UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549





FORM
10-K




x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the fiscal year ended December 31, 2008




OR




 ̈ 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 0-23486




NN,
INC.


(Exact
name of registrant as specified in its charter)






Delaware
            
            62-1096725(State or
      other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)2000
      Waters Edge Drive
              Johnson
      City, Tennessee
            
            37604(Address of
      principal executive offices)
            
            (Zip
      Code)




Registrant's
telephone number, including area code: (423) 743-9151




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






Title
      of
              each class
            
            Name
      of each exchange
              on which
      registeredCommon Stock,
      par value $.01
            
            The NASDAQ
      Stock Market LLC




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


None


(Title of
class)





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes  ̈                      No
x





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  ̈                      No
x





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities and Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.


Yes x                      No
 ̈





Indicate by check mark 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 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.  x





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 definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):





Large
accelerated filer  ̈                                                      Accelerated
filer x                                           Non-accelerated
filer  ̈                 
     Smaller reporting Company  ̈


(Do not
check if a smaller reporting company)





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





The aggregate market value of the
voting stock held by non-affiliates of the registrant at June 30, 2008, based on
the closing price on the NASDAQ Stock Market LLC on that date was approximately
$222,308,972.





The number of shares of the
registrant's common stock outstanding on March 31, 2009 was 16,267,924.




DOCUMENTS INCORPORATED BY
REFERENCE


Portions
of the Proxy Statement with respect to the 2009 Annual Meeting of Stockholders
are incorporated by reference in Part III, Items 10 to 14 of this Annual Report
on Form 10-K as indicated herein.





PART
I




Item
1.  Business Overview




NN, Inc.
has three operating segments, the Metal Bearing Components Segment, the Plastic
and Rubber Components Segment, and the Precision Metal Components
Segment.   As used in this Annual Report on Form 10-K, the terms
“NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its
subsidiaries.




Within
the Metal Bearing Components Segment, we manufacture and supply high precision
bearing components, consisting of balls, cylindrical rollers, tapered rollers,
and metal retainers, for leading bearing manufacturers on a global
basis.  We are a leading independent manufacturer of precision steel
bearing balls and rollers for the North American, European and Asian
markets.  In 2008, Metal Bearing Components accounted for 76% of total
NN, Inc. sales.  Sales of balls and rollers accounted for
approximately 70% of our total net sales with 52% of sales from balls and 18% of
sales from rollers.  Sales of metal bearing retainers accounted for 6%
of net sales.  See Note 12 of the Notes to Consolidated Financial
Statements.  Through a series of acquisitions, we have built upon our
strong core ball business and expanded our bearing component product
offering.  Today, we offer among the industry’s most complete line of
commercially available bearing components.  We emphasize engineered
products that take advantage of our competencies in product design and tight
tolerance manufacturing processes.  Our bearing customers use our
components in fully assembled ball and roller bearings, which serve a wide
variety of industrial applications in the transportation, electrical,
agricultural, construction, machinery, mining and aerospace
markets.




Within
the Plastic and Rubber Components Segment, we manufacture high precision rubber
seals and plastic retainers for leading bearing manufacturers on a global
basis.  In addition, we manufacture specialized plastic products
including automotive components, electronic instrument cases and precision
electronic connectors.  We also manufacture rubber seals for use in
various automotive and industrial applications.  In 2008, plastic
products accounted for 5% of net sales and rubber seals accounted for 4% of net
sales.




In 2006, we began to execute on a new
five year strategic business plan to leverage our competencies in precision
metal products by creating an adjacent platform to the Metal Bearing Components
Segment which would broaden our reach into attractive end markets.  As
part of this new strategy, on November 30, 2006, we added a Precision Metal
Components Segment through the acquisition of Whirlaway Corporation
(“Whirlaway”) (See Note 2 of the Notes to Consolidated Financial
Statements.)  Whirlaway is a high precision metal components and
assemblies manufacturer that supplies customers serving the air conditioning,
appliance, automotive, commercial refrigeration and diesel engine
industries.  Our entry into the precision metal components market is
part of our strategy to serve markets and customers we view as adjacent to
bearing components that utilize our core manufacturing
competencies.  These products accounted for 15% of net sales in
2008.





The three
business segments are composed of the following manufacturing
operations:





Metal Bearing Components
Segment


·
            Erwin,
      Tennessee Ball and Roller Plant (“Erwin
Plant”)


·
            Mountain
      City, Tennessee Ball Plant (“Mountain City
  Plant”)


·
            Kilkenny,  Ireland
      Ball Plant (“Kilkenny Plant”) *


·
            Eltmann,
      Germany Ball Plant (“Eltmann
Plant”)


·
            Pinerolo,
      Italy Ball Plant (“Pinerolo Plant”)


·
            Veenendaal,
      The Netherlands Roller and Stamped Metal Parts Plant (“Veenendaal
      Plant”)


·
            Kysucke
      Nove Mesto, Slovakia Ball Plant (“Kysucke
  Plant”)


·
            Kunshan,
      China Ball Plant (“Kunshan Plant”)





Plastic and Rubber
Components Segment


·
            Delta
      Rubber Company, Danielson, Connecticut Rubber Seal Plant (“Danielson
      Plant”)


·
            Industrial
      Molding Corporation, Inc. Lubbock, Texas Plastic Injection Molding Plant
      (“Lubbock Plant”)







2




Precision Metal Components
Segment


·
            Whirlaway
      Corporation, Wellington, Ohio Metal Components Plant 1 (“Wellington Plant
      1”)


·
            Whirlaway
      Corporation, Wellington, Ohio Metal Components Plant 2 (“Wellington Plant
      2”)


·
            Whirlaway
      Corporation, Hamilton, Ohio Metal Components Plant (“Hamilton Plant”)
      *


·
            Whirlaway
      Corporation, Tempe, Arizona Metal Components Plant, formerly known as
      Triumph LLC (“Tempe Plant”)





*Production
ceased in the first quarter of 2009, we are currently in the process of closing
this manufacturing operation.





Financial
information about the segments is set forth in Note 12 of the Notes to
Consolidated Financial Statements.





Recent
Developments




On
November 26, 2008, we announced the closure of our precision steel ball
manufacturing facility located in Kilkenny, Ireland.  The closure was
part of our long term strategy to rationalize our European
operations.  We view the rationalization of manufacturing operations
in Europe as a necessary action to adjust our global manufacturing capacity to
current and long term market requirements.





During
the first quarter of 2009, we entered into an amended and restated $90.0 million
revolving credit facility maturing September 2011 with Key Bank as
administrative agent.  The amended facility was entered into to
conform our financial covenants to our current outlook in this difficult
economic cycle.




Corporate
Information




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




Products




Metal Bearing Components
Segment




Precision Steel
Balls.  At our Metal Bearing Components Segment facilities, we
manufacture and sell high quality, precision steel balls in sizes ranging in
diameter from 5/32 of an inch (3.969 mm)  to 2 1⁄2 inches (63.5 mm). We
produce and sell balls in grades ranging from grade 3 to grade 1000, according
to international standards endorsed by the American Bearing Manufacturers
Association.  The grade number for a ball, in addition to defining
allowable dimensional variation within production batches, indicates the degree
of spherical precision of the ball; for example, grade 3 balls are manufactured
to within three-millionths of an inch of roundness.  Our steel balls
are used primarily by manufacturers of anti-friction bearings where precise
spherical, tolerance and surface finish accuracies are
required.  Sales of precision steel balls accounted for approximately
68%, 67%, and 74% of net Metal Bearing Component Segment sales in 2008, 2007,
and 2006, respectively.




Steel Rollers.  We
manufacture tapered rollers at our Veenendaal Plant and cylindrical rollers at
our Erwin Plant.  Most cylindrical rollers are made to specific
customer requirements for diameter and length, so there is very little overlap
of common cylindrical rollers matching two or more customers’
needs.  Rollers are an alternative rolling element used instead of
balls in anti-friction bearings that typically have heavier loading or different
speed requirements.  Our roller products are used primarily for
applications similar to those of our precision steel ball product line, plus
certain non-bearing applications such as hydraulic pumps and
motors.  Cylindrical rollers accounted for approximately 4% of
consolidated net sales in each year of 2008, 2007, and 2006,
respectively.  Tapered rollers are used in tapered roller bearings
that are used in a variety of applications including automotive gearbox
applications, automotive wheel bearings and a wide variety of industrial
applications.  Tapered rollers accounted for approximately 14%, 14%
and 16% of consolidated net sales in 2008, 2007 and 2006,
respectively.




Metal
Retainers.We manufacture and sell precision metal retainers
for roller bearings used in a wide variety of industrial
applications.  Retainers are used to separate and space the rolling
elements (rollers) within a fully assembled bearing.  We manufacture
metal retainers at our Veenendaal Plant.




3


Plastic and Rubber
Components Segment




Bearing Seals.  At
our Danielson Plant, we manufacture and sell a wide range of precision bearing
seals produced through a variety of compression and injection molding processes
and adhesion technologies to create rubber-to-metal bonded bearing
seals.  The seals are used in applications for automotive, industrial,
agricultural and mining markets.




Plastic
Retainers.At our Lubbock Plant, we manufacture and sell
precision plastic retainers for ball and roller bearings used in a wide variety
of industrial applications.  Retainers are used to separate and space
the rolling elements (balls or rollers) within a fully assembled
bearing.  We manufacture plastic retainers at our Lubbock
Plant.




Precision Plastic
Components.At our Lubbock Plant, we also manufacture and sell
a wide range of specialized plastic products including automotive under-the-hood
components, electronic instrument cases and precision electronic connectors and
lenses, as well as a variety of other specialized parts.




Precision Metal Components
Segment




Precision Metal
Components.  We sell a wide range of precision metal
components.  These components are manufactured at the three Whirlaway
plants in Ohio (one was closed in the first quarter of 2009) and one plant in
Arizona.  The precision metal components offered include fluid control
components, fluid control assemblies, shafts, and other precision metal
parts.  The components are used in the following end
markets:  automotive brake/chassis, thermal air conditioning systems,
commercial refrigeration, automotive engine, diesel engine fuel systems, other
automotive, and other industrial applications.




Research
and Development




The
amounts spent on research and development activities by us during each of the
last three fiscal years are not material.  We expensed amounts as
incurred.




Customers




Our
products are supplied primarily to bearing manufacturers for use in a broad
range of industrial applications, including transportation, electrical,
agricultural, construction, machinery, mining and
aerospace.  Additionally, we supply precision metal, rubber, and
plastic components to automotive and industrial companies that are not used in
bearing assemblies.  We supply approximately 400 customers; however,
our top 10 customers account for approximately 78% of our
revenue.  Only one of these customers, SKF, had sales levels that were
10% or greater of total net sales. In 2008, 36% of our products were sold to
customers in North America, 51% to customers in Europe, and the remaining 13% to
customers located throughout the rest of the world, primarily Asia and Latin
America.  Sales to various U.S. and foreign divisions of SKF accounted
for approximately 41% of net sales in 2008.




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




The
two-year agreement with Schaeffler Group (INA) effective as of July 1, 2006
expired as of June 30, 2008 and we are currently supplying product at agreed
upon commercial terms.   In May 2007, a new contract was signed
with SKF to supply precision balls in Europe with terms retroactively applied to
January 1, 2007 and effective until December 31, 2009.




The
five-year supply agreement with SKF providing for the purchase of steel rollers
and metal retainers manufactured at our Veenendaal Plant expired during 2008 and
we are in the process of negotiating a new agreement with SKF covering tapered
rollers and metal retainers.




During
2008, the Metal Bearing Components Segment sold products to approximately 300
customers located in 30 different countries.  Approximately 88% of the
net sales in 2008 were to customers outside the United
States.  Approximately 68% of net sales in 2008 were to customers
within Europe.   Sales to the top ten customers accounted for
approximately 84% of the net sales in 2008.  Sales to SKF accounted
for approximately 53% of net sales of the segment in 2008.




4


During
2008, the Plastic and Rubber Components Segment sold its products to over 70
customers located principally in North America.  Approximately 22% of
the Plastic and Rubber Components Segment’s net sales were to customers outside
the United States, with the vast majority to customers in Mexico and
Canada.  Sales to the Segment’s top ten customers accounted for
approximately 76% of the Segment’s net sales in 2008.




During
2008, the Precision Metal Components Segment sold its products to 21 customers
located in three countries.  Approximately 97% of all sales were to
customers located within the United States.  Sales to the segment’s
top ten customers accounted for approximately 89% of the segment’s net sales in
2008.




In both
the foreign and domestic markets, we principally sell our products directly to
manufacturers and do not sell significant amounts through distributors or
dealers.




See Note
12 of the Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations" for additional Segment financial
information.




The
following table presents a breakdown of our net sales for fiscal years 2008,
2007 and 2006:




(In
      Thousands)
            
            2008
            
            
            2007
            
            
            2006Metal
      Bearing Components Segment
            
            $
            321,660
            
            
            $
            303,059
            
            
            $
            272,299Percentage
      of Total Sales
            
            
            75.7
            %
            
            
            72.0
            %
            
            
            82.4
            %Precision
      Metal Components Segment
            
            
            64,235
            
            
            
            67,384
            
            
            
            4,722Percentage
      of Total Sales
            
            
            15.1
            %
            
            
            16.0
            %
            
            
            1.4
            %Plastic
      and Rubber Components Segment
            
            
            38,942
            
            
            
            50,851
            
            
            
            53,304Percentage
      of Total Sales
            
            
            9.2
            %
            
            
            12.0
            %
            
            
            16.2
            %Total
            
            $
            424,837
            
            
            $
            421,294
            
            
            $
            330,325Percentage
      of Total Sales
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %







The
increase in value of Euro denominated sales resulted in net sales increasing
$18.9 million in 2008, $19.6 million in 2007 and $1.6 million in 2006 when
converted to U.S. Dollars.





The
Precision Metal Components Segment includes only one month of revenue in
2006.  Based on pro-forma results, 2006 revenues would have been $77.7
million or 19% of the total pro-forma sales. (See Note 2 of the Notes to
Consolidated Financial Statements)





Sales
and Marketing




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




Our Metal
Bearing Components Segment marketing strategy focuses on increasing our
outsourcing relationships with global bearing manufacturers that maintain
captive bearing component manufacturing operations.  Our marketing
strategy for the Plastic and Rubber Components Segment and the Precision Metal
Components Segment is to offer custom manufactured, high quality, precision
parts to niche markets with high value-added characteristics at competitive
price levels.  This strategy focuses on relationships with key
customers that require the production of technically difficult parts and
assemblies, enabling us to take advantage of our strengths in custom product
development, tool design, component assembly, and precision molding and
machining processes.




5


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




Manufacturing
Process




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




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




Within
the precision metal components industry we are well positioned in the market
place by virtue of our focus on critical components and assemblies for highly
engineered mechanical systems used in various durable goods.




Employees




As of
December 31, 2008, we employed a total of 1,967 full-time
employees.  Our Metal Bearing Components Segment employed 263 in the
U.S., 926 in Europe, and 101 in China; our Plastic and Rubber Components Segment
employed 278, all in the U.S.; and our Precision Metal Components Segment
employed 391, all in the U.S.  In addition, there were eight employees
at our corporate headquarters.  Of our total employment, 19% are
management/staff employees and 81% are production employees.  We
believe we are able to attract and retain high quality employees because of our
quality reputation, technical expertise, history of financial and operating
stability, attractive employee benefit programs, and our progressive,
employee-friendly working environment.  The employees in the Eltmann
Plant, Pinerolo Plant and Veenendaal Plant are unionized.  We have
good labor relations, and we have never experienced any significant involuntary
work stoppages.  We consider our relations with our employees
worldwide to be excellent.




We signed
a new agreement with the union representatives of our workers at our Eltmann
Plant for significant contract revisions including new wage rates and increased
working hours during February 2008.  During February 2009, production
ceased at the Kilkenny, Ireland plant of the Metal Bearing Components Segment
and the plant is in the process of being closed.  The entire work
force of the manufacturing location, 68 employees, will be permanently laid-off
due to the closure of this plant.  During the first quarter
of 2009, the Hamilton Plant ceased production and was closed which resulted
in the permanent lay-off of 20 employees.




Competition




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




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




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




6


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




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




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





Raw
Materials




The
primary raw material used in our core ball and roller business of the Metal
Bearing Components Segment is 52100 Steel, which is high quality chromium
steel.  During 2008, approximately 90% of the steel used by the
segment was 52100 Steel in rod and wire form.  Our other steel
requirements include metal strip, chrome rod and wire, and type S2 rock bit
steel.




The Metal
Bearing Components Segment businesses purchase substantially all of their 52100
Steel requirements from mills in Europe and Japan and all of their metal strip
requirements from European mills and traders.  The principal suppliers
of 52100 Steel in the U.S. are Daido Steel Inc., Kobe Steel, Lucchini (affiliate
of Ascometal France) and Ohio Star Forge Co.  The principal supplier
of 52100 Steel in Europe is Ascometal France (See Note 15 of the Notes to
Consolidated Financial Statements), while the principal supplier of metal strip
is Thyssen.  Our other steel requirements are purchased principally
from foreign steel manufacturers.  If any of our current suppliers
were unable to supply 52100 Steel to us, we are unable to provide assurances
that we would not face higher costs or production interruptions as a result of
obtaining 52100 Steel from alternate sources.




We
purchase steel on the basis of price and, more significantly, composition and
quality.  The pricing arrangements with our suppliers are typically
subject to adjustment every three to six months in the U.S. and contractually
adjusted on an annual basis within the European locations for the base steel
price and quarterly for surcharge adjustments for precision steel
balls.  In general, we do not enter into written supply agreements
with suppliers or commit to maintain minimum monthly purchases of steel except
for the supply arrangements between Ascometal and the European operations of our
Metal Bearing Components Segment (see Note 15 of the Notes to Consolidated
Financial Statements).




Because
52100 Steel is principally produced by foreign manufacturers, our operating
results would be negatively affected in the event that the U.S. or European
governments impose any significant quotas, tariffs or other duties or
restrictions on the import of such steel, if the U.S. Dollar decreases in value
relative to foreign currencies or if supplies available to us would
significantly decrease.  The value of the U.S. Dollar factors into the
steel price as the suppliers' base currencies are the Euro and Japanese
Yen.




The Metal
Bearing Components Segment has historically been  affected by upward
price pressure on steel principally due to general increases in global demand
and due to global increased consumption of steel.  More recently steel
price increases have abated on the basis of reduced scrap prices and overall
reduction in global demand for steel products.    Our
contracts with key customers provide for steel price adjustments as
incurred.




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




The
primary raw materials used by the Plastic and Rubber Components Segment are
engineered resins, injection grade nylon and proprietary rubber
compounds.  We purchase substantially all of our resin requirements
from domestic manufacturers and suppliers.  The majority of these
suppliers are international companies with resin manufacturing facilities
located throughout the world.  We use certified vendors to provide a
custom mix of proprietary rubber compounds.  This segment also
procures metal stampings from several domestic suppliers.




7


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





Patents,
Trademarks and Licenses




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




Seasonal
Nature of Business




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




Environmental
Compliance




Our
operations and products are subject to extensive federal, state and local
regulatory requirements both domestically and abroad relating to pollution
control and protection of the environment.  We maintain a compliance
program to assist in preventing and, if necessary, correcting environmental
problems. In the Metal Bearing Components Segment the Eltmann Plant, Kilkenny
Plant, and Pinerolo Plant are ISO 14000 certified and received the EPD
(Environmental Product Declaration.)  The Veenendaal Plant is also ISO
14000 certified.  Based on information compiled to date, management
believes that our current operations are in substantial compliance with
applicable environmental laws and regulations, the violation of which would have
a material adverse effect on our business and financial condition.  We
have assessed conditional asset retirement obligations and have found them to be
immaterial to the consolidated financial statements. We cannot assure you,
however, that currently unknown matters, new laws and regulations, or stricter
interpretations of existing laws and regulations will not materially affect our
business or operations in the future.  More specifically, although we
believe that we dispose of wastes in material compliance with applicable
environmental laws and regulations, we cannot assure you that we will not incur
significant liabilities in the future in connection with the clean-up of waste
disposal sites.  We maintain long-term environmental insurance
covering the four manufacturing locations purchased with the Whirlaway
acquisition.  We are currently a potentially responsible party of a
remedial investigation at a former waste recycling facility used by
us.  See Item 3. and Note 15. in the Notes to Consolidated Financial
Statements.




Executive
Officers of the Registrant




Our
executive officers are:




Name
            Age
            PositionRoderick
      R. Baty
            55
            Chairman
      of the Board, Chief Executive Officer and PresidentFrank
      T. Gentry, III
            53
            Vice
      President – General Manager U.S. Ball and Roller
  DivisionRobert
      R. Sams
            51
            Vice
      President – SalesJames
      H. Dorton
            52
            Vice
      President – Corporate Development and Chief Financial
    OfficerWilliam
      C. Kelly, Jr.
            50
            Vice
      President – Chief Administrative Officer, Secretary, and
      TreasurerNicola
      Trombetti
            48
            Vice
      President – Managing Director of NN EuropeThomas
      G. Zupan
            53
            Vice
      President – Precision Metal Components DivisionJames
      Anderson
            44
            Vice
      President – Plastic and Rubber Components
  Division





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




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




8


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




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




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




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




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




Thomas G.
Zupan co-founded Whirlaway in 1973 with his father and began his career as a
toolmaker.  He gained further experience in every line business
function including Engineering, Production Operations, Quality Assurance, H/R,
Sales, Material Control, IS, and Finance as the company grew from owner operator
to professionally managed.  In 1991, Mr. Zupan became CEO and sole
shareholder of Whirlaway.  Upon the sale of Whirlaway to NN on
November 30, 2006 Mr. Zupan was appointed Vice President – Precision Metal
Components Division.




James. O.
Anderson was appointed Vice President-Plastics and Rubber Division in October
2006.  Mr. Anderson joined NN in January 2005 and served as the
General Manager of Industrial Molding in Lubbock, Texas.  Prior to
joining NN, Mr. Anderson served for six years in the U.S. Army as an artillery
officer and worked in various manufacturing roles with Dana Corporation and
Accuma Corporation from 1996 to 2005.




Item
1A.   Risk Factors




Cautionary
Statements for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995




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




You
should carefully consider the following risks and uncertainties, and all other
information contained in or incorporated by reference in this annual report on
Form 10-K, before making an investment in our common stock.  Any of
the following risks could have a material adverse effect on our business,
financial condition or operating results.  In such case, the trading
price of our common stock could decline and you may lose all or part of your
investment.






9


The
Recession impacting both U.S. and Europe Automotive and Industrial Markets could
have a material adverse effect on our ability to finance our operations and
implement our growth strategy
  During
the three month period ended December 31, 2008, we experienced a sudden and
significant reduction in customer orders driven by reductions in automotive
and industrial end market demand.  At the same time, our Plastic and
Rubber Components and our Precision Metal Components Segments have continued to
be negatively impacted by reductions in North American automotive demand that
began in the three month period ended June 30, 2008 and worsened during the
second half of 2008.





Our
company has never been affected by a recession that has impacted both of our key
geographic markets of the U.S. and Europe simultaneously.  Continued
sudden and significant reductions in sales to our customers could materially
reduce our operating results due to the profits lost on reduced sales levels
plus the inability in the short term to reduce our variable and fixed cost of
operations.  A continued recession could have a material adverse
effect on our financial condition, results of operations and cash flows from
operations.





In
addition, our ability to sustain our existing committed credit facilities and
our ability to obtain new credit to finance our operations and growth plans
could be impaired depending on our performance against established financial
covenants including our results of operations.





World
wide availability of credit continues to be limited





The
availability of credit from financial institutions to businesses has diminished
during the course of 2008.  The reduction in available credit is due
to many factors including the global economic slowdown and financial
institutions being impacted by subprime mortgage defaults and various other
types of credit defaults.  In addition to the limits on availability,
the interest rates charged by financial institutions have increased to reflect
the greater level of inherent risk in the debt markets.  If the
limitation on the availability of credit continues, or worsens our ability and
the ability of our customers and vendors to obtain credit in the future may be
adversly impacted resulting in a potential adverse impact on our business and
that of our customers and vendors.




The
demand for our products is cyclical, which could adversely impact our
revenues.




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




We
depend on a very limited number of foreign sources for our primary raw material
and are subject to risks of shortages and price fluctuation.




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




Increases
in the market demand for steel can have the impact of increasing scrap
surcharges we pay in procuring our steel in the form of higher unit prices and
could adversely impact the availability of steel.  Our contracts with
key customers allow us to pass along steel price increases as
incurred.




We
depend heavily on a relatively limited number of customers, and the loss of any
major customer would have a material adverse effect on our
business.




Sales to
various U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 41% of consolidated net
sales in 2008.  No other customers accounted for more than 10% of
sales.  During 2008, our ten largest customers accounted for
approximately 78% of our consolidated net sales.  The loss of all or a
substantial portion of sales to these customers would cause us to lose a
substantial portion of our revenue and would lower our operating profit margin
and cash flows from operations.




10


We
operate in and sell products to customers outside the U.S. and are subject to
several related risks.




