File No. 000-24020)).                                              



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.6.9        |  | 2006A Amendment to Loan Documents between JP Morgan Chase Bank, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC and Sypris Technologies Kenton, Inc. dated February 28, 2006 (incorporated by reference to Exhibit 10.6.9 to the Companys Form 10-K for the fiscal year ended December
31, 2005 filed on March 15, 2006 (Commission File No. 000-24020)).                                                                                                                                                                                                                                                        
|              | 
|10.6.10       |  | Amended and Restated Loan Agreement dated as of April 6, 2007 between Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC, Sypris Technologies Kenton, Inc., Sypris Technologies Mexican Holdings, LLC; and JP Morgan Chase Bank, N.A., LaSalle Bank National Association, and National City Bank
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on April 11, 2007 (Commission File No. 000-24020)).                                                                                                                                                                                          
|              | 
|10.6.11       |  | 2007A Amendment to Loan Documents between JP Morgan Chase Bank, NA, Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC and Sypris Technologies Kenton, Inc. dated September 17, 2007 (incorporated by reference to Exhibit 10.3 to the Companys Form 10-Q filed on November 2, 2007
(Commission File No. 000-24020)).                                                                                                                                                                                                                                                                                                   
|              | 
|10.7          |  | Note Purchase Agreement between The Guardian Life Insurance Company of America, Connecticut General Life Insurance Company, Life Insurance Company of North America, Jefferson
Pilot Financial Insurance Company, Jefferson-Pilot Life Insurance Company, Jefferson Pilot LifeAmerica Insurance Company, and Sypris Solutions, Inc. dated as of June 10, 2004 (incorporated by reference to Exhibit 10.2 to the Companys Form 10-Q
for the quarterly period ended June 30, 2004 filed on August 3, 2004 (Commission File No. 000-24020)).                                                                                                                                                                                                    
|              | 
|10.7.1        |  | First Amendment to Note Purchase Agreement between The Guardian Life Insurance Company of America, Connecticut General Life Insurance Company, Life Insurance Company of North
America, Jefferson Pilot Financial Insurance Company, Jefferson-Pilot Life Insurance Company, Jefferson Pilot LifeAmerica Insurance Company, and Sypris Solutions, Inc. dated as of August 3, 2005 (incorporated by reference to Exhibit 10.3 to the
Companys Form 10-Q filed on August 5, 2005 (Commission File No. 000-24020)).                                                                                                                                                                                                                             
|              | 
|10.7.2        |  | Second Amendment to Note Purchase Agreement between The Guardian Life Insurance Company of America, Connecticut General Life Insurance Company, Life Insurance Company of
North America, Jefferson Pilot Financial Insurance Company, Jefferson-Pilot Life Insurance Company, Jefferson Pilot LifeAmerica Insurance Company, and Sypris Solutions, Inc. dated as of March 13, 2006 (incorporated by reference to Exhibit 10.7.2 to
the Companys Form 10-K for the fiscal year ended December 31, 2005 filed on March 15, 2006 (Commission File No. 000-24020)).                                                                                                                                                                              
|              | 
|10.7.3        |  | Third Amendment to the Note Purchase Agreement dated as of April 6, 2007 between Sypris Solutions, Inc., Sypris Test & Measurement, Inc., Sypris Technologies, Inc.,
Sypris Electronics, LLC, Sypris Data Systems, Inc., Sypris Technologies Marion, LLC, Sypris Technologies Kenton, Inc., Sypris Technologies Mexican Holdings, LLC; and The Guardian Life Insurance Company Of America, Connecticut General Life Insurance
Company, Life Insurance Company of North America, Jefferson Pilot Financial Insurance Company, Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York. (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed on April 11, 2007(Commission File No. 000-24020))
|              | 
|10.7.4        |  | Security Interest Agreement dated April 6, 2007 (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed on April 11, 2007(Commission File No.
000-24020)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|10.8          |  | Lease between John Hancock Mutual Life Insurance Company and Honeywell, Inc. dated April 27, 1979; related Notice of Assignment from John Hancock Mutual Life Insurance
Company to Sweetwell Industrial Associates, L.P., dated July 10, 1986; related Assignment and Assumption of Lease between Honeywell, Inc. and Defense Communications Products Corporation (prior name of Group Technologies Corporation) dated May 21,
1989; and related Amendment I to Lease Agreement between Sweetwell Industries Associates, L.P. and Group Technologies Corporation dated October 25,                                                                                                                                                            



