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

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.

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.

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           2006
Net sales                                                 100.0 %          100.0 %        100.0 %
Cost of product sold (exclusive of depreciation
shown separately below)                                    81.1             80.0           78.0
Selling, general and administrative expenses                8.5              8.7            9.1
Depreciation and amortization                               6.6              5.4            5.3
Gain 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            7.8
Interest expense                                            1.2              1.5            1.2
Other income                                               (0.2 )           (0.0 )         (0.4 )
Income (loss) before provision for income taxes            (6.1 )            1.2            7.0
Provision (benefit) for income taxes                       (2.0 )            1.5            2.6
Net 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, 2008

                     2009                           $  4,297
                     2010                              3,405
                     2011                              2,670
                     2012                              1,190
                     2013                              1,107
                     Thereafter                        7,176

                     Total 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.

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.

OVERALL RESULTS

(In Thousands of Dollars)                                 Consolidated NN, Inc.
                                             2008          2007                Change
Net sales                                  $ 424,837     $ 421,294     $   3,543
    Foreign exchange effects                                                            17,575
    Volume                                                                             (22,536 )
    Price                                                                                1,518
    Mix                                                                                    539
    Material inflation pass-through                                                      6,447

Cost of products sold (exclusive of
depreciation
 and amortization shown separately
below)                                       344,685       337,024         7,661
    Foreign exchange effects                                                            14,440
    Volume                                                                              (7,205 )
    Cost reduction                                                                     (12,994 )
    Mix                                                                                    687
    Inflation                                                                           12,733

Selling, general, and administrative          36,068        36,473          (405 )
    Foreign exchange effects                                                             1,012
   Reductions in wage related cost
and discretionary spending                                                              (1,417 )

Depreciation and amortization                 27,981        22,996         4,985
    Foreign exchange effects                                                             1,148
    Additional depreciation                                                              3,837

Restructuring and impairment charges          42,065        13,636        28,429
Interest 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.

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.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

   (In Thousands of Dollars)                           Year ended December 31,
                                            2008          2007               Change

   Net sales                              $ 321,660     $ 303,059     $ 18,601
       Foreign exchange effects                                                      17,575
       Volume                                                                        (7,677 )
       Price                                                                            672
       Mix                                                                              539
       Material inflation pass- through                                               7,492

   Segment 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 2008 restructuring 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 2007 restructuring 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              Change

         Net 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.

. . .