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




·
            adverse
      foreign currency fluctuations;




·
            changes
      in trade, monetary and fiscal policies, laws and regulations, and other
      activities of governments, agencies and similar
    organizations;




·
            the
      imposition of trade restrictions or
  prohibitions;




·
            high
      tax rates that discourage the repatriation of funds to the
      U.S.;




·
            the
      imposition of import or other duties or taxes;
  and




·
            unstable
      governments or legal systems in countries in which our suppliers,
      manufacturing operations, and customers are
  located.




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




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




Failure
of our product could result in a product recall




The
majority of our products go into bearings used in the automotive industry and
other critical industrial manufacturing applications.  A failure of
our components could lead to a product recall.  If a recall were to
happen as a result of our components failing, we could bear a substantial part
of the cost of correction.  In addition to the cost of fixing the
parts affected by the component, a recall could result in the loss of a portion
of or all of customers’ business.  To partially mitigate this risk, we
carry limited product recall insurance and have invested heavily in the TS16949
quality program.




The
costs and difficulties of integrating acquired business could impede our future
growth.




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




We
may not be able to continue to make the acquisitions necessary for us to realize
our future growth strategy.




Acquiring
businesses that complement or expand our operations has been and continues to be
an important element of our business strategy.  This strategy calls
for growth through acquisitions constituting the majority of our future growth
objectives, with the remainder resulting from internal growth and increased
market penetration.  For recent acquisitions see Note 2 of the Notes
to Consolidated Financial Statements.  We cannot assure you that we
will be successful in identifying attractive acquisition candidates or
completing acquisitions on favorable terms in the future.  In
addition, we may borrow funds to acquire other businesses, increasing our
interest expense and debt levels.  Our inability to acquire
businesses, or to operate them profitably once acquired, could have a material
adverse effect on our business, financial position, results of operations and
cash flows.  Our amended and restated credit facility entered into on March
13, 2009, prohibits acquisitions without prior approval of the participants of
the credit facility and until such time as we meet certain earnings and
financial covenant levels.




11


Our
growth strategy depends in part on outsourcing, and if the industry trend toward
outsourcing does not continue, our business could be adversely
affected.




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




Our
market is highly competitive and many of our competitors have significant
advantages that could adversely affect our business.




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




The
production capacity we have added over the last several years has at times
resulted in our having more capacity than we need, causing our operating costs
to be higher than expected.




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




The
price of our common stock may be volatile.




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




·
            economic
      recession or other macro economic
factors;




·
            our
      operating and financial performance and
  prospects;




·
            quarterly
      variations in the rate of growth of our financial indicators, such as
      earnings (loss) per share, net income (loss) and
  revenues;




·
            changes
      in revenue or earnings estimates or publication of research reports by
      analysts;




·
            loss
      of any member of our senior management
team;




·
            speculation
      in the press or investment
community;




·
            strategic
      actions by us or our competitors, such as acquisitions or
      restructurings;




·
            sales
      of our common stock by
stockholders;




·
            general
      market conditions;




·
            domestic
      and international economic, legal and regulatory factors unrelated to our
      performance;




·
            loss
      of a major customer; and




·
            ability
      to declare and pay a regular
dividend.




12




The stock
markets in general have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.  These
broad market fluctuations may adversely affect the trading price of our common
stock.  In addition, due to the market capitalization of our stock,
our stock tends to be more volatile than large capitalization stocks that
comprise the Dow Jones Industrial Average or Standard and Poor’s 500
Index.




Provisions
in our charter documents and Delaware law may inhibit a takeover, which could
adversely affect the value of our common stock.




Our
certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable and may prevent you
from receiving a takeover premium for your shares.  These provisions
include, for example, a classified board of directors and the authorization of
our board of directors to issue up to 5.0 million preferred shares without a
stockholder vote.  In addition, our restated certificate of
incorporation provides that stockholders may not call a special
meeting.




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




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




In
addition, during 2008 we adopted a shareholder’s rights plan intended to deter
coercive or unfair takeover tactics and prevent an acquirer from gaining control
of the company at less than fair value.  The plan gives existing
shareholders the right to purchase Junior Participating Preferred Stock of the
company once and only if the acquirer obtains 15% of our common
stock.




Item
1B.   Unresolved Staff Comments




None




Item
      2.
            Properties




The
manufacturing plants for each of the company's segments are listed
below.  In addition, the company leases a portion of a small office
building in Johnson City, Tennessee which serves as our corporate
headquarters.





Metal Bearing Components
      SegmentManufacturing
      Operation
            Country
            Sq.
      Feet
            Owned
      or LeasedErwin
      Plant
            U.S.A.
            125,000
            OwnedMountain
      City Plant
            U.S.A.
            86,400
            OwnedKilkenny
      Plant
            Ireland
            125,000
            OwnedEltmann
      Plant
            Germany
            175,000
            LeasedPinerolo
      Plant
            Italy
            330,000
            OwnedKysucke
      Plant
            Slovakia
            135,000
            OwnedVeenendaal
      Plant
            The
      Netherlands
            159,000
            OwnedKunshan
      Plant
            China
            110,000
            Leased





The
Eltmann Plant is leased from the Schaeffler Group, which is also a
customer.  The Kunshan Plant lease is accounted for as a capital lease
and we have an option to purchase the facility at various points in the
future.  Production at the Kilkenny, Ireland plant ceased on February
6, 2009 and was moved to other European Metal Bearing Components
operations.  The plant is being made ready for sale.


13





Plastic and Rubber Components
      SegmentManufacturing
      Operation
            Country
            Sq.
      Feet
            Owned
      or LeasedDanielson
      Plant
            U.S.A.
            50,000
            OwnedLubbock
      Plant
            U.S.A.
            228,000
            Owned








Precision
      Metal Components SegmentManufacturing
      Operation
            Country
            Sq.
      Feet
            Owned
      or LeasedWellington
      Plant 1
            U.S.A.
            86,000
            LeasedWellington
      Plant 2
            U.S.A.
            132,000
            LeasedHamilton
      Plant
            U.S.A.
            19,000
            OwnedTempe
      Plant
            U.S.A.
            140,000
            Leased





The
Wellington Plants are leased from a company controlled by the former owner of
Whirlaway Corporation, who is currently an officer of NN, Inc. (see Note 20 of
the Notes to Consolidated Financial Statements).  Production at the
Hamilton Plant was stopped and the facility was sold during the first quarter
of 2009.  Production was moved to the Wellington
plant.





For more
information, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources."





Item
      3.
            Legal
  Proceedings




On March
20, 2006, the Company received correspondence from the Environmental Protection
Agency (“EPA”) requesting information regarding Alternate Energy Resources, Inc.
(“AER”), a former waste recycling vendor used by the Company’s former
Walterboro, South Carolina facility.  AER, located in Augusta,
Georgia, ceased operations in 2000 and EPA began investigating its
facility.  As a result of AER’s operations, soil and groundwater
became contaminated.  Besides the Company, EPA initially contacted
fifty-four other companies (“Potentially Responsible Parties” or PRPs”) who also
sent waste to AER.  Most of these PRPs, including the Company, have
entered into a consent order with EPA to investigate and remediate the site
proactively.  To date, each participating PRP has signed a joint
defense agreement and has contributed to retaining an environmental consultant
who has prepared a remedial investigation, which has been accepted by
EPA.  In addition, a Feasibility Study, which outlines remedial
options, has been submitted to EPA for approval.  Once approved, costs
associated with the chosen remediation will be known and the PRPs will be able
to discuss proper allocation of the cost of cleanup, based on formula including
both volume and the nature of the waste sent to AER for disposal.  As
of the date hereof, the Company does not know the amount of its allocated
share.  However, we believe our contribution to the remediation of the
site, if any, would be approximately 1.083% or less of the volume of waste sent
to the facility and we assert that our waste was non-hazardous.





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




No
matters were submitted for a vote of stockholders during the fourth quarter of
2008.




14


Part
II




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




Since our
initial public offering in 1994, the common stock has been traded on The NASDAQ
Stock Market LLC (“NASDAQ”) under the trading symbol “NNBR.”  Prior to
such time there was no established market for the common stock.  As of
March 16, 2009, there were approximately 2,000 holders of the Common
Stock.  On March 16, 2009, the closing per share stock price as reported by
NASDAQ was $0.97.





The
following table sets forth the high and low closing sales prices of the common
stock, as reported by NASDAQ, and the dividends paid per share on the common
stock during each calendar quarter of 2008 and 2007.






Close
      PriceHigh
            
            
            Low
            
            
            Dividend2008First
      Quarter
            
            $
            10.28
            
            
            $
            7.65
            
            
            $
            0.08Second
      Quarter
            
            
            13.94
            
            
            
            9.60
            
            
            
            0.08Third
      Quarter
            
            
            16.98
            
            
            
            12.57
            
            
            
            0.08Fourth
      Quarter
            
            
            13.11
            
            
            
            0.97
            
            
            
            0.002007First
      Quarter
            
            $
            13.27
            
            
            $
            11.40
            
            
            $
            0.08Second
      Quarter
            
            
            12.78
            
            
            
            11.65
            
            
            
            0.08Third
      Quarter
            
            
            12.51
            
            
            
            9.00
            
            
            
            0.08Fourth
      Quarter
            
            
            10.67
            
            
            
            8.07
            
            
            
            0.08





15





The
following graph compares the cumulative total shareholder return on our common
stock (consisting of stock price performance and reinvested dividends) from
December 31, 2003 with the cumulative total return (assuming reinvestment of all
dividends) of (i) the Value Line Machinery Index (“Machinery”) and (ii) the
Standard & Poor’s 500 Stock Index, for the period December 31, 2003 through
December 31, 2008.  The Machinery index is an industry index comprised
of 49 companies engaged in manufacturing of machinery and machine parts, a list
of which is available from the Company.  The comparison assumes $100
was invested in our common stock and in each of the foregoing indices on
December 31, 2003.  We cannot assure you that the performance of the
common stock will continue in the future with the same or similar trend depicted
on the graph.








Comparison
of Five-Year Cumulative Total Return*


NN,
Inc., Standard & Poors 500 and Value Line Machinery Index


(Performance
Results Through 12/31/08)









Assumes
$100 invested at the close of trading on December 31, 2003 in NN, Inc. common
stock, Standard & Poors 500 and Value Line Machinery Index.





*Cumulative
total return assumes reinvestment of dividends.





Cumulative
      Return12/31/2004
            
            
            12/31/2005
            
            
            12/31/2006
            
            
            12/31/2007
            
            
            12/31/2008NN,
      Inc.
            
            
            108.12
            
            
            
            89.17
            
            
            
            107.36
            
            
            
            83.81
            
            
            
            20.76Standard
      & Poors 500
            
            
            108.99
            
            
            
            112.26
            
            
            
            127.55
            
            
            
            132.06
            
            
            
            81.23Machinery
            
            
            124.14
            
            
            
            134.74
            
            
            
            170.07
            
            
            
            242.37
            
            
            
            140.60





16


The
declaration and payment of dividends are subject to the sole discretion of our
Board of Directors and depend upon our profitability, financial condition,
capital needs, future prospects and other factors deemed relevant by the Board
of Directors.  During the three month period ended December 31, 2008,
we suspended our regular quarterly dividend in order to enhance our liquidity
due to the current economic downturn.




The terms
of our revolving credit facility amended and restated on March 13, 2009 restrict
the payment of dividends until the company can maintain certain financial
covenants.  Additionally, the terms of our revolving credit facility
restrict the declaration and payment of dividends in excess of certain amounts
specified in the credit agreement in any fiscal year.  For further
description of our revolving credit facility, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources”.




During
thefourth
quarter of 2008, we repurchased 85,171 shares of common stock at a total cost of
$1.0 million under our publicly announced $20 million repurchase plan authorized
by the Board of Directors on September 17, 2008.









Issuer
      Purchases of Equity Securities
              In
      the Fourth Quarter 2008Period
            (a)
      Total Number of Shares (or Units) Purchased
            (b)
      Average Price Paid per Share (or Unit) including
    commissions
            (c)
      Total Number of Shares (or Units) Purchased as Part of Publicly Announced
      Plans or Programs
            (d)
      Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
      Purchased Under the Plans or ProgramsOctober
      1 – October 31
            85,171
            $11.91
            85,171
            $18,985,932







For the
full year of 2008, we repurchased 85,171 shares for a total amount of $1.0
million at an average price of $11.91 including commissions.




See Part
III, Item 12 – “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters” of this 2008 Annual Report on Form 10-K for
information required by Item 201 (d) of regulation S-K.








Item
      6.
            Selected Financial
Data




The
following selected financial data has been derived from the audited financial
statements of the Company. The selected financial data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the audited consolidated financial statements,
including notes thereto.


17











(In Thousands, Except Per Share
      Data)
            
            Year ended December
    31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Statement
      of Income Data:Net
      sales
            
            $
            424,837
            
            
            $
            421,294
            
            
            $
            330,325
            
            
            $
            321,387
            
            
            $
            304,089Cost
      of products sold (exclusive of depreciation shown separately
      below)
            
            
            344,685
            
            
            
            337,024
            
            
            
            257,703
            
            
            
            248,828
            
            
            
            240,580Selling,
      general and administrative expenses
            
            
            36,068
            
            
            
            36,473
            
            
            
            30,008
            
            
            
            29,073
            
            
            
            29,755Depreciation
      and amortization
            
            
            27,981
            
            
            
            22,996
            
            
            
            17,492
            
            
            
            16,331
            
            
            
            16,133(Gain)
      loss on disposal of assets
            
            
            (4,138
            )
            
            
            (71
            )
            
            
            (705
            )
            
            
            (391
            )
            
            
            856Impairment
      of goodwill
            
            
            30,029
            
            
            
            10,016
            
            
            
            --
            
            
            
            --
            
            
            
            --Restructuring
      and impairment charges (income), excluding goodwill
      impairments
            
            
            12,036
            
            
            
            3,620
            
            
            
            (65
            )
            
            
            (342
            )
            
            
            2,398Income
      (loss) from operations
            
            
            (21,824
            )
            
            
            11,236
            
            
            
            25,892
            
            
            
            27,888
            
            
            
            14,367Interest
      expense
            
            
            5,203
            
            
            
            6,373
            
            
            
            3,983
            
            
            
            3,777
            
            
            
            4,029Other
      income
            
            
            (850
            )
            
            
            (386
            )
            
            
            (1,048
            )
            
            
            (653
            )
            
            
            (853
            )Income
      (loss) before provision for income taxes
            
            
            (26,177
            )
            
            
            5,249
            
            
            
            22,957
            
            
            
            24,764
            
            
            
            11,191Provision
      (benefit) for income taxes
            
            
            (8,535
            )
            
            
            6,422
            
            
            
            8,522
            
            
            
            9,752
            
            
            
            4,089Net
      income (loss)
            
            $
            (17,642
            )
            
            $
            (1,173
            )
            
            $
            14,435
            
            
            $
            15,012
            
            
            $
            7,102Basic
      income per share:Net
      income (loss)
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.84
            
            
            $
            0.88
            
            
            $
            0.42Diluted
      income per share:Net
      income (loss)
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.83
            
            
            $
            0.87
            
            
            $
            0.41Dividends
      declared
            
            $
            0.24
            
            
            $
            0.32
            
            
            $
            0.32
            
            
            $
            0.32
            
            
            $
            0.32Weighted
      average number of shares
              outstanding
      - Basic
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,125
            
            
            
            17,004
            
            
            
            16,728Weighted
      average number of shares
              outstanding
      – Diluted
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,351
            
            
            
            17,193
            
            
            
            17,151


18







As of December 31,(In
      Thousands, Except Per Share Data)
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Balance
      Sheet Data:Current
      assets
            
            $
            124,621
            
            
            $
            138,024
            
            
            $
            125,864
            
            
            $
            105,950
            
            
            $
            108,440Current
      liabilities
            
            
            63,355
            
            
            
            84,256
            
            
            
            74,869
            
            
            
            64,839
            
            
            
            74,431Total
      assets
            
            
            284,040
            
            
            
            350,078
            
            
            
            342,701
            
            
            
            269,655
            
            
            
            288,342Long-term
      debt
            
            
            90,172
            
            
            
            100,193
            
            
            
            80,711
            
            
            
            57,900
            
            
            
            67,510Stockholders'
      equity
            
            
            109,759
            
            
            
            130,043
            
            
            
            133,169
            
            
            
            116,074
            
            
            
            115,140





For the
year ended December 31, 2008, goodwill, certain intangible assets, and certain
tangible assets were subject to impairment charges of $38,371 ($24,402
after tax).  In addition, restructuring charges of $2,247 ($2,247
after tax) and impairment charges of $1,447 ($1,447 after tax) on long lived
assets were recorded related to the closure of the Kilkenny
plant.  Finally, 2008 benefited from the sale of excess land resulting
in a gain of $4,018 ($2,995 after tax).





For the
year ended December 31, 2007, Whirlaway added $62,662 in sales; $53,515 in cost
of products sold (exclusive of depreciation and amortization); $4,106 in
selling, general and administrative expenses; $3,991 in depreciation and
amortization; $2,406 in interest expense and $852 in net loss.





For the
year ended December 31, 2006, Whirlaway added $4,722 in sales; $4,706 in cost of
products sold (exclusive of depreciation and amortization); $363 in selling,
general and administrative expenses; $345 in depreciation and amortization; $240
in interest expense and $598 in net loss.





On
November 30, 2006, we purchased 100% of the stock of Whirlaway and incorporated
its assets and liabilities into our consolidated financial
statements.  Included in the December 31, 2006 balance sheet data are
acquired total current assets of $19,276, assets of $55,673 and current
liabilities of $7,475.  In addition, we incurred third party debt of
$24,700 related to the acquisition.




During
2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD.  This subsidiary, which began production of precision
balls during the fourth quarter of 2005, is located in the Kunshan Economic and
Technology Development Zone, Jiangsu, The People’s Republic of
China.





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




The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the Consolidated Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this Form
10-K.  Historical operating results and percentage relationships among
any amounts included in the Consolidated Financial Statements are not
necessarily indicative of trends in operating results for any future
period.




Risk Factors




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





Overview
and Management Focus




Our
strategy and management focus is based upon the following long-term
objectives:





·
            Growth
      by taking over the in-house production of components from our global
      customers, providing a competitive and attractive outsourcing
      alternative





·
            Creation
      of a new precision metal components
platform




·
            Global
      expansion of our manufacturing base to better address the global
      requirements of our customers






19




Management
generally focuses on these trends and relevant market indicators:





·
            Global
      industrial growth and economics





·
            Global
      automotive production rates





·
            Costs
      subject to the global inflationary environment, including, but not limited
      to:





o
            Raw
      material





o
            Wages
      and benefits, including health care
costs





o
            Regulatory
      compliance





o
            Energy





·
            Raw
      material availability





·
            Trends
      related to the geographic migration of competitive
      manufacturing





·
            Regulatory
      environment for United States public
companies





·
            Currency
      and exchange rate movements and
trends





·
            Interest
      rate levels and expectations





Management
generally focuses on the following key indicators of operating
performance:




·
            Sales
      growth





·
            Cost
      of products sold levels





·
            Selling,
      general and administrative expense
levels





·
            Net
      income (loss)





·
            Cash
      flow from operations and capital
spending





·
            Customer
      service reliability





·
            External
      and internal quality indicators





·
            Employee
      development





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




Critical Accounting
Policies




Our
significant accounting policies, including the assumptions and judgment
underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial
Statements.  These policies have been consistently applied in all
material respects and address such matters as revenue recognition, inventory
valuation, asset impairment recognition, business combination accounting and
pension and post-retirement benefits.  Due to the estimation processes
involved, management considers the following summarized accounting policies and
their application to be critical to understanding our business operations,
financial condition and results of operations.  We cannot assure you
that actual results will not significantly differ from the estimates used in
these critical accounting policies.




20


Revenue
Recognition.  The Company recognizes revenues based on the
stated shipping terms with the customer when these terms are satisfied and the
risks of ownership are transferred to the customer. The Company has an inventory
management program for certain major Metal Bearing Components Segment customers
whereby revenue is recognized when products are used by the customer from
consigned stock, rather than at the time of shipment.  Under both
circumstances, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sellers’ price is determinable and
collectability is reasonably assured.




Accounts
Receivable.  Accounts receivable are recorded upon recognition
of a sale of goods and ownership and risk of loss is assumed by the
customer.  Substantially all of the Company’s accounts receivable is
due primarily from the core served markets: bearing manufacturers, automotive
industry, electronics, industrial, agricultural and aerospace.  The
Company recorded $0.2 million, $0.5 million and $0.3 million of bad debt expense
during 2008, 2007 and 2006.  In establishing allowances for doubtful
accounts, the Company performs credit evaluations of its customers, considering
numerous inputs when available including the customers’ financial position, past
payment history, relevant industry trends, cash flows, management capability,
historical loss experience and economic conditions and
prospects.  Accounts receivable are written off or reserves
established when considered to be uncollectible or at risk of being
uncollectible.  While management believes that adequate allowances for
doubtful accounts have been provided in the Consolidated Financial Statements,
it is possible that the Company could experience additional unexpected credit
losses.




Inventories.Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out method.  The Company’s inventories are not
generally subject to obsolescence due to spoilage or expiring product life
cycles.  The Company assesses inventory obsolescence routinely and
records a reserve when inventory items are deemed non recoverable in future
periods.  The Company operates generally as a make-to-order business;
however, the Company also stocks products for certain customers in order to meet
delivery schedules.  While management believes that adequate
write-downs for inventory obsolescence have been made in the Consolidated
Financial Statements, the Company could experience additional inventory
write-downs in the future.




Acquisitions and Acquired
Intangibles.  For new acquisitions, the Company uses estimates,
assumptions and appraisals to allocate the purchase price to the assets acquired
and to determine the amount of goodwill.  These estimates are based on
market analyses and comparisons to similar assets.  Annual tests are
required to be performed to assess whether recorded goodwill is
impaired.  The annual tests require management to make estimates and
assumptions with regard to the future operations of its reporting units, and the
expected cash flows that they will generate.  These estimates and
assumptions therefore impact the recorded value of assets acquired in a business
combination, including goodwill, and whether or not there is any subsequent
impairment of the recorded goodwill and the amount of such
impairment.




Income taxes.Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.  The Company
has three units (the Eltmann Plant, Kysucke Plant and Kunshan Plant) that have
incurred or are incurring net operating losses.  Management has placed
full valuation allowances against the deferred tax assets from these net
operating losses.  (See Note 13 of the Notes to Consolidated Financial
Statements.)




Impairment of Long-Lived
Assets.  The Company’s long-lived assets include property,
plant and equipment and certain intangible assets subject to
amortization.  The recoverability of the long-term assets is dependent
on the performance of the companies which the Company has acquired, as well as
volatility inherent in the external markets for these
acquisitions.  In assessing potential impairment for these assets the
Company will consider these factors as well as forecasted financial
performance.    Future adverse changes in market conditions
or adverse operating results of the underlying assets could result in the
Company having to record additional impairment charges not previously
recognized.  (See Notes 6 and 11 of the
Notes to Consolidated Financial Statements).




Pension
Obligations.  The Company uses several assumptions in
determining its periodic pension and post-retirement expense and obligations
which are included in the Consolidated Financial Statements.  These
assumptions include determining an appropriate discount rate, rate of benefit
increase as well as the remaining service period of active
employees.




21


Results of Operations




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







As
      a Percentage of Net Sales
              Year
      ended December 31,2008
            
            
            2007
            
            
            2006Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of product sold (exclusive of depreciation shown separately
      below)
            
            
            81.1
            
            
            
            80.0
            
            
            
            78.0Selling,
      general and administrative expenses
            
            
            8.5
            
            
            
            8.7
            
            
            
            9.1Depreciation
      and amortization
            
            
            6.6
            
            
            
            5.4
            
            
            
            5.3Gain
      on disposal of assets
            
            
            (1.0
            )
            
            
            0.0
            
            
            
            (0.2
            )Impairment
      of goodwill
            
            
            7.1
            
            
            
            2.4
            
            
            
            --Restructuring
      and impairment charges, excluding goodwill impairments
            
            
            2.8
            
            
            
            0.8
            
            
            
            --Income
      (loss) from operations
            
            
            (5.1
            )
            
            
            2.7
            
            
            
            7.8Interest
      expense
            
            
            1.2
            
            
            
            1.5
            
            
            
            1.2Other
      income
            
            
            (0.2
            )
            
            
            (0.0
            )
            
            
            (0.4
            )Income
      (loss) before provision for income taxes
            
            
            (6.1
            )
            
            
            1.2
            
            
            
            7.0Provision
      (benefit) for income taxes
            
            
            (2.0
            )
            
            
            1.5
            
            
            
            2.6Net
      income (loss)
            
            
            (4.1
            %)
            
            
            (0.3
            %)
            
            
            4.4
            %







Off
Balance Sheet Arrangements




We have
operating lease commitments for machinery, office equipment, vehicles,
manufacturing and office space which expire on varying dates.  The
following is a schedule by year of future minimum lease payments as of December
31, 2008 under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year (in thousands).