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |  | 1991, regarding Tampa industrial park property (incorporated by reference to Exhibit 10.2 to the Companys Registration Statement on Form S-1 filed May 18, 1994
(Registration No. 33-76326)).                                                                                                                                                                                                                                               
|              | 
|10.8.1        |  | Agreement related to Fourth Renewal of Lease between Sweetwell Industries Associates, L.P. and Group Technologies Corporation dated November 1, 2000, regarding Tampa
industrial park property (incorporated by reference to Exhibit 10.8.1 to the Companys Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).                                                                  
|              | 
|10.8.2        |  | Agreement related to Fifth Renewal of Lease between Sweetwell Industries Associates, L.P. and Group Technologies Corporation dated October 12, 2006, regarding Tampa
industrial park property (incorporated by reference to Exhibit 10.8.2 to the Companys Form 10-K for the fiscal year ended December 31, 2006 filed on March 14, 2007 (Commission File No. 000-24020)).                                                                  
|              | 
|10.9          |  | Lease between Metrum-Datatape, Inc. (assignee of Metrum, Inc.) and Alliant Techsystems, Inc. dated March 29, 1993 and amended July 29, 1993, May 2, 1994, November 14, 1995,
December 4, 1996 and February 12, 1998 regarding 4800 East Dry Creek Road Property (incorporated by reference to Exhibit 10.25 to the Companys Form 10-Q for the quarterly period ended June 28, 1998 filed on August 4, 1998 (Commission File No.
000-24020)).
|              | 
|10.10         |  | Lease between Sypris Data Systems, Inc. and Via Verde Venture, LLC. dated September 24, 2003 regarding 160 East Via Verde, San Dimas, California (incorporated by
reference to Exhibit 10.11 to the Companys Form 10-K for the fiscal year ended December 31, 2003 filed on February 12, 2004 (Commission File No. 000-24020)).                                                                                                             
|              | 
|10.11*        |  | Sypris Solutions, Inc. 1994 Stock Option Plan for Key Employees as Amended and Restated effective February 26, 2002 (incorporated by reference to Exhibit 4.5 to the
Companys Form S-8 filed on May 9, 2002 (Registration No. 333-87880)).                                                                                                                                                                                                  
|              | 
|10.12*        |  | Sypris Solutions, Inc. Share Performance Program For Stock Option Grants dated July 1, 1998 (incorporated by reference to Exhibit 10.28 to the Companys Form 10-Q for
the quarterly period ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020)).                                                                                                                                                                    
|              | 
|10.13*        |  | Sypris Solutions, Inc. Independent Directors Stock Option Plan as Amended and Restated effective February 26, 2002 (incorporated by reference to Exhibit 4.5 to the
Companys Form S-8 filed on May 9, 2002 (Registration No. 333-87882)).                                                                                                                                                                                                  
|              | 
|10.14*        |  | Sypris Solutions, Inc., Directors Compensation Program As Amended and Restated Effective February 24, 2004 and as amended December 15, 2004, (incorporated by reference to
Exhibit 10.1 to the Companys Form 8-K filed on December 21, 2004 (Commission File No. 000-24020)).                                                                                                                                                               
|              | 
|10.15*        |  | Sypris Solutions, Inc. Directors Compensation Program adopted on September 1, 1995 Amended and Restated on March 1, 2005 (incorporated by reference to Exhibit 10.1 to the
Companys Form 8-K filed on March 3, 2005 (Commission File No. 000-24020)).                                                                                                                                                                                       
|              | 
|10.16*        |  | Sypris Solutions, Inc. Directors Compensation Program adopted on September 1, 1995 Amended and Restated on February 20, 2007 (incorporated by reference to Exhibit 10.16 to
the Companys Form 10-K for the fiscal year ended December 31, 2006 filed on March 14, 2007 (Commission File No. 000-24020)).                                                                                                                                    
|              | 
|10.17*        |  | Sypris Solutions, Inc. Executive Bonus Plan, effective as of January 1, 2003 (incorporated by reference to Exhibit 10.2 to the Companys Form 10-Q for the quarterly
period ended March 30, 2003 filed on April 30, 2003 (Commission File No. 000-24020)).                                                                                                                                                                                   
|              | 
|10.18*        |  | Sypris Solutions, Inc. Incentive Bonus Plan, effective as of January 1, 2004 (incorporated by reference to Exhibit 10.17 to the Companys Form 10-K for the fiscal year
ended December 31, 2004 filed on March 11, 2005 (Commission File No. 000-24020)).                                                                                                                                                                                    
|              | 
|10.19*        |  | Sypris Solutions, Inc. Incentive Bonus Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on March 3, 2005
(Commission File No. 000-24020)).                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                      
|10.20*        |  | 2004 Sypris Equity Plan effective as of April 27, 2004 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarterly period ended March 31,
2004 filed on April 30, 2004 (Commission File No. 000-24020)).                                                                                                             
|              | 
|10.21*        |  | Form of non-qualified stock option award agreement for non-employee directors (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on December 21,
2004 (Commission File No. 000-24020)).                                                                                                                                  
|              | 
|10.22*        |  | Form of non-qualified stock option award agreement for grants to executive officers and other key employees (incorporated by reference to Exhibit 10.3 to the Companys
Form 8-K filed on December 21, 2004 (Commission File No. 000-24020)).                                                                                                    
|              | 
|10.23*        |  | Form of performance-based stock option award agreement for grants to executive officers and other key employees (incorporated by reference to Exhibit 10.4 to the
Companys Form 8-K filed on December 21, 2004 (Commission File No. 000-24020)).                                                                                                
|              | 
|10.24*        |  | Form of Restricted Stock Award Agreement for grants to executive officers and other key employees (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K
filed on March 3, 2005 (Commission File No. 000-24020)).                                                                                                                  
|              | 
|10.25*        |  | Form of Non-Qualified Stock Option Award Agreement for Six-Year Stock Option for grants to executive officers and other key employees (incorporated by reference to Exhibit
10.4 to the Companys Form 8-K filed on March 3, 2005 (Commission File No. 000-24020)).                                                                              
|              | 
|10.26*        |  | Form of Amendment to Stock Option Agreements to Accelerate Vesting Periods for Certain Underwater Options for grants to executive officers and other key employees
(incorporated by reference to Exhibit 10.25 to the Companys Form 10-K for the fiscal year ended December 31, 2004 filed on March 11, 2005 (Commission File No. 000-24020)).
|              | 
|10.27*        |  | Employment Agreement by and between Metrum-Datatape, Inc. and G. Darrell Robertson dated February 28, 2000 (incorporated by reference to Exhibit 10.20 to the Companys
Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).                                                           
|              | 
|10.28         |  | Underwriting Agreement dated March 20, 2002 among Sypris Solutions, Inc., Needham & Company, Inc. and A.G. Edwards & Sons, Inc. (incorporated by reference to Exhibit
10.20 to the Companys Form 10-Q for the quarterly period ended March 31, 2002 filed on April 29, 2002 (Commission File No. 000-24020)).                                   
|              | 
|10.29         |  | Underwriting Agreement dated March 11, 2004 among Sypris Solutions, Inc. and Needham & Company, Inc. (incorporated by reference to Exhibit 10.3 to the Companys Form
10-Q for the quarterly period ended March 31, 2004 filed on April 30, 2004 (Commission File No. 000-24020)).                                                               
|              | 
|10.30*        |  | Amendment to Stock Option Agreements to David D. Johnson (incorporated by reference to Exhibit 10.7 to the Companys Form 10-Q filed on May 6, 2005 (Commission File No.
000-24020)).                                                                                                                                                            
|              | 
|10.31*        |  | Sypris Solutions, Inc. Incentive Bonus Plan (July 1, 2005  December 31, 2005) (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on June
27, 2005 (Commission File No. 000-24020)).                                                                                                                                     
|              | 
|10.32*        |  | Form of Two-Year Restricted Stock Award Agreement for Grants to Executive Officers and Other Key Employees (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed on June 27, 2005 (Commission File No. 000-24020)).                                                                                                         
|              | 
|10.33*        |  | Amended Form of Two-Year Restricted Stock Award Agreement for Grants to Executive Officers and Other Key Employees (incorporated by reference to Exhibit 10.8 to the
Companys Form 10-Q filed on August 5, 2005 (Commission File No. 000-24020)).                                                                                               
|              | 
|10.34*        |  | Form of 1-3-5 Year Restricted Stock Award Agreement for Grants to Executive Officers and Other Key Employees (incorporated by reference to Exhibit 10.3 to the Companys
Form 8-K filed on June 27, 2005 (Commission File No. 000-24020)).                                                                                                       