Year
      ended December 31, 20082009
            
            $
            4,2972010
            
            
            3,4052011
            
            
            2,6702012
            
            
            1,1902013
            
            
            1,107Thereafter
            
            
            7,176Total
      minimum lease payments
            
            $
            19,845





Sales
Concentration





Sales to
various U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 41% of consolidated net
sales in 2008.  During 2008, our ten largest customers accounted for
approximately 78% of our consolidated net sales.  None of our other
customers individually accounted for more than 10% of our consolidated net sales
for 2008.  The loss of all or a substantial portion of sales to these
customers would cause us to lose a substantial portion of our revenue and have a
corresponding negative impact on our operating profit margin due to operation
leverage these customers provide.  This could lead to sales volumes
not being high enough to cover our current cost structure or provide adequate
operating cash flows.  Due to a limit on the amount of excess bearing
component production capacity, in the markets we serve, we believe it would be
difficult for any of our top ten customers to change suppliers in the short
term.




22


The
two-year supply agreement effective July 1, 2006 with Schaeffler Group expired
June 30, 2008 and we are currently supplying product at agreed upon commercial
terms.




In May
2007, a new contract for precision steel balls in Europe was signed with SKF
with terms being retroactive to January 1, 2007 and effective until December 31,
2009.




The five
year supply agreement with SKF providing for the purchase of steel rollers and
metal retainers expired during 2008 and we are in the process of negotiating a
new agreement.






Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007.




Overview
of the Three and Twelve Month Periods Ended December 31, 2008




The three
month period ended December 31, 2008 was affected by the sudden and significant
reduction in demand for our products in all geographic markets
served.  During the fourth quarter of 2008, overall demand was down
approximately 30% from 2007 sales levels in the two main geographic markets
served, the U.S. and Europe.  Demand was down in both automotive and
industrial end markets served by us due to the global economic
downturn.  As a result, our sales were down 29% compared to the same
three month period of 2007.




In order
to minimize the impact of this unprecedented sales volume reduction, we have
taken actions to reduce cost and conserve cash.  The actions include
the reduction of capital expenditures, elimination of discretionary spending,
temporary suspension of our regular quarterly dividend, closure of two
production facilities, wage and salary reductions and employee
layoffs.




For the
three month period ended December 31, 2008, sales decreased $30.8 million from
the equivalent period of 2007.  Of this reduction, $30.1 million was
directly related to lower sales volume from the depressed automotive and
industrial end market demand experienced in the period.




For the
three month period ended December 31, 2008, we had a loss from operations,
excluding non-operating charges and benefits, of $2.6 million versus net income
of $4.0 for the three month period ended December 31, 2007.  The
majority of the variance between the years was directly related to lower sales
volume from the economic downturn.




Prior to
the three month period ended December 31, 2008, we had reported record revenues
and earnings for the nine month period ended September 30,
2008.  Thus, the results of the year ended December 31, 2008 were
significantly impacted by the aforementioned 30% reductions in sales volume
directly related to the economic downturn and depressed demand for automotive
and industrial products experienced during the three month period ended December
31, 2008.




23




OVERALL
RESULTS





(In
      Thousands of Dollars)
            
            Consolidated
      NN, Inc.2008
            
            
            2007
            
            
            ChangeNet
      sales
            
            $
            424,837
            
            
            $
            421,294
            
            
            $
            3,543Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,575Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (22,536
            )Price
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,518Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            539Material
      inflation pass-through
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,447Cost
      of products sold (exclusive of depreciation
              and
      amortization shown separately below)
            
            
            344,685
            
            
            
            337,024
            
            
            
            7,661Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            14,440Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,205
            )Cost
      reduction
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12,994
            )Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            687Inflation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,733Selling,
      general, and administrative
            
            
            36,068
            
            
            
            36,473
            
            
            
            (405
            )Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,012Reductions
      in wage related cost and discretionary spending
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,417
            )Depreciation
      and amortization
            
            
            27,981
            
            
            
            22,996
            
            
            
            4,985Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,148Additional
      depreciation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,837Restructuring
      and impairment charges
            
            
            42,065
            
            
            
            13,636
            
            
            
            28,429Interest
      expense, net
            
            
            5,203
            
            
            
            6,373
            
            
            
            (1,170
            )Gain
      on disposal of assets
            
            
            (4,138
            )
            
            
            (71
            )
            
            
            (4,067
            )Other
      income, net
            
            
            (850
            )
            
            
            (386
            )
            
            
            (464
            )Income
      (loss) before provision for income taxes
            
            
            (26,177
            )
            
            
            5,249
            
            
            
            (31,426
            )Provision
      for income taxes
            
            
            (8,535
            )
            
            
            6,422
            
            
            
            (14,957
            )Net
      income (loss)
            
            $
            (17,642
            )
            
            
            (1,173
            )
            
            $
            (16,469
            )





Net Sales.  As
discussed above, the significant sales volume decrease experienced in the three
month period ended December 31, 2008 had a major impact on the full year 2008
sales levels.  There was $30.1 million in volume lost in the fourth
quarter of 2008 due to the economic downturn and related reduction in demand for
automotive and industrial end market products.  Prior to the fourth
quarter, sales volume had increased by $7.5 million year to date primarily in
our Metal Bearings Components Segment from market share gains and strong levels
of industrial end market demand in North America and in Europe to a lesser
extent.





Partially
offsetting the negative volume was the positive effect due to the appreciation
in value of Euro denominated sales relative to the U.S.
Dollar.  Finally, sales were positively affected by price increases
from passing through raw material inflation to customers, price increases given
to certain non-contractual customers and favorable product mix to existing
customers.





Cost of Products Sold (exclusive of
depreciation and amortization).  As discussed above, the
significant sales volume reduction experienced in the three month period ended
December 31, 2008 had a major impact on cost of products sold.  The
magnitude of the reductions and short period in which the reductions occurred
limited our ability to reduce fixed production costs.  We took
aggressive actions to reduce cost including drastically reducing plant operating
days.  The reduction in cost of products sold during the period
directly related to the economic downturn was $14.6 million.  Prior to
the fourth quarter, cost of product sold had increased by $7.3 million due to
higher sales volume mentioned above.






24


Apart
from the volume impacts, cost of products sold increased due to the increase in
value of Euro denominated costs relative to the U.S. Dollar.  In
addition, raw material, labor and utility inflation experienced during 2008
increased cost of products sold.  Offsetting these increases were
favorable impacts from our Level 3 cost reduction program and other planned
projects focused on reducing manufacturing costs at all locations and from
operating improvements at our three newest operations: Whirlaway, China, and
Slovakia.





Selling, General and Administrative
Expenses.  Spending on wage related costs was substantially
reduced in the three month period ended December 31, 2008.  Cost for
management bonuses and stock based compensation were reduced due to the fourth
quarter 2008 operating performance.  In addition, during the fourth
quarter of 2008, most discretionary spending was eliminated.  The
increase in the value of Euro denominated costs relative to the U.S. Dollar
partially offset the reductions.





Depreciation and
Amortization.  We accelerated depreciation during the three
month period ended December 31, 2008, on certain assets to adjust to their new
estimated useful lives.  The accelerated depreciation totaled $3.5
million and was related to assets that were abandoned and ceased to be used on
or before December 31, 2008.  Additionally, depreciation expense was
higher due to the increase in the value of the Euro based depreciation and
amortization relative to the U.S. Dollar.  Finally, depreciation
expense increased for assets placed in service at our new plants in China and
Slovakia.





Restructuring and impairment
charges.  During 2008, goodwill, certain intangible
assets, and certain long lived tangible assets were subject to impairment
charges of $38.4 million.  In addition, restructuring charges of $2.2
million and impairment charges of $1.4 million on long lived assets were
recorded related to the closure of the Kilkenny plant.   During
2007, we impaired certain goodwill and fixed asset balances related to the Metal
Bearing Components Segment restructuring totaling $13.4 million.





Interest expense.
Interest expense was lower in 2008 versus 2007 primarily due to decreases in the
base LIBOR interest rate which reduced the cost of borrowing under our variable
rate credit agreement and due to repayments made in 2008.





Gain on disposal of
assets.During 2008, the Veenendaal Plant  (part of the
Metal Bearing Components Segment) sold excess land with a book value of $1.6
million for proceeds of $5.6 million and a resulting gain of $4.0
million.





Provision for income
taxes.  The year ended December 31, 2008 effective rate of 33%
was lower than the year ended December 31, 2007 effective rate of
122%.  The majority of the difference between the 2008 and 2007 rates
was with the 2008 impairment losses.  We did not apply valuation reserves
to the deferred tax benefits as those benefits will be recognized either through
realized deferred tax liabilities or from expected future tax
deductions.  The locations that generated the deferred tax benefits in
the year ended December 31, 2008, are expected to have sufficient future taxable
income so it is more likely than not these benefits will be utilized.  The
2007 impairment charges had minimal tax benefits due to valuation reserves
placed on the deferred tax benefits related to the impairment and severance
charges and other related tax benefits as the locations incurring these benefits
were not expected to generate significant future taxable income.











25




RESULTS
BY SEGMENT





METAL BEARING COMPONENTS
SEGMENT





(In
      Thousands of Dollars)
            
            Year
      ended December 31,2008
            
            
            2007
            
            
            ChangeNet
      sales
            
            $
            321,660
            
            
            $
            303,059
            
            
            $
            18,601Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,575Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,677
            )Price
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            672Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            539Material
      inflation pass- through
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,492Segment
      net income (loss)
            
            $
            14,647
            
            
            $
            4,958
            
            
            $
            9,689





The
fourth quarter economic downturn led to a reduction in sales of $21.5
million.  Prior to the fourth quarter, sales had increased in the
Metal Bearing Components Segment $13.8 million due to higher sales volume in
North America, Europe and Asia from new programs, market share gains, and strong
European and North American industrial end market demand compared to
2007.  Sales were positively affected by the favorable impacts from
the rise in value of Euro based sales relative to the U.S. dollar, primarily in
the first nine months of the year.  Finally, sales increased due to
price increases related to passing through raw material inflation to customers,
from price increases given to certain non-contractual customers
and favorable product and customer mix.





The 2008
and 2007 segment net incomes include restructuring and impairment charges,
net of tax of $3.7 million and $13.5 million, respectively. Additionally, 2008
segment net income was impacted by a favorable net $1.6 million in
non-operating items.  The first was a $3.0 million after tax gain on
sale of excess land.  The second was a $1.1 million tax benefit
related to reducing certain deferred tax liabilities at our Italian operation
under a new Italian tax law.  Partially offsetting these favorable
impacts was the accelerated depreciation of certain long-lived tangible assets
that were abandoned in the fourth quarter of 2008 totaling $2.5 million after
tax.





Factoring
out the non-operating benefits and restructuring charges above, 2008 segment net
income was $1.7 million lower than the prior year.  The 2008 results
were negatively impacted by the fourth quarter economic
downturn.  As much of the segments’ manufacturing cost base is in
Western Europe, we have less ability to proactively reduce labor and labor
related costs there than in other geographic areas in which we operate due to
country and plant specific labor rules. Partially offsetting the fourth quarter
decline were planned cost reduction initiatives at all locations, in particular
at our Asia and Slovakia operations, which had a positive impact, net of
inflation, to segment income.





The
2008restructuring
and impairment charges for the segment, net of tax are $2.2 million of severance
and other employment related cost and non-cash impairment charges of $1.4
million on long lived assets both related to the closure of the segment’s
Kilkenny Plant.  The 2007restructuring and
impairment charges, net of tax included $13.5 million in non-cash charges
related to impairment of goodwill and fixed assets to levels supported by
projected cash flows after restructuring activity within the
segment.




PRECISION METAL COMPONENTS
SEGMENT





(In
      Thousands of Dollars)
            
            Year
      ended December 31,2008
            
            
            2007
            
            
            ChangeNet
      sales
            
            $
            64,235
            
            
            $
            67,384
            
            
            $
            (3,149
            )Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,149
            )Segment
      net loss
            
            $
            (7,353
            )
            
            $
            (1,450
            )
            
            $
            (5,903
            )





The
reduction in sales volume to customers that serve the U.S. automotive market,
particularly light trucks, began for this segment during the second and third
quarters of 2008.  The sales reduction intensified in the fourth
quarter with the more than 30% reduction in automotive build rates in the
U.S.  As a result, sales volume was $3.9 million less in the fourth
quarter of 2008 compared to the fourth quarter of 2007 primarily due to the
economic downturn.





26


The 2008
segment net loss included $7.8 million of impairment charges, net of tax. 
Factoring out the impairment charges, segment net income was favorable to the
prior year by $1.9 million.  Despite lower sales volumes, the segment’s net
income increeased primarily due to production efficiencies in labor and
manufacturing supplies experienced in 2008 through the application of our Level
3 and other cost improvement programs.  In addition, interest cost was
lower for the segment due to positive cash flow and lower base interest
rates.





The 2008
impairment charges, net of tax are from the impairment of all of the segment’s
goodwill, the full impairment of the customer relationship intangible
asset, and the impairment of certain long lived tangible
assets.





PLASTIC AND RUBBER
COMPONENTS SEGMENT





(In
      Thousands of Dollars)
            
            Year
      ended December 31,2008
            
            
            2007
            
            
            ChangeNet
      sales
            
            $
            38,942
            
            
            $
            50,851
            
            
            $
            (11,909
            )Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11,710
            )Price
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (199
            )Segment
      net income (loss)
            
            $
            (17,223
            )
            
            $
            2,242
            
            
            $
            (19,465
            )





Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to customers that sell products to U.S. automotive manufacturers.  The
lower sales were due to a general downturn in that market and due to the effects
of a strike at a major U.S. automotive supplier that occurred earlier in the
year, which affected several of our customers’ sales volumes.  While
the lower sales volumes were occurring most of 2008 for the segment, the
reduction intensified in the fourth quarter of 2008 due to impact from the
global recession.  During the fourth quarter, we experienced sales
volumes $4.7 million less than the fourth quarter of 2007.





The 2008
segment net loss included $16.6 million of impairment charges, net of tax. 
Factoring out the impairment charges, the segment incurred a loss of $0.6
million in 2008.  The segment net loss was negatively affected by
the volume decreases in sales.   Planned cost reduction projects,
net of inflation, partially offset the volume impacts. The 2008
impairment charges, net of tax are from the impairment of all of the segment’s
goodwill.





27





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





OVERALL
RESULTS


(In
      Thousands of Dollars)
            
            Consolidated
      NN, Inc.2007
            
            
            2006
            
            
            ChangeNet
      sales
            
            $
            421,294
            
            
            $
            330,325
            
            
            $
            90,969Due
      to Acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            62,662Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            19,600Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,507Price
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,400
            )Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,900
            )Material
      inflation pass-through
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,500Cost
      of products sold (exclusive of depreciation
              and
      amortization shown separately below)
            
            
            337,024
            
            
            
            257,703
            
            
            
            79,321Due
      to Acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            53,500Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,700Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,821Cost
      reduction
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,400
            )Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (400
            )Inflation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,100Selling,
      general, and administrative
            
            
            36,473
            
            
            
            30,008
            
            
            
            6,465Due
      to Acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,100Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,265Increase
      in wage related cost and other
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,100Depreciation
      and amortization
            
            
            22,996
            
            
            
            17,492
            
            
            
            5,504Due
      to Acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,000Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,000Additional
      depreciation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            504Restructuring
      and impairment charges (income)
            
            
            13,636
            
            
            
            (65
            )
            
            
            13,701Interest
      expense, net
            
            
            6,373
            
            
            
            3,983
            
            
            
            2,390Gain
      on disposal of assets
            
            
            (71
            )
            
            
            (705
            )
            
            
            634Other
      income, net
            
            
            (386
            )
            
            
            (1,048
            )
            
            
            662Income
      before provision for income taxes
            
            
            5,249
            
            
            
            22,957
            
            
            
            (17,708
            )Provision
      for income taxes
            
            
            6,422
            
            
            
            8,522
            
            
            
            (2,100
            )Net
      income (loss)
            
            $
            (1,173
            )
            
            $
            14,435
            
            
            $
            (15,608
            )








Net Sales.  Sales
have increased due to the addition of the Precision Metal Components Segment
with the acquisition of Whirlaway and due to appreciation in value of Euro
denominated sales relative to the U.S. Dollar.  In addition, sales
have increased due to the pass through of raw material inflation to customers
and due to higher volume to existing customers primarily at our European
operations.  Partially offsetting these increases are price decreases
given to several large customers in agreement with contractual terms and
unfavorable customer, product, and currency mix.





Cost of Products Sold (exclusive of
depreciation and amortization).  Cost of products sold
increased primarily due to the addition of the Precision Metal Components
Segment on November 30, 2006 and due to the increase in value of Euro
denominated costs relative to the U.S. Dollar.  In addition, raw
material, labor and utility inflation increased and costs increased related to
higher sales volume primarily at our European operations.  Offsetting
these increases were favorable mix impacts to cost of products sold and the
impact of projects focused on reducing cost of manufacturing .





Selling, General and Administrative
Expenses.  The selling, general and administrative (“SG&A”)
expense increase was primarily due to the addition of the Precision Metal
Components Segment on November 30, 2006.  In addition, SG&A
expense increased due to the appreciation in the value of Euro denominated
expenses relative to the U.S. Dollar.  Finally, the total was higher
due to increased stock compensation expense, from higher spending on consulting
and professional fees, higher travel, salary cost and additional bad debt
expense.





28


Depreciation and
Amortization.  These costs were higher due to the acquisition
of the Precision Metal Components Segment and due to the increase in the value
of Euro based depreciation and amortization relative to the U.S.
Dollar.





Interest expense.
Interest expense was primarily higher due to the additional debt assumed to
acquire the Precision Metal Components Segment on November 30,
2006.





Gain on disposal of
assets.In 2006, we incurred a gain from the sale of excess
land at our Pinerolo Plant facility ($1.8 million) partially offset by a loss on
disposal of excess equipment at the same facility ($1.1 million).





Restructuring and Impairment
Charges.We have begun to take steps to appropriately adjust our cost
structure and align our plant capacity in our Metal Bearing Components
Segment.  This will include restructuring at the European operations
of the Metal Bearing Components Segment as we adjust our global precision ball
manufacturing capacity to take better advantage of favorable cost structures at
our two newest plants the Kysucke Plant and the Kunshan Plant.  As a
result of this restructuring, certain goodwill and fixed assets in our European
operations are now considered impaired.  As a result, during the
second quarter of 2007, we recorded approximately $13.3 million ($12.6 million
after-tax) of non-cash impairment costs.  These costs include the
write-down of certain excess production equipment and the impairment of goodwill
to levels supported by projected cash flows after the
restructuring.





Provision for income taxes.The 2007 effective tax rate was 122%, versus the effective tax rate in
2006 of 37%.  The effective tax rate in 2007 was much higher than
normal due to the impact of the impairment charges taken during 2007, which
carried significant valuation allowances against the related tax benefits,
resulting in the high effective tax rate for 2007.  Factoring out the
impairment impacts in 2007, our effective tax rate would have been approximately
38%.  There were two other significant offsetting items affecting 2007
tax expense.  During the fourth quarter, the deferred tax liabilities
at our Italian operation of the Metal Bearing Components Segment were lowered
due to enacted reductions in the Italian statutory tax rates which decreased tax
expense by $1.0 million.  Offsetting this reduction was a $0.8 million
increase in tax expense related to recording a full valuation allowance on a
deferred tax asset for tax loss carry forwards at a location still incurring
losses. The 2006 effective rate is lower than the historical effective rate due
to the favorable 19% tax rate on the gain from sale of land at our Pinerolo
Plant.


RESULTS
BY SEGMENT





METAL BEARING COMPONENTS
SEGMENT





(In
      Thousands of Dollars)
            
            Year
      ended December 31,2007
            
            
            2006
            
            
            ChangeNet
      sales
            
            $
            303,059
            
            
            $
            272,299
            
            
            $
            30,760Foreign
      exchange effects
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            19,560Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,400Price
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,800
            )Mix
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,900
            )Material
      inflation pass- through
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,500Segment
      net income
            
            $
            4,958
            
            
            $
            18,331
            
            
            $
            (13,373
            )





The sales
increase at the Metal Bearing Components Segment was primarily due to the
positive impacts from the rise in value of Euro based sales relative to the U.S.
Dollar.  Additionally, the Metal Bearing Components Segment
experienced higher volume with existing European customers for tapered rollers
and metal bearing retainers and increases related to the pass through of raw
material inflation to customers.  These increases were partially
offset by unfavorable product and currency mix to existing customers and due to
contractual price decreases to certain large customers.





The major
negative factors affecting the segment net income in 2007 was the $13.5 million
of after tax goodwill and tangible asset impairment charges related to the
restructuring of the segment.  Factoring out the impairment charges, the
segment net income was $18.4 million.  Despite higher sales volume net
income was impacted by price decreases given to certain customers under
contractual terms in 2007 ($2.4 million, net of tax) and unfavorable customer,
currency, and product mix ($1.0 million, net of tax).  Additionally,
there was a gain on the sale of land, net of loss on disposal of machinery, at
our Pinerolo Plant in the first quarter of 2006 ($0.8 million, net of tax) and
gains on favorable foreign exchange impacts from the appreciation of the
Slovakian Koruna during 2006 ($0.7 million, net of tax) that did not repeat in
2007.





29


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





PRECISION METAL COMPONENTS
SEGMENT


(In
      Thousands of Dollars)
            
            Year
      Ended December 31,2007
            
            
            2006
            
            
            ChangeNet
      sales
            
            $
            67,384
            
            
            $
            4,722
            
            
            $
            62,662Due
      to Acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            62,662Segment
      net loss
            
            $
            (1,450
            )
            
            $
            (598
            )
            
            $
            (852
            )








The
Precision Metal Components Segment was formed on November 30, 2006 by the
purchase of Whirlaway Corporation.   Therefore, only one month of
operations of the segment was included in the financial statements for the year
ended December 31, 2006.




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





PLASTIC AND RUBBER
COMPONENTS SEGMENT





(In
      Thousands of Dollars)
            
            Year
      ended December 31,2007
            
            
            2006
            
            
            ChangeNet
      sales
            
            $
            50,851
            
            
            $
            53,304
            
            
            $
            (2,453
            )Volume
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,653
            )Material
      inflation pass- through
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,200Segment
      net income
            
            $
            2,242
            
            
            $
            2,695
            
            
            $
            (453
            )





Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to the automotive market and to certain specialty non-automotive
customers.   Partially offsetting the volume decreases were
benefits from raw material inflation pass through.





Net
income was negatively affected by the volume decreases in sales ($1.0 million,
after tax).  Partially offsetting the volume impacts were cost
reduction projects net of inflation ($0.6 million, after tax).  The
increases in sales from raw material pass through were offset by raw material
inflation.





Changes
in Financial Condition from December 31, 2007 to December 31, 2008




From
December 31, 2007 to December 31, 2008, our total assets and current assets
decreased $66.0 million and $13.4 million, respectively.  The
depreciation in the value of Euro denominated account balances relative to the
U.S. Dollar caused total assets and current assets to decrease approximately
$5.7 million and $2.6 million, respectively, from December 31,
2007.





30


Factoring
out the foreign exchange effects, the majority of the decrease in non-current
assets was the impairments of $30.0 of goodwill and $5.6 of intangible
assets.  In addition, fixed assets were impaired $4.2 million due to
the Kilkenny Plant closure and SFAS 144 impairments and $3.5 million of fixed
assets were abandoned and had accelerated depreciation taken during
2008.  Finally, non-current assets decreased as non-accelerated
depreciation expense was $5.1 million higher than capital spending and excess
land with a net book value of $2.1 million was sold in 2008.





Factoring
out the foreign exchange effects, current assets at December 31, 2008 were
$10.8 million lower than December 31, 2007.   Accounts receivable
decreased $14.1 million due to lower sales volume in the fourth quarter of 2008
versus the fourth quarter of 2007 and from a reduction in overdue receivables
during 2008 accounting for almost all of the difference in current
assets.





From
December 31, 2007 to December 31, 2008, our total liabilities and current
liabilities decreased $45.7 million and $20.9 million,
respectively.  The depreciation in the value of Euro denominated
account balances relative to the U.S. Dollar caused total liabilities and
current liabilities to decrease approximately $2.2 million and $1.3 million,
respectively, from December 31, 2007.





Factoring
out the foreign exchange effects, total liabilities decreased $43.5 million from
December 31, 2007 to December 31, 2008. Accounts payable decreased $10.7
million due to lower levels of purchases in the fourth quarter of 2008 from the
large sales and production volume declines and extended plant shut down periods
experienced during the fourth quarter of 2008.  In addition,
liabilities were lower due to the reduction in the current maturities of
long-term debt of $4.9 million and long-term debt of $10.0 million as cash flow
from operations was used to pay down debt.  Finally, the deferred tax
liabilities decreased $13.5 million primarily due to the goodwill and other
long-lived asset impairments recorded in 2008.




Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable, was $61.2 million at December 31, 2008 as compared
to $53.8 million at December 31, 2007.  The ratio of current assets to
current liabilities increased from 1.64:1 at December 31, 2007 to 1.97:1 at
December 31, 2008.  The increase in working capital was due primarily
to a $4.9 million reduction in the balance of the current portion of long-term
debt and the $1.6 million reduction in cash and cash equivalents.





Cash flow
provided by operations was $27.5 million in 2008 compared with cash flow
provided by operations of $21.6 million in 2007.  The increase in cash
flow provided by operations is primarily due to the reduction in accounts
receivable from lower sales volumes and reductions in overdue
accounts.





During
the fourth quarter of 2008, we recorded approximately $39.8 million ($25.8
million after tax) of non-cash impairment costs.  These charges
included the full impairment of goodwill at our Precision Metal Components
Segment and at our Plastic and Rubber Components Segment, full impairment of the
customer relationship intangible in our Precision Metal Components Segment, and
the impairment of certain long lived tangible assets at our Precisions Metal
Components Segment and our Kilkenny Plant.