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.35*        |  | Amended Form of 1-3-5 Year Restricted Stock Award Agreement for Grants to Executive Officers and Other Key Employees (incorporated by reference to Exhibit 10.9 to the
Companys Form 10-Q filed on August 5, 2005 (Commission File No. 000-24020)).                                                                                                                                                                                     
|              | 
|10.36*        |  | Long-term Incentive Program and Form of Long-term Incentive Award Agreements for Grants to Executive Officers and Other Key Employees (incorporated by reference to Exhibit
10.4 to the Companys Form 8-K filed on June 27, 2005 (Commission File No. 000-24020)).                                                                                                                                                                      
|              | 
|10.37*        |  | Amended Executive Long-Term Incentive Program and Alternate Form of Executive Long-Term Incentive Award Agreements for Grants to Executive Officers and Other Key Employees
(incorporated by reference to Exhibit 10.10 to the Companys Form 10-Q filed on August 5, 2005 (Commission File No. 000-24020)).                                                                                                                             
|              | 
|10.38*        |  | Form of Amendment to Stock Option Agreements to Accelerate Vesting Periods for Certain Underwater Options for grants to executive officers and other key employees
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on January 6, 2006 (Commission File No. 000-24020)).                                                                                                                                     
|              | 
|10.39         |  | Preliminary Settlement Agreement between Sypris Solutions, Inc, and Dana Corporation (Debtor in Possession) dated May 10, 2006 (incorporated by reference to Exhibit 10.1 to
the Companys Form 8-K filed on May 10, 2006 (Commission File No. 000-24020)).                                                                                                                                                                              
|              | 
|10.40*        |  | Form of Four-year Restricted Stock Award Agreement for Grants to Executive Officers and Terms of Awards Under the 2007 Special Incentive Executive Award Program (incorporated
by reference to Exhibit 10.1 to the Companys Form 8-K filed on January 17, 2007 (Commission File No. 000-24020)).                                                                                                                                        
|              | 
|10.41*        |  | Form of Refund Agreement to Award Cash Incentive Grants (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on January 17, 2007 (Commission File
No. 000-24020)).                                                                                                                                                                                                                                                 
|              | 
|10.42*        |  | Form of Standard Terms of Executive Awards Granted Under the 2007 Stock Option Exchange Program (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed on May 18, 2007 (Commission File No. 000-24020)).                                                                                                                                                                                                             
|              | 
|10.43*        |  | Form of 3-4-5 Restricted Stock Award Agreement for Grants to Executive Officers and Other Key Employees, Amends and Replaces Exhibit 10.24, Restricted Stock Award Agreement
(incorporated by reference to Exhibit 10.3 to the Companys Form 8-K Filed on March 3, 2005 (Commission File No. 000-24020)) (incorporated by reference to Exhibit 10.5 to the Companys Form 10-Q filed on August 8, 2007 (Commission File No.
000-24020)).
|              | 
|10.44         |  | Redacted copy of Settlement Agreement with Dana Corporation signed on July 24, 2007 and effective as of August 7, 2007 (incorporated by reference to Exhibit 10.1 to the
Companys Form 10-Q filed on November 2, 2007 (Commission File No. 000-24020)).                                                                                                                                                                                 
|              | 
|10.45         |  | Redacted copy of Supply Agreement with Dana Corporation signed on July 24, 2007 and effective as of August 7, 2007 (incorporated by reference to Exhibit 10.2 to the
Companys Form 10-Q filed on November 2, 2007 (Commission File No. 000-24020)).                                                                                                                                                                                     
|              | 
|21            |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|23            |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                             
|              | 
|31.1          |  | CEO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|31.2          |  | CFO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|32            |  | CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                                                                                                                    



|* | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 2008.



SYPRIS SOLUTIONS, INC.(Registrant)/s/ Jeffrey T. Gill(Jeffrey T. Gill)President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 2008:



|                                            |  |  |  |                                                                         
|------------------------------------------- |  |  |  | ------------------------------------------------------------------------
|/s/ Robert E. Gill (Robert E. Gill)         |  |  |  | Chairman of the Board                                                   
|                                            |  | 
|/s/ Jeffrey T. Gill (Jeffrey T. Gill)       |  |  |  | President, Chief Executive Officer and Director                         
|                                            |  | 
|/s/ T. Scott Hatton (T. Scott Hatton)       |  |  |  | Vice President and Chief Financial Officer (Principal Financial Officer)
|                                            |  | 
|/s/ M. Glen French (M. Glen French)         |  |  |  | Controller (Principal
Accounting Officer)                               
|                                            |  | 
|/s/ John F. Brinkley (John F. Brinkley)     |  |  |  | Director                                                                
|                                            |  | 
|/s/ William G. Ferko (William G. Ferko)     |  |  |  | Director                                                                
|                                            |  | 
|/s/ R. Scott Gill (R. Scott Gill)           |  |  |  | Director                                                                
|                                            |  | 
|/s/ William L. Healey (William L. Healey)   |  |  |  | Director                                                                
|                                            |  | 
|/s/ Sidney R. Petersen (Sidney R. Petersen) |  |  |  | Director                                                                
|                                            |  | 
|/s/ Robert Sroka (Robert Sroka)             |  |  |  | Director                                                                



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SCHEDULE II

SYPRIS SOLUTIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS



|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|------------------------------------------------------- |  | ---------------------------- | ----- | --------------------------- | - | ----- | ----------------------- |  | ---------- | - |  | ---------------------- | ------ | ---- |  | - | -----
|                                                        |  | Balance atBeginningof Period |       | Charged toCosts andExpenses |   |       | Charged toOtherAccounts |  | Deductions |   |  | Balance atEnd ofPeriod
|                                                        |  | (in thousands)              
|Allowance for doubtful accounts:                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|                                                        |  |                              |       |                             |  
|Year ended December 31, 2007                            |  | $                            | 1,502 |                             | $ | (132  | )                       |  | $          |  |  | $                      | (775   | )(1) |  | $ | 595  
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|Year ended December 31, 2006                            |  | $                            | 1,898 |                             | $ | 437   |                         |  | $          |  |  | $                      | (833   | )(1) |  | $ | 1,502
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|Year ended December 31, 2005                            |  | $                            | 1,697 |                             | $ | 607   |                         |  | $          |  |  | $                      | (406   | )(1) |  | $ | 1,898
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|Reserve for inactive, obsolete and unsalable inventory: |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|                                                        |  |                              |       |                             |  
|Year ended December 31, 2007                            |  | $                            | 6,788 |                             | $ | 1,322 |                         |  | $          |  |  | $                      | (1,134 | )(2) |  | $ | 6,976
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|Year ended December 31, 2006                            |  | $                            | 6,342 |                             | $ | 836   |                         |  | $          |  |  | $                      | (390   | )(2) |  | $ | 6,788
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      
|Year ended December 31, 2005                            |  | $                            | 5,902 |                             | $ | 739   |                         |  | $          |  |  | $                      | (299   | )(2) |  | $ | 6,342
|                                                        |  |                              |       |                             |   |       |                         |  |            |   |  |                        |        |      |  |   |      



|(1) | Uncollectible accounts written off.
|--- | -----------------------------------

|(2) | Inactive, obsolete and unsalable inventory written off.
|--- | -------------------------------------------------------



77