During
the second quarter of 2007, we recorded approximately $13.4 million ($12.7
million after-tax) of non-cash impairment charges.  These charges included
the write-down to estimated fair market value of certain excess production
equipment and the full impairment of goodwill at one location to levels
supported by projected cash flows after the restructuring.





Liquidity and Capital
Resources




In
consideration of the weak overall economic environment, particularly in the
automotive and industrial end markets in which the Company operates, and the
resulting significant decline in sales in all operating segments and reduced
projected results for future periods, we have implemented certain actions to
manage our liquidity position.  These actions include:  obtaining
amendments to our existing credit agreements to align covenant levels with the
current and expected weaker operating performance over the next five quarters,
suspending our quarterly dividend to shareholders, reducing capital
spending, establishing programs to reduce working capital needs, reducing or
eliminating discretionary spending where possible, reducing permanent employment
levels, reducing working hours for many facilities, downsizing plant operations
and accelerating plant closures.  In addition, we have temporarily reduced
the compensation of the Board of Directors and the Chief Executive Officer by
20%, and reduced the compensation of other managers and employees where legally
and contractually possible by 10% - 20%.  We have also delayed payment of
bonuses earned in 2008 and eliminated bonus opportunities for 2009.




31


The
company has forecasted reduced levels of revenue and cash flow based on our
recent sales levels, current economic conditions, published economic forecasts
and input from our major customers.  These forecasts were used to set new
financial and operating covenants in our amended credit facilities.  While
there can be no assurances, management believes that the Company will be able to
comply with the revised covenants of the amended debt agreements through at
least the next five quarters.  However, further deterioration of market
conditions and sales levels in excess of our forecasts for revenue and cash flow
could result in the Company failing to meet these covenants which could cause a
material adverse impact on our liquidity and financial position.




During the year ended
December 31, 2008, we had in place a $135.0 million revolving credit facility
maturing in September 2011 with Key Bank as administrative agent. That
credit facility provided us the ability to borrow in U.S. Dollars at LIBOR plus
an applicable margin of .60% to .925% or Euros at EURIBOR plus an applicable
margin of 0.60% to 0.925%.  The facility had a $10.0 million swing
line feature to meet short term cash flow needs with an interest rate equal to
the prime lending rate.The
loan agreement contained customary financial and non-financial covenants
specifying we had to maintain certain liquidity measures.  The loan
agreement also contained customary restrictions on, among other things,
additional indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock
repurchases), issuance of equity securities, and merger, acquisition and other
fundamental changes in our business including a “material adverse change”
clause.  The credit agreement was collateralized by the pledge of
stock of certain foreign and domestic subsidiaries and guarantees of certain
domestic subsidiaries.  At December 31, 2008, we
had $72.6 million of availability under the $135.0 million
facility.




During
the first quarter of 2009, we entered into an amended and restated $90 million
revolving credit facility maturing September 2011 with Key Bank as
administrative agent.  The amended agreement was entered into to conform
the covenants to our current outlook for the next twelve months in this
difficult economic cycle.  In addition to the reduction in availability,
the interest rate will be LIBOR plus an applicable margin of 4.0%.  The
financial and non financial covenants have been amended to relax certain
financial covenants and the facility is now secured by assets of the company in
addition to pledges of stock of certain foreign and domestic subsidiaries and
guarantees of certain domestic subsidiaries.  Finally, the new agreement
places greater restrictions on our usage of cash flows including
prohibiting share repurchases, dividends and investments and/or acquisitions
without the approval of credit facility participants and until such time as
we meet certain earnings and financial covenant levels.




During
the year ended December 31, 2008, we also had in place the $40.0 million senior
notes.  These notes bore interest at a fixed rate of 4.89% and mature
on April 26, 2014.  Interest is paid semi-annually.  As of
December 31, 2008, $34.3 million remained outstanding.  Annual
principal payments of approximately $5.7 million began on April 26, 2008 and
extend through the date of maturity.  The agreement contained
customary financial and non-financial covenants.  Such covenants
specified that we must maintain certain liquidity measures.  The
agreement also contained customary restrictions on, among other things,
additional indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock
repurchases), issuance of equity securities, and mergers, acquisitions and other
fundamental changes in our business including a “material adverse change”
clause.  The notes were collateralized by the pledge of stock of
certain foreign subsidiaries.





During
the first quarter of 2009, the senior note agreement was amended.  The
amended agreement was entered into to conform the covenants to our
current outlook for the next twelve months in this difficult economic
cycle.  The term, principal balance, and principal payment schedule all
remain the same as the original agreement.  The interest rate was increased
from 4.89% to 8.50%.  In addition, the financial and non-financial
covenants were amended and additional collateralization and restrictions on
usage of cash flows were added to the agreement in line with the amended $90
million revolving credit facility.




We were
in compliance with all covenants related to the $135.0 million credit facility
and the $40.0 million senior notes as of December 31, 2008. See Note 7 of the
Notes to Consolidated Financial Statements





During
the three month period ended June 30, 2008, the Veenendaal, The Netherlands
facility (part of the Metal Bearing Components Segment) sold excess land for
proceeds of $5.6 million and a resulting gain of $4.0 million ($3.0 million,
after tax).





32


To date,
cash generated by foreign subsidiaries has been used primarily for general
purposes including investments in property, plant and equipment and prepayment
of the former Euro term loan.  In 2007, a $5.0 million dividend, on
earnings for which U.S. Federal tax was previously paid, was declared and paid
by a foreign subsidiary.  During 2006, a European subsidiary repaid an
$8.0 million loan with the parent company.  These funds were used to
repay part of our domestic credit facilities.  Remaining undistributed
foreign earnings are deemed to be permanently reinvested.




Our
arrangements with our domestic customers typically provide that payments are due
within 30 days following the date of our shipment of goods, while arrangements
with foreign customers of our domestic business (other than foreign customers
that have entered into an inventory management program with us) generally
provide that payments are due within 90 or 120 days following the date of
shipment.  Under the Metal Bearing Components Segment’s inventory
management program with certain European customers, payments typically are due
within 30 days after the customer uses the product.   Our
arrangement with European customers regarding due dates vary from 30 to 90 days
following date of sale with an average of approximately 50 days
outstanding.  Our sales and receivables can be influenced by
seasonality due to our relative percentage of European business coupled with
many foreign customers ceasing production during the month of
August.  For information concerning our quarterly results of
operations for the years ended December 31, 2008 and 2007, see Note 16 of
the Notes to Consolidated Financial Statements.




We
invoice and receive payment from many of our customers in Euro as well as other
currencies.  In 2008, the fluctuation of the Euro against the U.S.
Dollar positively impacted sales and income.  As a result of these
sales, our foreign exchange transaction and translation risk has
increased.  Various strategies to manage this risk are available to
management including producing and selling in local currencies and hedging
programs.  As of December 31, 2008, no currency hedges were in
place.  In addition, a strengthening of the U.S. Dollar and/or Euro
against foreign currencies could impair our ability to compete with
international competitors for foreign as well as domestic sales.




Sales to
various U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 41% of consolidated net
sales in 2008.  During 2008, our ten largest customers accounted for
approximately 78% of our consolidated net sales.  None of our other
customers individually accounted for more than 10% of our consolidated net sales
for 2008.  The loss of all or a substantial portion of sales to these
customers would cause us to lose a substantial portion of our revenue and have a
corresponding negative impact on our operating profit margin due to operation
leverage these customers provide.  This could lead to sales volumes
not being high enough to cover our current cost structure or provide adequate
operating cash flows.  Due to a limit on the amount of excess bearing
component capacity, in the markets we serve, we believe it would be difficult
for any of our top ten customers to change suppliers in the short
term.




During
2008, we spent approximately $18.5 million on capital
expenditures.  Of this amount, approximately $5.4 million related to
geographic expansion of our manufacturing base and approximately $13.1 million
related to cost reduction, equipment upgrades, process upgrades, or
replacements.  During 2009, we plan to spend approximately $3.5
million on capital expenditures.  We have limited our 2009 capital
spending in order to maximize liquidity during the forecasted 2009 economic
downturn.  We intend to finance these activities with cash generated
from operations and funds available under our credit facilities.  We
believe that funds generated from operations and borrowings will be sufficient
to finance our working capital needs and projected capital expenditure
requirements through December 31, 2009.




The table
below sets forth our contractual obligations and commercial commitments as of
December 31, 2008 (in thousands):




Payments
      Due by PeriodCertain
              Contractual
      Obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            After
      5 yearsLong-term
      debt including current portion
            
            $
            97,088
            
            
            $
            6,916
            
            
            $
            73,028
            
            
            $
            11,428
            
            
            $
            5,716Expected
      interest payments
            
            
            16,753
            
            
            
            5,721
            
            
            
            9,237
            
            
            
            1,619
            
            
            
            176Operating
      leases
            
            
            19,845
            
            
            
            4,297
            
            
            
            6,075
            
            
            
            2,297
            
            
            
            7,176Capital
      leases
            
            
            4,451
            
            
            
            266
            
            
            
            532
            
            
            
            532
            
            
            
            3,121Expected
      pension contributions and benefit payments
            
            
            2,576
            
            
            
            166
            
            
            
            396
            
            
            
            479
            
            
            
            1,535Other
      long-term obligations (1)
            
            
            48,000
            
            
            
            48,000
            
            
            
            --
            
            
            
            --
            
            
            
            --Total
      contractual cash obligations
            
            $
            188,713
            
            
            $
            65,366
            
            
            $
            89,268
            
            
            $
            16,355
            
            
            $
            17,724




(1) Other
Long-Term Obligations consists of steel purchase commitments at our European
operations (See Note 15 of the Notes to Consolidated Financial
Statements.)





33


We have
approximately $1.7 million in unrecognized tax benefits and related penalties
and interest accrued within the liabilities section of our balance
sheet.  We are unsure when or if at all these amounts might be paid to
U.S. and/or foreign taxing authorities.  Accordingly, these amounts
have been excluded from the table above.  See Note 13 in the Notes to
Consolidated Financial Statements for additional details.




Functional Currencies




We
currently have operations in Ireland, Germany, Italy and The Netherlands, all of
which are Euro participating countries, and in Slovakia which joined the
European Union in May 2004 and adopted the Euro as its currency on January
1, 2009.  Each of our European facilities sell product to customers in many
of the Euro participating countries.  The Euro has been adopted as the
functional currency at all locations in Europe, except Slovakia whose functional
currency is the Slovak Koruna.  The functional currency of NN Asia is
the Chinese Yuan.




Seasonality and Fluctuation in Quarterly
Results




Our net
sales historically have been seasonal in nature, due to a significant portion of
our sales being to European customers that cease or significantly slow
production during the month of August.  For information concerning our
quarterly results of operations for the years ended December 31, 2008 and 2007,
see Note 16 of the Notes to Consolidated Financial Statements.




Inflation and Changes in
Prices




The cost
base of our operations have been materially affected by steel inflation during
recent years, but due to the ability to pass on this steel inflation to our
customers the overall financial impact has been minimized.  The prices
for 52100 Steel, engineered resins and other raw materials which we purchase are
subject to material change.  Our typical pricing arrangements with
steel suppliers are subject to adjustment every six months.  We
typically reserve the right to increase product prices periodically in the event
of increases in our raw material costs.  In the past, we have been
able to minimize the impact on our operations resulting from the 52100 Steel
price fluctuations by taking such measures.




Recently Issued Accounting
Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(SFAS 157), which provides guidance on how to measure assets and liabilities
that are measured at fair value.  SFAS 157 applies whenever another
U.S. GAAP standard requires (or permits) assets or liabilities to be measured at
fair value but does not expand the use of fair value to any new
circumstances.  This standard requires additional disclosures in both
annual and quarterly reports.  SFAS 157 was effective for financial
statements issued for fiscal years beginning after November 15, 2007, excluding
non-financial assets and liabilities except those that are recognized or
disclosed at fair value on a recurring basis.  The adoption of SFAS
157 for non-financial assets and liabilities was deferred until January 1,
2009.  We are still evaluating the effect of adoption of SFAS 157 on
our non-financial assets and liabilities.  We adopted the provisions
of SFAS 157 that pertain to financial assets and liabilities on January 1, 2008
and this has had no effect on our income from operations, cash flows, and
financial condition.




In
February, 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115" (SFAS 159).  SFAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair value at
specified election dates.  Upon adoption, an entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date.  Most of the
provisions apply only to entities that elect the fair value
option.  However, the amendment to SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities.  SFAS 159 was effective for
us as of January 1, 2008.  We have elected not to apply the provisions
of SFAS 159 for our existing financial liabilities.  We will continue
to report our existing financial liabilities on a cost basis as we believe this
is a better representation of our actual financial obligations.





34


In
December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations" ("SFAS No. 141R") which replaces SFAS No. 141 "Business
Combinations" ("SFAS No. 141").  SFAS No. 141R retains the fundamental
requirements of SFAS No. 141 that the acquisition method of accounting be used
for all business combinations.  However, SFAS No. 141R provides for
the following changes from SFAS No. 141:  an acquirer will record 100%
of assets and liabilities of acquired business, including goodwill, at fair
value, regardless of the level of interest acquired; certain contingent assets
and liabilities will be recognized at fair value at the acquisition date;
contingent consideration will be recognized at fair value on the acquisition
date with changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date.  SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after January
1, 2009.  SFAS No. 141R will not have an impact on the Company's
consolidated financial statements when effective, but the nature and magnitude
of the specific effects will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.




Item
7A.    Quantitative and Qualitative Disclosures About Market
Risk




We are
exposed to changes in financial market conditions in the normal course of our
business due to our use of certain financial instruments as well as transacting
in various foreign currencies.  To mitigate our exposure to these
market risks, we have established policies, procedures and internal processes
governing our management of financial market risks.  We are exposed to
changes in interest rates primarily as a result of our borrowing
activities.  At December 31, 2008, these borrowings included $40.0
million aggregate principal amount of fixed rate senior notes and our $135
million revolving credit facility which was used to maintain liquidity, fund our
business operations, and fund acquisitions.  At December 31, 2008, we
had $34.3 million of fixed rate senior notes outstanding and $62.4 million
outstanding under the variable rate revolving credit facilities.  At
December 31, 2008, a one-percent increase in the interest rate charged on our
outstanding variable rate borrowings would result in interest expense increasing
annually by approximately $0.6 million.  The nature and amount of our
borrowings may vary as a result of future business requirements, market
conditions and other factors.




Translation
of our operating cash flows denominated in foreign currencies is impacted by
changes in foreign exchange rates.  Our Metal Bearing Component
Segment invoices and receives payment in currencies other than the U.S. Dollar
including the Euro.  In 2008, the fluctuation of the Euro against the
U.S. Dollar positively impacted assets, revenue and income.  To help
reduce exposure to foreign currency fluctuation, management has incurred debt in
Euros in the past and has, from time to time, used foreign currency hedges to
hedge currency exposures when these exposures meet certain discretionary
levels.  We did not use any significant currency hedges in 2008, nor
did we hold a position in any foreign currency hedging instruments as of
December 31, 2008.







Item
      8.
            Financial
      Statements and Supplementary Data
            
            PageIndex to
      Financial StatementsFinancial
      StatementsReport of
      Independent Registered Public Accounting Firm
            .................................................................................
            36Consolidated
      Balance Sheets at December 31, 2008 and 2007
            .................................................................................
            37Consolidated
      Statements of Income (Loss) and Comprehensive Income (Loss)
      for
      the years ended December 31, 2008, 2007 and 2006
            ..................................................................................
            38Consolidated
      Statements of Changes in Stockholders’ Equity for theyears
      ended December 31, 2008, 2007 and 2006
            ..................................................................................
            39Consolidated
      Statements of Cash Flows for the years endedDecember
      31, 2008, 2007 and 2006
            ..................................................................................
            40Notes to
      Consolidated Financial Statements
            .................................................................................
            41






35




Report of
Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders of NN, Inc




Internal Control - Integrated Framework
















PricewaterhouseCoopers
LLP


Raleigh,
North Carolina


March 31,
2009


36





NN,
      Inc.Consolidated Balance
      SheetsDecember
      31, 2008 and 2007(In
      thousands, except per share data)





Assets
            
            2008
            
            
            2007Current
      assets:Cash and cash
      equivalents
            
            $
            11,052
            
            
            $
            13,029Accounts receivable,
      net
            
            
            50,484
            
            
            
            65,566Inventories, net
            
            
            53,173
            
            
            
            51,821Income
      tax receivable
            
            
            2,565
            
            
            
            --Other current
    assets
            
            
            5,858
            
            
            
            6,263Current deferred tax
      asset
            
            
            1,489
            
            
            
            1,345Total current
    assets
            
            
            124,621
            
            
            
            138,024Property,
      plant and equipment, net
            
            
            145,690
            
            
            
            161,008Goodwill,
      net
            
            
            8,908
            
            
            
            39,471Intangible
      assets, net
            
            
            2,098
            
            
            
            9,279Non
      current deferred tax assets
            
            
            993
            
            
            
            322Other
      non-current assets
            
            
            1,730
            
            
            
            1,974Total
      assets
            
            $
            284,040
            
            
            $
            350,078Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts payable
            
            $
            39,415
            
            
            $
            51,124Accrued salaries, wages and
      benefits
            
            
            12,745
            
            
            
            15,087Income taxes
            
            
            --
            
            
            
            144Current maturities of long-term
      debt
            
            
            6,916
            
            
            
            11,851Current portion of obligation
      under capital lease
            
            
            266
            
            
            
            249Other liabilities
            
            
            4,013
            
            
            
            5,801Total current
      liabilities
            
            
            63,355
            
            
            
            84,256Non-current
      deferred tax liability
            
            
            4,939
            
            
            
            18,682Long-term
      debt, net of current portion
            
            
            90,172
            
            
            
            100,193Accrued
      pension
            
            
            13,826
            
            
            
            14,395Obligation
      under capital lease, net of current portion
            
            
            1,872
            
            
            
            1,792Other
      non-current liabilities
            
            
            117
            
            
            
            717Total
      liabilities
            
            
            174,281
            
            
            
            220,035Commitments
      and Contingencies (Note 15)Stockholders’
      equity:Common stock - $0.01 par value,
      authorized 45,000 shares,
              issued and outstanding 16,268 in 2008 and 15,855 shares in
              2007
            
            
            163
            
            
            
            159Additional paid-in
      capital
            
            
            49,524
            
            
            
            45,032Retained earnings
            
            
            35,593
            
            
            
            57,083Accumulated other comprehensive
      income
            
            
            24,479
            
            
            
            27,769Total stockholders’
      equity
            
            
            109,759
            
            
            
            130,043Total
      liabilities and stockholders’ equity
            
            $
            284,040
            
            
            $
            350,078








See
accompanying notes to consolidated financial statements


37





NN,
      Inc.Consolidated Statements of
      Income (Loss) and Comprehensive Income (Loss)Years
      ended December 31, 2008, 2007 and 2006(In
      thousands, except per share data)





2008
            
            
            2007
            
            
            2006Net
      sales
            
            $
            424,837
            
            
            $
            421,294
            
            
            $
            330,325Cost
      of products sold (exclusive of depreciation shown separately
      below)
            
            
            344,685
            
            
            
            337,024
            
            
            
            257,703Selling,
      general and administrative
            
            
            36,068
            
            
            
            36,473
            
            
            
            30,008Depreciation
      and amortization
            
            
            27,981
            
            
            
            22,996
            
            
            
            17,492Gain
      on disposal of assets
            
            
            (4,138
            )
            
            
            (71
            )
            
            
            (705
            )Impairment
      of goodwill
            
            
            30,029
            
            
            
            10,016
            
            
            
            --Restructuring
      and impairment charges (income), excluding goodwill
      impairments
            
            
            12,036
            
            
            
            3,620
            
            
            
            (65
            )Income
      (loss) from operations
            
            
            (21,824
            )
            
            
            11,236
            
            
            
            25,892Interest
      expense
            
            
            5,203
            
            
            
            6,373
            
            
            
            3,983Other
      income
            
            
            (850
            )
            
            
            (386
            )
            
            
            (1,048
            )Income
      (loss) before provision for income taxes
            
            
            (26,177
            )
            
            
            5,249
            
            
            
            22,957Provision
      (benefit) for income taxes
            
            
            (8,535
            )
            
            
            6,422
            
            
            
            8,522Net
      income (loss)
            
            $
            (17,642
            )
            
            $
            (1,173
            )
            
            $
            14,435Other
      comprehensive income (loss):Actuarial
      gain (loss) recognized in change of projected benefit obligation
      (net
              of
      tax of $0 and $248, respectively)
            
            
            (58
            )
            
            
            656
            
            
            
            --Foreign
      currency translation gain (loss)
            
            
            (3,232
            )
            
            
            11,764
            
            
            
            12,265Comprehensive income (loss)
            
            $
            (20,932
            )
            
            $
            11,247
            
            
            $
            26,700Basic
      income (loss) per share:Net income (loss)
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.84Weighted average shares
      outstanding
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,125Diluted
      income (loss) per share:Net income (loss)
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.83Weighted average shares
      outstanding
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,351Cash
      dividends per common share
            
            $
            0.24
            
            
            $
            0.32
            
            
            $
            0.32












































See
accompanying notes to consolidated financial statements





38





NN,
      Inc.Consolidated
      Statements of Changes in Stockholders’ EquityYears
      ended December 31, 2008, 2007 and 2006(In
      thousands)






Common
      Stock
            
            
            
            
            
            Additional
              Paid in
              Capital
            
            
            
            
            
            Accumulated
              OtherNumber
              of
              Shares
            
            
            Par
              Value
            
            
            Additional
              Paid in
              Capital
            
            
            Unearned
              Compen-
              sation
            
            
            Retained
              Earnings
            
            
            Comprehen-
              sive
              Income
            
            
            TotalBalance,
      December 31, 2005
            
            
            17,206
            
            
            $
            172
            
            
            $
            57,754
            
            
            $
            (467
            )
            
            $
            55,218
            
            
            $
            3,397
            
            
            $
            116,074Reclassification of   unearnedcompensation
            
            
            --
            
            
            
            --
            
            
            
            (467
            )
            
            
            467
            
            
            
            --
            
            
            
            --
            
            
            
            --Shares issued
            
            
            99
            
            
            
            1
            
            
            
            983
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            984Repurchase of outstanding  shares
            
            
            (463
            )
            
            
            (4
            )
            
            
            (5,269
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (5,273
            )Elimination of variable stock optionliability
            
            
            --
            
            
            
            --
            
            
            
            8
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            8Net income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            14,435
            
            
            
            --
            
            
            
            14,435Amortization of restricted stock award
            
            
            --
            
            
            
            --
            
            
            
            283
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            283Stock option expense
            
            
            --
            
            
            
            --
            
            
            
            181
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            181Dividends declared
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (5,475
            )
            
            
            --
            
            
            
            (5,475
            )Elimination of additional   minimumpension
      liability  (net of tax of $46)
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            80
            
            
            
            80Adjustment to initially apply  FAS 158and
      record unrecognized net losses thathave
      not been recognized as acomponent
      of pension income  (net oftax
      $224)
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (393
            )
            
            
            (393
            )Cumulative translation gain
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            12,265
            
            
            
            12,265Balance,
      December 31, 2006
            
            
            16,842
            
            
            $
            169
            
            
            $
            53,473
            
            
            $
            --
            
            
            $
            64,178
            
            
            $
            15,349
            
            
            $
            133,169Shares
      issued
            
            
            24
            
            
            
            --
            
            
            
            292
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            292Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,173
            )
            
            
            --
            
            
            
            (1,173
            )Amortization
      of restricted stock awards
            
            
            --
            
            
            
            --
            
            
            
            309
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            309Forfeiture
      of restricted stock
            
            
            (3
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Repurchase
      of outstanding shares
            
            
            (1,008
            )
            
            
            (10
            )
            
            
            (9,712
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (9,722
            )Stock
      option expense
            
            
            --
            
            
            
            --
            
            
            
            670
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            670Dividends
      declared
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (5,322
            )
            
            
            --
            
            
            
            (5,322
            )Effect
      of adoption of FIN 48
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (600
            )
            
            
            --
            
            
            
            (600
            )Actuarial
      gain recognized in change ofprojected
      benefit obligation (net of tax$248)
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            656
            
            
            
            656Cumulative
      translation gain
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            11,764
            
            
            
            11,764Balance,
      December 31, 2007
            
            
            15,855
            
            
            $
            159
            
            
            $
            45,032
            
            
            $
            --
            
            
            $
            57,083
            
            
            $
            27,769
            
            
            $
            130,043Shares issued
            
            
            498
            
            
            
            5
            
            
            
            3,857
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3,862Tax benefit on options exercised
            
            
            --
            
            
            
            --
            
            
            
            1,197
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,197Net loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (17,642
            )
            
            
            --
            
            
            
            (17,642
            )Restricted stock awards expense
            
            
            --
            
            
            
            --
            
            
            
            (196
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (196
            )Stock option expense
            
            
            --
            
            
            
            --
            
            
            
            647
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            647Dividends declared
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (3,848
            )
            
            
            --
            
            
            
            (3,848
            )Cumulative translation loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (3,232
            )
            
            
            (3,232
            )Actuarial loss recognized in change ofprojected
      benefit obligation (net of tax $0)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (58
            )
            
            
            (58
            )Repurchase of shares
            
            
            (85
            )
            
            
            (1
            )
            
            
            (1,013
            )
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,014
            )Balance,
      December 31, 2008
            
            
            16,268
            
            
            $
            163
            
            
            $
            49,524
            
            
            
            --
            
            
            $
            35,593
            
            
            $
            24,479
            
            
            $
            109,759


See
accompanying notes to consolidated financial statements


39





NN,
      Inc.Consolidated Statements of
      Cash FlowsYears
      Ended December 31, 2008, 2007 and 2006(In
      thousands)2008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net
      Income (loss)
            
            $
            (17,642
            )
            
            $
            (1,173
            )
            
            $
            14,435Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            27,981
            
            
            
            22,996
            
            
            
            17,492Amortization
      and write-off of debt issue costs
            
            
            244
            
            
            
            219
            
            
            
            460Gain on
      disposals of property, plant and equipment
            
            
            (4,138
            )
            
            
            (71
            )
            
            
            (705
            )Allowance
      for doubtful accounts
            
            
            239
            
            
            
            496
            
            
            
            311Compensation
      expense from issuance of restricted stock and incentive stock
      options
            
            
            451
            
            
            
            979
            
            
            
            464Deferred
      income tax benefit
            
            
            (14,558
            )
            
            
            (1,183
            )
            
            
            (1,384
            )Capitalized
      interest and non cash interest expense
            
            
            176
            
            
            
            66
            
            
            
            (204
            )Non-cash
      restructuring and impairment charges (income)
            
            
            41,784
            
            
            
            13,636
            
            
            
            (65
            )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
            
            
            12,521
            
            
            
            (837
            )
            
            
            (759
            )Inventories
            
            
            (2,095
            )
            
            
            (5,974
            )
            
            
            3,221Income
      tax receivable
            
            
            (2,565
            )
            
            
            --
            
            
            
            (956
            )Other
      current assets
            
            
            578
            
            
            
            260
            
            
            
            (188
            )Other
      assets
            
            
            (123
            )
            
            
            801
            
            
            
            920Accounts
      payable
            
            
            (10,875
            )
            
            
            (5,533
            )
            
            
            2,308Other
      liabilities
            
            
            (4,467
            )
            
            
            (3,088
            )
            
            
            (2,347
            )Net
      cash provided by operating activities
            
            
            27,511
            
            
            
            21,594
            
            
            
            33,003Cash
      flows from investing activities:Cash
      paid to acquire business, net of cash received
            
            
            --
            
            
            
            (94
            )
            
            
            (25,025
            )Acquisition
      of property, plant and equipment
            
            
            (18,498
            )
            
            
            (18,856
            )
            
            
            (19,282
            )Principal
      received from note receivable
            
            
            --
            
            
            
            --
            
            
            
            2,505Proceeds
      from disposals of property, plant and equipment
            
            
            5,778
            
            
            
            74
            
            
            
            3,550Acquisition
      of intangible asset
            
            
            --
            
            
            
            (173
            )
            
            
            (1,846
            )Net
      cash used by investing activities
            
            
            (12,720
            )
            
            
            (19,049
            )
            
            
            (40,098
            )Cash
      flows from financing activities:Proceeds
      from long-term debt
            
            
            --
            
            
            
            26,400
            
            
            
            47,188Debt
      issue costs paid
            
            
            (35
            )
            
            
            (251
            )
            
            
            (536
            )Proceeds
      from bank overdrafts
            
            
            --
            
            
            
            612
            
            
            
            784Repayment
      of long-term debt
            
            
            (9,714
            )
            
            
            --
            
            
            
            (30,556
            )Proceeds
      (repayment) of short-term debt, net
            
            
            (4,034
            )
            
            
            4,610
            
            
            
            266Proceeds
      from issuance of stock and exercise of stock options
            
            
            3,862
            
            
            
            292
            
            
            
            984Cash
      dividends paid
            
            
            (3,848
            )
            
            
            (5,322
            )
            
            
            (5,475
            )Other
      financing activity
            
            
            (46
            )
            
            
            (38
            )
            
            
            (23
            )Payment
      of related party debt
            
            
            --
            
            
            
            (18,638
            )
            
            
            --Repurchase
      of common stock
            
            
            (1,014
            )
            
            
            (9,722
            )
            
            
            (5,273
            )Net
      cash provided (used) by financing activities
            
            
            (14,829
            )
            
            
            (2,057
            )
            
            
            7,359Effect
      of exchange rate changes on cash flows
            
            
            (1,939
            )
            
            
            860
            
            
            
            561Net
      change in cash and cash equivalents
            
            
            (1,977
            )
            
            
            1,348
            
            
            
            825Cash
      and cash equivalents at beginning of period
            
            
            13,029
            
            
            
            11,681
            
            
            
            10,856Cash
      and cash equivalents at end of period
            
            $
            11,052
            
            
            $
            13,029
            
            
            $
            11,681Supplemental
      schedule of non-cash investing and financing activities:Incurred
      note payable to former owner as part of consideration for acquiring a
      business
            
            
            --
            
            
            
            --
            
            
            $
            21,305Restricted
      stock expense(income) ($(196) in 2008, $309 in 2007, and $283 in 2006) and
      stock option expense ($647 in 2008, $670 in 2007 and $181 in 2006)
      included in stockholders’ equity
            
            $
            451
            
            
            $
            979
            
            
            $
            464Windfall
      tax benefits on incentive stock options
            
            $
            1,216
            
            
            $
            8
            
            
            $
            133Reduced
      note payable to customer with offsetting reduction to accounts receivable
      ($1,384 in 2008 and $1,390 in 2007) and an increase to interest expense
      ($176 in 2008 and $186 in 2007)
            
            $
            1,208
            
            
            $
            1,204
            
            
            
            --Adjusted
      the goodwill balance related to Whirlaway acquisition for final fair value
      of assets andliabilitiesacquired.
            
            
            --
            
            
            $
            1,828
            
            
            
            --Increase
      in unrecognized tax benefits upon the adoption of FIN 48 charged to
      beginning retainedearnings
            
            
            --
            
            
            $
            600
            
            
            
            --Cash
      paid for interest and income taxes was as follows:Interest
            
            $
            4,937
            
            
            $
            6,174
            
            
            $
            3,353Income
      taxes
            
            $
            8,024
            
            
            $
            8,404
            
            
            $
            11,911


See
accompanying notes to consolidated financial statements


40
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)





1)
            Summary of Significant Accounting Policies and
      Practices




(a)
            Description
      of Business




NN, Inc.
(the “Company”) is a manufacturer of precision balls, cylindrical and tapered
rollers, bearing retainers, plastic injection molded products, precision bearing
seals and precision metal components. The Company’s balls, rollers, retainers,
and bearing seals are used primarily in the domestic and international
anti-friction bearing industry. The Company’s plastic injection molded products
are used in the bearing, automotive, instrumentation and fiber optic industries.
The precision metal components products are used in automotive, diesel engine,
refrigeration, and heating and cooling industries.




In
consideration of the weak overall economic environment, particularly in the
automotive and industrial end markets in which the Company operates, and the
resulting significant decline in sales in all operating segments and reduced
projected results for future periods, we have implemented certain actions to
manage our liquidity position.  These actions include:  obtaining
amendments to our existing credit agreement to align covenant levels with the
current and expected weaker operating performance over the next five quarters,
suspending our quarterly dividend to shareholders, reducing capital spending,
establishing programs to reduce working capital needs, reducing or eliminating
discretionary spending where possible, reducing permanent employment levels,
reducing working hours for many facilities, downsizing plant operations and
accelerating plant closures.  In addition, we have temporarily reduced the
compensation of the Board of Directors and the Chief Executive Officer by 20%
and reduced the compensation of other managers and employees where legally and
contractually possible by 10% - 20%.  We have also delayed payment of
bonuses earned in 2008 and eliminated bonus opportunities for 2009.




The
company has forecasted reduced levels of revenue and cash flow based on our
recent sales levels, current economic conditions, published economic forecasts
and input from our major customers.  These forecasts were used to set new
financial and operating covenants in our amended credit facilities.  While
there can be no assurances, management believes that the Company will be able to
comply with the revised covenants of the amended debt agreements through at
least the next five quarters.  However, further deterioration of market
conditions and sales levels in excess of our forecasts for revenue and cash flow
could result in the Company failing to meet these  covenants which could
cause a material adverse impact on our liquidity and financial
position.




(b)
            Cash
      and Cash Equivalents




The
Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.




(c)
            Inventories




Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out method.  Our policy is to expense abnormal
amounts of idle facility expense, freight, handling cost, and
waste.  In addition, we allocate fixed production overheads based on
the normal capacity of our facilities.




Inventories
also include tools, molds and dies in progress that the Company is producing and
will ultimately sell to its customers.  This activity is principally
related to our Plastic and Rubber Components and Precision Metal Components
Segments.  These inventories are carried at the lower of cost or
market.





(d)
            Property,
      Plant and Equipment




Property,
plant and equipment are stated at cost less accumulated depreciation. Assets
held for sale are stated at lower of depreciated cost or fair market value less
estimated selling costs. Expenditures for maintenance and repairs are charged to
expense as incurred. Major renewals and betterments are capitalized. When a
property item is retired, its cost and related accumulated depreciation are
removed from the property accounts and any gain or loss is recorded in the
statement of income.  The Company reviews the carrying values of
long-lived assets for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be
recoverable.  During the years ended December 31, 2008, 2007 and 2006,
the Company recorded impairment charges of $4,197, $3,320 and $0, respectively
(See Notes 3 and 6 for further details).  Property, plant and
equipment includes tools, molds and dies principally used in our Plastic and
Rubber Components and Precision Metal Components Segments that are the property
of the Company.





Depreciation
is provided principally on the straight-line method over the estimated useful
lives of the depreciable assets for financial reporting purposes. Accelerated
depreciation methods are used for income tax purposes.  In the event
we abandon and cease to use certain property, plant, and equipment,
depreciation estimates are revised and, in most cases, depreciation expense
will be accelerated to reflect the shorten useful live of the asset. 
During the year ended December 31, 2008, we recognized $3,509 in accelerated
depreciation for property, plant and equipment that was abandoned and ceased to
be used. (See Note 6)




41


NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)




(e)      Revenue
Recognition




The
Company recognizes revenues based on the stated shipping terms with the customer
when these terms are satisfied and the risks of ownership are transferred to the
customer.  TheCompany
has an inventory management program for certain Metal Bearing Components Segment
customers whereby revenue is recognized when products are used by the customer
from consigned stock, rather than at the time of shipment.  Under both
circumstances, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sellers’ price is determinable and
collectability is reasonably assured.




(f)
            Accounts
      Receivable.




Accounts
receivable are recorded upon recognition of a sale of goods and ownership and
risk of loss is assumed by the customer.  Substantially all of the
Company’s accounts receivable is due primarily from the core served markets:
bearing manufacturers, automotive industry, electronics, industrial,
agricultural and aerospace.  The Company experienced $0.2 million,
$0.5 million, and $0.3 million of bad debt expense during 2008, 2007 and 2006,
respectively.  In establishing allowances for doubtful accounts, the
Company performs credit evaluations of its customers, considering numerous
inputs when available including the customers’ financial position, past payment
history, relevant industry trends, cash flows, management capability, historical
loss experience and economic conditions and prospects.  Accounts
receivable are written off or reserves established when considered to be
uncollectible or at risk of being uncollectible.




(g)
            Income
      Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.




(h)
            Net
      Income (Loss) Per Common Share




Basic
earnings per share reflect reported earnings divided by the weighted average
number of common shares outstanding. Diluted earnings per share include the
effect of dilutive stock options, unvested restricted stock, and the respective
tax benefits.




(i)
            Stock
      Incentive Plan




Effective
January 1, 2006, the Company adopted SFAS 123(R) under the modified prospective
method.  From that date onward, the Company is accounting for new
awards and awards modified under this new standard.  Any options
issued henceforth will be expensed based on the fair value of the options at the
grant date.  As of December 31, 2005, the Company did not have any
unvested stock options due to an accelerated vesting program implemented in
December 2005.  As such, this statement only impacted the Company for
its outstanding restricted stock and stock option and restricted stock awards
issued subsequent to January 1, 2006.  The cost of the options and
restricted stock awards will be expensed as compensation expense over the
vesting periods based on the fair value at the grant date.  (See Note
9)





The
Company accounts for restricted stock awards by recognizing compensation expense
ratably over the vesting period as specified in the
award.  Compensation expense to be recognized is based on the stock
price at date of grant.






42


Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)


(j)
            Principles
      of Consolidation




The
Company’s consolidated financial statements include the accounts of NN, Inc. and
its subsidiaries.  All of the Company's subsidiaries are 100%
owned and all are included in the consolidated financial statements for the
years end December 31, 2008, 2007, and 2006.  All significant
inter-company profits, transactions, and balances have been eliminated in
consolidation.




(k)
            Foreign
      Currency Translation




Assets
and liabilities of the Company’s foreign subsidiaries are translated at current
exchange rates, while revenue, costs and expenses are translated at average
rates prevailing during each reporting period.  Translation
adjustments arising from the translation of foreign subsidiary financial
statements are reported as a component of other comprehensive income and
accumulated other comprehensive income within stockholders’ equity.  In
addition, transactions denominated in foreign currencies are initially recorded
at the current exchange rate at the date of the transaction.  The balances
are adjusted to the current exchange rate as of each balance sheet date and as
of the date when the transaction is consummated.  Any transaction gains or
losses are expensed in the Consolidated Statement of Net Income (Loss) as
incurred.




(l)
            Goodwill
      and Other Indefinite Lived Intangible
Assets




The
Company recognizes the excess of the purchase price of an acquired entity over
the fair value of the net identifiable assets as goodwill.  Goodwill
is tested for impairment on an annual basis as of October 1 and between annual
tests in certain circumstances.  The impairment tests are performed at
the reporting unit level for those units that have goodwill.  SFAS 142
prescribes a two-step process for testing for goodwill impairments.  The
first step is to determine if the carrying value of the reporting unit with
goodwill is less than the related fair value of the reporting unit.  The
fair value of the reporting unit is determined through use of discounted cash
flow methods and/or market based multiples of earning and sales methods. 
If the carrying value of the reporting unit is less than fair value of the
reporting unit the goodwill is not considered impaired.  If the carrying
value is greater than fair value then the potential for impairment of goodwill
exists.  The potential impairment is determined by allocating the fair
value of the reporting unit among the assets and liabilities based on a purchase
price allocation methodology as if the reporting unit was acquired in a business
combination.  The fair value of the goodwill is implied from this
allocation and compared to the carrying value with an impairment loss recognized
if the carrying value is greater than the implied fair value.




We base
our fair value estimates on management business plans and projected financial
information which are subject to a high degree of management judgment and
complexity.  Actual results may differ from these projections and the
differences may be material.




Our
indefinite lived intangible asset is accounted for similarly to
goodwill.  These assets are tested for impairment at least annually by
comparing the fair value to the carrying value and if the fair value is
less than carrying value, an impairment is recognized for the
difference.




(m)
            Long
      Lived Intangible Assets




The
Company recognizes an acquired intangible asset apart from goodwill whenever the
asset arises from contractual or other legal rights, or whenever it is capable
of being divided or separated from the acquired entity or sold, transferred,
licensed, rented, or exchanged, whether individually or in combination with a
related contract, asset or liability.  An intangible asset other than
goodwill is amortized over its estimated useful life unless that life is
determined to be indefinite.  The Company reviews the lives of
intangible assets each reporting period, and if necessary, recognizes impairment
losses if the carrying amount of an intangible asset is not recoverable from
expected future cash flows and its carrying amount exceeds its fair value. (See
Notes 3 and 11.)




(n) 
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of




The
Company accounts for long-lived assets in accordance with the provisions of SFAS
No. 144, “Accounting for the Impairment of or Disposal of Long-Lived
Assets.”  Long-lived tangible and intangible assets are tested for
recoverability when changes in circumstances indicate the carrying value of
these assets may not be recoverable.  A test for recoverability is
also performed when managment has committed to a plan to dispose of a reporting
unit or asset group.  Assets to be held and used are tested for
recoverability when indications of impairment are
evident.  Recoverability of a long-lived tangible and intangible
asset  is evaluated by comparing its carrying value to the
future estimated undiscounted cash flows expected to be generated by the
asset or asset group. If the asset is not recoverable, the asset  is
considered impaired and adjusted to fair value which is then
depreciated/amortized over its remaining useful life.  Assets held for
sale are carried at the lesser of carrying value or fair value less costs of
disposal. (See Notes 3, 6 and 11)




43
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)






(o)  
Use of Estimates in the Preparation of Financial Statements




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.




(p)   Reclassifications




Certain
2007 and 2006 amounts have been reclassified to conform with 2008
presentation.




(q)
            Recently
      Issued Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair
Value Measurements” (SFAS 157), which provides guidance on how to measure
assets and liabilities that are measured at fair value.  SFAS 157
applies whenever another U.S. GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances.  This standard requires additional
disclosures in both annual and quarterly reports.  SFAS 157 was
effective for financial statements issued for fiscal years beginning after
November 15, 2007, excluding non-financial assets and liabilities except those
that are recognized or disclosed at fair value on a recurring
basis.  The adoption of SFAS 157 for non financial assets and
liabilities was deferred until January 1, 2009.  We are still
evaluating the effect of adoption of SFAS 157 on our non-financial assets and
liabilities.  We adopted the provisions of SFAS 157 that pertain
tofinancial
assets and liabilities on January 1, 2008 and this has had no effect on our
income from operations, cash flows, and financial condition.


In
February, 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets   and Financial Liabilities—Including an amendment of FASB
Statement No. 115" (SFAS 159).  SFAS 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value at specified election dates.  Upon adoption, an entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date.  Most of
the provisions apply only to entities that elect the fair value
option.  However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities.  SFAS 159 was effective for
us as of January 1, 2008.  We have elected not to apply the provisions
of SFAS 159 for our existing financial liabilities.  We will continue
to report our existing financial liabilities on a cost basis as we believe this
is a better representation of our actual financial obligations.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which establishes principles and requirements
for the acquirer in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R
also provides guidance for the recognition and measurement of goodwill acquired
in the business combination and for disclosure to enable financial statement
users to evaluate the nature and financial effects of the business combination.
This Statement replaces SFAS No. 141, "Business Combinations" ("SFAS No. 141").
While SFAS No. 141R retains the fundamental requirements in SFAS No. 141 that
the acquisition method of accounting be used for all business combinations and
for an acquirer to be identified for each business combination, it also improves
the comparability of the information about business combinations provided in
financial reports. In addition, SFAS No. 141R defines the acquirer as the entity
that obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves control.
This Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.





44
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)


2)
            Acquisitions




Whirlaway
Acquisition





On
November 30, 2006, we purchased 100% of the common shares of Whirlaway from its
sole shareholder for $24,337 in cash and a note payable, paid in 2007, to the
former owner for $18,638.  In addition, we incurred fees of $825 from
third parties as part of the purchase.  The results of Whirlaway’s
operations have been consolidated with NN, Inc. since the date of
acquisition.





The
following table summarized the final fair values of assets acquired and
liabilities assumed at date of acquisition.





At
      November 30, 2006Current
      assets
            
            $
            19,276Property,
      plant, and equipment
            
            
            25,837Other
      assets
            
            
            128Intangible
      assets subject to amortization
            
            
            7,180Intangible
      assets not subject to amortization
            
            
            900Goodwill
            
            
            4,274Total assets
    acquired
            
            
            57,595Current
      liabilities
            
            
            7,246Other
      long-term liabilities
            
            
            4,270Long
      term debt
            
            
            2,279Total liabilities
      assumed
            
            
            13,795Net assets
    acquired
            
            $
            43,800




The
intangible assets not subject to amortization are trade names that have
indefinite lives.  The intangible assets subject to amortization are
customer relationship intangible asset of $6,900, a covenant not to compete of
$150, and a lease interest favorable to market of $130.  The
intangible assets subject to amortization have a weighted average life of
approximately 10 years.   Based on the Company’s analysis, all of
the goodwill and intangible assets will be deductible and amortized over 15
years for federal tax.





The
following unaudited pro-forma financial information shows the revenue, net
income, and earnings per share for the year ended December 31, 2006 as though
the acquisition of Whirlaway occurred at the beginning of that fiscal
year.  This pro-forma information has been adjusted for the effects of
purchase accounting on the assets and liabilities
acquired.   These adjustments include amortization and
depreciation based on allocated values of assets acquired, interest expense
based on new debt incurred in acquisition, and recognizing the tax impacts of
each adjustment.





December
      31,
              2006Revenues
            
            $
            403,316Net
      income
            
            $
            15,848Earnings
      per share basic
            
            $
            0.93Earnings
      per share fully diluted
            
            $
            0.91







3)
            Restructuring and Impairment
      Charges







Impairment of Goodwill and
Other Intangible Assets




During
the fourth quarter of 2008, we recorded $30,029 ($19,258 after tax) of
non-cash impairment charges related to the impairment of goodwill. 
Goodwill was impaired at our  Precision Metal Components reporting
unit and at both reporting units of our Plastic and Rubber Components
Segment.  These impairments were calculated using an equal weighting
of present value of expected future cash flows methods and market based
multiples of sales and earnings methods pursuant to SFAS 142 for the goodwill
(see Note 10).  In addition, we recorded approximately $5,592 ($3,448
after tax) of non-cash impairment charges related to the full
impairment of the customer relationship intangible at our Precision Metal
Components reporting unit.  This impairment was calculated using estimates
of fair value pursuant to SFAS 144 for intangible assets (see Note 11). 
Finally, we recorded $2,750 ($1,696 after tax) of non-cash impairment charges
related to the full impairment of property, plant and equipment at our Precision
Metal Components reporting unit.  This impairment was calculated using
estimates of fair value pursuant of SFAS 144 for tangible assets (see Note
6).




45




These
impairments were triggered by the significant financial impact the global
economic downturn had on these segments during the three month period ended
December 31, 2008 and expected impact in future periods.





Metal Bearing Components
Segment Restructuring, Impairment and Other Cost Reduction
Actions





During
2007, we announced several actions intended to improve corporate financial
performance that resulted in the recognition of certain restructuring,
impairment and other non-recurring charges.  In July 2007, management
made a decision that reducing output at four of the six Metal Bearing Components
Segment locations that manufacture precision steel balls would be the best
financial and logistical solution to align capacity.  As we have increased
capacity at our two newest precision steel ball plants in China and Slovakia,
the need to align our capacity across our worldwide system of six precision
steel ball plants had grown.  While the decision to realign production
among four of the six was successful, during 2008 it was determined the best
course of action was to close one of the four precision steel ball plants in
Europe.




As such,
on November 26, 2008, we announced the closure of our precision steel ball
manufacturing facility located in Kilkenny, Ireland.  The closure was
part of our long term strategy to rationalize our European
operations.  We view the rationalization of manufacturing operations
in Europe as a necessary action to adjust our global manufacturing capacity to
current and long term market requirements.




The
closure affected 68 employees and is expected to be completed in
2009.  We recorded restructuring charges of $2,247 related to
severance and other employment cost for the 68 employees.  These
severance cost were recorded in accordance to SFAS 146 and were reported in the
Restructuring and Impairment Charges (Income), Excluding Goodwill Impairments
line as a component of income from operations.  The following
summarizes the 2008 restructuring charges related to this closure:





Reserve
      Balance at 1/01/08
            
            
            Charges
            
            
            Paid
      in 2008
            
            
            Currency
              Impacts
            
            
            Reserve
      Balance at 12/31/08Severance
      and other employee costs
            
            $
            --
            
            
            $
            2,247
            
            
            $
            (281
            )
            
            $
            92
            
            
            $
            2,058Total
            
            $
            --
            
            
            $
            2,247
            
            
            $
            (281
            )
            
            $
            92
            
            
            $
            2,058





As a
result of the decision to close the Kilkenny facility, we performed a test of
recoverability of the long-lived assets associated with that
facility.  This test was pursuant to the provisions of SFAS 144 which
require that interim tests of asset recoverability be performed under certain
circumstances.  As a result of the test, we concluded $1,447
of production equipment was impaired and adjusted these assets to the
estimated fair market value.  The impairment charge was reported in the
Restructuring and Impairment Charges (Income), Excluding Goodwill Impairments
line as a component of income from operations.





During
the second quarter of 2007, we knew the reduction of output at four of our six
ball precision steel ball plants would lead to a reduction in cash flow in
certain plants.  As such, we performed tests of the recoverability of
the goodwill and long-lived assets associated with the affected
facilities.  As a result, we recorded approximately $13,336 ($12,624
after-tax) of non-cash impairment costs.  These charges include the
write-down to estimated fair market value of certain excess production equipment
of $3,320 ($3,212 after tax) and the full impairment of goodwill at one European
reporting unit of $10,016 ($9,412 after tax) to levels supported by projected
cash flows after the realignment of production.  These impairments
were calculated using present value of expected future cash flows methods
pursuant to SFAS 142 for the goodwill and estimates of fair value pursuant to
SFAS 144 for the fixed assets.






46





During
the third quarter of 2007, we recorded approximately $1,272 ($1,196 after tax)
of cash restructuring charges and approximately $90 ($66 after tax) of non-cash
impairment charges related to the write-down to estimated fair value of certain
excess production equipment as part of the Metal Bearings Components Segment
restructuring.  The majority of the severance was for one time
termination benefits of 19 production employees at our Eltmann
Plant.  During the fourth quarter of 2007, the Eltmann workers counsel
approached management with an unsolicited offer to increase working hours and
lower wages if management would reconsider the involuntary termination
order.  Although management considered its notice final and
irrevocable, the workers’ offer was compelling, and management agreed to
consider it.  On February 13, 2008, we signed a new agreement with the
German workers and rescinded the layoff order.  Therefore, $1,062
($1,062 after tax) of the severance charge related to the 19 production
employees no longer met the requirements of SFAS 146 for a restructuring accrual
and was reversed in the fourth quarter of 2007.




4)
            Accounts Receivable and Sales
      Concentrations





December 31,2008
            
            
            2007Trade
            
            $
            51,119
            
            
            $
            66,978Less
      - allowance for doubtful accounts
            
            
            635
            
            
            
            1,412Accounts
      receivable, net
            
            $
            50,484
            
            
            $
            65,566




Activity
in the allowance for doubtful accounts is as follows:




Description
            
            Balance
      at beginning of year
            
            
            Additions
            
            
            Write-offs
            
            
            Currency
              Impacts
            Additions
              due
      to
              acquisition
            
            Balance
      at
              end
      of yearDecember 31,
      2008Allowance
      for doubtful accounts
            
            $
            1,412
            
            
            $
            239
            
            
            $
            (1,004
            )
            
            $
            (12
            )
            $
            --
            
            $
            635December 31,
      2007Allowance
      for doubtful accounts
            
            $
            1,001
            
            
            $
            496
            
            
            $
            (102
            )
            
            $
            17
            
            $
            --
            
            $
            1,412December 31,
      2006Allowance
      for doubtful accounts
            
            $
            1,119
            
            
            $
            311
            
            
            $
            (818
            )
            
            $
            10
            
            $
            379
            
            $
            1,001




For the
years ended December 31, 2008, 2007 and 2006, sales to SKF amounted to $172,958,
$169,765, and $150,841, respectively, or 40.7%, 40.3%, and 45.6% of consolidated
revenues, respectively.  For the year ended December 31, 2006, sales
to Schaeffler Group (INA) amounted to $37,283 or 11.3% of consolidated
revenues.  None of the Company’s other customers accounted for more
than 10% of our net sales in 2008, 2007 or 2006.  SKF was the only
customer with an Accounts Receivable concentration in excess of
10%.  This outstanding balance as of December 31, 2008 and 2007 was
$15,588 and $23,535, respectively.  All revenues and receivables
related to SKF and Schaeffler Group (INA) are in the Metal Bearing Components
and Plastics and Rubber Components Segments.


47
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)







5)
            Inventories









December
      31,2008
            
            
            2007Raw
      materials
            
            $
            15,599
            
            
            $
            15,076Work
      in process
            
            
            10,186
            
            
            
            9,808Finished
      goods
            
            
            29,729
            
            
            
            28,925Less-inventory
      reserve
            
            
            (2,341
            )
            
            
            (1,988
            )Inventories,
      net
            
            $
            53,173
            
            
            $
            51,821





Inventory
on consignment at customers’ sites at December 31, 2008 and 2007 was
approximately $5,878 and $5,702, respectively.




6)
            Property,
      Plant and Equipment







December 31,Estimated
              Useful
      Life
            
            2008
            
            
            2007Land
      owned
            
            
            $
            6,314
            
            
            $
            7,975Land
      under capital lease
            
            
            
            484
            
            
            
            452Buildings
      and improvements owned
            15-40
      years
            
            
            44,035
            
            
            
            42,976Building
      under capital lease
            20
      years
            
            
            1,789
            
            
            
            1,671Machinery
      and equipment
            3-12
      years
            
            
            245,578
            
            
            
            235,062Construction
      in process
            
            
            
            9,759
            
            
            
            15,002307,959
            
            
            
            303,138Less
      - accumulated depreciation
            
            
            
            162,269
            
            
            
            142,130Property,
      plant and equipment, net
            
            
            $
            145,690
            
            
            $
            161,008







During
the fourth quarter of 2008, the asset groups of six of our reporting units were
tested for impairment pursuant to SFAS 144.  The reporting units in
which there was an impairment are discussed below.




During
the fourth quarter of 2008, fixedassets
at the Kilkenny Plant of the Metal Bearing Components Segment were impaired,
pursuant to SFAS 144, as of the result of the closure of this facility (see
Note 3.)  The total reduction in fixed assets from the impairment
charge was $1,447 and was reported in the Restructuring and Impairment Charges
(Income), Excluding Goodwill Impairments on the Consolidated Statements of
Income (Loss).




During
the fourth quarter of 2008, fixed assets at the Precision Metal Components
Segment were impaired. The impairment was determined pursuant to SFAS
144.  The key component of the impairment was the impact the global
economic downturn has had and is expected to have on the segment.  The
total reduction in fixed assets from the impairment charge was $2,750 and was
reported in the Restructuring and Impairment Charges (Income), Excluding
Goodwill Impairments on the Consolidated Statements of Income
(Loss).




During
the fourth quarter of 2008, as a result of the closure of the Kilkenny facility
and the fourth quarter global economic downturn, we abandoned and ceased to use
certain excess production equipment at two of our European Metal Bearing
Components Segment production facilities.  Depreciation was
accelerated on these assets as the useful lives of these assets were now
diminished.  The additional depreciation equaled $1,768 ($1,374 after
tax).




In
addition, during the fourth quarter of 2008, we decided to abandon the system
integration cost of an enterprise resource software system used in a
portion of the U.S. facilities that cannot be configured properly to support our
business.  Depreciation was accelerated as the useful live of the
majority of the cost expended to implement the software was now
diminished.  The additional depreciation equaled $1,741 ($1,114 after
tax).




During
the three month period ended June 30, 2008, the Veenendaal Plant (part of the
Metal Bearing Components Segment) disposed of excess land with a book value of
$1,610 for proceeds of $5,628 and a resulting gain of $4,018 ($2,995, after
tax).







48


In 2007,
fixed assets at certain European operations of the Metal Bearing Components
Segment were impaired as a result of the Metal Bearing Components Segment
restructuring (see Note 3).  The total reduction in fixed assets from
the impairment charge was $3,410 and was reported in the restructuring and
impairment charges of the Consolidated Statements of Income.




7)
            Debt






Long-term
debt at December 31, 2008 and 2007 consisted of the following:




2008
            
            
            2007Borrowings
      under our $135,000 revolving credit facility bearing interest at a
      floating rate equal to LIBOR (0.44% at December 31, 2008) plus an
      applicable margin of 0.60 to 0.925, expiring September 20,
      2011
            
            $
            62,441
            
            
            $
            70,
      476Borrowings
      under our $40,000 aggregate principal amount of senior notes bearing
      interest at a fixed rate of 4.89% maturing on April 26,
      2014.  Annual principal payments of $5,714 began on April 26,
      2008 and extend through the date of maturity.
            
            
            34,286
            
            
            
            40,000Long-term
      note payable with customer related to acquiring equipment from customer as
      part of long-term supply agreement.  Note carries a 0% rate of
      interest.  Interest on this note has been imputed at a rate of
      5.41%.  Note is reduced by applying a fixed amount per piece
      purchased by customer.
            
            
            361
            
            
            
            1,568Total
      long-term debt
            
            
            97,088
            
            
            
            112,044Less
      current maturities of long-term debt
            
            
            6,916
            
            
            
            11,851Long-term
      debt, excluding current maturities
            
            $
            90,172
            
            
            $
            100,193





During
the year ended December 31, 2008 we had a $135,000 credit facility that provided
us the ability to borrow in U.S. Dollars at LIBOR plus an applicable margin of
0.60% to 0.925% or Euros at EURIBOR plus an applicable margin of 0.60% to
0.925%.  The facility had a $10,000 swing line feature to meet short
term cash flow needs.  Any borrowings under this swing line were
considered short term.   Costs associated with entering into the
revolving credit facility were capitalized and amortized into interest expense
over the life of the facility.  As of December 31, 2008, $470 of net
capitalized loan origination cost was on the balance sheet within other
non-current assets.  The loan agreement contained customary financial
and non-financial covenants specifying that we must maintain certain liquidity
measures.  The loan agreement also contained customary restrictions
on, among other things, additional indebtedness, liens on our assets, sales or
transfers of assets, investments, restricted payments (including payment of
dividends and stock repurchases), issuance of equity securities, and merger,
acquisition and other fundamental changes in the Company’s business including a
“material adverse change” clause.  The credit agreement was
collateralized by the pledge of stock of certain foreign and domestic
subsidiaries and guarantees of certain domestic subsidiaries.





During
the first quarter of 2009, we entered into an amended and restated $90,000
revolving credit facility maturing September 2011 with Key Bank as
administrative agent.  The amended agreement was entered into to
conform the covenants to our current outlook for the next twelve months in this
difficult economic cycle.  In addition to the reduction in
availability, the interest rate will be LIBOR plus an applicable margin of
4.0%.  The financial and non financial covenants have been amended to
relax certain financial covenants and the facility is now secured by assets of
the company in addition to pledges of stock of certain foreign and domestic
subsidiaries and guarantees of certain domestic
subsidiaries.  Finally, the new agreement places greater restrictions
on our usage of cash flows including prohibiting share repurchases, dividends
and investments and/or acquisitions without the approval of credit facility
participants and until such time as we meet certain earnings and financial
covenants levels.








49


During
the year ended December 31, 2008, we had outstanding $40,000 aggregate principal
amount of senior notes which were placed in a private
placement.  These notes bore interest at a fixed rate of 4.89% and
mature on April 26, 2014.  Interest was paid
semi-annually.  As of December 31, 2008, $34,286 remained
outstanding.  Annual principal payments of approximately $5,714 began
on April 26, 2008 and extend through the date of maturity.  The
agreement contained customary financial and non-financial
covenants.  Such covenants specified that we must maintain certain
liquidity measures.  The agreement also contained customary
restrictions on, among other things, additional indebtedness, liens on our
assets, sales or transfers of assets, investments, restricted payments
(including payment of dividends and stock repurchases), issuance of equity
securities, and mergers, acquisitions and other fundamental changes in our
business including a “material adverse change” clause.  The notes were
collateralized by the pledge of stock of certain foreign
subsidiaries.  We incurred costs as a result of issuing these notes
which have been recorded as a component of other non-current assets and are
being amortized over the term of the notes.  The unamortized balance
at December 31, 2008 was $483.





During
the first quarter of 2009, the senior note agreement was amended.  The
amended agreement was entered into to conform the covenants to our current
outlook for the next twelve months in this difficult economic
cycle.  The term, principal balance, and principal payment schedule
all remain the same as the original agreement.  The interest rate
was increased from 4.89% to 8.50%.  In addition, the financial and
non-financial covenants were amended and additional collateralization and
restrictions on usage of cash flows were added to the agreement in line with the
amended $90,000 revolving credit facility.





We were
in compliance with all covenants related to the $135,000 credit facility and the
$40,000 senior notes as of December 31, 2008.  The table below
summarizes the various financial covenants of the two agreements as of December
31, 2008:





Financial Covenants
            Required Ratio
            Actual RatioFixed
      charge coverage ratio
            Not
      less than 2.00 to 1.00
            2.91
      to 1.00Funded
      debt to EBITDA
            Not
      to exceed 2.50 to 1.00
            2.19
      to 1.00Funded
      indebtedness to
              capitalization
      ratio
            Not
      to exceed 0.55 to 1.00
            0.47
      to 1.00Interest
      and rent expense
              coverage
      ratio
            No
      less than 3.00 to 1.00
            4.98
      to 1.00Capital
      expenditures
            Not
      to exceed 150% of prior year
              Depreciation
            Capital
      expenditures 114%
              of
      prior year depreciationMinimum
      net worth
            No
      less than $74,434
            $109,759












Financial Covenants
            Required
      RatioFunded
      indebtedness to capitalization ratio
            Not to exceed
      0.60 to 1.00Interest
      coverage ratio
            Not less
      than
              3.09 to 1.00 for period ending March 31, 2009,
                1.14 to 1.00 for period ending June 30, 2009,
                Ratio is waived for remainder of 2009Minimum
      EBITDA
            EBITDA shall
      not be less than the following for the most recently completed four fiscal
      quarters:
              $25,132 for period ending March 31, 2009,
                $6,783 for the period ending June 30, 2009,
                ($5,614 ) for the period ending September 30,
        2009,
                ($7,842) for the period ending December 31, 2009Capital
      expenditures
            Not to exceed
      $3,500




The
aggregate maturities of long-term debt including current portion for each of the
five years subsequent to December 31, 2008 are as follows:





2009
            
            $
            6,9162010
            
            
            5,7142011
            
            
            67,3142012
            
            
            5,7142013
            
            
            5,714Thereafter
            
            
            5,716Total
            
            $
            97,088







50


On June
1, 2004, our wholly owned subsidiary, NN Asia, entered into a twenty year lease
agreement with Kunshan Tian Li Steel Structure Co. LTD for the lease of land and
building (approximately 110,000 square feet) in the Kunshan Economic and
Technology Development Zone, Jiangsu, The People’s Republic of
China.  The fair value of the land and building are estimated to be
approximately $408 and $1,509, respectively and undiscounted annual lease
payments of approximately $224 (approximately $4,482 aggregate non-discounted
lease payments over the twenty year term).  The lease is cancelable
after the fifth, ninth, and fourteenth years without payment or penalty by the
Company.  In addition, after the end of year five we can buy the land
for its ascribed fair value and the building for actual cost less
depreciation.




Below are
the minimum future lease payments under the capital lease together with the
present value of the net minimum lease payments as of December 31,
2008:





Year
      ended December 312009
            
            $
            2662010
            
            
            2662011
            
            
            2662012
            
            
            2662013
            
            
            266Thereafter
            
            
            3,121Total
      minimum lease payments
            
            
            4,451Less
      interest included in payments above
            
            
            (2,313
            )Present
      value of minimum lease payments
            
            $
            2,138




8)
            Employee
      Benefit Plans





We have
two defined contribution 401(k) profit sharing plans covering substantially all
U.S. employees.  All employees are eligible for the plans on the first
day of the month following their employment date.  A participant may
elect to contribute between 1% and 60% of their compensation to the plans,
subject to Internal Revenue Service (“IRS”) dollar
limitations.  Participants age 50 and older may defer an additional
amount up to the applicable IRS Catch Up Provision Limit.  The Company
provides a matching contribution which is determined on an individual,
participating company basis.  Currently, the matching contribution for
U.S. employees of the Metal Bearing Components Segment is the greater of five
hundred dollars or 50% of the first 4% of compensation
contributed.  The matching contribution for IMC employees is 25% of
the first 6% of compensation contributed and the matching contribution for Delta
employees is 50% of the first 6% of compensation contributed.  The
matching contribution for Precision Metal Components Segment employees is 25% of
the first 5% of compensation contributed.  All participant
contributions are immediately vested at 100%.  Contributions by the
Company for the Metal Bearing Components Segment were $175, $171, and $146 in
2008, 2007, and 2006, respectively.  Contributions by the Company for
the Plastic and Rubber Components Segment were $108 $123, and $110 in 2008, 2007
and 2006, respectively.  Contributions by the Company for
the Precision Metal Components Segment employees were $127 and $121 in 2008
and 2007, respectively.





The
Company has a defined benefit pension plan covering its Eltmann Plant. The
benefits are based on the expected years of service. The plan is
unfunded.





For the
years ended December 31, 2008 and 2007, we accounted for the Eltmann plan under
SFAS 158.  For the year ended December 31, 2008, we measured our
benefit obligations as of the date of our fiscal year end statement of financial
position as prescribed under SFAS 158.





Following
is a summary of the funded status and changes in the projected benefit
obligation for the defined benefit pension plan during 2008 and
2007:


51
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)





2008
            
            
            2007Reconciliation
      of Funded Status:Benefit
      obligation
            
            $
            (4,901
            )
            
            $
            (4,947
            )Fair
      value of plan assets
            
            
            --
            
            
            
            --Funded
      status
            
            $
            (4,901
            )
            
            $
            (4,947
            )Net
      amount recognized under accrued pension
            
            $
            (4,901
            )
            
            $
            (4,947
            )Items not yet recognized as a component of net periodic pension
      cost:Unrecognized net actuarial
      gain
            
            $
            (157
            )
            
            $
            (221
            )







2008
            
            
            2007Change
      in projected benefit obligation:Benefit
      obligation at beginning of year
            
            $
            4,947
            
            
            $
            5,167Interest
      cost
            
            
            281
            
            
            
            239Benefits
      paid
            
            
            (161
            )
            
            
            (115
            )Effect
      of currency translation
            
            
            (224
            )
            
            
            560Actuarial
      loss (gain)
            
            
            58
            
            
            
            (904
            )Benefit
      obligation at December 31
            
            $
            4,901
            
            
            $
            4,947





2008
            
            
            2007Weighted-average
      assumptions as of December 31:Discount
      rate
            
            
            5.75
            %
            
            
            5.65
            %Rate
      of compensation increase
            
            
            0%
      - 1.5
            %
            
            
            0%
      - 1.5
            %Measurement
      date
            
            12/31/08
            
            
            10/31/07





In
determining the pension discount rate to be used for the Company’s German
defined benefit plan, the Company utilizes the German Federal Reserve Bank yield
curve for high quality corporate bonds with maturities that are consistent with
the projected future benefit obligations of the plan.




During
the year ended December 31, 2006, the plan benefits were curtailed by not
allowing new employees to join the plan and by eliminating any effects of future
wage increases.  The net effect was to decrease the benefit obligation
and the unrecognized net loss by $1,147.  The rate of compensation
increase of 1.5% only applies to current retirees during the years ended
December 31, 2008 and 2007.




The
expected pension benefit payments for the next ten fiscal years are as
follows:





Pension Benefits2009
            1662010
            1902011
            2062012
            2282013
            2512014-2018
            1,535





52
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)





2008
            
            
            2007
            
            
            2006Components
      of net periodic benefit cost:Interest
      cost on projected benefit obligation
            
            $
            281
            
            
            $
            239
            
            
            $
            218Amortization
      of net loss
            
            
            --
            
            
            
            6
            
            
            
            8Net
      periodic pension benefit cost
            
            $
            281
            
            
            $
            245
            
            
            $
            226




2008
            
            
            2007
            
            
            2006Amounts
      Recognized in Accumulated Other Comprehensive Income:Period
      actuarial (gain) loss
            
            $
            58
            
            
            $
            (904
            )
            
            $
            (33
            )Curtailment
      gain
            
            
            --
            
            
            
            --
            
            
            
            1,147FAS
      158 adoption impact
            
            
            --
            
            
            
            --
            
            
            
            (491
            )Net
      periodic pension (benefit) cost
            
            $
            58
            
            
            $
            (904
            )
            
            $
            (623
            )





The
amount of actuarial gain expected to be a component of net pension cost in 2009
is $0.





We do not
expect to make any contributions to the plan in 2009 or thereafter in excess of
the pension benefit payments listed above.





Severance
Indemnity





In
accordance with Italian law, the Company has an unfunded severance plan under
which all employees are entitled to receive severance indemnities (Trattamento
di Fine Rapporto or “TFR”) upon termination of their employment.





Effective
January 1, 2007, the amount payable based on salary paid is remitted to a
pension fund managed by a third party. The severance indemnities paid to the
pension fund accrue approximately at the rate of 1/13.5 of the gross salaries
paid during the year.  The amounts accrued become payable upon
termination of the individual employee, for any reason, e.g., retirement,
dismissal or reduction in work force.  Employees are fully vested in
TFR benefits after their first year of service.  The amounts shown in
the table below represent the actual liability at December 31, 2008 and 2007
reported under accrued pension.





The
following table details the changes in Italian severance indemnity for the years
ended December 31, 2008 and 2007:





2008
            
            
            2007Beginning
      balance
            
            $
            (8,551
            )
            
            $
            (8,020
            )Amounts
      accrued
            
            
            (1,061
            )
            
            
            (707
            )Payments
      to employees
            
            
            458
            
            
            
            406Payments
      to government managed plan
            
            
            718
            
            
            
            601Foreign
      currency impacts
            
            
            363
            
            
            
            (831
            )Ending
      balance
            
            $
            (8,073
            )
            
            $
            (8,551
            )











53











Service
and Early Retirement Provisions





We have
two plans that cover our Veenendaal Plant employees.  One provides an
award for employees who achieve 25 or 40 years of service and the other is for
employees who retire before normal retirement age.  These plans are
both unfunded and the benefits are based on years of service and rate of
compensation.  The table below summarizes the changes in the two plans
combined for the years ended December 31, 2008 and 2007:





2008
            
            
            2007Beginning
      balance
            
            $
            (897
            )
            
            $
            (495
            )Service
      cost
            
            
            (50
            )
            
            
            (329
            )Interest
      cost
            
            
            (81
            )
            
            
            --Benefits
      paid
            
            
            137
            
            
            
            --Foreign
      currency impacts
            
            
            39
            
            
            
            (73
            )Ending
      balance
            
            $
            (852
            )
            
            $
            (897
            )







9)
            Stock
      Compensation




On
January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
prospective method that required compensation expense of all employee and
non-employee director share-based compensation awards to be recognized in the
financial statements based upon their fair value over the requisite service or
vesting period for all new awards granted after the effective date and for all
awards granted prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date. Effective with adoption of SFAS No. 123(R),
compensation expense related to stock option awards is recognized in the
financial statements at the fair value of the award.  The Company
accounts for restricted share awards by recognizing the fair value of the
awarded stock at the grant date as compensation expense over the vesting period,
less anticipated forfeitures.




In the
years ended December 31, 2008, 2007, and 2006 approximately $451, $981 and $464
of compensation expense was recognized in selling, general and administrative
expense for all share-based awards.  The cost recognized in the years
ended December 31, 2008, 2007 and 2006 related to stock options was $647, $670
and $181.  The cost related to restricted stock awards was $30, $83
and $283.  The cost related to our long-term incentive plan was
($226), $226 and $0, respectively.




Stock
Option Awards




Option
awards are typically granted to non-employee directors and key employees on an
annual basis.  A single option grant is typically awarded to eligible
employees and non-employee directors each year if and when granted by the
Compensation Committee of the Board of Directors and occasional individual
grants are awarded to eligible employees.  All employee and
non-employee directors are awarded options at an exercise price equal to the
closing price of the Company's stock on the date of grant. The term life of
options is ten years with vesting periods of generally three years for key
employees and one year for non-employee directors.  The fair value of
options cannot be determined by market value as our options are not traded in an
open market. Accordingly, a financial pricing model is utilized to determine
fair value. The Company utilizes the Black Scholes model which relies on certain
assumptions to estimate an option's fair value.




During
2008, 2007 and 2006, the Company granted 160, 192 and 172 options, respectively,
to certain key employees and non-employee directors.   The
weighted average grant date fair value of the options granted during the years
ended December 31, 2008, 2007 and 2006 was $2.73, $ 4.32 and
$4.30.  The total fair value of shares vested during the years
ended December 31, 2008, 2007, and 2006 was $560, $336, and $0,
respectively.  The number of options available for future issuance under
the current plan is 248.  Upon exercise of stock options, new shares
of the Company’s stock are issued.   The weighted average
assumptions relevant to determining the fair value at the dates of grant are
below:












54









2008
            2007
            2006Term
            6
      years
            6
      years
            6
      yearsRisk
      free interest rate
            2.50%
            4.75%
            4.90%Dividend
      yield
            3.42%
            2.66%
            2.81%Expected
      volatility
            40.75%
            41.23%
            43.63%Expected
      forfeiture rate
            6.20%, 0%
            6.20%, 0%
            6.20%, 0%







The
expected volatility rate is derived from actual Company common stock historical
volatility over the same time period as the expected term. The volatility rate
is derived by mathematical formula utilizing daily closing price
data.




The
expected dividend yield is derived by mathematical formula which uses the
expected Company annual dividends over the expected term divided by the fair
market value of the Company's common stock at the grant date.




The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.




The
forfeiture rate is determined from examining the historical pre-vesting
forfeiture patterns of past option issuances to key employees.  The
forfeiture rate is estimated to be 0% for non-employee
directors.  While the forfeiture rate is not an input of the Black
Scholes model for determining the fair value of the options, it is an important
determinant of stock option compensation expense to be recorded.




The term
is derived from using the “Simplified Method” of determining stock option terms
as described under the Securities and Exchange Commissions Staff Accounting
Bulletin 107.




The
following table provides a reconciliation of option activity for the year ended
December 31, 2008:




Options
            
            Shares
              (‘000)
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              Value
              ($000)Outstanding
      at January 1, 2008
            
            
            1,530
            
            
            $
            9.93Granted
            
            
            160
            
            
            
            9.36Exercised
            
            
            (498
            )
            
            
            7.75Forfeited
      or expired
            
            
            (8
            )
            
            
            11.65Outstanding
      at December 31, 2008
            
            
            1,184
            
            
            $
            10.76
            
            
            
            6.14
            
            
            $
            (10,019)
            (1)Exercisable
      at December 31, 2008
            
            
            890
            
            
            $
            10.84
            
            
            
            5.43
            
            
            $
            (7,607)
            (1)





(1)
Intrinsic value is the amount by which the December 31, 2008 market price of the
stock ($2.29) is less than the exercise price of the options outstanding at
December 31, 2008.




As
of December 31, 2008, there was approximately $307 of unrecognized compensation
cost to be recognized over approximately two years.




Cash
proceeds from the exercise of options in the year ended December 31, 2008, 2007,
and 2006 totaled approximately $3,862, $292, and $984.  For the years
ended December 31, 2008, 2007 and 2006, proceeds from stock options were
presented inclusive of tax benefits of $1,216, $8 and $133, respectively, in the
Financing Activities section of the Consolidated Statements of Cash
Flows.  The total intrinsic value of options exercised during the
years ended December 31, 2008, 2007 and 2006 was $3,576, $23, and $421,
respectively.







55


Restricted
Stock Awards




The
recognized compensation costs before tax for these restricted stock awards in
the years ended December 31, 2008, 2007, and 2006 were approximately $30, $83,
and $283, respectively.  The unrecognized compensation cost before tax
for these awards at December 31, 2008, is zero as these awards fully vested on
July 5, 2008.  The number of restricted stock awards available for future
issue is 255.




Long-Term
Incentive Plan





On June
29, 2007, the Company granted certain directors and other key employees an award
of 151,500 performance units pursuant to the NN, Inc. 2005 Incentive
Plan.  Each unit was equal to one share of NN common
stock.  The award entitled the grantee to earn units based upon
achieving earnings per share and return on capital employed targets over a
defined performance cycle.  The value of the performance units was
based on the grant date fair value of one share of NN common stock and the
performance period was fiscal years 2007, 2008 and 2009.  Based on the
fourth quarter economic downturn and the impact it is expected to have on 2009
results, the performance targets were deemed unachievable and the plan was
terminated by the board of directors.  As such, the $226 in
compensation expense recognized in 2007 was eliminated in 2008 and there is no
unrecognized compensation cost, before tax, to be recognized at December 31,
2008.




10)
            Goodwill,
      Net




We
completed our annual goodwill impairment review during the fourth quarter of
2008, 2007, and 2006.  Goodwill is tested for impairment on an annual
basis as of October 1 and between annual tests in certain
circumstances.  We were in the process of finalizing our October 1,
2008 goodwill impairment testing during the fourth quarter when our business was
adversely affected by the global economic downturn.  Our sales for the
fourth quarter of 2008 were down 29% from the prior year period.  In
addition, during this time frame the price of our common stock decreased
approximately 80% and our market capitalization became lower than our net
carrying value of stockholders’ equity.  Given the dramatic impact the
global economic downturn had on our 2008 financial results and
expected impact in future periods, we determined a triggering event had occurred
in the fourth quarter of 2008 and as such finalized our impairment testing for
the year ended December 31, 2008 as of that date.




Based on
the results of the fourth quarter impairment tests, we determined the carrying
amount of the goodwill reported in the Plastic and Rubber Components and
Precision Metal Components reporting units was impaired.  As such,
during the fourth quarter of 2008, we recorded $30,029 ($19,258 after-tax) for
the full impairment of goodwill in our Precision Metal Components Segment and at
both reporting units of our Plastic and Rubber Components
Segment.  These impairments were calculated using an equal weighting
of a present value of expected future cash flows method and a market based
multiples of sales and earnings method pursuant to SFAS 142. The main cause of
the impairments was the significant reductions in future expected cash flows at
each of the reporting units for the periods examined due to the current and
expected sales decline in the automotive and industrial end markets and from
general market weakness caused by the global economic
downturn.




During the second quarter of 2007, we
recorded $10,016 in impairment charges related to the restructuring of the Metal
Bearing Components Segment (See Note 3 for further
details).    In performing the impairment reviews for 2007
and 2006, the Company estimated the fair values of the reporting units from
discounting each segments’ projected future cash flows.





As of
December 31, 2008, goodwill remains only at the Pinerolo Plant of the Metal
Bearing Components Segment.  There was no impairment to the goodwill
balance as the fair value of this reporting unit was $40,200 which exceeded the
carrying value of the reporting unit of $24,947 by $15,253.  The fair value
was calculated using an equal weighting of a present value of expected future
cash flows method and a market based multiples of sales and earnings method
pursuant to SFAS 142.






56


The
changes in the carrying amount of goodwill for the years ended December 31, 2008
and 2007 are as follows:




(In
      thousands)
            
            Plastic
      and
              Rubber
              Components
              Segment
            
            
            Metal
      Bearing
              Components
              Segment
            
            
            Precision
      Metal
              Components
              Segment
            
            
            TotalBalance
      as of January 1, 2007
            
            $
            25,755
            
            
            $
            18,040
            
            
            $
            2,352
            
            
            $
            46,147Adjustments
      to purchase price
              allocation
            
            
            --
            
            
            
            --
            
            
            
            1,922
            
            
            
            1,922Impairment
      of goodwill
            
            
            --
            
            
            
            (10,016
            )
            
            
            --
            
            
            
            (10,016
            )Currency
      impacts
            
            
            --
            
            
            
            1,418
            
            
            
            --
            
            
            
            1,418Balance
      as of December 31, 2007
            
            $
            25,755
            
            
            $
            9,442
            
            
            $
            4,274
            
            
            $
            39,471Impairment
      of goodwill
            
            
            (25,755
            )
            
            
            --
            
            
            
            (4,274
            )
            
            
            (30,029
            )Currency
      impacts
            
            
            --
            
            
            
            (534
            )
            
            
            --
            
            
            
            (534
            )Balance
      as of December 31, 2008
            
            $
            --
            
            
            $
            8,908
            
            
            $
            --
            
            
            $
            8,908





The
adjustments to purchase price allocation under the Precision Metal Components
Segment related to changes made to the acquired assets and liabilities of
Whirlaway during the finalization of the purchase price allocation in 2007 (See
Note 2 for further details).




11)
            Intangible
      Assets, Net




The
changes in the carrying amount of Intangible Assets, net, for the years ended
December 31, 2008 and 2007 are as follows:





Intangible assets subject to
amortization, net of amortization




(In
      Thousands)
            
            Precision
      Metal Components Segment
            
            
            Metal
      Bearing Components Segment
            
            
            TotalBalance
      as of January 1, 2007
            
            $
            7,141
            
            
            $
            2,090
            
            
            $
            9,231Acquisition
      of intangibles
            
            
            --
            
            
            
            173
            
            
            
            173Amortization
            
            
            (657
            )
            
            
            (558
            )
            
            
            (1,215
            )Currency
      impacts
            
            
            --
            
            
            
            190
            
            
            
            190Balance
      as of December 31, 2007
            
            $
            6,484
            
            
            $
            1,895
            
            
            $
            8,379Impairment
      of intangibles
            
            
            (5,592
            )
            
            
            --
            
            
            
            (5,592
            )Amortization
            
            
            (869
            )
            
            
            (626
            )
            
            
            (1,495
            )Currency
      impacts
            
            
            --
            
            
            
            (94
            )
            
            
            (94
            )Balance
      as of December 31, 2008
            
            $
            23
            
            
            $
            1,175
            
            
            $
            1,198





The
intangible asset within the Metal Bearing Components Segment is a contract
intangible related to the SNR purchase agreement and related supply
agreement.  This intangible asset is subject to amortization over
approximately 5 years, from 2006 to 2011, and amortization expense will
approximate $550 for each of the five years, depending on Euro to US Dollar
exchange rates.  For the year ended December 31, 2008, the
amortization expense totaled $626 and accumulated amortization totaled
$1,585.





The
intangible assets within the Precision Metal Components segment were acquired on
November 30, 2006 with the purchase of Whirlaway (See Note 2.)  The
majority of the acquired value was a customer relationship intangible with an
acquisition date fair value of $6,900.  As of July 1, 2007, this
intangible asset has an estimated useful life of 10 years and $751 of
amortization expense was recorded in 2008.  During the fourth quarter
of 2008, based on the testing of goodwill in the Precision Metal Components
Segment, there were indications that the intangible assets of the segment were
impaired.  The intangible assets were tested pursuant to SFAS 144
using expected future cash flows from the asset group tested  to determine
if impairment was indicated.  The result was that the customer
relationship intangible asset was fully impaired and an impairment charge
was recorded within the Restructuring and Impairment Charges (Income), Excluding
Goodwill Impairments line on the Consolidated Statement of Income (Loss). 
The impairment was due to the reduction in segment sales during the
fourth quarter of 2008, lower expected sales levels in future periods and the
significant reductions in future expected cash flows for the periods examined
due to the current and expected declines in the automotive and industrial end
markets and from general market weakness caused by the global economic
downturn.




57


The
remaining balance is made up of a favorable leasehold intangible with an
unamortized balance of $23.  The accumulated amortization related to
all of the intangible assets at December 31, 2008 is $1,565.  In
addition, as part of the Whirlaway acquisition we acquired an intangible asset
not subject to amortization of $900 related to the value of the trade names of
Whirlaway.  This intangible asset has an indefinite life and as such
is not amortized but is subject to an annual impairment test.  As of
December 31, 2008, based on testing pursuant to SFAS 142, the fair value of this
intangible asset exceeded its book value.




12)
            Segment
  Information




The
Company determined its reportable segments under the provisions of SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.”   During the fourth quarter of 2006, the Company
changed its operational structure and strategic focus such that the operations
are now managed in three reportable segments.   The core
precision steel ball and steel roller business is managed as one reportable
segment as the operations have become more fully inter-related and
integrated.  A new segment entitled “Precision Metal Components” was
established December 1, 2006 as a result of the Whirlaway
acquisition.




The
Company’s three reportable segments are based on differences in product lines
and are as follows:





Metal Bearing Components
Segment


·  Erwin
Plant


·  Mountain
City Plant


·  Kilkenny
Plant*


·  Eltmann
Plant


·  Pinerolo
Plant


·  Veenendaal
Plant


·  Kysucke
Plant


·  Kunshan
Plant





Plastic and Rubber
Components Segment


·  Danielson
Plant


·  Lubbock
Plant





Precision Metal Components
Segment


·  Wellington
Plant 1


·  Wellington
Plant 2


·  Hamilton
Plant *


·  Tempe
Plant







*Production
ceased in the first quarter of 2009, we are currently in the process of closing
this manufacturing operation.




All of
the facilities in the Metal Bearing Components Segment are engaged in the
production of precision balls, rollers, and metal retainers and automotive
specialty products used primarily in the bearing industry. The Plastic and
Rubber Components Segment facilities are engaged in the production of plastic
injection molded products for the bearing, automotive, instrumentation and fiber
optic markets and precision rubber bearing seals for the bearing, automotive,
industrial, agricultural, and aerospace markets.  The Precision Metal
Components Segment is engaged in the production of highly engineered fluid
control components and assemblies, shafts, and prismatic machined parts for the
air conditioning, appliance, automotive, commercial refrigeration, and diesel
engine industries.






58


The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment
performance based on segment net income after income taxes. The Company accounts
for inter-segment sales and transfers at current market prices. The Company did
not have any individually material inter-segment transactions during 2008, 2007,
or 2006.




Metal
      Bearing Components Segment
            
            
            Precision
      Metal Components Segment
            
            
            Plastic
      and Rubber Components Segment
            
            
            Corporate
      and
              Consolidations
            
            
            TotalDecember
      31, 2008Net
      sales
            
            $
            321,660
            
            
            $
            64,235
            
            
            $
            38,942
            
            
            $
            --
            
            
            $
            424,837Interest
      expense
            
            
            215
            
            
            
            1,678
            
            
            
            955
            
            
            
            2,355
            
            
            
            5,203Depreciation
      and amortization
            
            
            21,005
            
            
            
            4,685
            
            
            
            2,287
            
            
            
            4
            
            
            
            27,981Income
      tax expense (benefit)
            
            
            6,896
            
            
            
            (4,547
            )
            
            
            (9,495
            )
            
            
            (1,389
            )
            
            
            (8,535
            )Segment
      net income (loss)
            
            
            14,647
            
            
            
            (7,353
            )
            
            
            (17,223
            )
            
            
            (7,713
            )
            
            
            (17,642
            )Segment
      assets
            
            
            218,551
            
            
            
            36,806
            
            
            
            21,153
            
            
            
            7,530
            
            
            
            284,040Expenditures
      for long- lived assets
            
            
            15,677
            
            
            
            1,737
            
            
            
            1,084
            
            
            
            --
            
            
            
            18,498December 31, 2007Net
      sales
            
            $
            303,059
            
            
            $
            67,384
            
            
            $
            50,851
            
            
            $
            --
            
            
            $
            421,294Interest
      expense
            
            
            67
            
            
            
            2,646
            
            
            
            960
            
            
            
            2,700
            
            
            
            6,373Depreciation
      and amortization
            
            
            16,393
            
            
            
            4,337
            
            
            
            2,262
            
            
            
            4
            
            
            
            22,996Income
      tax expense (benefit)
            
            
            9,452
            
            
            
            (820
            )
            
            
            1,255
            
            
            
            (3,465
            )
            
            
            6,422Segment
      net income (loss)
            
            
            4,958
            
            
            
            (1,450
            )
            
            
            2,242
            
            
            
            (6,923
            )
            
            
            (1,173
            )Segment
      assets
            
            
            238,276
            
            
            
            53,422
            
            
            
            51,997
            
            
            
            6,383
            
            
            
            350,078Expenditures
      for long- lived assets
            
            
            15,634
            
            
            
            1,541
            
            
            
            1,681
            
            
            
            --
            
            
            
            18,856December
      31, 2006Net
      sales
            
            $
            272,299
            
            
            $
            4,722
            
            
            $
            53,304
            
            
            $
            --
            
            
            $
            330,325Interest
      expense
            
            
            45
            
            
            
            240
            
            
            
            960
            
            
            
            2,738
            
            
            
            3,983Depreciation
      and amortization
            
            
            14,783
            
            
            
            345
            
            
            
            2,324
            
            
            
            40
            
            
            
            17,492Income
      tax expense (benefit)
            
            
            10,681
            
            
            
            (336
            )
            
            
            1,547
            
            
            
            (3,370
            )
            
            
            8,522Segment
      net income (loss)
            
            
            18,331
            
            
            
            (598
            )
            
            
            2,695
            
            
            
            (5,993
            )
            
            
            14,435Segment
      assets
            
            
            233,051
            
            
            
            53,535
            
            
            
            51,836
            
            
            
            4,279
            
            
            
            342,701Expenditures
      for long- lived assets
            
            
            18,479
            
            
            
            30
            
            
            
            773
            
            
            
            --
            
            
            
            19,282





Due to
the large number of countries in which we sell our products, sales to external
customers and long-lived assets utilized by us are reported in the following
geographical regions:


59
 NN,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except per share data)








December 31,
      2008
            
            
            December 31,
      2007
            
            
            December 31,
      2006Sales
            
            
            Property,
              Plant, and
              Equipment
            
            
            Sales
            
            
            Property,
              Plant, and
              Equipment
            
            
            Sales
            
            
            Property,
              Plant, and
              EquipmentUnited
      States
            
            $
            131,877
            
            
            $
            44,441
            
            
            $
            137,140
            
            
            $
            51,363
            
            
            $
            77,526
            
            
            $
            54,617Europe
            
            
            219,391
            
            
            
            84,520
            
            
            
            215,209
            
            
            
            97,238
            
            
            
            194,359
            
            
            
            94,369Asia
            
            
            36,648
            
            
            
            16,729
            
            
            
            31,879
            
            
            
            12,407
            
            
            
            24,119
            
            
            
            7,461Canada
            
            
            5,041
            
            
            
            --
            
            
            
            5,089
            
            
            
            --
            
            
            
            8,028
            
            
            
            --Mexico
            
            
            14,444
            
            
            
            --
            
            
            
            15,065
            
            
            
            --
            
            
            
            13,164
            
            
            
            --S.
      America
            
            
            17,436
            
            
            
            --
            
            
            
            16,912
            
            
            
            --
            
            
            
            13,129
            
            
            
            --All
      foreign countries
            
            
            292,960
            
            
            
            101,249
            
            
            
            284,154
            
            
            
            109,645
            
            
            
            252,799
            
            
            
            101,830Total
            
            $
            424,837
            
            
            $
            145,960
            
            
            $
            421,294
            
            
            $
            161,008
            
            
            $
            330,325
            
            
            $
            156,447







13)
            Income
      Taxes




Income
before provision for income taxes for the years ended December 31, 2008, 2007
and 2006 was as follows:





Year
      ended December 31,2008
            
            
            2007
            
            
            2006Income
      before provision for income taxes:United
      States
            
            $
            (38,649
            )
            
            $
            630
            
            
            $
            3,735Foreign
            
            
            12,472
            
            
            
            4,619
            
            
            
            19,222Total
            
            $
            (26,177
            )
            
            $
            5,249
            
            
            $
            22,957





Total
income tax expense (benefit) for the years ended December 31, 2008, 2007, and
2006 were as follows:







Year
      ended December 31,2008
            
            
            2007
            
            
            2006Current:U.S.
      Federal
            
            $
            305
            
            
            $
            --
            
            
            $
            3,035State
            
            
            218
            
            
            
            (18
            )
            
            
            201Non-U.S.
            
            
            5,500
            
            
            
            7,623
            
            
            
            6,670Total
      current expense
            
            $
            6,023
            
            
            $
            7,605
            
            
            $
            9,906





Deferred:U.S.
      Federal
            
            $
            (13,094
            )
            
            $
            176
            
            
            $
            (3,388
            )State
            
            
            (1,260
            )
            
            
            271
            
            
            
            17Valuation
      allowance
            
            
            (593
            )
            
            
            5,082
            
            
            
            1,581Non-U.S.
            
            
            389
            
            
            
            (6,712
            )
            
            
            406Total
      deferred expense (benefit)
            
            
            (14,558
            )
            
            
            (1,183
            )
            
            
            (1,384
            )Total
      expense (benefits)
            
            $
            (8,535
            )
            
            $
            6,422
            
            
            $
            8,522






60




A
reconciliation of taxes based on the U.S. federal statutory rate of 34%, 34% and
35% for the years ended December 31, 2008, 2007, and 2006 is summarized as
follows:




Year
      ended December 31,2008
            
            
            2007
            
            
            2006Income
      taxes (benefit) at the federal statutory rate
            
            $
            (8,900
            )
            
            $
            1,785
            
            
            $
            8,034Lowering
      of U.S. effective rate from 35% to 34%
            
            
            --
            
            
            
            (314
            )
            
            
            219Impact
      of incentive stock options
            
            
            220
            
            
            
            228
            
            
            
            63Increase
      in valuation allowance
            
            
            1,663
            
            
            
            5,082
            
            
            
            --Reduction
      in net deferred tax liabilities in Italy due to changes in tax
      laws
            
            
            (1,142
            )
            
            
            (1,050
            )
            
            
            --State
      income taxes, net of federal taxes
            
            
            (1,115
            )
            
            
            (12
            )
            
            
            143Non-U.S.
      earnings taxed at different rates
            
            
            530
            
            
            
            390
            
            
            
            353Other
      permanent differences, net
            
            
            209
            
            
            
            313
            
            
            
            (290
            )$
            (8,535
            )
            
            $
            6,422
            
            
            $
            8,522




The tax
effects of the temporary differences are as follows:






Year
      ended December 31,2008
            
            
            2007Deferred
      income tax liabilityTax
      in excess of book depreciation
            
            $
            9,508
            
            
            $
            13,199Goodwill
            
            
            1,549
            
            
            
            4,969Allowance
      for bad debts
            
            
            9
            
            
            
            86Other
      deferred tax liabilities
            
            
            545
            
            
            
            428Gross
      deferred income tax liability
            
            
            11,611
            
            
            
            18,682Deferred
      income tax assetsGoodwill
            
            
            7,947
            
            
            
            --Inventories
            
            
            492
            
            
            
            385Pension/Personnel
      accruals
            
            
            1,067
            
            
            
            986Environmental
      provision
            
            
            --
            
            
            
            441Net
      operating loss, carry forwards
            
            
            2,240
            
            
            
            3,149Foreign
      tax credits
            
            
            3,326
            
            
            
            3,244Other
      deferred tax assets
            
            
            152
            
            
            
            125Gross
      deferred income tax assets
            
            
            15,224
            
            
            
            8,330Valuation allowance on deferred tax assets
            
            
            (6,070
            )
            
            
            (6,663
            )Net
      deferred income tax assets
            
            
            9,154
            
            
            
            1,667Net
      deferred income tax liability
            
            $
            2,457
            
            
            $
            17,015




The net
operating loss carry forwards are composed of net operating losses in Germany,
Slovakia, and China for which full valuation allowances have been recorded as of
December 31, 2008, as it is management’s judgment that the resulting tax
benefits are not realizable.  According to German law, there are not
any time limitations on carrying forward the $6,344 in net operating losses of
our German subsidiary.  Slovakian net operating losses of $548 expire
by 2012.  The China net operating losses of $88, $814, $2,163 and
$2,037 expire in 2009, 2010, 2011, and 2012, respectively and have an effective
tax rate of 2% as the majority of these losses will be applied to income during
our tax holiday once profitability is achieved.






61


The
foreign tax credits relate to profits of certain foreign subsidiaries that were
taxed as deemed dividends.  These credits represent the foreign taxes
paid by these subsidiaries at higher effective rates that will be used to offset
future foreign source income.  A full valuation allowance was placed
against these credits based on estimates of future levels of U.S. income tax and
foreign source income to be generated that these credits can be used to
offset.   The valuation allowance will be periodically reviewed
as our estimates of future foreign source income are amended based on actual
foreign source income recognized in our tax returns and future changes in
foreign source income.




As
realization of deferred tax assets is not assured, management has placed
valuation allowances against deferred tax assets it believes are not
recoverable.  For the remainder, management believes it is more likely
than not that those net deferred tax assets will be realized. However, the
amount of the deferred tax assets considered realizable could be reduced based
on changing conditions.




As of December 31, 2006, all of the
Company's foreign earnings have been previously taxed in the U.S. due to the
application of IRC Sec. 956.  Accordingly, no deferred taxes have been
provided for undistributed earnings up to that time. For the remainder of the
foreign earnings, we expect to reinvest future earnings indefinitely in
operations and expansions outside the U.S. and do not expect such earnings to
become subject to U.S. taxation in the foreseeable future.  If such
earnings were distributed beyond the amount for which taxes have been provided,
foreign tax credits would substantially offset any incremental U.S. tax
liability.  A deferred tax liability will be recognized when we expect
that it will recover these undistributed earnings in a taxable manner, such as
through the receipt of dividends or sale of the investments. It is not
practicable to determine the U.S. income tax liability, if any, that would be
payable if such earnings were not reinvested indefinitely.







The
Company adopted the provisions of FIN 48 on January 1, 2007.  As a
result of the implementation of FIN 48, the Company recognized a $600 increase
in our income tax liabilities and a corresponding reduction in beginning
retained earnings.





As of the
date of adoption, the total unrecognized benefits were approximately $879, all
of which, if recognized, would affect the effective tax rate.   A
reconciliation of the beginning and ending amounts of unrecognized tax benefits,
excluding interest and penalties for the years ended December 31, 2008 and 2007
is as follows:





2008
            
            
            2007Beginning
      Balance
            
            $
            1,045
            
            
            $
            879Additions
      based on tax positions related to the current year
            
            
            --
            
            
            
            --Additions
      for tax positions of prior years
            
            
            --
            
            
            
            386Reductions
      for tax positions of prior years
            
            
            (57
            )
            
            
            (220
            )Settlements
            
            
            --
            
            
            
            --Ending
      Balance
            
            $
            988
            
            
            $
            1,045





As of
December 31, 2008, the $988 of unrecognized tax benefits would, if recognized,
impact the Company’s effective tax rate.





Interest
and penalties related to federal, state, and foreign income tax matters are
recorded as a component of the provision for income taxes in our statements of
income (loss).  As of January 1, 2007, we had accrued $609 in both
U.S. and foreign interest and penalties.  During 2007, we accrued an
additional $48 in foreign interest and penalties resulting in an accrued balance
of  $657 of  interest and penalties as of December 31,
2007.  During 2008, we accrued an additional $43 in foreign interest
and penalties resulting in an accrued balance of $700 of interest and penalties
as of December 31, 2008.





62


The
Company or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions.  With
few exceptions, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years before 2004.  The
Company is no longer subject to non-U.S. income tax examinations within various
European Union countries for years before 2002.  We do not foresee any
significant changes to our unrecognized tax benefits within the next twelve
months.







14)
            Reconciliation of Net Income
      Per Share




Year
      ended December 31,2008
            
            
            2007
            
            
            2006Net
      income (loss)
            
            $
            (17,642
            )
            
            $
            (1,173
            )
            
            $
            14,435Weighted
      average shares outstanding
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,125Effective
      of dilutive stock options
            
            
            --
            
            
            
            --
            
            
            
            226Dilutive
      shares outstanding
            
            
            15,895
            
            
            
            16,749
            
            
            
            17,351Basic
      net income (loss) per share
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.84Diluted
      net income (loss) per share
            
            $
            (1.11
            )
            
            $
            (0.07
            )
            
            $
            0.83




Excluded
from the shares outstanding for the years ended December 31, 2008, 2007,
and 2006 were 824, 821, and 301 anti-dilutive options, respectively, which had
exercise prices ranging from of $10.67 to $12.62 for the year ended December 31,
2008, $11.19 and $12.62 for the year ended December 31, 2007, and $12.62 per
share for the year ended December 31, 2006.  In addition in 2008 and
2006, there were 160 and 172, respectively, of options that were anti-dilutive
due to the large amount of unrecognized compensation expense associated with
these options.




15)
            Commitments and
      Contingencies




The
Company has operating lease commitments for machinery, office equipment,
vehicles, manufacturing and office space which expire on varying dates. Rent
expense for 2008, 2007, and 2006 was $4,844, $4,908, and $2,617, respectively.
The following is a schedule by year of future minimum lease payments as of
December 31, 2008 under operating leases that have initial or remaining non
cancelable lease terms in excess of one year.







Year
      ended December 31,2009
            
            $
            4,2972010
            
            
            3,4052011
            
            
            2,6702012
            
            
            1,1902013
            
            
            1,107Thereafter
            
            
            7,176Total
      minimum lease payments
            
            $
            19,845







The Metal
Bearing Components Segment has a supply contract with Ascometal France
(“Ascometal”) for the purchase of steel in Europe that covers the years 2007,
2008 and 2009.  The contract will automatically renew annually unless
formal notice is sent by either party one year in advance.  The
percentage of steel purchased for European operations granted to Ascometal under
the contract is approximately 70% or $48,000 based on 2008 purchase
levels.  The contract, among other things, stipulates that Ascometal
achieve certain performance targets related to quality, reliability and service
and the percentage granted can be reduced if those targets are not met by the
vendor.  The contract provisions include annual price adjustments
based upon published steel scrap indexes.




63


On March
20, 2006, the Company received correspondence from the Environmental Protection
Agency (“EPA”) requesting information regarding Alternate Energy Resources, Inc.
(“AER”), a former waste recycling vendor used by the Company’s former
Walterboro, South Carolina facility.  AER, located in Augusta,
Georgia, ceased operations in 2000 and EPA began investigating its
facility.  As a result of AER’s operations, soil and groundwater
became contaminated.  Besides the Company, EPA initially contacted
fifty-four other companies (“Potentially Responsible Parties” or PRPs”) who also
sent waste to AER.  Most of these PRPs, including the Company, have
entered into a consent order with EPA to investigate and remediate the site
proactively.  To date, each participating PRP has signed a joint
defense agreement and has contributed to retaining an environmental consultant
who has prepared a Remedial Investigation, which has been accepted by
EPA.  In addition, a feasibility study, which outlines remedial
options, has been submitted to EPA for approval.  Once approved, costs
associated with the chosen remediation will be known and the PRPs will be able
to discuss proper allocation of the cost of cleanup, based on formula including
both volume and the nature of the waste sent to AER for disposal.  As
of the date hereof, the Company does not know the amount of its allocated
share.  However, we believe our contribution to the remediation of the
site, if any, would be approximately 1.083% or less of the volume of waste sent
to the facility and we assert that our waste was non-hazardous.







16)
            Quarterly Results of Operations
      (Unaudited)




The
following summarizes the unaudited quarterly results of operations for the years
ended December 31, 2008 and 2007.




Year
      ended December 31, 2008March 31
            
            
            June 30
            
            
            Sept. 30
            
            
            Dec. 31Net
      sales
            
            $
            121,542
            
            
            $
            122,240
            
            
            $
            104,866
            
            
            $
            76,189Income
      (loss) from operations
            
            
            8,717
            
            
            
            12,612
            
            
            
            5,110
            
            
            
            (48,263
            )Net
      income (loss)
            
            
            5,102
            
            
            
            9,173
            
            
            
            2,947
            
            
            
            (34,864
            )Basic
      net income (loss) per share
            
            
            0.32
            
            
            
            0.58
            
            
            
            0.18
            
            
            
            (2.14
            )Dilutive
      net income (loss) per share
            
            
            0.32
            
            
            
            0.57
            
            
            
            0.18
            
            
            
            (2.14
            )Weighted
      average shares outstanding:Basic
      number of shares
            
            
            15,855
            
            
            
            15,899
            
            
            
            16,222
            
            
            
            16,268Effect
      of dilutive stock options
            
            
            107
            
            
            
            155
            
            
            
            169
            
            
            
            --Diluted
      number of shares
            
            
            15,962
            
            
            
            16,054
            
            
            
            16,391
            
            
            
            16,268









Year
      ended December 31, 2007March 31
            
            
            June 30
            
            
            Sept. 30
            
            
            Dec. 31Net
      sales
            
            $
            107,944
            
            
            $
            107,302
            
            
            $
            99,021
            
            
            $
            107,027Income
      (loss) from operations
            
            
            7,920
            
            
            
            (7,173
            )
            
            
            3,212
            
            
            
            7,277Net
      income (loss)
            
            
            3,755
            
            
            
            (10,365
            )
            
            
            398
            
            
            
            5,039Basic
      net income (loss) per share
            
            
            0.22
            
            
            
            (0.62
            )
            
            
            0.02
            
            
            
            0.31Dilutive
      net income (loss) per share
            
            
            0.22
            
            
            
            (0.62
            )
            
            
            0.02
            
            
            
            0.31Weighted
      average shares
              outstanding:Basic
      number of shares
            
            
            16,813
            
            
            
            16,815
            
            
            
            16,765
            
            
            
            16,159Effect
      of dilutive stock options
            
            
            220
            
            
            
            --
            
            
            
            139
            
            
            
            121Diluted
      number of shares
            
            
            17,033
            
            
            
            16,815
            
            
            
            16,904
            
            
            
            16,280







64


The
fourth quarter of 2008 was impacted by impairments of goodwill, fixed assets and
other intangible assets totaling $38,371 (24,402 after tax).  In
addition, we recorded restructuring charges of $2,247 ($2,247 after tax) and
related fixed asset impairments of $1,447 ($1,447 after tax) from the Kilkenny
plant closure. (See Notes 3, 6, 10 and 11.)




In the
second quarter of 2008, we benefited from a sale of excess land in our Metal
Bearing Components Segment that resulted in a gain of $4,018 ($2,995 after
tax).  In addition the second quarter was impacted by a $1,142
deferred tax benefit at the Italian operations of our Metal Bearing Components
Segment related to a change in Italian tax law.




In the
fourth quarter of 2007, we benefited from a reduction in deferred tax
liabilities of $1,050 at our Italian operations due to the Italian government
enacting in December 2007 a reduction in statutory tax rates.




The third
quarter of 2007 included an accrual of $1,272 ($1,196 after tax) for cash
restructuring charges related to the Metal Bearing Components Segment
restructuring (See Note 3).  During the fourth quarter of 2007, $1,062
$(1,062 after tax) of these restructuring charges was reversed.




The
second quarter of 2007 included $13,366 ($12,623 after tax) in non-cash charges
within our Metal Bearing Components Segment related to impairment of goodwill
and fixed assets to levels supported by projected cash flows after restructuring
activity within the segment (See Note 3).




17)
            Fair Value of Financial
      Instruments




Management
believes the fair value of financial instruments with maturities of less than a
year approximate their carrying value due to the short maturity of these
instruments or in the case of the Company’s variable rate debt, due to the
variable interest rates.  The fair value of the Company’s fixed rate
long-term borrowings is calculated using significant other observable inputs
(Level 2 inputs under SFAS 157 fair value hierarchy).  The fair value
is calculated using a discounted cash flow analysis factoring in current market
borrowing rates for similar types of borrowing arrangements under our credit
profile.  The carrying amounts and fair values of the Company’s
long-term debt are in the table below:





December
      31, 2008
            
            
            December
      31, 2007Carrying
      Amount
            
            
            Fair
              Value
            
            
            Carrying
      Amount
            
            
            Fair
              ValueVariable
      rate long-term debt
            
            $
            62,441
            
            
            $
            62,441
            
            
            $
            70,476
            
            
            $
            70,476Fixed
      rate long-term debt
            
            $
            34,647
            
            
            $
            30,188
            
            
            $
            41,568
            
            
            $
            40,222




18)
            Accumulated Other Comprehensive
      Income




The
majority of our Accumulated Other Comprehensive Income balance relates to
foreign currency translation of our foreign subsidiary balances.  At
December 31, 2008, we have deducted from accumulated other comprehensive income
$3,232 due to foreign currency translation.  At December 31, 2007, we
have added to accumulated other comprehensive income $11,764 due to foreign
currency translation.  Income taxes on the foreign currency
translation adjustment in other comprehensive income were not recognized because
the earnings are intended to be indefinitely reinvested in those
operations.




Also
added to accumulated other comprehensive income as of December 31, 2008 and 2007
was an actuarial loss of $58, net of tax, and an actuarial gain of $656, net of
tax, both from our pension liability.




65


19)
            Common
      Stock Repurchase





On
September 12, 2008, our Board of Directors authorized a new share repurchase
program in effect for a period of one year beginning September 15, 2008 with a
maximum approved amount of $20 million worth of shares to be repurchased on the
open market from time to time in accordance with market
regulations.  The new plan replaced an existing $25 million share
repurchase program initiated on September 13, 2007 that expired on September 13,
2008.  During the year ended December 31, 2008, we repurchased 85,171
shares at approximately $11.91 per share for a total value of approximately
$1.0 million under this new plan.  During 2008, we did not purchase
shares under any other program.  Our amended and restated credit facility
entered into on March 16, 2009, prohibits the repurchase of our shares until
such time as we meet certain earnings and financial covenant
levels.




During
the year ended December 31, 2007, the Company repurchased, under a 2006 approved
repurchase program, approximately 211 shares at an approximate average cost of
$10.26 a share for a total of $2,166.  This program expired September
13, 2007 with a total of approximately 674 shares being purchased totaling
$7,441.




A new
share repurchase program was established for a period of one year beginning on
September 13, 2007, and the amount approved for purchase, from this date until
the expiration of the program, was $25 million worth of shares to be purchased
in the open market from time to time in accordance with applicable laws and
market regulations.  During the year ended December 31, 2007, the
Company repurchased approximately 797 shares under this program at an average
cost of $9.53 per share for a total of $7,556.  The total of all share
repurchases during the year ended December 31, 2007 was approximately 1,008
shares for $9,722.






20)
            Related
      Party Transactions




During
the year ended December 31, 2007, we remitted $18,638 to the former sole
shareholder of Whirlaway to repay the related party note payable from the
November 2006 acquisition.  With the acquisition of Whirlaway, we
entered into operating leases covering two of the Whirlaway manufacturing
facilities with a company owned by the former shareholder of Whirlaway who is
now an officer of the Company. The rent payments in 2008 and 2007 to this
related party were $644 each year.  The total future rent payments
will be $1,932 over 3 years or $644 per year.







66


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




None.




Item
9A.         Controls and
Procedures




The
Company's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined under Rule l3a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act").  Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2008, the end of the period covered
by this annual report on Form 10-K.





Management's
Report on Internal Control Over Financial Reporting





The
management of NN, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f).  Management, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company's internal control
over financial reporting based on the Internal Control- Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").  Based on its evaluation, management
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2008.





The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears under
item 8 of this filing.




Changes
in Internal Control over Financial Reporting





There
were no changes in the Company's internal control over financial reporting
during the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.





Item
9B.        Other
Information





None


67


Part
III




Item
      10.
            Directors, Executive Officers and
      Corporate Governance




The
information required by this item of Form 10-K concerning the Company's
directors is contained in the sections entitled "Information about the
Directors" and "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2008, in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by
reference.




Code of
Ethics.   Our Code of Ethics (the “Code”) was approved by
our Board on November 6, 2003.  The Code is applicable to all
officers, directors and employees.  The Code is posted on our website
at http://www.nnbr.com.  We will satisfy any disclosure requirements
under Item 10 of Form 8-K regarding an amendment to, or waiver from, any
provision of the Code with respect to our principal executive officer, principal
financial officer, principal accounting officer and persons performing similar
functions by disclosing the nature of such amendment or waiver on our website or
in a report on Form 8-K.





Item
      11.
            Executive
  Compensation




The
information required by Item 402 of Regulation S-K is contained in the sections
entitled "Information about the  Directors -- Compensation of
Directors" and "Executive Compensation" of the Company's definitive Proxy
Statement and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.




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




The
information required by Items 201(d) and 403 of Regulation S-K is contained in
the section entitled "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement and, in accordance with General Instruction G to Form
10-K, is hereby incorporated herein by reference.




Information
required by Item 201 (d) of Regulations S-K concerning the Company’s equity
compensation plans is set forth in the table below:




Table
of Equity Compensation Plan Information




(in
thousands)


Plan
      Category
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              
              (a)
            Weighted
      –average exercise price of outstanding options, warrants and
      rights
              
              
              
              (b)
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              
              (c)Equity
      compensation plans approved by security holders
            1,184
            $10.76
            503Equity
      compensation plans not approved by security holders
            --
            --
            --Total
            1,184
            $10.76
            503







68


Item
      13.
            Certain Relationships and Related
      Transactions, and Director
Independence




During
2007, we paid $18.6 million to the former shareholder of Whirlaway, Thomas
Zupan, who is now Vice President – Precision Metal Components
Division.  Additionally, on November 30, 2006, the company entered
into operating leases covering two of the Whirlaway manufacturing facilities
with a company owed by Mr. Zupan.  The rent payments in 2008 and 2007
to this related party were $ 0.6 million.  The total future rent
payments as of December 31, 2008 will be $1.9 million over 3 years or
approximately $0.6 million per year.




Information regarding
review, approval or ratification of transactions with related persons is
contained in a section entitled "Certain Relationships and Related Transactions"
of the Company's definitive Proxy Statement and, in accordance with General
Instruction G to Form 10-K, is hereby incorporated herein by
reference.




Information
regarding director independence is contained in a section entitled “Information
about the Directors” of the Company’s definitive Proxy Statement and, in
accordance with General Instruction G to Form 10-K, is hereby incorporated
herein by reference.





Item
      14.
            Principal Accountant Fees
      and Services




Information
required by this item of Form 10-K concerning the Company’s accounting fees and
services is contained in the section entitled “Fees Paid to Independent
Registered Public Accounting Firm” of the Company’s definitive Proxy Statement
and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.







Part IV




Item
      15.
            Exhibits and Financial
      Statement Schedules






(a)
      List of Documents Filed as Part of this Report1. Financial
      StatementsThe
      financial statements of the Company filed as part of this Annual Report on
      Form 10-K begins on the following pages hereof:PageReport of
      Independent Registered Public Accounting
      Firm ..................................................................................................................................................
            
            36Consolidated
      Balance Sheets at December 31, 2008 and
      2007................................................................................................................................................
            
            37Consolidated
      Statements of Income (Loss) and Comprehensive Income (Loss) for theyears
      ended December 31, 2008, 2007, and
    2006 ...............
            
            38Consolidated
      Statements of Changes in Stockholders’ Equity for theyears
      ended December 31, 2008, 2007, and
      2006 ............................................
            
            39Consolidated
      Statements of Cash Flows for the years endedDecember
      31, 2008, 2007, and
      2006 .................................................................................
            
            40Notes to
      Consolidated Financial
      Statements............................................................................................................................................................................
            
            412.
      Financial Statement SchedulesNot
      applicable.3.  See
      Index to Exhibits (attached hereto)(b)
      Exhibits:  See Index to Exhibits (attached
    hereto).The
      Company will provide without charge to any person, upon the written
      request of such person, a copy of any of the Exhibits to this Form
      10-K.(c)  Not
      Applicable








69




SIGNATURES




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









By:          /s/
Roderick R.
Baty


Roderick R.
Baty


Chairman of the
Board,


Chief Executive
Officer and President





Dated:  March 31,
2009





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




Name and Signature
            Title
            Date/s/
      roderick r. baty
            Chairman
      of the Board, Chief Executive Officer and President
            March
      31, 2009Roderick
      R. Baty/s/
      james h. dorton
            Vice
      President-Corporate Development and
              Chief Financial Officer
            March
      31, 2009James
      H. Dorton/s/
      william c. kelly jr.
            Vice
      President-Chief Administrative Officer,
              Secretary and Treasurer
            March
      31, 2009William
      C. Kelly, Jr./s/
      Thomas c. burwell, Jr.Thomas
      C. Burwell, Jr.
            Corporate
      Controller
            March
      31, 2009/s/
      g. ronald morris
            Director
            March
      31, 2009G.
      Ronald Morris/s/
      michael e. werner
            Director
            March
      31, 2009Michael
      E. Werner/s/
      steven t. warshaw
            Director
            March
      31, 2009Steven
      T. Warshaw/s/
      richard g. fanelli
            Director
            March
      31, 2009Richard
      G. Fanelli/s/
      robert m. aiken, jr.
            Director
            March
      31, 2009Robert
      M. Aiken, Jr.


70


Index to Exhibits





2.1
            Asset
      Purchase Agreement dated April 14, 2003 among SKF Holding Maatschappij
      Holland B.V., SKF B.V., NN, Inc. and NN Netherlands B.V. (incorporated by
      reference to Exhibit 2.1 of Form 8-K filed on May 16,
  2003)





3.1
            Restated
      Certificate of Incorporation of the Company (incorporated by reference to
      Exhibit 3.1 of the Company’s Registration Statement No. 333-89950 on Form
      S-3 filed June 6, 2002)3.2
            Restated
      By-Laws of the Company (incorporated by reference to Exchibit 3.2 of the
      Company's Registration Statement No. 333-89950 on Form S-3 filed June 6,
      2002)3.3
            Form
      of Certificate of Designation of Series A Junior Participating Preferred
      Stock on NN, Inc., as filed with the Secretary of  the State of
      Delaware on December 15, 2008  (incorporated by reference to the
      Company's Form 8-K filed December 18, 2008)3.4
            Amendments
      to the Restated By-Laws of NN, Inc.  (incorporated by reference to
      the Company's Form 8-K filed December 18,
2008)







4.1
            The
      specimen stock certificate representing the Company’s Common Stock, par
      value $0.01 per share (incorporated by reference to Exhibit 4.1 of the
      Company’s Registration Statement No. 333-89950 on Form S-3 filed June 6,
      2002)





4.2
            Article
      IV, Article V (Sections 3 through 6), Article VI (Section 2) and Article
      VII (Sections 1 and 3) of the Restated Certificate of Incorporation of the
      Company (included in Exhibit 3.1)





4.3
            Article
      II (Sections 7 and 12), Article III (Sections 2 and 15) and Article VI of
      the Restated By-Laws of the Company (included in Exhibit
    3.2)4.4
            Rights
      Agreement, dated as of December 16, 2008, by and between NN, Inc. and
      Computershare Trust Company, N.A., including the form of Certificate of
      Designation, the Form of Right, Certificate and the Summary of Rights to
      Purchase attached thereto as Exhibits A, B and C, respectively 
      (incorporated by reference to the Company's Form 8-K filed December 18,
      2008)





10.1
            NN,
      Inc. Stock Incentive Plan and Form of Incentive Stock Option Agreement
      pursuant to the Plan (incorporated by reference to Exhibit 10.1 of the
      Company’s Registration Statement No. 333-89950 on Form S-3/A filed July
      15, 2002)*





10.2
            Amendment
      No. 1 to the NN, Inc. Stock Incentive Plan (incorporated by reference to
      Exhibit 4.6 of the Company’s Registration Statement No. 333-50934 on Form
      S-8 filed on November 30, 2000)*





10.3
            Amendment
      No. 2 to the NN, Inc. Stock Incentive Plan (incorporated by reference to
      Exhibit 4.7 of the Company’s Registration Statement No. 333-69588 on Form
      S-8 filed on September 18, 2001)*





10.4
            Amendment
      No. 3 to NN, Inc. Stock Incentive Plan as ratified by the shareholders on
      May 15, 2003 amending the Plan to permit the issuance of awards under the
      Plan to directors of the Company (incorporated by reference to Exhibit
      10-1 of the Company's Quarterly Report on Form 10-Q filed August 14,
      2003)*





10.5
            Form
      of Indemnification Agreement (incorporated by reference to Exhibit 10.6 of
      the Company’s Registration Statement No. 333-89950 on Form S-3/A filed
      July 15, 2002)





10.6
            Form
      of Stock Option Agreement, dated December 7, 1998, between the Company and
      the non-employee directors of the Company (incorporated by reference to
      Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed March 31,
      1999)*





10.7
            Elective
      Deferred Compensation Plan, dated February 26, 1999 (incorporated by
      reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K
      filed March 31, 1999)*





10.8
            NN,
      Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company's
      Form S-8 filed December 16, 2005)*





10.9
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and
      Roderick R. Baty (incorporated by reference to the Company's Form 8-K
      filed August 24, 2006)*





10.10
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and James
      H. Dorton (incorporated by reference to the Company's Form 8-K filed
      August 24, 2006)*





10.11
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and
      Nicola Trombetti (incorporated by reference to the Company's Form 8-K
      filed August 24, 2006)*




71






10.12
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and
      Thomas McKown (incorporated by reference to the Company's Form 8-K filed
      August 24, 2006)*





10.13
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and James
      Anderson (incorporated by reference to the Company's Form 8-K filed August
      24, 2006)*





10.14
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and David
      M. Gilson (incorporated by reference to the Company's Form 8-K filed
      October 3, 2006)*





10.15
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and
      Thomas G. Zupan (incorporated by reference to the Company's Form 8-K filed
      December 6, 2006)*





10.16
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and Frank
      T. Gentry (incorporated by reference to Company's Current Report on Form
      8-K filed August 24, 2006)*





10.17
            Executive
      Employment Agreement, dated August 21, 2006, between the Company and
      Robert R. Sams (incorporated by reference to the Company's Current Report
      on Form 8-K filed August 21, 2006)*





10.18
            Executive
      Employment Agreement dated August 21, 2006, between the Company and
      William C. Kelly, Jr. (incorporated by reference to the Company's Current
      Report on Form 8-K filed August 24,
2006)*





10.19
            NN
      Euroball, ApS Shareholder Agreement dated April 6, 2000 among NN, Inc., AB
      SKF and FAG Kugelfischer Georg ShaferAG (incorporated by reference to
      Exhibit 10.26 of the Company's Annual Report on Form 10-K filed March 29,
      2002)





10.20
            Frame
      Supply Agreement between Euroball S.p.A., Kugelfertigung Eltmann GmbH, NN
      Euroball Ireland Ltd. and Ascometal effective January 1, 2002 (We have
      omitted certain information from the Agreement and filed it separately
      with the Securities and Exchange Commission pursuant to our request for
      confidential treatment under Rule 24b-2. We have identified the omitted
      confidential information by the following statement, "Confidential
      portions of material have been omitted and filed separately with the
      Securities and Exchange Commission," as indicated throughout the document
      with an asterisk in brackets ([*])) (incorporated by reference to Exhibit
      10.26 of the Company's Annual Report on Form 10-K filed March 31,
      2003)





10.21
            Supply
      Agreement between NN Euroball ApS and AB SKF dated April 6, 2000. (We have
      omitted certain information from the Agreement and filed it separately
      with the Securities and Exchange Commission pursuant to our request for
      confidential treatment under Rule 24b-2. We have identified the omitted
      confidential information by the following statement, "Confidential
      portions of material have been omitted and filed separately with the
      Securities and Exchange Commission, " as indicated throughout the document
      with a n asterisk in brackets([*]) (incorporated by reference to Exhibit
      10.3 of the Company's Quarterly Report on Form 10-Q filed August 14,
      2003)





10.22
            Global
      Supply Agreement among NN, Inc., NN Netherlands B.V. and SKF Holding
      Maatschappij Holland B.V. dated April 14, 2003. (We have omitted certain
      information from the Agreement and filed it separately with the Securities
      and Exchange Commission pursuant to our request for confidential treatment
      under Rule 24b-2. We have identified the omitted confidential information
      by the following statement, "Confidential portions of material have been
      omitted and filed separately with the Securities and Exchange Commission,
      " as indicated throughout the document with a n asterisk in
      brackets([*])(incorporated by reference to Exhibit 10.4 of the Company's
      Quarterly Report on Form 10-Q filed August 14,
  2003)





10.23
            Note
      Purchase Agreement dated April 22, 2004 among NN, Inc. as the Borrower and
      its Subsidiary Guarantors and the Prudential Insurance Company of America
      as Agent for the Purchase. (incorporated by reference to Exhibit 10.28 of
      the Company's Annual Report on Form 10-K filed March 16,
    2005)





10.24
            Second
      Amended and Restated Note Purchase and Shelf Agreement dated as of March
      13, 2009, among NN, Inc. and The Prudential Insurance Company of
      America, Prudential Retirement Insurancce and Annuity Company, American
      Bankers Life Assurance Company of Florida, Inc., Farmers New World Life
      Insurance Company and Time Insurance Company (incorporated by reference to
      the Company's Form 8-K filed March 17,
2009)




10.25
            Amended
      and Restated Credit Agreement dated as of March 13, 2009 among NN,
      Inc., and the Lenders as named therein, KeyBank National Association as
      Lead Arranger, Book Runner and Administrative Agent, and Regions
      Bank, as Swing Line Lender (incorporated by reference to the Company's
      Current Report on Form 8-K filed March 17,
  2009)








72





21.1           List
of Subsidiaries of the Company.





23.1           Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm





31.1           Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act





31.2           Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act





32.1           Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
Act





32.2           Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act





______________


*           Management
contract or compensatory plan or arrangement.










73